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-K/A for the year ended December 31, 2008.

Forward-Looking Information

Certain of the statements in all parts of this document, contain "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-K/A for the year ended December 31, 2008. 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. As further discussed herein, future growth in assets, earnings, cash flows and share values will be dependent upon our ability to effectively compete for capital and 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.

We continue to implement our business strategy to acquire, discover and develop oil and gas reserves and achieve continued balanced 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 the use of commodity price hedging. The current volatile price environment for oil and natural gas is significant, and management cannot predict the prices that will be available during the life of our current business plan. Following is a brief outline of our current plans:

(1) Acquisitions

a. Acquire operated oil and gas properties with significant producing reserves and development and exploration potential;

b. Solicit industry or institutional partners to participate, on a promoted basis, in acquisitions or projects where the capital commitments or risks exceed our existing financial capability, in order to manage our financial position, diversify opportunities, reduce average cost and generate operating fees.

(2) Development Exploitation

a. Drill proved undeveloped and probable reserves to optimize value;

c. Implement re-engineering and development programs within existing fields to extend field life, increase proved reserves, lower per unit operating costs, and enhance economics.

(3) Exploration

a. Generate exploration projects and increase direct participation with growth over time;

b. Solicit industry partners, on a promoted basis, for internally generated projects.

(4) Cost Control

a. Target low operating and general and administrative costs;

b. Minimize drilling and development costs;

c. Promote partners to reduce costs and generate operating fees.

(5) Asset Rationalization

a. Selectively divest assets to upgrade our producing property portfolio and to lower corporate wide "per-unit" operating and administrative costs, and focus on existing fields and new projects with greater development and exploitation potential;

b. Focus on assets that maximize the rate of return for our investors.

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. Management believes that opportunities may become available to acquire corporate entities or otherwise effect business combinations, particularly as a result of recent commodity prices and the contraction in equity and debt financing markets. We intend to consider any such opportunities which may become available and are beneficial to stockholders. 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.

Property Acquisitions and Divestitures in 2009

Bakken Acquisition

In May 2009, we closed an acquisition of producing wells and acreage in the Bakken Shale trend of the Williston Basin. The acquisition was made through an existing joint venture. We acquired a 15% interest in approximately 60,000 net acres, and also acquired 15% of varying working interests in 59 producing and productive wells. Our share of producing wells and undeveloped locations added approximately 486,000 barrel of oil equivalent ("BOE") of proved reserves and numerous prospective

locations. We now have working interest in the area ranging from 10% to 15% in approximately 100,000 net acres. Of those total acres, approximately 59,000 net acres are located in Mountrail County, with the remainder located in adjacent North Dakota counties and Richland County, Montana. The acquisition cost was approximately $10.4 million, subject to closing adjustments for normal operations activity and other customary purchase price adjustments. We funded the acquisition with borrowings from our senior secured revolving credit facility.

Giddings Field Acquisition

In May 2009, we entered into a Purchase and Sale Agreement (the "Purchase Agreement") with an affiliated limited partnership for which we serve as the general partner, SBE Partners LP (the "Seller") for the acquisition (the "Acquisition") of certain oil and gas producing properties in Giddings Field, Grimes and Montgomery Counties, Texas (the "Interests"). Prior to the Acquisition, we had direct working interests in the properties ranging from about 6.5% to 7.8%. After the Acquisition, we hold direct working interests in the producing wells ranging from approximately 34% to 37%. The acquired direct working interests total an estimated 25 Bcfe of proved reserves, 88% natural gas and 73% developed, with daily production, at the time of the transaction, totaling 10,625 Mcf and 85 Bbls of associated liquids. In addition, we immediately increased our partnership sharing ratio from 2% to 30%, amounting to approximately 13.2 Bcfe. Furthermore, our share of the partnership's daily production, subsequent to the transaction, amounts to 5,618 Mcf and 45 Bbls of associated liquids. We will remain the general partner of the affiliated partnership and operator of the properties. The Acquisition also provides additional development opportunities and exposure to the upside associated with the Eagleford Shale and other prospective targets. Under the Purchase Agreement, the Interests were purchased for a net cash purchase price of $48.4 million, subject to adjustments at closing for normal operations activity and other customary purchase price adjustments (the "Purchase Price"). We funded the Purchase Price with borrowings from our senior secured revolving credit facility. The Purchase Agreement contains representations and warranties, covenants, and indemnifications that are customary for oil and gas producing property acquisitions.

In January 2009, we sold a producing property located in Louisiana to an unaffiliated party for $1.6 million. We recognized a gain of $1.3 million in conjunction with this sale.

In August 2009, we received a distribution of proved undeveloped property and unproved acreage in the Giddings Field from SBE Partners LP, an affiliated partnership. The property was recorded an estimated fair market value of $1.6 million.

Results of Operations

Three months ended September 30, 2009, compared to three months ended September 30, 2008

The Company recorded net income of $3,428,000 for the three months ended September 30, 2009 compared to net income of $5,799,000 for the same period in 2008. This $2,371,000 decrease resulted primarily from the following factors:

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

  Oil and gas sales                                                    $ (1,783 )
  Lease operating expenses                                                1,199
  Production taxes                                                          888
  Exploration expense                                                      (591 )
  Re-engineering and workovers                                             (112 )
  General and administrative expenses ("G&A")                              (263 )
  Depletion, depreciation and amortization expense ("DD&A")              (2,477 )
  Net interest income (expense)                                            (776 )
  Hedge ineffectiveness                                                  (1,001 )
  Gain (loss) on derivative contracts                                       (83 )
  Gain (loss) on sale of property                                          (251 )
  Other income - net                                                      1,591

  Income before income taxes                                             (3,659 )
  Provision for income taxes                                              1,288

  Decrease in net income                                               $ (2,371 )

The following discussion applies to the above changes.

Oil and Natural Gas Sales. Net revenues from oil and gas sales decreased $1,783,000, or 8%. Revenue increased by $2,720,000 and $439,000 due to the Giddings Field and Bakken acquisitions, respectively. These increases were offset by a revenue decrease of $4,942,000 that resulted primarily from decreases in commodity prices, offset by increases in production volumes. Properties purchased in the two acquisitions accounted for increased volumes of approximately 1,040,000 Mcf of gas and approximately 10,000 barrels of oil. Price and production comparisons are set forth in the following table.

                                                          Percent            Three Months Ended
                                                          increase              September 30,
                                                         (decrease)           2009          2008
Gas Production (MMcf)                                           132 %           1,678          723
Oil Production (MBbls)                                           27 %             212          167
Barrel of Oil Equivalent (MBOE)                                  71 %             492          288
Average Price Gas Before Hedge Settlements (per Mcf)            -71 %      $     2.67     $   9.13
Average Price Oil Before Hedge Settlements (per Bbl)            -47 %      $    61.65     $ 116.01
Average Realized Price Gas (per Mcf)                            -58 %      $     3.87     $   9.12
Average Realized Price Oil (per Bbl)                            -30 %      $    63.55     $  90.60

Lease Operating Expenses. Lease operating expenses decreased from approximately $5,594,000 in the third quarter of 2008 to $4,395,000 for the same period in 2009, a decrease of $1,199,000 or 21%. On a unit-of-production basis, barrel of oil equivalent ("BOE") costs decreased by $10.49 or 54% as a result of acquisition of properties with lower operating costs, divestitures of properties with higher operating costs, re-engineering projects completed during 2008 that either enhanced production or lowered per unit operating costs, and reductions in costs for materials, services and rigs during 2009.

Re-engineering and Workover. Re-engineering and workover costs increased by $112,000 from $649,000 to $761,000, due primarily to projects associated with a waterflood on one of our North Dakota properties.

Production Taxes. Production taxes decreased by $888,000 or 43%, due to decreased revenues. The production taxes we pay are generally calculated as a percentage of oil and natural gas sales revenues before the effects of hedging. Our production taxes for the quarter ended September 30, 2009 and 2008 were 6.8% and 8.0%, respectively, of oil and gas sales before the effects of hedging. The 2009 rate decreased from 2008 due to a change in our portfolio of producing properties and the approval of production tax exemptions for a number of our producing wells.

General and Administrative Expenses. G&A increased $263,000 during the quarter ended September 30, 2009 compared to the same period in 2008. Additional non-cash charges of $239,000 related to stock-based compensation were the primary cause of the increase. The remaining $24,000 increase resulted from the overall expansion of the business and salary increases which were offset by our ongoing cost reduction efforts. The total non-cash charges related to stock-based compensation included in G&A expense for the three months ended September 30, 2009 and 2008 are $403,000 and $164,000, respectively.

Depreciation, Depletion and Amortization. DD&A expense increased by $2,477,000 or 65% due to higher capitalized costs. Capitalized costs increased due to acquisition and successful drilling and development activities, including additional property interests acquired in both the Giddings Field, Texas and the Bakken Shale trend in North Dakota.

Interest Income and Expense. Interest expense increased by $611,000 due to higher average debt levels in the third quarter of 2009 compared to the same period in 2008. During the third quarter of 2009, our average outstanding debt was approximately $101,000,000 compared to $50,000,000 for the same period in 2008. Interest income decreased by $165,000 in the third quarter of 2009 over the same period of 2008, due to on average lower invested cash balances and lower interest rates.

Hedge Ineffectiveness. In the third quarter of 2009 the loss from hedge ineffectiveness was $111,000, compared to gain from hedge ineffectiveness of $890,000 for the same period in 2008. In the second, third and fourth 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 for the year. In the third quarter of 2009, the differential between the market benchmark used for hedging and the prices we realized on our sales of oil and gas remained fairly consistent and given that the commodity hedges decreased in value during the first nine months of the year, the inception-to-date ineffectiveness decreased and we recorded an expense.

Loss on Derivative Contracts. In December 2008, we split a $50 million notional value interest rate swap that was previously accounted for as a cash flow hedge. The swap was split into a $10 million notional amount swap and a $40 million notional amount swap. We continued hedge accounting for the $40 million swap and accounted for the $10 million swap as a trading security. In the third quarter of 2009, we recognized cash settlement losses on the $10 million swap of $117,000. These losses were offset by mark-to-market gains of $34,000.

Other Income. Other income increased by $1,591,000 in the third quarter of 2009 compared to the same period in 2008 due to an increase in partnership income of $2,008,000, and an increase in property operating income of $17,000, these increased were partially offset by $434,000 lower partnership management fees. Our management fee income decreased due to decreased net revenues of the partnerships. Partnership income in the third quarter of 2009 included a one-time $1,000,000 gain related to the distribution of the Giddings Field proved undeveloped properties to us by an affiliated partnership.

In the third quarter 2009 we had a net gain on sales of properties and other assets of $57,000 versus $308,000 in the same period of 2008.

Income Tax Expense. Income tax expense for the third quarter of 2009 was $2,540,000 compared to $3,828,000 for the same period in 2008. Our income tax expense decreased due to lower pre-tax earnings. Our effective tax rate during the third quarter of 2009 was approximately 42.6% versus 39.8% in the same period during 2008. Our effective tax rate increased as a result of the non-cash compensation expense on qualified stock options; the expense related to these options is not deductible in determining taxable income as well as an increase in our expected year-to-date tax rates versus our expectation in the prior quarter.

Nine months ended September 30, 2009, compared to nine months ended September 30, 2008

The Company recorded net income of $7,404,000 for the nine months ended September 30, 2009 compared to net income of $17,813,000 for the same period in 2008. This $10,409,000 decrease resulted primarily from the following factors:

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

Oil and gas sales                                                      $ (20,235 )
Lease operating expenses                                                   3,972
Production taxes                                                           3,843
Exploration expense                                                         (457 )
Re-engineering and workovers                                                 274
General and administrative expenses ("G&A")                                 (643 )
Depletion, depreciation and amortization expense ("DD&A")                 (4,220 )
Impairment expense                                                          (128 )
Net interest income (expense)                                               (166 )
Hedge ineffectiveness                                                       (139 )
Gain (loss) on derivative contracts                                         (141 )
Gain (loss) on sale of property                                             (724 )
Other income - net                                                         2,501

Income before income taxes                                               (16,263 )
Provision for income taxes                                                 5,854

Decrease in net income                                                 $ (10,409 )

The following discussion applies to the above changes.

Oil and Natural Gas Sales. Net revenues from oil and gas sales decreased $20,235,000, or 29%. Revenue increased by $3,666,000 and $837,000 due to the Giddings Field and Bakken acquisitions, respectively. These increases were offset by a decrease of $24,738,000 that resulted primarily from decreases in commodity prices. Properties purchased in the two acquisitions accounted for increased volumes of approximately 1,338,000 Mcf of gas and approximately 18,000 barrels of oil. Price and production comparisons are set forth in the following table.

                                                          Percent             Nine Months Ended
                                                          increase              September 30,
                                                         (decrease)           2009          2008
Gas Production (MMcf)                                            52 %           3,430        2,251
Oil Production (MBbls)                                            9 %             601          553
Barrel of Oil Equivalent (MBOE)                                  26 %           1,173          928
Average Price Gas Before Hedge Settlements (per Mcf)            -67 %      $     3.06     $   9.24
Average Price Oil Before Hedge Settlements (per Bbl)            -53 %      $    51.45     $ 109.81
Average Realized Price Gas (per Mcf)                            -55 %      $     3.95     $   8.82
Average Realized Price Oil (per Bbl)                            -34 %      $    59.23     $  89.50

Lease Operating Expenses. Lease operating expenses decreased from approximately $17,174,000 during the first nine months of 2008 to $13,202,000 for the same period in 2009, a decrease of $3,972,000 or 23%. On a unit-of-production basis, BOE costs decreased by $7.24 or 39% as a result of acquisition of properties with lower operating costs, divestitures of properties with higher operating costs, re-engineering projects completed during 2008 that either enhanced production or lowered per unit operating costs, and reductions in costs for materials, services and rigs during 2009

Re-engineering and Workover. Re-engineering and workover costs decreased by $274,000 from $2,331,000 to $2,057,000, due to completion of projects associated with 2007 and 2008 acquisitions that occurred during 2008 and the divestiture of certain higher cost properties.

Production Taxes. Production taxes decreased by $3,843,000 or 60%, due to decreased revenues as well as from a nonrecurring refund of $599,000 resulting from a regulatory state tax exemption received on Austin Chalk wells with high drilling costs. The production taxes we pay are generally calculated as a percentage of oil and natural gas sales revenues before the effects of hedging. Our production taxes for the first nine months of 2009 and 2008 were 6.2% and 7.9%, respectively, of oil and gas sales before the effects of hedging. The 2009 rate decreased compared to 2008 as a result of a change in our portfolio of producing properties, production tax exemptions and the nonrecurring refund.

General and Administrative Expenses. G&A increased by $643,000 during the first nine months of 2009 compared to the same period in 2008. Additional non-cash charges of $602,000 related to stock-based compensation were the primary cause of the increase. The remaining $41,000 increase resulted from the overall expansion of the business and salary increases which were offset by our ongoing cost reduction efforts. The total non-cash charges related to stock-based compensation included in G&A expense for the nine months ended September 30, 2009 and 2008 are $1,064,000 and $462,000, respectively.

Depreciation, Depletion and Amortization. DD&A expense increased by $4,220,000 or 37% due to higher capitalized costs. Capitalized costs increased due to acquisitions of additional property interests in both the Austin Chalk and Bakken Shale and continued successful drilling in those same areas.

Interest Income and Expense. Interest expense decreased by $309,000 due to lower weighted average debt levels and lower interest rates during the nine months of 2009 compared to the same period in 2008. During the first nine months of 2009, our weighted average outstanding debt was approximately $51,000,000 compared to $57,000,000 for the same period in 2008. The interest rate on our debt at September 30, 2009 was 3.00% versus 6.22% at September 30, 2008. Interest income decreased by $475,000 during the first nine months of 2009 compared to the same period during 2008, due to a lower average invested cash balance as well as lower interest rates on that balance.

Hedge Ineffectiveness. For the first nine months of 2009 the loss from hedge ineffectiveness was $186,000, compared to a loss of $47,000 for the same period in 2008. During 2008 our realized price was more consistent with the market benchmark used for hedging than during the same period of 2009; therefore, the ineffectiveness charge was lower.

Loss on Derivative Contracts. In December 2008, we split a $50 million notional value interest rate swap that was previously accounted for as a cash flow hedge. The swap was split into a $10 million notional amount swap and a $40 million notional amount swap. We continued hedge accounting for the $40 million swap and accounted for the $10 million swap as a trading security. For the first nine months of 2009, we recognized cash settlement losses on the $10 million swap of $294,000. These losses were offset by mark-to-market gains of $153,000.

Other Income. Other income increased by $2,501,000 during the first nine months of 2009 compared to the same period in 2008 due to an increase in partnership income of $2,813,000 and an increase in property operating income of $260,000, partially offset by a $572,000 decrease in partnership management fees. . . .