The following is Management's Discussion and Analysis ("MD&A") of significant factors that have affected certain aspects of our financial position and operating results during the periods included in the accompanying unaudited consolidated financial statements. This discussion should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes thereto, included elsewhere in this Quarterly Report on Form 10-Q and should further be read in conjunction with our Annual Report on Form 10-KSB/A for the year ended December 31, 2007.

Forward-Looking Information

Certain of the statements in all parts of this document, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by words such as "may," "will," "expect," "anticipate," "estimate" or "continue," or comparable words. All statements other than statements of historical facts included in this report, including, without limitation, statements regarding our business strategy, plans, objectives, expectations, intent, and beliefs of management, related to current or future operations are forward-looking statements. Such statements are based on certain assumptions and analyses made by management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. The forward-looking statements included in this report are subject to a number of material risks and uncertainties including assumptions about the pricing of oil and gas, assumptions about operating costs, operations continuing as in the past or as projected by independent or Company engineers, the ability to generate and take advantage of acquisition opportunities and numerous other factors. A detailed discussion of important factors that could cause actual results to differ materially from the Company's expectations are discussed herein and in the Company's Annual Report on Form 10-KSB/A for the year ended December 31, 2007. Forward-looking statements are not guarantees of future performance and actual results; therefore, developments and business decisions may differ materially from those envisioned by such forward-looking statements.

General Overview

We are an independent oil and gas company engaged in the acquisition and development of oil and gas reserves through an active and diversified program which includes purchases of reserves, re-engineering, development and exploration activities. We are currently focused in Texas, Louisiana, Oklahoma, North Dakota, Montana and Colorado. As further discussed herein, future growth in assets, earnings, cash flows and share values are dependent upon our ability to acquire, discover and develop commercial quantities of oil and gas reserves that can be produced at a profit and assemble an oil and gas reserve base with a market value exceeding its acquisition, development and production costs.

On April 17, 2007, the Company completed certain merger transactions ("Merger") among the Company, Southern Bay and PICA. The Merger provided, in substance, for the mergers of the businesses of Southern Bay and PICA, two independent oil and gas entities, into the Company, and further included the purchase of working interests in oil and gas properties. A total of 10,690,000 shares of the Company's common stock were issued in connection with the Merger. Prior to the Merger, neither Southern Bay nor PICA nor any of their owners or affiliates had any material relationship with the Company or any of its associates, or any director or officer of the Company, or any affiliate of any such director or officer. The Merger resulted in a change of control of the Company as its board of directors and executive officers consist mostly of persons formerly affiliated with Southern Bay and PICA.

Under generally accepted accounting principles, Southern Bay was deemed to have acquired the Company, PICA and certain oil and gas properties. Southern Bay accounted for the transactions using the purchase method of accounting for business combinations. Accordingly, the historical financial statements presented for the Company are those of Southern Bay, back to its inception in 2004, with the Company, PICA and the acquired oil and gas properties treated as purchased upon closing.

Our business strategy is to acquire, discover and develop oil and gas reserves and achieve continued growth. Management continues to focus on reducing operating and administrative costs on a per unit basis. In addition, we have attempted to mitigate downward price volatility by using commodity price hedging, and emphasize development drilling and exploration. Following is a brief outline of our current plans.

(1) Acquire oil and gas properties with significant producing reserves and development and exploration potential.

(2) Solicit industry or institutional partners, on a promoted basis for selected acquisitions, in order to diversify, reduce average cost and generate operating fees.

(3) Implement re-engineering and development programs within existing fields.

(4) Pursue exploration projects and increase direct participation over time. Solicit industry partners, on a promoted basis, for internally generated projects.

(6) Continue activities directed toward reducing per-unit operating and general and administrative costs on a long-term sustained basis.

(7) Obtain additional capital through the issuance of equity securities and/or through debt financing.

While the impact and success of our plans cannot be predicted with accuracy, management's goal is to replace production and further increase our reserve base at an acquisition or finding cost that will yield attractive rates of return and increase shareholder value.

In addition to our fundamental business strategy, we intend to actively pursue corporate acquisitions or mergers as a means of continued growth, increasing value and creating liquidity for our equity holders. Management believes that opportunities may become available to acquire corporate entities or otherwise effect business combinations. The primary financial considerations in the evaluation of any such potential transaction will include, but are not limited to: (1) the ability of small capitalization oil and gas companies to gain recognition and favor in the public markets, (2) share appreciation potential,
(3) shareholder liquidity, and (4) capital formation and cost of capital to effect growth.

Oil and Gas Properties

We use the Successful Efforts method of accounting for oil and gas operations. Under this method, costs to acquire oil and gas properties, drill successful exploratory wells, drill and equip development wells and install production facilities are capitalized. Exploration costs, including unsuccessful exploratory wells and geological and geophysical costs are charged to operations as incurred. Depreciation, depletion and amortization ("DD&A") of the capitalized costs associated with proved oil and gas properties are computed using the unit-of-production method, at the field level, based on proved reserves. Oil and gas properties are periodically assessed for impairment and generally written down to estimated fair value if the sum of estimated future undiscounted pretax cash flows, based on engineering and expected economic circumstances, is less than the carrying value of the asset. The fair value of impaired assets is generally determined using market values, if known, or using reasonable projections of production, prices and costs and discount rates commensurate with the risks involved.

Recent Property Acquisitions and Divestitures

In January 2007, we acquired properties located in the Giddings Field of the Austin Chalk trend of Texas. In conjunction with this acquisition, a partnership was formed with a large institutional investor as limited partner. A wholly-owned subsidiary of the Company acquired both a direct 8% working interest in the properties and a 2% general partner interest in this partnership. Our share of the acquisition purchase price of $82 million was $6.6 million, and our general partner contribution was $1.6 million. These amounts were funded with additional capital contributions of $5 million from former Southern Bay partners, borrowings under our bank credit agreement of $3 million and working capital of $196,000.

As more fully discussed in Note B to the consolidated financial statements in Part I of this Form 10-Q, on October 16, 2007, we acquired the limited partnership interest in an affiliated limited partnership from the non affiliated limited partner for $91.1 million. As a result, we then owned 100% of this limited partnership which held oil and gas property interests in Louisiana, the Gulf Coast, South Texas, the Permian Basin and the Black Warrior Basin. We subsequently dissolved the partnership and integrated the oil and gas properties into our existing operations. As part of our ongoing property review, we divested certain of the purchased properties and may divest certain additional purchased properties that no longer meet our primary objectives.

In February 2008, we acquired producing properties located in the Williston Basin of North Dakota and Montana for a purchase price of $7.9 million in cash. The properties are operated by the Company.

In May 2008, we acquired properties located throughout the state of Oklahoma which included 200 producing wells and approximately 100 additional drilling locations. In conjunction with this acquisition, a partnership was formed with a large institutional investor as limited partner. A wholly-owned subsidiary of the Company acquired both a direct 18% working interest in the properties and a 2% general partner in this partnership. Our share of the acquisition purchase price of $61.7 million was $12.8 million, and our general partner contribution was $978,000. This acquisition was funded with the proceeds from the divestitures discussed below.

In September 2008, the Company acquired producing properties in Oklahoma from an unaffiliated party for $3.6 million in cash. The acquired properties are operated by the Company.

In January 2008, the Company sold all of its interest in the Grand Canyon Unit, a property acquired in the Merger. This property, located in Otsego County, Michigan, was sold to an unaffiliated party for $6.6 million in cash. The carrying value of this property at the date of the sale was equal to the selling price; therefore, no gain or loss was recognized. The sale of the property allows the Company to focus on its core areas of operation.

In February 2008, the Company sold its interests in certain oil and gas properties to unaffiliated parties for $1.8 million and recognized a gain of $430,000. In May 2008, the Company closed the sales of certain other non-core oil and gas properties in Louisiana and Texas to unaffiliated parties for approximately $11.8 million. These sales were part our planned property divestiture program. The properties, which were producing approximately 390 BOPD, included fields located in inland waters with short production lives, limited upside, high operating and administrative costs and significant plugging and abandonment obligations. Our divestures will allow us to focus on activities that have greater development and exploration potential and therefore, higher potential returns.

Results of Operations

Three months ended September 30, 2008, compared to three months ended September 30, 2007

The Company recorded net income of $5,799,000 for the three months ended September 30, 2008 compared to net income of $1,412,000 for the same period in 2007. This $4,387,000 increase resulted primarily from the following factors:

Net amounts contributing to increase (decrease) in net income (in 000s):

   Oil and gas sales                                                  $ 14,250
   Lease operating expenses                                             (3,226 )
   Production taxes                                                     (1,483 )
   Exploration expense                                                     (29 )
   Re-engineering and workovers                                           (347 )
   General and administrative expenses ("G&A")                            (430 )
   Depletion, depreciation and amortization expense ("DD&A")            (2,105 )
   Net interest income (expense)                                        (1,065 )
   Hedge ineffectiveness                                                   893
   Gain (loss) on sale of property                                         308
   Other income-net                                                        515

   Income before income taxes                                            7,281
   Provision for income taxes                                           (2,894 )

   Net increase                                                       $  4,387

The following discussion applies to the above changes.

Net revenues from oil and gas sales increased $14,250,000, or 190%. Properties acquired from AROC Energy LP in October 2007, accounted for $13,876,000 of the increase. Revenue decreased due to properties sold during the second quarter of 2008 by $217,000. The remaining $591,000 resulted primarily from increases in commodity prices and increases in production volumes. Price and production comparisons are set forth in the following table. Properties acquired from AROC Energy LP accounted for increased production of approximately 319,000 Mcf of gas and approximately 78,000 barrels of oil during the third quarter of 2008. Properties sold during the second quarter of 2008 accounted for decreased production of approximately 1,800 Mcf of gas and approximately 2,500 barrels of oil.

                                                                         Three Months
                                                        Percent             Ended
                                                        increase        September 30,
                                                       (decrease)       2008      2007
Gas Production (MMcf)                                         119 %        723       330
Oil Production (MBbls)                                         90 %        167        88
Barrel of oil equivalent (MBOE)                               101 %        288       143
Average Price Gas Before Hedge Settlements (per Mcf)           68 %   $   9.13   $  5.45
Average Price Oil Before Hedge Settlements (per Bbl)           64 %   $ 116.01   $ 70.80
Average Realized Price Gas (per Mcf)                           62 %   $   9.12   $  5.63
Average Realized Price Oil (per Bbl)                           41 %   $  90.60   $ 64.08

Lease operating expenses increased from approximately $2,368,000 in the third quarter of 2007 to $5,594,000 for the same period in 2008, an increase of $3,226,000 or 136%. Properties acquired from AROC Energy LP accounted for $2,591,000 of the increase. On a unit-of-production basis, barrel of oil equivalent ("BOE") costs increased by $2.90 or 18% as a result of higher costs due to an unprecedented demand for personnel, materials, services and rigs caused by high commodity prices. Re-engineering and workover costs increased by $347,000 from $302,000 to $649,000, due to increased emphasis on restoring and enhancing existing production capabilities. Production taxes increased by $1,483,000 or 245%, due to increased production volumes and revenues.

G&A increased $430,000 due primarily to overall business expansion, as well as increases in salaries and other overhead expenses, partially offset by cost reductions resulting from the centralization of certain functions.

The increase in DD&A expense attributable to the properties acquired from AROC Energy LP was $1,869,000. The remaining increase of $236,000 was due to property additions subsequent to the Merger, partially offset by lower net capitalized costs on other properties.

Interest expense increased by $950,000 due to higher debt levels in the third quarter of 2008 compared to the same period in 2007. As of September 30, 2008, we had outstanding debt of $50,000,000 compared to a balance of zero as of September 30, 2007. During the third quarter of 2008 and 2007, our average outstanding debt was approximately $50,000,000 and zero, respectively. Interest income decreased by $115,000 in the third quarter of 2008 over the same period of 2007, due to lower interest rates on average invested cash balances.

In the third quarter of 2008 the gain from hedge ineffectiveness was $890,000, compared to an expense of $3,000 for the same period in 2007. In the first quarter of 2008 there was a larger differential between the market benchmark used for hedging and the prices we realized on sales of oil and gas. This, combined with an increased liability, caused us to record a large ineffectiveness loss. In the second and third quarters of 2008 our realized price was more consistent with the market benchmark used for hedging therefore the cumulative ineffectiveness charge was reduced and we recorded a gain on hedge ineffectiveness.

Other income increased by $515,000 in the third quarter of 2008 compared to the same period in 2007 due to increased partnership management fees of $284,000 and increased partnership income of $250,000; these increases were offset by a decrease in property operating income of $19,000. Additionally, in the third quarter of 2008 we had a net gain on sales of non-core properties and other assets of $308,000.

Income tax expense for the third quarter of 2008 was $3,828,000 compared to $934,000 for the same period in 2007. Our income tax expense increased significantly as a result of significantly higher pre-tax earnings. Our effective tax rate during the third quarter of 2008 and 2007 was approximately 40%.

Nine months ended September 30, 2008, compared to nine months ended September 30, 2007

The Company recorded net income of $17,813,000 for the nine months ended September 30, 2008 compared to a net income of $949,000 for the same period in 2007. This $16,864,000 increase resulted primarily from the following factors:

   Oil and gas sales                                                 $  51,234
   Lease operating expenses                                            (11,491 )
   Production taxes                                                     (4,998 )
   Exploration expense                                                    (531 )
   Re-engineering and workovers                                         (1,597 )
   General and administrative expenses ("G&A")                            (827 )
   Depletion, depreciation and amortization expense ("DD&A")            (6,694 )
   Net interest income (expense)                                        (3,655 )
   Hedge ineffectiveness                                                   (47 )
   Gain (loss) on sale of property                                       2,284
   Other income-net                                                      1,368

   Income before income taxes                                           25,046
   Provision for income taxes                                           (8,182 )

   Net increase                                                      $  16,864

The following discussion applies to the above changes.

Net revenues from oil and gas sales increased $51,234,000, or 283%. Properties acquired in the Merger and from AROC Energy LP accounted for $3,185,000 and $42,448,000 of the increase, respectively. The remaining $5,601,000 increase resulted primary from increases in commodity prices and increases in production volumes. Price and production comparisons are set forth in the following table. Properties acquired in the Merger accounted for increased production of approximately 51,000 barrels of oil during the nine month period ended September 30, 2008. Properties acquired from AROC Energy LP accounted for increased production of approximately 1,121,000 Mcf of gas and approximately 293,000 barrels of oil during the nine month period ended September 30, 2008.

                                                           Percent          Nine Months Ended
                                                           increase           September 30,
                                                          (decrease)         2008         2007
Gas Production (MMcf)                                            155 %          2,251        883
Oil Production (MBbls)                                           156 %            553        216
Barrel of oil equivalent (MBOE)                                  156 %            928        363
Average Price Gas Before Hedge Settlements (per Mcf)              47 %    $      9.24    $  6.29
Average Price Oil Before Hedge Settlements (per Bbl)              71 %    $    109.81    $ 64.07
Average Realized Price Gas (per Mcf)                              41 %    $      8.82    $  6.26
Average Realized Price Oil (per Bbl)                              53 %    $     89.50    $ 58.40

Lease operating expenses increased from approximately $5,683,000 during the nine months ended September 30, 2007, to $17,174,000 for the same period in 2008, an increase of $11,491,000 or 202%. Properties acquired in the Merger and from AROC Energy LP accounted for $1,434,000 and $8,154,000 of the increase, respectively. On a unit-of-production basis, barrel of oil equivalent ("BOE") costs increased by $2.83 or 18% as a result of higher costs due to an unprecedented demand for personnel, materials, services and rigs caused by high commodity prices. Re-engineering and workover costs increased by $1,597,000 from $734,000 to $2,331,000, due to our increased emphasis on restoring and enhancing existing production capabilities. Production taxes increased by $4,998,000 or 355%, due to increased production volumes and revenues.

G&A increased $827,000 due primarily to overall business expansion as well as increases in salaries and other overhead expenses, partially offset by cost reductions resulting from centralization of certain functions.

The increase in DD&A expense attributable to the properties acquired from AROC Energy LP was $5,934,000. The remaining increase of $760,000 was due to property additions subsequent to the Merger, partially offset by lower net capitalized costs on other properties.

Interest expense increased by $3,477,000 due to higher debt levels during the nine months ended September 30, 2008, compared to the same period of 2007. As of September 30, 2008, we had outstanding debt of $50,000,000 compared to a balance

of zero as of September 30, 2007. During the nine month period ended September 30, 2008, and 2007, our average outstanding debt was approximately $73,000,000 and $2,500,000, respectively. Interest income decreased by $178,000 during the nine month period ended September 30, 2008, compared to the same period of 2007, due to lower interest rates on average invested cash balances.

During the nine month period ended September 30, 2008, the losses from hedge ineffectiveness were $47,000, compared to zero for the same period in 2007. This resulted from fluctuations in the market value of the liability associated with our hedge contracts. Since September 30, 2007, commodity prices have experienced significant fluctuations therefore the gain or loss associated with the ineffective portions of our hedges has also fluctuated.

Other income increased by $1,368,000 during the nine month period ended September 30, 2008, compared to the same period in 2007, due to increased partnership management fees of $706,000 and increased partnership income of $692,000. These increases were partially offset by a decrease in property operating income of $30,000. Additionally, during the nine months ended September 30, 2008, we had a net gain on sales of non-core properties and other assets of $2,269,000.

Income tax expense for the nine month period ended September 30, 2008, was $10,970,000 compared to $2,788,000 for the same period in 2007. Income tax expense increased due to increased pre-tax earnings; our effective tax rate during the nine month period ended September 30, 2008, was approximately 38%.

Impact of Property Acquisitions, Divestitures and Development

We estimate that production volumes for the year 2008 will range from 700,000 to 725,000 Bbls of oil and from 2,900,000 to 3,100,000 Mcf of natural gas. The lower ends of these ranges represent an increase of approximately 79% and 76%, respectively, over 2007. Ranges are provided herein because estimates are dependent on the availability of rigs, materials and services, within the industry. These estimates are predicated on the results of operations for the nine months ended September 30, 2008, adjusted for production from properties sold, estimated production from properties acquired, and from our drilling and development program. We closed several divestitures of properties situated in state waters and onshore along the Gulf Coast in May 2008 and closed an acquisition in Oklahoma in June 2008. In the opinion of management, the acquired properties have longer productive lives and greater development and exploration potential than those properties which were sold. In addition, the Company reduced its estimated future abandonment expenses. However as a result of the divestitures, the Company has experienced a temporary net reduction in production volumes. As previously disclosed, divestitures resulted in reduced oil volumes by about 390 BOPD, while the Oklahoma acquisition will initially add about 600 Mcfd. Management expects to replace this net reduction by its drilling and development program, but due to availability of rigs, materials and services the timing cannot be predicted with accuracy.

In connection with property acquisitions, we generally implement a capital expenditures program, directly related to existing producing wells and those capable of production, which we refer to as "re-engineering activities." These activities are intended to increase production and forestall natural or mechanical production declines, as well as lower recurring expenses. Thereafter, we conduct detailed field studies designed to isolate development and exploration opportunities, if any. We have identified numerous projects in our existing property portfolio relating to proved behind-pipe and undeveloped reserves and expect to define additional development and exploratory potential. Net future cash flows could be favorably affected by additional development potential and/or reductions to per-unit operating costs. No assurance can be given, however, that we will be able to successfully and economically develop additional reserves.

Impact of Changing Prices and Costs

Our revenues and the carrying value of our oil and gas properties are subject to significant change due to changes in oil and gas prices. As demonstrated historically, prices are volatile and unpredictable. Oil prices increased . . .