This discussion should be read in conjunction with the financial statements of the Company and notes thereto.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow provided by operations for the nine month period ended September 30, 2008 was $75,736,000. Excluding the effects of significant unforeseen expenses or other income, our cash flow from operations fluctuates primarily because of variations in oil and gas production and prices or changes in working capital accounts. Our oil and gas production will vary based on actual well performance but may be curtailed due to factors beyond our control. Hurricanes in the Gulf of Mexico may shut down our production for the duration of the storm's presence in the Gulf or damage production facilities so that we cannot produce from a particular property for an extended amount of time. In addition, downstream activities on major pipelines in the Gulf of Mexico can also cause us to shut-in production for various lengths of time.

Our realized oil and gas prices vary due to world political events, supply and demand of products, product storage levels, and weather patterns. We sell the vast majority of our production at spot market prices. Accordingly, product price volatility will affect our cash flow from operations. To mitigate price volatility we sometimes lock in prices for some portion of our production through the use of financial instruments.

The Company's activities include development and exploratory drilling. The Company's strategy is to develop a balanced portfolio of drilling prospects that includes lower risk wells with a high probability of success and higher risk wells with greater economic potential.

For 2008 we budgeted $60 million for exploration and development in our core operating areas. As of November 2008, the Company has committed approximately $50 million on wells in these areas that have been spudded since January 1, 2008. We expect to continue to make significant capital expenditures over the next several years as part of our long-term growth strategy.

If our exploratory drilling results in significant new discoveries, we will have to expend additional capital in order to finance the completion, development, and potential additional opportunities generated by our success. We believe that, because of the additional reserves resulting from the successful wells and our record of reserve growth in recent years, we will be able to access sufficient additional capital through additional bank financing.

The Company has in place both a stock repurchase program and a limited partnership interest repurchase program. Spending under these programs in 2007 was $4.8 million. As of September 30, 2008 the Company has expended approximately $4.89 million on these programs. The amount of treasury stock the Company may purchase is restricted by debt covenants with the Company's primary lender.

The Company currently maintains two credit facilities with a bank totaling $360 million, with a combined current borrowing base of $133.9 million. The bank reviews the borrowing base semi-annually and, at their discretion, may decrease or propose an increase to the borrowing base relative to a redetermined estimate of proved oil and gas reserves. Our oil and gas properties are pledged as collateral for the line of credit and we are subject to certain financial covenants defined in the agreement. We are currently in compliance with these financial covenants. If we do not comply with these covenants on a continuing basis, the lenders have the right to refuse to advance additional funds under the facility and/or declare all principal and interest immediately due and payable.

During the second quarter of 2008, the Company's offshore subsidiary arranged a subordinated credit facility with a private lender controlled by a director of the Company. The facility provides availability of $50 million and is secured by properties released by the bank and pledged under this agreement. The current advances under this credit facility are $20 million due January 2010.

It is the goal of the Company to increase its oil and gas reserves and production through the acquisition and development of oil and gas properties. The Company also continues to explore and consider opportunities to further expand its oilfield servicing revenues through additional investment in field service equipment. However, the majority of the Company's capital spending is discretionary, and the ultimate level of expenditures will be dependent on the Company's assessment of the oil and gas business environment, the number and quality of oil and gas prospects available, the market for oilfield services, and oil and gas business opportunities in general.

RESULTS OF OPERATIONS

Revenues and net income during the nine month period ended September 30, 2008, as compared to the same periods in 2007, reflect the increased oil and gas sales, presented below, offset by exploration costs and depreciation and depletion of oil and gas properties. The table summarizes production volumes and average sales prices realized (including realized gains and losses from derivatives).

                                         Nine Months Ended                              Three Months Ended
                                           September 30                                    September 30
                                                            Increase /                                     Increase /
                                2008            2007        (Decrease)          2008           2007        (Decrease)
Barrels of Oil Produced           469,000        419,000         50,000          149,000        153,000         (4,000 )
Average Price Received      $       95.05   $      62.34   $      32.71     $      96.89   $      72.99   $      23.91

Oil Revenue                 $  44,577,000   $ 26,120,000   $ 18,457,000     $ 14,437,000   $ 11,165,000   $  3,272,000

MCF of Gas Produced             6,838,000      7,895,000     (1,057,000 )      2,115,000      3,677,000     (1,562,000 )
Average Price Received      $        9.36   $       7.81   $       1.55     $       9.21   $       6.64   $       2.58

Gas Revenue                 $  63,997,000   $ 61,684,000   $  2,313,000     $ 19,489,000   $ 24,405,000   $ (4,916,000 )

Total Oil & Gas Revenue     $ 108,574,000   $ 87,804,000   $ 20,770,000     $ 33,926,000   $ 35,570,000   $ (1,644,000 )

Oil and gas prices received excluding the impact of derivatives were;

                            Nine Months Ended                  Three Months Ended
                              September 30                        September 30
                                          Increase /                          Increase /
                      2008      2007      (Decrease)      2008      2007      (Decrease)
        Oil Price   $ 111.46   $ 61.65   $      49.81   $ 116.19   $ 73.03   $      43.16
        Gas Price   $   9.95   $  7.13   $       2.83   $  10.22   $  6.20   $       4.02

Changes in production are due to production from properties added during 2007 and early 2008 offset by the natural decline of existing properties. The increase in oil production is related to our onshore drilling program while the change in gas production reflects the decline in production from our offshore properties.

Lease operating expense for the nine months of 2008 increased by $6,484,000, 25.17% compared to 2007 due to the addition of lease operating expenses of new properties, increased production taxes related to higher prices and overall price increases in oil field services.

General and administrative expenses for the nine months of 2008 increased by $883,000, 8.6% compared to 2007.

Field Service income and expense for the nine months of 2008 increased $586,000 and $1,446,000, respectively, compared to 2007. These increases reflect the upward trend in rates and costs during 2008.

Depreciation and depletion increased to $50,809,000 in 2008 from $42,713,000 in 2007. This increase is directly attributed to the majority of the Company's offshore properties coming on line late 2007. These additions increased the overall property basis and production for the company.

This Report contains forward-looking statements that are based on management's current expectations, estimates and projections. Words such as "expects," "anticipates," "intends," "plans," "believes," "projects" and "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, and are subject to the safe harbors created thereby. These statements are not guarantees of future performance and involve risks and uncertainties and are based on a number of assumptions that could ultimately prove inaccurate and, therefore, there can be no assurance that they will prove to be accurate. Actual results and outcomes may vary materially from what is expressed or forecast in such statements due to various risks and uncertainties. These risks and uncertainties include, among other things, the possibility of drilling cost overruns and technical difficulties, volatility of oil and gas prices, competition, risks inherent in the Company's oil and gas operations, the inexact nature of interpretation of seismic and other geological and geophysical data, imprecision of reserve estimates, and the Company's ability to replace and expand oil and gas reserves. Accordingly, stockholders and potential investors are cautioned that certain events or circumstances could cause actual results to differ materially from those projected.