The following discussion of operations for the three and nine months ended September 30, 2008 and 2007 should be read in conjunction with our condensed consolidated financial statements and the notes thereto included in this Form 10-Q and with the consolidated financial statements, notes and management's discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Overview

We are an independent oil and natural gas company engaged in the acquisition, development, production and exploration of oil and natural gas properties located onshore in the United States. We focus on properties within our core operating areas which we believe have significant development and exploration opportunities. Our properties are primarily located in the Mid-Continent region, including North Louisiana and the Haynesville Shale, the Fayetteville Shale in the Arkoma basin of Arkansas and in the Western region, including the Permian Basin of West Texas and southeastern New Mexico. We seek to maintain a portfolio of long-lived, lower risk properties in resource-style plays, which typically are characterized by lower geological risk and a large inventory of identified drilling opportunities. We focus on increasing drilling opportunities in our core areas, where we can apply our experience and economies of scale, including the Fayetteville Shale in Arkansas and the Haynesville Shale in North Louisiana. We believe the steps we have taken during 2007 and to date in 2008 will help us grow production and reserves in resource-style, tight-gas areas in North Louisiana and Arkansas.

In the last several months, the Haynesville Shale has become one of the most active new natural gas plays in the United States. This area is defined by a shale formation located approximately 1,500 feet below the Cotton Valley formation at depths ranging from approximately 10,500 feet to 13,000 feet. The formation is as much as 300 feet thick and is composed of an organic rich black shale. It is located across numerous parishes in Northwest Louisiana, primarily in Caddo, Bossier, Red River, DeSoto, Webster and Bienville parishes and also in East Texas, primarily in Harrison, Panola and Shelby counties. Our Elm Grove/Caspiana acreage position is located near what we believe is the center of the play. We believe our acreage in those fields is prospective for Haynesville Shale natural gas production based, in part, on a vertical test well we drilled in 2006 in which over 200 feet of Haynesville Shale was found to be present. We currently own or have entered into agreements to acquire approximately 300,000 net acres in the Haynesville Shale. We have completed our first four operated horizontal wells in the Haynesville Shale. We are currently operating ten horizontal drilling rigs and anticipate an increase to twelve operated rigs by the end of the year.

We also recently announced the successful discovery of a new shale play in South Texas. The objective reservoir is the Eagle Ford Shale found at a depth of approximately 11,000 feet to 12,000 feet and with thickness of approximately 250 feet. We currently have approximately 150,000 net acres leased in the play. Our first well, the South Texas Syndicate #241-1H, had an initial production rate of 9.1 million cubic feet of natural gas equivalent per day (Mmcfe/d). We currently are drilling our second well and have budgeted to keep one rig active in the field for the balance of 2008 and 2009.

In the first nine months of 2008, we produced 78.4 billion cubic feet of natural gas equivalent (Bcfe) compared to production of 88.5 Bcfe for the comparable period of the prior year resulting in a decrease of 10.1 Bcfe due to the sale of our Gulf Coast properties during the fourth quarter of 2007. Natural gas production was 71.6 billion cubic feet (Bcf) and oil production was 1,128 thousand barrels of oil (Mbbls) for the first nine months of 2008. We drilled 523 gross wells (194.6 net) during the first nine months of 2008, 513 of which were successful for a success rate of 98%. We reported oil and gas revenues for the nine months ended September 30, 2008 of $824.5 million. This represents an increase of $168.5 million as compared to the prior year as increasing oil and natural gas prices more than offset the decrease in our production volumes resulting from the sale of our Gulf Coast properties.

Our financial results depend upon many factors, particularly the price of oil and natural gas and our ability to market our production. Commodity prices are affected by changes in market demands, which are impacted by overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and

other factors. As a result, we cannot accurately predict future oil and natural gas prices, and therefore, we cannot determine the effect increases or decreases in future prices will have on our capital program, production volumes and future revenues. Finding and developing oil and natural gas reserves at economical costs are also critical to our long-term success.

Capital Resources and Liquidity

Our primary sources of capital resources and liquidity are internally generated cash flows from operations, availability under our Senior Credit Agreement, and access to both the debt and equity capital markets. The capital markets have been impacted by concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the mortgage market and a declining real estate market. Continued volatility in the capital markets could adversely impact our access to the capital markets, which could reduce our ability to execute our development and acquisition plans, our ability to replace our reserves, and eventually, our production levels. We do not currently believe our liquidity has been materially affected by the recent events in the global financial markets and we do not expect our liquidity to be materially impacted in the near future. We will continue to monitor our liquidity and the capital markets.

In October, we announced that we will reduce our 2009 capital budget by approximately one third and reallocate spending to projects with the highest internal rates of return and highest potential for reserve growth. This shift will allow us to further affirm our strong capitalization. The 2009 capital budget, which includes drilling, completions, seismic and facilities, is currently $1.0 billion, revised from a previously announced budget of $1.5 billion. The reallocation of capital reflects an increased emphasis on development of non-proved locations in our successful Haynesville, Fayetteville and Eagle Ford Shale projects, with the benefit of higher expected overall reserve growth potential. In conjunction with 2009 capital planning, we also completed the redetermination of our Senior Credit Agreement, which was increased to $1.1 billion from $800 million, in September, 2008. We will continue to monitor the oil and natural gas markets and may adjust our capital program should circumstance warrant it.

Our future capital resources and liquidity may depend, in part, on our success in developing the leasehold interests that we acquired during the fourth quarter of 2007 and to date in 2008. Cash is required to fund capital expenditures necessary to offset inherent declines in production and proven reserves, which is typical in the capital-intensive oil and gas industry. Future success in growing reserves and production will be highly dependent on capital resources available and the success of finding and acquiring additional reserves. We expect to use marketable securities on hand at September 30, 2008, additional borrowings under our Senior Credit Agreement and net proceeds from future capital transactions, if necessary, to provide us with additional financial flexibility to fund the balance of our 2008 and our 2009 capital budgets as well as any potential acquisitions. Long-term cash flows are subject to a number of variables including the level of production and prices as well as various economic conditions that have historically affected the oil and natural gas industry. A material drop in oil and natural gas prices or a reduction in production and reserves would reduce our ability to fund capital expenditures, reduce debt, meet financial obligations and remain profitable.

Cash Flow

Our sources of cash for the nine months ended September 30, 2008 and 2007 were from operating and financing activities. Proceeds from the sale of common stock, the issuance of new senior debt and cash received from operations were offset by repayments of our Senior Credit Agreement and cash used in investing activities to fund our drilling program and acquisition activities, net of any divestiture activities. Operating cash flow fluctuations were substantially driven by changes in commodity prices and changes in our production volumes. Working capital was substantially influenced by these variables. Fluctuation in cash flow may result in an increase or decrease in our future capital expenditures. See "Results of Operations" below for a review of the impact of prices and volumes on sales.

Net (decrease) increase in cash is summarized as follows:

                                                         Nine Months Ended
                                                           September 30,
                                                        2008            2007
                                                          (In thousands)
      Cash flows provided by operating activities   $    525,784     $  452,988
      Cash flows used in investing activities         (2,497,027 )     (734,233 )
      Cash flows provided by financing activities      1,973,310        285,453

      Net increase in cash                          $      2,067     $    4,208

Operating Activities. Net cash provided by operating activities for the nine months ended September 30, 2008 and 2007 were $525.8 million and $453.0 million, respectively.

Net cash provided by operating activities increased in 2008 primarily due to changes in working capital associated with the 11% decrease in production volumes as a result of the sale of our Gulf Coast properties during the fourth quarter of 2007 offset by the 41% increase in our average realized natural gas equivalent price compared to the same period in the prior year. We expect to continue to increase our production volumes during the fourth quarter of 2008 and in 2009 as a result of our 2008 and 2009 capital programs. However, we are unable to predict future production levels or future commodity prices, and, therefore, we cannot provide any assurance about future levels of net cash provided by operating activities.

Investing Activities. The primary driver of cash used in investing activities is capital spending, inclusive of acquisitions and net of dispositions. Cash used in investing activities was $2.5 billion and $734.2 million for the nine months ended September 30, 2008 and 2007, respectively.

During the first nine months of 2008, we spent $2.5 billion on capital expenditures. Our acquisitions were partially funded by the remaining restricted cash that we had deposited with a qualified intermediary following the sale of our Gulf Coast properties to facilitate like-kind exchange transactions. Our program to acquire additional interests and acreage in our key areas, including the Fayetteville Shale in Arkansas, Elm Grove and Terryville fields in Louisiana, the Haynesville Shale in Louisiana and the Eagle Ford Shale in Texas is ongoing on a selective basis. In addition, we participated in the drilling of 523 gross wells in 2008 (194.6 net wells). We spent an additional $75.5 million on other property and equipment during the first nine months of 2008 as well, primarily to fund the development of gathering systems in the Fayetteville Shale in Arkansas.

During the first nine months of 2008, we used a portion of the funds from our debt and equity offerings discussed below to purchase a net $252.7 million of marketable securities. These marketable securities have been classified and accounted for as trading securities and will be used primarily to fund our leasing and acquisition activities in the Haynesville Shale.

During the first nine months of 2007, we spent $699.9 million on capital expenditures in conjunction with our acquisition and drilling programs. We acquired additional interests in both the Elm Grove and Terryville fields and drilled 268 wells.

During the third quarter of 2007, we closed our acquisition of One Tec, L.L.C. with properties in Arkansas, Indiana and Texas for $39.9 million, net of $2.1 million cash acquired.

The remaining portion of our capital budget for 2008 and our 2009 capital budget is expected to be funded from marketable securities on hand at September 30, 2008, additional borrowings under the Senior Credit Agreement, cash flows from operations and net proceeds from future capital offerings, if necessary. We establish the budget for these amounts based on our current estimate of future commodity prices. Due to the volatility of commodity prices, our budget may be periodically adjusted.

Financing Activities. Net cash flows provided by financing activities were $2.0 billion and $285.5 million for the nine months ended September 30, 2008 and 2007, respectively. Cash flows provided by financing activities in 2008 were the result of the sale of a total of 78.2 million shares of common stock and the issuance of $800 million of new senior notes in May and June of 2008.

On February 1, 2008, we sold an aggregate of 20.7 million shares of our common stock in an underwritten public offering. The net proceeds from the sale were approximately $297 million, after deducting underwriting discounts and commissions and estimated expenses.

On May 13, 2008, we sold an aggregate of 25.0 million shares of our common stock in an underwritten public offering. Pursuant to the underwriting agreement, we granted the underwriters a 30-day option to purchase up to an additional 3.75 million shares of common stock at the public offering price less underwriting discounts and commissions. The underwriters exercised in full their option to purchase additional shares of common stock which closed on May 23, 2008. The net proceeds from these sales were approximately $727 million, after deducting underwriting discounts and commissions and estimated expenses.

On May 13, 2008, we issued $500 million aggregate principal amount of the 2015 Notes in a private placement under the Securities Act of 1933, as amended. The net proceeds from the sale of the 2015 Notes were approximately $490 million, after deducting the initial purchasers' discounts and estimated offering expenses and commissions.

On June 19, 2008, we issued an additional $300 million aggregate principal amount of 2015 Notes in a private placement under the Securities Act of 1933, as amended. The net proceeds from the sale of the 2015 Notes were approximately $294 million, after deducting the initial purchasers' discount and estimated offering expenses and commissions.

On August 15, 2008, we sold an aggregate of 28.8 million shares of our common stock in an underwritten public offering. The net proceeds from the sale were approximately $734 million, after deducting underwriting discounts and commissions and estimated expenses.

Capital financing and excess cash flow are used to repay debt to the extent available. During the first nine months of 2008, we had net borrowings of $227.7 million primarily due to the cash requirements of our drilling and acquisition activities in 2008 offset by sales of common stock and issuances of long term debt discussed above. As of September 30, 2008, the Senior Credit Agreement had a $1.1 billion borrowing base. During the first nine months of 2007, we had net borrowings of $280.8 million.

Contractual Obligations

We have no material changes in our long-term commitments associated with our capital expenditure plans or operating agreements other than those described below. Our level of capital expenditures will vary in future periods depending on the success we experience in our acquisition, developmental and exploration activities, oil and natural gas price conditions and other related economic factors. Currently no sources of liquidity or financing are provided by off-balance sheet arrangements or transactions with unconsolidated, limited-purpose entities.

In our Form 10-K for the year ended December 31, 2007, we disclosed that we had drilling rigs under contract for a total commitment over three years of $69.3 million. As of September 30, 2008, we have drilling rigs under contract for a total commitment of $423.5 million over the next 4 years.

We have various other contractual commitments pertaining to exploration, development and production activities. We have work related commitments for, among other things, pipeline and well equipment, obtaining and processing seismic data and natural gas transportation. At September 30, 2008, these work related commitments totaled $252.4 million over the next 9 years.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operation are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There have been no changes to our critical accounting policies from those described in our annual report on Form 10-K for the year ended December 31, 2007.

Results of Operations

Quarters ended September 30, 2008 and 2007

We reported net income of $305.5 million for the three months ended September 30, 2008 compared to net income of $26.8 million for the comparable period in 2007. The increase in our net income of $278.7 million from the three months ended September 30, 2007 was driven by the change in fair value of derivative instruments due to the decline in the forward strip pricing used to value our derivatives which resulted in a net gain on derivative contracts before tax of $388.2 million.

                                                         Three Months Ended
                                                           September 30,
In thousands (except per unit and per Mcfe amounts)      2008          2007          Change
Net income available to common stockholders           $  305,465     $  26,795     $  278,670
Oil and gas revenues                                     304,960       213,337         91,623
Expenses:
Production:
Lease operating                                           12,324        17,236         (4,912 )
Workover and other                                         1,696         2,110           (414 )
Taxes other than income                                   12,185        12,844           (659 )
Gathering, transportation and other                       12,489         8,265          4,224
General and administrative:
General and administrative                                15,607        12,258          3,349
Stock-based compensation                                   3,389         3,581           (192 )
Depletion, depreciation and amortization:
Depletion-Full cost                                       98,293        99,802         (1,509 )
Depreciation-Other                                           787           854            (67 )
Accretion expense                                            320           456           (136 )
Net gain on derivative contracts                         388,216        20,337        367,879
Interest expense and other                               (40,018 )     (34,308 )       (5,710 )
Income tax provision                                    (190,603 )     (15,165 )     (175,438 )
Production:
Natural Gas-Mmcf (1)                                      26,701        25,601          1,100
Crude Oil-Mbbl                                               378           742           (364 )
Natural Gas Equivalent-Mmcfe                              28,972        30,052         (1,080 )
Average Daily Production-Mmcfe                               315           327            (12 )
Average price per unit (2):
Natural gas-Mcf (1)                                   $     9.68     $    6.22     $     3.46
Crude oil price-Bbl                                       117.14         73.04          44.10
Equivalent-Mcfe                                            10.45          7.10           3.35
Average cost per Mcfe:
Production:
Lease operating                                       $     0.43     $    0.57     $    (0.14 )
Workover and other                                          0.06          0.07          (0.01 )
Taxes other than income                                     0.42          0.43          (0.01 )
Gathering, transportation and other                         0.43          0.28           0.15
General and administrative:
General and administrative                                  0.54          0.41           0.13
Stock-based compensation                                    0.12          0.12             -
Depletion                                                   3.39          3.32           0.07

(1) Approximately 2% and 3% of natural gas production represents natural gas liquids (calculated with a 6:1 equivalent ratio) with an average price of $67.32 per Bbl and $44.11 per Bbl for the three months ended September 30, 2008 and 2007, respectively.

(2) Amounts exclude the impact of cash paid/received on settled contracts as we did not elect to apply hedge accounting.

For the three months ended September 30, 2008, oil and natural gas revenues increased $91.6 million from the same period in 2007, to $305.0 million. The increase was primarily due to the increase of $3.35 per Mcfe in our realized average price to $10.45 per Mcfe, which increased revenues by $97 million. The effect of the increase in price was partially offset by a decrease in production of 1,080 Mmcfe due to the sale of our Gulf Coast properties during the fourth quarter of 2007. Decreased production led to an approximate $7.7 million decrease in revenues for the three months ended September 30, 2008.

Lease operating expenses decreased $4.9 million for the three months ended September 30, 2008. The decrease was primarily due to the decrease in production volumes as a result of the sale of our Gulf Coast properties during the fourth quarter of 2007. On a per unit basis, lease operating expenses decreased from $0.57 per Mcfe in 2007 to $0.43 per Mcfe in 2008. This decrease on a per unit basis is primarily due to the sale of our higher lease operating cost Gulf Coast properties during the fourth quarter of 2007 and an increase in production from lower operating cost areas in Arkansas and Louisiana.

Workover expenses decreased $0.4 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. The decrease was primarily due to the sale of our Gulf Coast properties during the fourth quarter of 2007 which historically had a higher amount of activity compared to our ongoing operations.

Taxes other than income decreased $0.7 million for the three months ended September 30, 2008 as compared to the same period in 2007. The largest components of taxes other than income are production and severance taxes which are generally assessed as either a percentage of gross oil and natural gas sales or as a fixed rate based on production. As a percentage of oil and gas sales, taxes other than income decreased from 6% in 2007 to 4% in 2008. This decrease as a percentage of revenue is primarily attributable to the sale of our Gulf Coast properties and the increase in production associated with Louisiana and Arkansas.

Gathering, transportation and other expense increased $4.2 million, or $0.15 per Mcfe, for the three months ended September 30, 2008 as compared to the same period in 2007. This increase was primarily due to an increase in production in the Fayetteville Shale which has higher gathering, transportation and other costs.

General and administrative expense for the three months ended September 30, 2008 increased $3.3 million as compared to the same period in 2007. This increase was primarily attributable to the ongoing effort of adding personnel to support the ramp up in activity associated with our 2008 drilling program. This building of the work force in a competitive environment resulted in approximately $3.1 million of additional expenses related to recruiting, retaining and compensating employees in the current quarter compared to the same quarter in the prior year.

Depletion for oil and natural gas properties is calculated using the unit of production method, which essentially depletes the capitalized costs associated with the evaluated properties plus future development costs based on the ratio of production volume for the current period to total remaining reserve volume for the evaluated properties. Depletion expense decreased $1.5 million for the three months ended September 30, 2008 from the same period in 2007, to $98.3 million. This decrease was primarily attributable to the decrease in production volumes due to the sale of our Gulf Coast properties during the fourth quarter of 2007 coupled with the proceeds from such sale being treated as an adjustment to our full cost pool. On a per unit basis, depletion expense increased $0.07 per Mcfe to $3.39 per Mcfe.

We enter into derivative commodity instruments to economically hedge our exposure to price fluctuations on our anticipated oil and natural gas production. Consistent with the prior year, we have elected not to designate any positions as cash flow hedges for accounting purposes, and accordingly, we recorded the net change in the mark-to-market value of these derivative contracts in the consolidated statement of operations. At September 30, 2008, we had a $69.6 million derivative asset, $55.2 million of which was classified as current, and a $24.1 million derivative liability, $13.6 million of which was classified as current. The Company recorded a net derivative gain of $388.2 million ($423.9 million net unrealized gain and $35.7 million loss for cash paid on

settled contracts) for the three months ended September 30, 2008 compared to a net derivative gain of $20.3 million ($3.0 million unrealized loss and a $23.3 million gain for cash received on settled contracts) in the prior year. This increase in our net derivative income is primarily attributable to the recent decrease in the forward strip pricing used to value our derivatives.

Interest expense and other increased $5.7 million for the three months ended September 30, 2008 compared to the same period in 2007. Interest expense increased $15.8 million due to the issuance of $800 million of new long-term debt in 2008 partially offset by a reduction in interest expense associated with our Senior Credit Agreement of $9.4 million from the prior year due to the decrease in our outstanding balance.

Income tax expense for the three months ended September 30, 2008 increased $175.4 million from the prior year. The increase in income tax expense from prior year was primarily due to our pre-tax income of $496.1 million for the three months ended September 30, 2008 compared to our pre-tax income of $42.0 . . .