The following discussion is intended to provide information relevant to an understanding of our financial condition, changes in our financial condition and our results of operations and cash flows and should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and in our Form 10-K for the year ended December 31, 2008.

Forward-Looking Statements

The information in this Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical or current facts, that address activities, events, outcomes and other matters that we plan, expect, intend, assume, believe, budget, predict, forecast, project, estimate or anticipate (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in our Form 10-K for the year ended December 31, 2008.

Forward-looking statements appear in a number of places and include statements with respect to, among other things:

• estimates of our oil and gas reserves;

• estimates of our future oil and gas production, including estimates of any increases or decreases in production;

• planned capital expenditures and the availability of capital resources to fund those expenditures;

• our outlook on oil and gas prices;

• our outlook on domestic and worldwide economic conditions;

• our access to capital and our anticipated liquidity;

• our future business strategy and other plans and objectives for future operations;

• the impact of political and regulatory developments;

• our assessment of counterparty risks and the ability of our counterparties to perform their future obligations;

• estimates of the impact of new accounting pronouncements on earnings in future periods; and

• our future financial condition or results of operations and our future revenues and expenses.

We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and marketing of oil and gas. These risks include, but are not limited to:

• the possibility of unsuccessful exploration and development drilling activities;

• our ability to replace and sustain production;

• commodity price volatility;

• domestic and worldwide economic conditions;

• the availability of capital on economic terms to fund our capital expenditures and acquisitions;

• our level of indebtedness;

• the impact of the current economic recession on our business operations, financial condition and ability to raise capital;

• declines in the value of our oil and gas properties resulting in a decrease in our borrowing base under our credit facility and impairments;

• the ability of financial counterparties to perform or fulfill their obligations under existing agreements;
• the uncertainty inherent in estimating proved oil and gas reserves and in projecting future rates of production and timing of development expenditures;

• drilling and other operating risks;

• hurricanes and other weather conditions;

• lack of availability of goods and services;

• regulatory and environmental risks associated with drilling and production activities;

• the adverse effects of changes in applicable tax, environmental and other regulatory legislation; and

• the other risks described in our Form 10-K for the year ended December 31, 2008.

Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data and the interpretation of that data by geological engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, these revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and gas that are ultimately recovered.

Should one or more of the risks or uncertainties described above or elsewhere in our Form 10-K for the year ended December 31, 2008 occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically disclaim all responsibility to publicly update or revise any information contained in a forward-looking statement or any forward-looking statement in its entirety.

All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

Overview

We are an independent oil and natural gas exploration, development, acquisition, and production company. Our basic business model is to increase shareholder value by finding and developing oil and gas reserves through exploration and development activities, and selling the production from those reserves at a profit. To be successful, we must, over time, be able to find oil and gas reserves and then sell the resulting production at a price that is sufficient to cover our finding costs, operating expenses, administrative costs and interest expense, plus offer us a return on our capital investment. From time to time, we may also acquire producing properties if we believe the acquired assets offer us the potential for reserve growth through additional developmental or exploratory drilling activities.

For most of 2008, the economic climate in the domestic oil and gas industry was suitable for our business model. Until the second half of 2008, oil and gas prices were favorable and provided us with the economic incentives necessary to assume the risks we face in our search for oil and gas reserves despite higher drilling, completion and operating expenses.

During the second half of 2008, global economies began to experience a significant slowdown sparked by a near-collapse in worldwide financial markets. This slowdown continued to intensify into the first quarter of 2009 and is currently being viewed by many economists as the most severe recession in United States history, second only to the Great Depression. The United States government has taken significant steps to support the financial markets and stimulate the economy in an effort to slow or reverse the downward spiral of economic indicators, but the success of these measures and the duration of the current recession cannot be predicted.

Reduced demand for energy caused by the current recession has resulted in a significant deterioration in oil and gas prices, which in turn has led to a significant reduction in drilling activity throughout the oil and gas industry. The prices we pay for field services generally lag behind the declines in oil and gas prices. As a result, we have experienced reductions in operating margins during the last half of 2008 and into the first quarter of 2009. The effects of lower operating margins on our business are significant since they reduce our cash flow from operations and diminish the present value of our oil and gas reserves. These factors have an adverse effect on our ability to access the capital resources we need to grow our reserve base. Lower operating margins also offer us less incentive to assume the drilling risks that are inherent in our business. In response to decreases in product prices and the resulting effect on our operating margins, we currently plan to spend approximately $78.5 million on exploration and development activities in fiscal 2009 as compared to $372.7 million spent in fiscal 2008.

We are monitoring the impact of the recession on our business, including the extent to which lower commodity prices could affect our financial liquidity. While we believe we are taking appropriate actions to preserve our short-term liquidity, a prolonged recession of this magnitude could negatively impact our long-term liquidity, financial position and results of operations.

Key Factors to Consider

The following summarizes the key factors considered by management in the review of our financial condition and operating performance for the first quarter of 2009 and the outlook for the remainder of 2009.

· Our oil and gas sales for the first quarter decreased $68.1 million, or 57%, from 2008. Price variances accounted for a $66.7 million decrease and production variances accounted for a $1.4 million decrease.

· Our oil and gas production for the first quarter of 2009 was 6% lower on a barrel of oil equivalent ("BOE") basis than in the comparable period in 2008. Our oil production was 10% higher than the first quarter of 2008 which was more than offset by a 17% drop in gas production compared to the 2008 period. The comparability of production between the two quarters was affected by the sale of certain South Louisiana properties in the second quarter of 2008.

· We recorded a $2.5 million net gain on derivatives in the first quarter of 2009, consisting of a $1.1 million realized gain on settled contracts and a $1.4 million gain for changes in mark-to-market valuations. Since we do not presently designate our derivatives as cash flow hedges under applicable accounting standards, we recognize the full effect of changing prices on mark-to-market valuations as a current charge or credit to our results of operations.

· During the first quarter of 2009, we increased borrowings under our revolving credit facility by $14.4 million from $94.1 million at December 31, 2008 to $108.5 million at March 31, 2009 in order to partially finance additions to property and equipment.

· At March 31, 2009, our capitalized unproved oil and gas properties totaled $84.2 million, of which approximately $40.7 million was attributable to unproved acreage. Therefore, our results of operations in future periods may be adversely affected by abandonments and impairments related to unproved oil and gas properties.

Recent Exploration and Development Activities

Overview
Our long-term exploration and development focus is on developmental drilling for oil reserves. With oil prices on the rise during the last half of 2007, we began a program to exploit our large inventory of lower risk, developmental drilling locations, primarily in the Permian Basin and the Austin Chalk (Trend) areas of our asset base. However, we continue to invest in our higher risk, higher impact exploration programs.

The current economic recession has caused us to significantly reduce the level of developmental drilling pending an improvement in product prices and operating margins. Approximately 70% of the $37.9 million spent on exploration and development activities during the first quarter of 2009 was applicable to exploratory prospects. These prospects were primarily in areas where we have invested significant capital in acreage and seismic data, or were prospects for which we had made drilling commitments to joint owners in the wells. We presently plan to spend approximately $78.5 million on exploration and development activities during 2009, of which approximately 50% is expected to be spent on developmental drilling. We may increase or decrease our planned activities, depending upon drilling results, operating margins, the availability of capital resources, and other factors affecting the economic viability of such activities.

Permian Basin
The Permian Basin is a sedimentary basin in West Texas and Southeastern New Mexico known for its large oil and gas deposits from the Permian geologic period. Although many fields in the Permian Basin have been heavily exploited in the past, higher product prices and improved technology (including deep horizontal drilling) encouraged high levels of current drilling and recompletion activities. We gained a significant position in the Permian Basin in 2004 when we acquired Southwest Royalties, Inc. This acquisition provided us with an inventory of potential drilling and recompletion activities.

We spent $8.7 million in the Permian Basin during the first quarter of 2009 on drilling and completion activities. We drilled 4 gross (3.9 net) operated wells in the Permian Basin and conducted various remedial operations on other wells in 2009. We currently plan to spend $25.1 million on drilling and completion activities in the Permian Basin in fiscal 2009.

North Louisiana
In 2005, we began a drilling program in North Louisiana targeting the Cotton Valley/Gray and Bossier formations. In this area, the Cotton Valley/Gray formations are encountered at depths ranging from 8,000 to 12,000 feet, and the Bossier formation is encountered at depths ranging from 11,000 to 15,500 feet.

To date, we have drilled 18 wells on our Terryville prospect and have completed 16 as producers. On our Ruston prospect, we have completed three wells as producers and are currently completing a fourth well. We spent $2.4 million in North Louisiana during the three months of 2009 on exploration and development activities, of which $2.2 million was spent on drilling and completion activities and $200,000 was spent on seismic and leasing activities. We currently plan to spend $4 million for fiscal 2009 in this area.

South Louisiana
We participated in the drilling of the State Lease 18669 #1, an exploratory well in Plaquemines Parish (West Lake Washington prospect) in 2008. The well was tested during the fourth quarter of 2008 at a rate of 11 million cubic feet of gas per day and 739 barrels of oil per day. After construction of a pipeline is complete, we expect to have the well on production by the middle of 2009. We own a 50% non-operated working interest in this well.

We have abandoned the drilling of the Miami Corp #1, an exploratory well in Bayou Sale field on our Liger Prospect in St. Mary Parish, Louisiana, due to down hole mechanical problems. We have moved the drilling rig approximately 20 feet north of the current location and are drilling the Miami Corp #2 as a replacement well. We have modified the drilling plan to address the problems encountered in the first well, and will target the same formation in the lower Miocene sands at an approximate depth of 17,500 feet. We will own a 50% working interest in any production established by this well.

We spent $9.8 million in South Louisiana during the three months ended March 31, 2009 on exploration and development activities, of which $9.1 million was spent on drilling and completion activities and $700,000 was spent on seismic and leasing activities. We currently plan to spend $23.3 million for fiscal 2009, of which $20.6 million relates to drilling and completion activities and the remaining $2.7 million relates to seismic and leasing activities.

East Texas Bossier
We have an extensive acreage position in East Texas targeting the prolific deep Bossier sands which are encountered at depths ranging from 14,000 to 22,000 feet in this area. Exploration for deep Bossier gas sands in this area is in its early stages and involves a high degree of risk. The geological structures are complex, and limited drilling activity offers minimal subsurface control. Deep Bossier wells are expensive to drill, with completed wells costing approximately $18 million each. Although seismic data is helpful in identifying possible sand accumulations, the only way to determine if the deep Bossier sand will be commercially productive is to drill wells to the targeted structures.

We are currently completing the Sunny Unit #1, a 17,300-foot exploratory well in Burleson County, Texas. The well was successfully drilled to the deep Bossier formation, and completed in the middle Bossier sands. We are currently flow testing the well to determine if the well is capable of producing gas in commercial quantities. To date, we have incurred drilling costs of approximately $17.7 million on this well (100% working interest).

Prior to drilling the Sunny Unit #1, we drilled two other wells targeting the deep Bossier sands in East Texas: the Big Bill Simpson #1, a 19,500-foot exploratory well in Leon County (70% working interest), and the Margarita #1, a 18,300-foot exploratory well in Robertson County (100% working interest). The Big Bill Simpson #1 is currently producing at minimal rates, and the Margarita #1 is currently producing at a rate of approximately 400 Mcf of gas per day from an upper Bossier sand.

We spent $13.5 million in the East Texas Bossier area during the three months ended March 31, 2009 on exploration and development activities, of which $5.9 million was spent on drilling and completion activities and $7.6 million was spent on seismic and leasing activities. We currently plan to spend $19.9 million for fiscal 2009, of which $6.9 million relates to drilling and completion activities and the remaining $13 million relates to seismic and leasing activities.

Austin Chalk (Trend)
Prior to 1998, we concentrated our drilling activities in an oil-prone area we refer to as the Austin Chalk (Trend) in Robertson, Burleson, Brazos, Milam and Leon Counties, Texas. Most of our wells in this area were drilled as horizontal wells, many with multiple laterals in different producing horizons, including the Austin Chalk, Buda and Georgetown formations. The existing spacing between some of our wells in this area affords us the opportunity to tap additional oil and gas reserves by drilling new wells between existing wells, a technique referred to as in-fill drilling. These in-fill wells are considered lower risk as compared to exploratory wells and until recently, offered more attractive rates of return.

We spent $400,000 in the Austin Chalk (Trend) area during the first three months of 2009. Due to recent declines in product prices and lower operating margins on drilling, we currently plan to spend only $1.5 million in the Austin Chalk (Trend) for fiscal 2009.

Utah
In 2008, we participated in the drilling of the Ron Lamb 31A-4-1, a 12,670-foot exploratory well in which we own a 33% non-operated working interest. The well was drilled in the central Overthrust area in Sanpete County, Utah targeting the oil-prone Navajo sandstone formation. We temporarily abandoned this well in the first quarter of 2009 and recorded a pre-tax charge of approximately $1.4 million for drilling and leasehold impairments related to this well in the first quarter of 2009. We plan to participate in the drilling of a third exploratory well in this area in the fourth quarter of 2009 to further evaluate our acreage position.

Supplemental Information

The following unaudited information is intended to supplement the consolidated
financial statements included in this Form 10-Q with data that is not readily
available from those statements.

                                                                  Three Months Ended
                                                                      March 31,
                                                                  2009          2008
Oil and Gas Production Data:
Gas (MMcf)                                                          4,613         5,548
Oil (MBbls)                                                           751           684
Natural gas liquids
(MBbls)                                                                53            58
Total (MBOE)                                                        1,573         1,667

Average Realized Prices (a):
Gas ($/Mcf)                                                    $     4.60     $    8.86
Oil ($/Bbl)                                                    $    37.09     $   96.37
Natural gas liquids
($/Bbl)                                                        $    22.94     $   54.83

Gain (Loss) on Settled Derivative Contracts (a):
($ in thousands, except per unit)
Gas: Net realized gain (loss)                                  $    1,398     $    (884 )
Per unit produced
($/Mcf)                                                        $      .30     $    (.16 )
Oil:  Net realized gain (loss)                                 $     (267 )   $ (12,906 )
Per unit produced
($/Bbl)                                                        $     (.36 )   $  (18.87 )

Average Daily Production:
Gas (Mcf):
Permian Basin                                                      15,674        15,562
North Louisiana                                                    14,550        13,596
South Louisiana                                                    12,592        23,552
Austin Chalk (Trend)                                                3,030         2,460
Cotton Valley Reef
Complex                                                             4,274         5,270
Other                                                               1,136           527
Total                                                              51,256        60,967

Oil (Bbls):
Permian Basin                                                       4,456         3,494
North Louisiana                                                       270           343
South Louisiana                                                       391           985
Austin Chalk (Trend)                                                3,142         2,635
Other                                                                  85            59
Total                                                               8,344         7,516

Natural Gas Liquids (Bbls):
Permian Basin                                                         225           215
North Louisiana                                                         1             2
South Louisiana                                                        45           140
Austin Chalk (Trend)                                                  307           272
Other                                                                  11             8
Total                                                                 589           637

                                                                                    Three Months Ended
                                                                                        March 31,
                                                                               2009                     2008
Exploration Costs (in thousands):
Abandonment and impairment costs:
North Louisiana                                                          $             260         $      297
South Louisiana                                                                        728                  -
Permian Basin                                                                          455                  -
East Texas Bossier                                                                   8,867                  -
Utah                                                                                 1,774                  -
Mississippi                                                                            311                  -
Other                                                                                   17                  -
Total                                                                               12,412                297

Seismic and other                                                                    4,270              3,675
Total exploration costs                                                  $          16,682         $    3,972

Depreciation, Depletion and Amortization (in thousands):
Oil and gas
depletion                                                                $          34,762         $   27,741
Contract drilling
depreciation                                                                         1,474              2,285
Other depreciation                                                                     229                247
Total DD&A                                                               $          36,465         $   30,273

Oil and Gas Costs ($/BOE Produced):
Production costs                                                         $           12.12         $    12.34
Oil and gas
depletion                                                                $           22.10         $    16.64

Net Wells Drilled (b):
Exploratory Wells                                                                      0.2                1.7
Developmental Wells                                                                    6.0               12.9

(a) No derivatives were designated as cash flow hedges in 2009 or 2008. All gains or losses on settled derivatives were included in other income (expense) - gain (loss) on derivatives.
(b) Excludes wells being drilled or completed at the end of each period.

Operating Results - Three-Month Periods

The following discussion compares our results for the three months ended March 31, 2009 to the comparative period in 2008. Unless otherwise indicated, references to 2009 and 2008 within this section refer to the respective quarterly period.

Oil and gas operating results

Oil and gas sales in 2009 decreased $68.1 million, or 57%, from 2008. Price variances accounted for a $66.7 million decrease, and production variances accounted for a $1.4 million decrease. Production in 2009 (on a BOE basis) was 6% lower than 2008, despite significant additions from our developmental drilling programs. Oil production increased 10% in 2009 from 2008 and gas production decreased 17% in 2009 from 2008. The comparability of production between the 2009 and 2008 periods was affected by the sale of certain South Louisiana properties which produced approximately 900 barrels of oil and 13,000 Mcf of gas per day during the 2008 period. After excluding the sold production from the 2008 reported volumes, oil production increased 26% during 2009 while gas production increased 7%. In 2009, our realized oil price was 62% lower than 2008, while our realized gas price was 48% lower. Historically, the markets for oil and gas have been volatile, and they are likely to continue to be volatile.

Production costs, consisting of lease operating expenses, production taxes and other miscellaneous marketing costs, decreased 7% in 2009 as compared to 2008 due primarily to lower production taxes. After giving effect to a 6% decrease in oil and gas production on a BOE basis, production costs per BOE decreased 2% from $12.34 per BOE in 2008 to $12.12 per BOE in 2009.

Oil and gas depletion expense increased $7 million from 2008 to 2009, of which rate variances accounted for a $8.6 million increase and production variances accounted for a $1.6 million decrease. On a BOE basis, depletion expense increased 33% from $16.64 per BOE in 2008 to $22.10 per BOE in 2009 due to a combination of higher depletable costs and lower estimated reserve quantities in 2009 compared to the 2008 period. Depletion expense per BOE of oil and gas production is an operating metric that is indicative of our weighted average . . .