Coalbed methane, or CBM, is natural gas that is trapped within buried coal and is stored, or adsorbed, onto the internal surfaces of the coal. In the past 20 years, CBM in the United States has evolved into a major component of the United States natural gas production. According to the National Energy Technology Laboratory, CBM provides approximately 8% of daily natural gas production in the United States.

The Rocky Mountain region, due to its immense coal reserve base, is a significant source of United States CBM production, and there are more than 17,000 CBM wells in the Powder River Basin, according to the U.S. Department of Energy. The primary CBM basins include the San Juan, Green River, Raton, Powder River and Uinta Basins in the western United States.

According to the U.S. Geological Survey, there are an estimated 700 Tcf of potential coalbed methane reserves in place that have not yet been developed in the lower 48 states. CBM production is expected to increase substantially due to the economic viability of the resources and the tremendous reserve potential of the numerous, virtually undeveloped U.S. coal basins. Within the Rocky Mountain region, the Powder River Basin has become a major CBM producing basin.

According to the U.S. Department of Energy 2002 Powder Basin Coalbed Methane Development and Produced Water Management Study, the Powder River Basin has an estimated 61 Tcf of CBM in place, of which 39 Tcf is estimated as recoverable. Of this 39 Tcf, 12 Tcf of recoverable CBM reserves are attributable to the Montana portion of the basin and 27 Tcf are attributable to the Wyoming portion. Approximately 0.94 Bcf of CBM is currently produced from the Powder River Basin per day.

The Company’s Powder River Basin properties are located in Wyoming and Montana. The Company’s principal Wyoming properties in the Powder River Basin are located in two distinct project areas: Recluse and Cabin Creek.

As of September 30, 2006, the Company held approximately 96,000 gross (54,000 net) acres in the Powder River Basin in Wyoming for prospective CBM development and it operated over 98% of this acreage. As of September 30, 2006, the Company had 668 approved drilling permits for its Powder River Basin properties in Wyoming and are in the process of applying for an additional 436 drilling permits.

The Company’s Montana properties are located in four project areas: Kirby, Deer Creek, Bear Creek and Bradshaw. As of September 30, 2006, the Company held approximately 325,000 gross (222,000 net) acres in Montana for prospective CBM development and it operated 100% of this acreage.

The Company has begun active development in both the Deer Creek and Kirby areas, and in 2005, it drilled 34 gross (32 net) wells. During the nine months ended September 30, 2006, the Company drilled an additional 116 gross (73 net) wells.

On April 20, 2006, the Company acquired undeveloped natural gas properties, including related interests and assets, located in the Green River Basin of Wyoming from Kennedy Oil for an aggregate purchase price of approximately $27.0 million in cash. The Company’s Green River Basin properties are located in the northeast area of Sweetwater County, Wyoming.

The properties currently consist of approximately 31,000 gross (30,000 net) undeveloped acres for prospective CBM development in the Fort Union Big Red Coal formation. As of September 30, 2006, the Company operated 100% of this acreage.

Revenue from gas sales increased $0.4 million during the nine months ended September 30, 2006, from $9.1 million during the nine months ended September 30, 2005 to $9.5 million during the nine months ended September 30, 2006.

Lease operating expenses increased $0.6 million in the nine months ended September 30, 2006 to $1.9 million, a 52% increase compared to the nine months ended September 30, 2005.

Depreciation, depletion, amortization and accretion expense increased $1.3 million for the nine months ended September 30, 2006 to $5.1 million, a 34% increase compared to the nine months ended September 30, 2005.