Crusader Energy (CKGRQ) 10-Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008.

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934 FOR THE TRANSITION PERIOD FROM                    TO                    .

COMMISSION FILE NO. 1-32533

CRUSADER ENERGY GROUP INC.

(Exact name of registrant as specified in its charter)

Nevada	88-0349241
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4747 Gaillardia Parkway
Oklahoma City, Oklahoma 73142
(Address of principal executive offices, including zip code)

(405) 285-7555
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yesþ      Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero  Accelerated filero  Non-accelerated filer  o
(Do not check if a smaller reporting company) Smaller reporting companyþ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso      Noþ

At November 6, 2008, the number of outstanding shares of the issuer’s common stock was 198,564,958.

CRUSADER ENERGY GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3. Quantitative and Qualitative Disclosures About Market Risk		37
Item 4T. Controls and Procedures		37
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		38
Item 1A. Risk Factors		38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 3. Defaults Upon Senior Securities		38
Item 4. Submission of Matters to a Vote of Security Holders		38
Item 5. Other Information		38
Item 6. Exhibits		39
SIGNATURES		40
INDEX TO EXHIBITS		41
EX-31.1
EX-31.2
EX-32.1
EX-32.2

AVAILABLE INFORMATION

     Crusader makes available free of charge on or through its Internet Web site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material has been electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The company’s Internet address is http://www.crusaderenergy.com and such filings are also available at the SEC’s Web site, http://www.sec.gov. Crusader also posts on its Internet Web site under the heading, “Investor Information”, other materials of general interest to investors including any current investor meeting information or Crusader conference or analyst presentations.

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

     This report contains “forward-looking statements” within the meaning of the Federal securities laws and regulations. Forward-looking statements are estimates and predictions by management about the future outcome of events and conditions that could affect Crusader’s business, financial condition and results of operations. We use words such as, “will,” “should,” “could,” “plans,” “expects,” “likely,” “anticipates,” “intends,” “believes,” “estimates,” “may,” and other words of similar expression to indicate forward-looking statements.

     There is no assurance that the estimates and predictions contained in our forward-looking statements will occur or be achieved as predicted. Any number of factors could cause actual results to differ materially from those referred to in a forward-looking statement, including drilling risks, operating hazards and other uncertainties inherent in the exploration for, and development and production of, oil and natural gas; volatility in oil and natural gas prices, including the adverse impact of lower prices on the amount of our cash flow available to meet capital expenditures, our ability to borrow and raise capital and on the values attributed to our proven reserves; drilling and operating risks in the unconventional shales and other reservoirs in which we operate, including uncertainties in interpreting engineering, reservoir and reserve data; the availability of technical personnel and drilling equipment; the timing and installation of processing and treatment facilities, third-party pipelines and other transportation facilities and equipment; changes in interest rates; and increasing production costs and other expenses.

     Further information on risks and uncertainties affecting our business is described under Risk Factors in this report and are also available in our reports filed with the Securities and Exchange Commission (“SEC”) which are incorporated by this reference as though fully set forth herein. We undertake no obligation to publicly update or revise any forward-looking statement.

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Crusader Energy Group Inc.

CONSOLIDATED BALANCE SHEETS (see Note 1)

	(Unaudited)
	September 30,			December 31,
	2008			2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	27,637,842		$	7,941,663
Accounts receivable:
Accrued oil and gas production revenue		18,095,835			7,581,187
Joint interest billings		23,545,280			14,045,470
Other		456,132			770,584
Prepaid expenses and other assets		4,816,657			126,450
Total current assets		74,551,746			30,465,354
OIL AND GAS PROPERTIES — AT COST, net, based on full cost accounting ($181,309,360 and $12,558,796 excluded from amortization at 2008 and 2007, respectively)		652,790,008			243,560,456
Derivative financial instruments		2,337,651			—
Other assets		20,298,926			5,199,199
	$	749,978,331		$	279,225,009
LIABILITIES AND MEMBERS’/STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	14,692,198		$	11,856,699
Accrued liabilities		22,987,939			5,934,262
Derivative financial instruments		13,989			1,775,617
Total current liabilities		37,694,126			19,566,578
LONG-TERM LIABILITIES
Asset retirement obligations		1,151,419			718,316
Derivative financial instruments		—			403,883
Other		—			215,778
Deferred income taxes		49,223,602			—
Notes payable		237,770,833			67,000,000
Total long-term liabilities		288,145,854			68,337,977
COMMITMENTS AND CONTINGENCIES (Note 9)
MEMBERS’ EQUITY		—			191,320,454
STOCKHOLDERS’ EQUITY
Common stock, $.01 par value, 500,000,000 authorized; 198,564,958 shares issued and outstanding at September 30, 2008		1,985,650			—
Additional paid-in capital		523,198,521			—
Accumulated deficit		(101,045,820	)		—
Total Stockholders’ Equity		424,138,351			—
	$	749,978,331		$	279,225,009

The accompanying notes are an integral part of these statements.

3

Crusader Energy Group Inc.

CONSOLIDATED STATEMENT OF OPERATIONS (see Note 1)

	(Unaudited)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
OPERATING REVENUES
Gas sales	$	19,461,726		$	5,236,783		$	40,291,425		$	14,789,573
Oil sales		13,682,006			5,508,222			35,337,557			12,127,594
Other		368,873			271,747			1,097,661			614,319
Total operating revenue		33,512,605			11,016,752			76,726,643			27,531,486
OPERATING COSTS AND EXPENSES
Lease operating		3,176,995			1,102,303			6,227,443			2,347,783
Production taxes		2,531,769			763,536			5,303,388			1,766,532
General and administrative		3,227,305			952,426			113,599,183			2,715,870
Depreciation, depletion and amortization		10,885,522			4,523,575			22,392,645			11,809,640
Accretion of asset retirement obligations		20,637			21,471			48,181			32,823
Total operating costs and expenses		19,842,228			7,363,311			147,570,840			18,672,648
Income (loss) from operations		13,670,377			3,653,441			(70,844,197	)		8,858,838
OTHER (EXPENSE) INCOME
Interest expense		(8,283,932	)		(862,468	)		(11,384,422	)		(1,797,650	)
Interest income and other		480,469			24,862			603,926			68,182
Risk management		19,008,980			832,160			(1,197,988	)		115,030
Total other (expenses) income		11,205,517			(5,446	)		(11,978,484	)		(1,614,438	)
Income (loss) before income taxes		24,875,894			3,647,995			(82,822,681	)		7,244,400
Income tax expense		8,456,038			—			20,282,862			—
NET INCOME (LOSS)	$	16,419,856		$	3,647,995		$	(103,105,543	)	$	7,244,400
EARNINGS (LOSS) PER SHARE
Basic and Diluted	$	0.08					$	(0.77	)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		198,194,958						134,469,036
Diluted		209,973,306						134,469,036
PRO FORMA INFORMATION (NOTE 2)
Historical income (loss) from operations before income taxes				$	3,647,995					$	7,244,400
Pro forma provision (benefit) for income taxes					1,419,070						2,818,072
Pro forma net income (loss)				$	2,228,925					$	4,426,328
PRO FORMA EARNINGS PER SHARE
Basic and Diluted				$	0.02					$	0.04
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and Diluted					100,100,000						100,100,000

The accompanying notes are an integral part of these statements.

4

Crusader Energy Group Inc.

Consolidated Statement of Members’/Stockholders’ Equity (see Note 1)
(Unaudited)

				Common Stock				Additional					Total
	Members’			Number of		$.01 Par		Paid In		Accumulated			Stockholders’
	Equity			Shares		Value		Capital		Deficit			Equity
Balance as of January 1, 2008	$	191,320,454				$	—	$	—	$	—		$	191,320,454
Net loss through June 25, 2008		(2,059,723	)				—		—		—			(2,059,723	)
Effect of business combination with Westside Energy Corp.		(189,260,731	)		198,194,958		1,981,950		412,204,785		—			224,926,004
Stock compensation		—			370,000		3,700		110,993,736					110,997,436
Net loss, June 26, 2008 through September 30, 2008		—					—				(101,045,820	)		(101,045,820	)
Balance as of September 30, 2008	$	—			198,564,958	$	1,985,650	$	523,198,521	$	(101,045,820	)	$	424,138,351

The accompanying notes are an integral part of these statements.

5

Crusader Energy Group Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (see Note 1)

	(Unaudited)
	Nine Months Ended
	September 30,
	2008			2007
Cash flows from operating activities
Net income (loss)	$	(103,105,543	)	$	7,244,400
Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of effect of business combinations:
Depreciation, depletion and amortization		22,392,645			11,809,640
Accretion of asset retirement obligations		48,181			32,823
Amortization of loan costs		1,337,556			11,796
Amortization of loan discount		520,833			—
Deferred income taxes		20,282,862			—
Stock compensation		106,860,370			—
Change in assets and liabilities (Increase) decrease in Accounts receivable		(5,643,913	)		(5,914,097	)
Derivative financial instruments		(3,153,638	)		2,535,426
Prepaid assets and other		(5,055,685	)		(254,919	)
Increase (decrease) in Accounts payable, accrued liabilities and other		(16,724,092	)		(124,344	)
Net cash provided by operating activities		17,759,576			15,340,725
Cash flows used in investing activities
Acquisitions of businesses, net of cash acquired		1,660,233			—
Proceeds from sale of oil and gas property		250,000			—
Oil and gas property costs		(137,629,827	)		(53,039,505	)
Net cash used in investing activities		(135,719,594	)		(53,039,505	)
Cash flows from financing activities
Payment of loan costs		(5,634,250	)		(291,957	)
Payments on debt borrowings		(157,209,553	)		—
Proceeds from debt borrowings		300,500,000			38,750,000
Net cash provided by financing activities		137,656,197			38,458,043
NET INCREASE IN CASH AND CASH EQUIVALENTS		19,696,179			759,263
Cash and cash equivalents at beginning of period		7,941,663			5,122,383
Cash and cash equivalents at end of period	$	27,637,842		$	5,881,646
Cash paid during period for interest	$	4,440,859		$	1,233,000

The accompanying notes are an integral part of these statements.

6

Crusader Energy Group Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS — CONTINUED
(Unaudited)

Noncash investing and financing activities:

During 2008 and 2007, the Company recorded a net asset and related liability of $384,922 and $252,732 associated with the asset retirement obligations on oil and gas properties (see Note 6). The amounts recorded in 2008 included $238,380 assumed in the business acquisitions (see Note 1).

At September 30, 2008 and 2007, accounts payable and accrued liabilities consisted of $28,624,829 and $14,802,511 related to oil and gas acquisition and development costs, respectively.

On June 26, 2008, in conjunction with the business acquisitions (see Note 1), the estimated fair market values of the assets acquired and liabilities assumed were as follows:

Estimated fair value of assets acquired:
Current assets	$	38,426,589
Oil and gas properties		297,651,522
Other long-term assets		3,434,576
Total fair value of assets		339,512,687
Liabilities:
Current liabilities		46,186,108
Note payable		34,650,225
Deferred income taxes, net		28,728,695
Other long-term liabilities		318,428
Net value of assets acquired	$	229,629,231

The accompanying notes are an integral part of these statements.

7

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 1: Nature of Operations and Acquisition of Businesses

Knight Energy Group, LLC (“Knight”) was formed on August 29, 2006, and its major operations consist of the exploration for and acquisition, production, and sale of crude oil and natural gas with an area of concentration in Oklahoma and Texas. On December 31, 2007, Westside Energy Corporation (“Westside”), a public company traded on the American Stock Exchange, entered into a definitive agreement to combine with several affiliated privately-held entities, including Knight, Knight Energy Group II, LLC (“Knight II”), RCH Upland Acquisition, LLC (“RCH”), Hawk Energy Fund I, LLC (“Hawk”) and other entities acquired (consisting of Knight Energy Management, LLC, Crusader Energy Group, LLC and Crusader Management Corporation) (with Knight II, Hawk, RCH and the other entities acquired collectively referred to as the “Crusader Entities”). On June 26, 2008, the business combination contemplated by the contribution agreement (the “Westside Transaction”) was completed and Westside changed its name to Crusader Energy Group Inc. (“Crusader” or the “Company”). For accounting purposes, the Westside Transaction was treated as a reverse acquisition with Knight as the acquirer and Westside and the Crusader Entities as the acquired parties, as described more fully below. As such, the historical financial statements of Crusader are Knight’s historical financial statements. The acquisitions have been accounted for using the purchase method and the results of operations for Westside and Crusader Entities are included subsequent to June 26, 2008. The accompanying financial statements include the Company’s accounts and the accounts of its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The aggregate purchase price paid by Knight in the Westside Transaction was approximately $229,629,000, consisting of unregistered common stock (valued at the closing price ($2.27) of Westside common stock on January 2, 2008, the announcement date of the Westside Transaction), cash and warrants assumed (see table below). The operations of the acquired entities consist of the exploration for and acquisition, production and sale of crude oil and natural gas with an area of concentration in Oklahoma and Texas. Knight completed the business combinations for the following reasons:

• additional opportunities to exploit its horizontal drilling expertise;

• attractive acreage in areas such as the Barnett Shale in the Fort Worth Basin, Bakken Shale in the Williston Basin and various shale plays in the Permian Basin;

• expected synergies (elimination of Westside general and administrative expenses and Knight II management fee);

• appealing route to becoming a publicly traded company; and

• enhanced access to public markets to execute its business strategy.

8

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 1: Nature of Operations and Acquisition of Businesses — Continued

The preliminary allocation of the purchase price and the estimated fair market values of the assets acquired and liabilities assumed are subject to modification and are shown below. The purchase price allocation is preliminary because certain items, such as the determination of the final tax bases and the fair value of certain assets and liabilities as of the acquisition date, have not been completed.

Preliminary calculation and allocation of									Other
purchase price:	Westside		Knight II		Hawk		RCH		Entities		Total
Shares of common stock issued		26,471,274		53,223,684		14,700,000		3,700,000		—		98,094,958
Westside closing stock price	$	2.27	$	2.27	$	2.27	$	2.27	$	2.27	$	2.27
Fair value of common stock issued	$	60,089,792	$	120,817,763	$	33,369,000	$	8,399,000	$	—	$	222,675,555
Plus cash consideration		—		—		—		—		501,000		501,000
Plus merger cost		1,133,986		2,280,015		629,724		158,502		—		4,202,227
Plus warrants assumed		2,250,449		—		—		—		—		2,250,449
Total purchase price		63,474,227		123,097,778		33,998,724		8,557,502		501,000		229,629,231
Plus fair value of liabilities assumed:
Current liabilities		5,673,233		31,340,279		9,101,959		70,637		—		46,186,108
Note payable		34,650,225		—		—		—		—		34,650,225
Deferred income taxes		13,686,849		326,551		11,083,779		3,631,516		—		28,728,695
Other long-term liabilities		146,660		44,823		97,945		29,000		—		318,428
Total purchase price plus liabilities assumed	$	117,631,194	$	154,809,431	$	54,282,407	$	12,288,655	$	501,000	$	339,512,687
Fair value of assets acquired:
Current assets	$	3,968,529	$	29,129,104	$	4,290,981	$	1,037,975	$	—	$	38,426,589
Oil and gas properties		113,647,665		122,836,424		49,916,753		11,250,680		—		297,651,522
Other long-term assets		15,000		2,843,903		74,673		—		501,000		3,434,576
Total fair value of assets acquired	$	117,631,194	$	154,809,431	$	54,282,407	$	12,288,655	$	501,000	$	339,512,687

9

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 1: Nature of Operations and Acquisition of Businesses — Continued

The following summary presents unaudited pro forma consolidated results of operations for the three and nine months ended September 30, 2008 and 2007, respectively, as if the acquisitions comprising the Westside Transaction had occurred as of January 1, 2007. The pro forma results are for illustrative purposes only and include adjustments in addition to the pre-acquisition historical results, such as increased depreciation, depletion and amortization expense resulting from the allocation of fair value to oil and gas properties acquired and change in tax status. The unaudited pro forma information is not necessarily indicative of the operating results that would have occurred if the acquisitions had been consummated at that date, nor is it necessarily indicative of future operating results. During the nine months ended September 30, 2008, the Company recognized $106,677,219 of compensation expense related to a significant, non-recurring grant of stock options.

	Three Months Ended September 30,
	Actual					Pro Forma
	2008			2007		2008		2007
Revenues	$	33,512,605		$	11,016,752	$	33,512,605	$	14,959,557
Income (loss) from continuing operations		13,670,377			3,653,441		13,670,377		6,251,676
Net income (loss)		16,419,856			2,228,925		16,419,856		2,419,002
Earnings per share:
Basic and Diluted	$	0.08		$	0.02	$	0.08	$	0.02
Production volumes:			��
Gas (Mcf)		2,208,667			809,653		2,208,667		1,272,140
Oil (Bbls)		120,766			79,489		120,766		98,717
Mcfe		2,933,263			1,286,587		2,933,263		1,864,442
Mcfe/day		31,883			13,985		31,883		20,266

	Nine Months Ended September 30,
	Actual					Pro Forma
	2008			2007		2008			2007
Revenues	$	76,726,643		$	27,531,486	$	90,295,326		$	37,250,908
Income (loss) from continuing operations		(70,844,197	)		8,858,838		(64,432,866	)		12,304,472
Net income (loss)		(103,105,543	)		4,426,328		(98,906,378	)		5,330,636
Earnings per share:
Basic and Diluted	$	(0.77	)	$	0.04	$	(0.74	)	$	0.05
Production volumes:
Gas (Mcf)		4,373,077			2,213,065		5,832,085			3,431,416
Oil (Bbls)		318,693			191,554		343,237			229,200
Mcfe		6,285,235			3,362,389		7,891,507			4,806,616
Mcfe/day		22,939			12,316		28,801			17,607

10

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 2: Summary of Significant Accounting Policies

Interim Financial Statements

The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q as prescribed by the SEC for smaller reporting companies and do not include all of the financial information and disclosures required by GAAP. The financial information as of September 30, 2008 and for the three and nine months ended September 30, 2008 and 2007 is unaudited. In the opinion of management, such information contains all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation of the results of the interim periods. The results of operations for the three and nine months ended September 30, 2008 are not necessarily indicative of the results of operations that will be realized for the year ended December 31, 2008. The interim financial statements should be read in conjunction with the financial statements as of December 31, 2007 and notes thereto, included in the proxy statement filed with the SEC on May 28, 2008.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates affecting these financial statements include estimates for quantities of proved oil and gas reserves, period end oil and gas sales and expenses, and asset retirement obligations, and are subject to change.

Income Taxes

Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” (“SFAS No. 109”) the Company follows the asset and liability method of accounting for income taxes, under which the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities were measured using enacted tax rates expected to apply to taxable income in the years in which the Company expects to recover or settle those temporary differences.

As changes in tax laws or rates are enacted, deferred income tax assets and liabilities are adjusted through the provision for income taxes. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The classification of current and noncurrent deferred tax assets and liabilities is based primarily on the classification of the assets and liabilities generating the difference.

As a result of our conversion to a taxable corporation on June 26, 2008, as part of the Westside Transaction, a charge to income tax provision of approximately $35,156,000 was made to record deferred taxes for the differences between the tax basis and financial reporting basis of our assets and liabilities.

11

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 2: Summary of Significant Accounting Policies — Continued

Pro Forma Income Taxes

Prior to consummating the Westside Transaction (see Note 1), the Company (i.e. Knight) was a limited liability company and classified as a partnership for income tax purposes. Accordingly, income taxes on net earnings were payable by the members and are not reflected in historical financial statements. Pro forma adjustments are reflected to provide for income taxes in accordance with SFAS No. 109. For unaudited pro forma income tax calculations, deferred tax assets and liabilities were recognized for the future tax consequences attributable to differences between the assets and liabilities and were measured using enacted tax rates expected to apply to taxable income in the years in which the Company expects to recover or settle those temporary differences. The pro forma tax effects assume the Company had been a taxable entity in the periods presented. Management believes that these assumptions provide a reasonable basis for presenting the pro forma tax effects.

Earnings (Loss) Per Common Share

Basic earnings (loss) per common share is computed by dividing the net earnings (loss) applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share are based on the assumption that stock options and warrants are converted into common shares using the treasury stock method. Conversion or exercise is not assumed if the results are antidilutive.

Potential common shares of 35,000,000, 501,392 and 370,000 relating to options, warrants and restricted stock, respectively, were excluded from the computations of diluted earnings (loss) per share because they are antidilutive for the nine months ended September 30, 2008.

Pro Forma Earnings (Loss) Per Share

Pro forma earnings (loss) per basic and diluted common share is computed based on the weighted average pro forma number of basic and diluted shares assumed to be outstanding during the periods. Pro forma basic and diluted earnings (loss) per share is presented for the historical three and nine months ended September 30, 2007 on the basis of 100,100,000 shares issued to Knight in the Westside Transaction on June 26, 2008.

	Three Months		Three Months		Nine Months			Nine Months
	Ended		Ended		Ended			Ended
	September 30, 2008		September 30, 2007		September 30, 2008			September 30, 2007
Net income available to shareholders	$	16,419,856	$	2,228,925	$	(103,105,543	)	$	4,426,328
Weighted average shares outstanding — basic		198,194,958		100,100,000		134,469,036			100,100,000
Effect of dilutive securities — stock options		11,347,189		—		—			—
Effect of dilutive securities — warrants		365,513		—		—			—
Effect of dilutive securities — restricted stock		65,645		—		—			—
Weighted average shares outstanding — diluted		209,973,306		100,100,000		134,469,036			100,100,000
Basic net income per share	$	0.08	$	0.02	$	(0.77	)	$	0.04
Diluted net income per share	$	0.08	$	0.02	$	(0.77	)	$	0.04

12

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 2: Summary of Significant Accounting Policies — Continued

Stock-based Compensation

SFAS No. 123(R), “Share-Based Payment” requires the Company to measure the costs of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following assumptions used for grants in 2008: no expected dividends, volatility ranging from 54% to 50%, risk-free interest rates ranging from 2.36% to 3.34% and expected lives ranging from 1 year to 4 years. The volatility assumptions were developed using a peer group of similar energy companies and our stock price. The weighted average fair value of the options issued in 2008 was $3.17. Based upon the provisions of the grant, no future service was required and as such, the total fair value of the grant was recognized during the second quarter of 2008.

The fair value of restricted stock awards issued is determined based on the fair market value of the shares on the date of grant. The Company granted 370,000 shares of restricted stock during the third quarter, with a grant date fair value of $3.30 per share. The fair value of the award is amortized ratably over the vesting period. The shares will vest at the rate of 30%, 30%, and 40% on January 1, 2009, 2010, and 2011, respectively.

Oil and Natural Gas Properties

We perform a review of the carrying value of our oil and natural gas properties, referred to as a ceiling test, under the full-cost accounting rules of the SEC on a quarterly basis. Under the ceiling test, capitalized costs, less accumulated amortization and related deferred income taxes, may not exceed an amount equal to the sum of the present value of estimated future net revenues less estimated future expenditures to be incurred in developing and producing the proved reserves, less any related income tax effects. Future net revenues are calculated by using the current prices and costs as of the end of the appropriate quarterly period.

Recently Issued Accounting Standards

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133(“SFAS No. 161”). SFAS No. 161 requires additional disclosures about derivative and hedging activities and is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is evaluating the impact the adoption of SFAS No. 161 will have on its financial statement disclosures. However, the Company’s adoption of SFAS No. 161 will not affect its current accounting for derivative and hedging activities.

In December 2007, the FASB issued SFAS No. 141(R),Business Combinations. This statement requires assets acquired and liabilities assumed to be measured at fair value as of the acquisition date, acquisition-related costs incurred prior to the acquisition to be expensed and contractual contingencies to be recognized at fair value as of the acquisition date. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact, if any, the adoption of this statement will have on our financial position, results of operations or cash flows.

13

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 3: Notes Payable

Notes payable consisted of the following at September 30 and December 31:

	2008			2007
Revolving line of credit with Union Bank of California (“UBOC”), bearing interest at an adjusted rate as defined in the agreement (6.05% and 7.07% at September 30, 2008 and December 31, 2007) payable quarterly, principal and any unpaid interest due October 4, 2010, collateralized by the Company’s oil and gas properties.	$	—		$	37,000,000
Subordinated term facility with UnionBancal Equities, Inc. an affiliate of UBOC, quarterly interest due at an adjusted rate as defined in the agreement (10.07% at December 31, 2007), retired in July 2008.		—			30,000,000
2nd lien term facility with JPMorgan Chase Bank, N.A., as administrative agent, bearing interest at an adjusted rate as defined in the agreement (11.25% at September 30, 2008) payable quarterly, principal and any unpaid interest due on July 18, 2013, collateralized by a second mortgage on the Company’s oil and gas properties		249,750,000			—
Discount on 2nd lien facility (5% discount on total issuance)		(11,979,167	)		—
	$	237,770,833		$	67,000,000

During the second quarter of 2008, the Company’s loan agreement was amended to provide for a revolving line of credit equal to the lesser of $200,000,000 or the borrowing base, as defined, and a subordinated term facility equal to $30,000,000, which was retired in the third quarter. The borrowing base was re-determined and was increased to $100,000,000. Additionally, the variable borrowing rate, as defined, was adjusted and generally calls for the London Interbank Offered Rate (“LIBOR”) plus 2.00% on the revolving line of credit and LIBOR plus 5.00% on the subordinated term facility.

On July 18, 2008 (“Effective Date”), the Company entered into a five-year $250,000,000 second lien term facility with JPMorgan Chase Bank, N.A., as administrative agent. Under the terms of the second lien agreement, the Company received loan proceeds net of a discount in the amount of 5% of the total issuance. The second lien term facility replaced our existing $30,000,000 second lien term facility with UnionBanCal Equities, Inc.

The second lien term loan facility bears interest at the lesser of: (a) LIBOR (subject to a floor of 3.50%) plus 7.75% or (b) the reference rate, as defined, plus 6.75%. The second lien facility has the following prepayment premium on principal amounts prepaid equal to: (i) the Applicable Premium, as defined, if the prepayment is made from the Effective Date through the first anniversary thereof, (ii) 5% if the prepayment is made from the first anniversary of the Effective Date through the second anniversary thereof, (iii) 3% if the prepayment is made from the second anniversary of the Effective Date through the third anniversary thereof, (iv) 1% if the prepayment is made from the third anniversary of the Effective Date through the fourth anniversary thereof and (v) 0% thereafter.

14

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 3: Notes Payable — Continued

The second lien term facility proceeds were used to refinance a portion of the outstanding debt under the revolving line of credit with UBOC and to retire the subordinated term facility and will be used to fund the Company’s drilling activity, acquisitions, and general corporate purposes. In connection with this transaction, the revolving line of credit was amended to equal the lesser of $140,000,000 or the borrowing base, as defined, and the borrowing base was reduced to $70,000,000. The reduction in the loan commitment and borrowing base was a result of one of our participating banks leaving the syndication. As a result, the Company expensed deferred financing costs related to its previous revolving and term credit facilities of approximately $1,100,000 as a loss on debt extinguished. This loss is included in interest expense during the third quarter of 2008.

The Company’s debt agreements have certain financial covenants which provide for, among other things, maintaining a certain current ratio (excluding fair value of derivative financial instruments), minimum reserve coverage and leverage ratio, and certain reporting requirements, as defined. The Company was in compliance with the financial covenants as of September 30, 2008 and December 31, 2007.

Note 4: Derivative Transactions

SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended, requires that the Company recognize a derivative as either an asset or a liability measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative and the resulting designation. Derivatives that are not hedges or not elected to be considered as hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through income or recognized in other comprehensive income until the hedged item is recognized in income. The ineffective portion of a hedge’s change in fair value will be immediately recognized in income.

Natural Gas and Oil Derivatives

The results of operations and operating cash flows are impacted by changes in market prices for oil and gas. To mitigate a portion of this exposure, the Company has entered into certain derivative instruments, none of which were elected to be designated as cash flow hedges. As of September 30, 2008 and 2007, the Company’s derivative instruments are generally comprised of collars, fixed price swaps, premium puts and basis protection swaps.

Collars contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, the Company receives the fixed price and pays the market price. If the market price is between the call and the put strike price, no payments are due from either party.

Premium puts contain a fixed floor price (put). If the market price falls below the put strike price, the Company receives the fixed price and pays the market price.

15

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 4: Derivative Transactions — Continued

In fixed-price swap instruments, the Company receives a fixed-price for the hedged commodity and pays a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.

Basis protection swaps are arrangements that guarantee a price differential for natural gas from a specified delivery point. For Mid-Continent basis protection swaps, which have negative differentials to NYMEX, the Company receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract.

Concentration of Credit Risk

The derivative transactions mentioned above expose the Company to credit risk from our counterparties. To mitigate this risk, we enter into these transactions only with investment-grade rated counterparties that management believes to be competent and competitive firms. Currently, concerns have arisen regarding the ability of certain investment banks to continue to meet their financial obligations. The Company does not believe that a failure by a counterparty would have a material negative impact on our liquidity. Also, the counterparties in our derivative contracts are parties to our credit facilities.

As of September 30, 2008, the Company has the following hedging transactions with two financial counterparties in the form of costless collars, fixed-price swaps, premium puts and basis protection swaps:

Natural Gas Production

		Collars						Swaps				Puts
Year	Month	MCF		Floor		Ceiling		MCF				MCF		Floor
2008	Oct - Dec		937,000	$	8.10	$	10.58		30,000	$	7.45		45,450	$	8.00
2009	Jan - Mar		678,500	$	8.13	$	10.12		—	$	—		259,131	$	8.00
2009	Apr - Jun		441,000	$	8.00	$	9.56		—	$	—		259,131	$	8.00
2009	Jul - Dec		882,000	$	8.00	$	9.56		—	$	—		518,262	$	8.00
2010	Jan - Dec		—	$	—	$	—		—	$	—		2,144,988	$	8.00

Oil Production

		Collars
Year	Month	Bbls		Floor		Ceiling
2008	Oct - Dec		56,280	$	77.74	$	88.00
2009	Jan - Dec		163,200	$	79.56	$	117.72
2010	Jan - Dec		115,200	$	100.00	$	161.75

Basis Differential Swap

Year	Month	MCF		ANR
2008	Oct - Dec		435,000	$	1.11
2009	Jan - Dec		1,560,000	$	0.76

16

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 4: Derivative Transactions — Continued

Interest Rate Derivatives

The Company uses interest rate derivatives to mitigate its exposure to the volatility in interest rates, none of which were elected to be designated as hedges. Changes in the fair value of non-designated derivatives that occur prior to their maturity (i.e., temporary fluctuations in value) are reported currently in the consolidated statements of operations as unrealized gains (losses) as risk management income (expense).

As of September 30, 2008, the following interest rate derivatives were outstanding:

			Weighted
			Average
	Notional		Fixed			Floating
	Amount		Rate			Rate
Floating to Fixed Swaps:
August 2008 — February 2011	$	250,000,000		3.71	%	3 month LIBOR

These instruments (natural gas, oil and interest rate derivatives) are recorded at fair value and changes in fair value, including settlements, have been reported as risk management income (expense) in the consolidated statement of operations. Settlements on these instruments occur every three months. The effective rate of long-term debt was 11.46% at September 30, 2008. The following table provides a summary of the components (cash and non-cash) of risk management income (expense):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Gains (losses) from:
Settlements with counterparty	$	(2,924,126	)	$	1,406,438		$	(5,228,022	)	$	2,694,152
Changes in fair value — premiums paid		3,170,962			—			3,170,962			—
Changes in fair value — non-cash		20,485,840			(574,278	)		2,582,768			(2,579,122	)
Total oil and gas derivatives		20,732,676			832,160			525,708			115,030
Settlements with counterparty		—			—			—			—
Changes in fair value		(1,723,696	)		—			(1,723,696	)		—
Total interest rate derivatives		(1,723,696	)		—			(1,723,696	)		—
Total risk management income (expense)	$	19,008,980		$	832,160		$	(1,197,988	)	$	115,030

17

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 4: Derivative Transactions — Continued

Fair Value Measurements

     SFAS No. 157,Fair Value Measurements(as amended) (“SFAS No. 157”), defines fair value, establishes a framework for measuring fair value, outlines a fair value hierarchy based on inputs used to measure fair value and enhances disclosure requirements for fair value measurements. The Company has not applied the provisions of SFAS No. 157 to nonrecurring, nonfinancial assets and liabilities as allowed under FASB Staff Position No. 157-2.

Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, use of unobservable prices or inputs are used to estimate the current fair value, often using an internal valuation model. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the item being valued.

Beginning January 1, 2008, assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels—defined by SFAS No. 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities—are as follows:

Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The fair value of our derivative contracts are measured using Level II inputs, and are determined by either market prices on an active market for similar assets or by prices quoted by a broker or other market-corroborated prices, including analysis of formal pricing curves on national exchanges.

Our asset retirement obligation is measured using primarily Level III inputs. The significant unobservable inputs to this fair value measurement include estimates of plugging and abandonment costs, inflation rate and well life. The inputs are calculated based on historical data as well as current estimated costs. See Note 6 for a rollforward of the asset retirement obligation.

18

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 4: Derivative Transactions — Continued

The estimated fair values of derivatives included in the consolidated balance sheets at September 30, 2008 and December 31, 2007 are summarized below. The decrease in the net derivative liability from December 31, 2007 to September 30, 2008 is primarily attributable to the effect of lower natural gas and oil prices, partially offset by cash settlements of derivatives during the period and new derivatives entered during the period.

	Fair Value Measurements
	September 30, 2008					December 31, 2007
	Significant					Significant
	Other			Significant		Other			Significant
	Observable			Unobservable		Observable			Unobservable
	Inputs			Inputs		Inputs			Inputs
	(Level 2)			(Level 3)		(Level 2)			(Level 3)
Derivative assets:
Gas basis protection swaps	$	843,300		$	—	$	1,475,042		$	—
Natural gas derivative instruments		4,031,573
Oil derivative instruments		1,498,867
Derivative liabilities:					—					—
Natural gas derivative instruments		—			—		(41,470	)		—
Oil derivative instruments		(2,326,382	)		—		(3,613,072	)		—
Interest rate instruments		(1,723,696	)		—		—			—
Net derivative asset (liability)	$	2,323,662		$	—	$	(2,179,500	)	$	—
Asset retirement obligation	$	—		$	1,151,419	$	—		$	718,316

Note 5: Stockholders’ Equity

In connection with the acquisition as described in Note 1, Crusader issued 171,723,684 million shares of unregistered common stock to the following entities: Knight Energy Group I Holding Co., LLC received 100,100,000 shares, Knight Energy Group II Holding Company, LLC received 53,223,684 shares, Hawk Energy Fund I Holding Company, LLC received 14,700,000 shares and RCH Energy Opportunity Fund I, L.P. received 3,700,000 shares. None of the shares may be sold or otherwise transferred until December 26, 2008.

19

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 5: Stockholders’ Equity — Continued

Additionally, Crusader assumed 501,392 warrants in the acquisition of Westside and their fair value were estimated using the Black-Scholes options-pricing model. A summary of the outstanding warrants and the assumptions used to estimate their fair value are as follows:

												Black
Number of	Exercise		Remaining		Risk Free						Expected	Scholes		Estimated
Warrants	Price		Term		Rate			Volatility			Dividend	Value		Fair Value
166,392	$	0.50		2/28/2009		2.36	%		58.50	%	None	$	5.15	$	856,573
100,000	$	0.50		5/7/2009		2.36	%		55.27	%	None	$	5.15		515,008
235,000	$	2.00		10/29/2009		2.63	%		52.53	%	None	$	3.74		878,868
501,392														$	2,250,449

The Company has the following stock-based compensation plans:

2004 Consultant Plan

The Consultant Plan provides for the granting of shares of common stock to certain outside consultants who assisted in the development and success of Westside’s business. There are 3,000,000 shares of common stock authorized to be awarded pursuant to the plan, of which 500,000 were registered with the SEC. The plan expires on April 15, 2014, or when no further shares are available for issuance, whichever comes first. As a result of the business combination as described in Note 1, any then outstanding awards under the plan either became fully vested or were forfeited due to the change in control. Any vested shares were included in the common stock issued to Westside and treated as business combination consideration, as no future service was required. No grants have been made since June 26, 2008.

2005 Director Stock Plan

The Director Stock Plan provides for the granting of shares of common stock to non-employee members of the Board of Directors to provide them with incentives for their service to the Company. There are 500,000 shares of common stock authorized to be awarded pursuant to this plan. Awards may be made under the plan until there are no further shares available for issuance or until March 30, 2015, whichever occurs first. Under the plan, each non-employee director receives a certain number of shares upon becoming a director, and annual awards thereafter, provided that the individual is still a director of the Company. Certain of the awards are also subject to time vesting, also provided that the individual is still a director of the Company. Effective January 1, 2008, the Board determined to cease making grants under this plan and now may make grants to non-employee directors at such times and in such amounts as the Board determines appropriate. As a result of the business combination as described in Note 1, any then outstanding awards under the plan either became fully vested or were forfeited due to the change in control. Any vested shares were included in the common stock issued to Westside and treated as business combination consideration, as no future service was required. No grants have been made since June 26, 2008.

2007 Equity Incentive Plan

The Equity Incentive Plan provides for the granting of incentive stock options, non-qualified options, stock grants and stock-based awards to attract and retain the services of employees, consultants, and directors of the Company and its subsidiaries. There are 2,000,000 shares authorized to be awarded under the plan. The plan has a termination date of July 9, 2017. As a result of the business combination as described in Note 1, any then outstanding awards under the plan either became fully vested or were forfeited due to the change in control.

20

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 5: Stockholders’ Equity — Continued

Any vested shares were included in the common stock issued to Westside and treated as business combination consideration, as no future service was required. No grants have been made since June 26, 2008.

2008 Long Term Incentive Plan

The Long Term Incentive Plan provides for the granting of incentive stock options, non-qualified options, restricted stock awards, restricted stock units, and stock appreciation rights to attract and retain employees, directors, and consultants of the Company. The plan was approved by the shareholders of Westside on June 26, 2008. There are 37,310,000 shares authorized to be awarded under the plan.

Stock Options

Pursuant to this plan and in connection with the acquisitions described in Note 1, Crusader issued options to purchase 35,000,000 shares of common stock, exercisable at $3.00 per share, to certain employees. The exercise price was determined at December 31, 2007, concurrent with the execution of the contribution agreement setting forth the terms of the business combination. The outstanding options vested immediately upon issuance and expire 4.5 years from the date of grant. Pursuant to the terms of the grant, the options are subject to a mandatory exercise program of 25% each year beginning in 2009.

The following table provides information related to stock option activity during the current quarter:

			Weighted
	Number of		Average		Weighted
	Shares		Exercise		Average		Aggregate
	Underlying		Price		Contract		Intrinsic
	Options		Per Share		Life in Years		Value(a)
Outstanding at January 1, 2008		—		—		—		—
Issued		35,000,000	$	3.00		4.50	$	92,400,000
Outstanding at September 30, 2008		35,000,000	$	3.00		4.25	$	3,500,000
Exercisable at September 30, 2008		35,000,000	$	3.00		4.25	$	3,500,000

(a)  The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying
      stock option exceeds the exercise price of the option.

21

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 5: Stockholders’ Equity — Continued

Restricted Shares

Pursuant to this plan, Crusader granted 370,000 shares of restricted stock to certain employees on September 18, 2008. Restricted share activity as of September 30, 2008 was as follows:

			Weighted
			Average
	Shares		Fair Value
Outstanding at December 31, 2007		—	$	—
Granted		370,000		3.30
Vested		—		—
Forfeited		—		—
Outstanding at September 30, 2008		370,000	$	3.30

As of September 30, 2008, total unrecognized stock-based compensation expense related to non-vested restricted shares was approximately $1,038,000, which is expected to be recognized over a weighted average period of approximately 2.25 years.

To the extent compensation cost relates to employees directly involved in natural gas and oil exploration and development activities, such amounts are capitalized to natural gas and oil properties which totaled approximately $27,000 and $4,164,000, during the three and nine months ended September 30, 2008, respectively. Amounts not capitalized are recognized as general and administrative expenses and totaled approximately $156,000 and $106,833,000 during the three and nine months ended September 30, 2008, respectively.

Note 6: Asset Retirement Obligation

The Company’s asset retirement obligations relate to estimated future plugging and abandonment expenses or disposal of its oil and gas properties and related facilities. These obligations to abandon and restore properties are based upon estimated future costs which may change based upon future inflation rates and changes in statutory remediation rules. The following table provides a summary of the Company’s asset retirement obligations:

	Nine Months
	Ended September
	30, 2008
Balance as of December 31, 2007	$	718,316
Liabilities incurred in current period		146,542
Liabilities assumed in business combination		238,380
Accretion expense		48,181
Balance as of September 30, 2008	$	1,151,419

22

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 7: Income Taxes

Income tax expense consists of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Current taxes	$	—	$	—	$	—	$	—
Deferred taxes		8,456,038		—		20,282,862		—
Income tax expense	$	8,456,038	$	—	$	20,282,862	$	—

Deferred income tax assets and liabilities are as follows:

	September 30,			December 31,
	2008			2007
Deferred tax assets:
Net operating loss carryforwards	$	26,360,649		$	—
Stock option expense		25,289,212			—
Derivatives		318,001			—
Other		2,784,346			—
Total deferred tax assets	$	54,752,208		$	—
Deferred tax liabilities:
Property and equipment, principally due to differences in depreciation		(103,975,810	)		—
Net deferred tax liabilities	$	(49,223,602	)	$	—

Upon the conversion from a limited liability company to a corporation in conjunction with becoming a public company, the Company incurred a one-time charge to operations in the second quarter of 2008 of approximately $36,156,000 to record deferred taxes upon change in tax status.

In assessing its ability to realize deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. The Company believes it is more likely than not that it will realize the benefits of these deductible differences.

23

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 7: Income Taxes — Continued

The provision for income taxes on continuing operations differs from the amounts computed by applying the federal income tax rate of 35% to net income (loss). The differences are summarized as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008			2007		2008			2007
Expected tax expense (benefit)	$	8,706,563		$	—	$	(28,987,938	)	$	—
State income taxes		694,037			—		(2,368,729	)		—
Conversion to corporation		—			—		35,156,421			—
Non-deductible stock compensation expenses		(195,130	)		—		16,368,867			—
Other		(749,432	)		—		114,241			—
	$	8,456,038		$	—	$	20,282,862		$	—

Note 8: Related Party Transactions

Prior to the Westside Transaction on June 26, 2008, general and administrative expenses and a fee for usage of property and equipment (including furniture and fixtures, office furniture and fixtures and vehicles) were charged to the Company monthly from a related entity, Crusader Management Corporation (“CMC”). During the nine months ended September 30, 2008, the Company incurred approximately $4,035,000 for its share of expenses related to the personnel services agreement executed with CMC. During the three and nine months ended September 30, 2007, the Company incurred approximately $1,151,000 and $2,089,000, respectively. Upon closing the acquisition as described in Note 1, CMC became a wholly-owned subsidiary of the Company.

Included in joint interest billings at December 31, 2007 was approximately $6,261,000, owed by affiliates. Upon closing the acquisition as described in Note 1, the affiliates became wholly-owned subsidiaries of the Company.

Note 9: Commitments and Contingencies

Prior to the Westside Transaction on June 26, 2008, the Company executed a personnel services agreement with CMC to provide all management, employee and other administrative services as necessary from time to time to operate the business of the Company. Upon closing the acquisition as described in Note 1, CMC became a wholly-owned subsidiary of the Company, and the existing personnel services agreement was terminated and a new personnel services agreement was entered into between the Company and CMC.

CMC has a retirement plan covering substantially all qualified employees under section 401(k) of the Internal Revenue Code with a matching policy to contribute for each participant a required matching contribution equal to 100% of the participant’s contribution up to 4% of each employee’s annual compensation and 50% of the participant’s contribution on the next 2% of each employee’s annual compensation. CMC’s contributions vest immediately. Knight and Crusader’s expenses under the plan were approximately $58,200, and $25,000 and $151,200 and $74,600 for the three and nine months ended September 30, 2008 and 2007, respectively, which were a component of the cost allocated through the CMC personnel services agreement (see Note 8).

24

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 9: Commitments and Contingencies — Continued

On December 28, 2007, CMC entered into an agreement with Le Norman Properties, LLC, to lease approximately 24,000 net square feet of office space located in Oklahoma City, Oklahoma for an initial term of five years. Le Norman Properties is wholly-owned by David D. Le Norman, who is a director, president and chief executive officer of the Company. The Company assumed the obligations under this lease. The lease calls for annual base rent of $624,000 plus expenses related to maintenance, taxes, insurance and utilities. The Company has an option to renew the lease for two additional five year terms for a base rent in an amount equal to the fair market rent for comparable buildings in the area.

The following table summarizes the Company’s future minimum payments under non-cancellable operating lease agreements at September 30, 2008:

Year ending December 31
2008	$	156,000
2009		624,000
2010		624,000
2011		624,000
2012		624,000
Thereafter		156,000
	$	2,808,000

The Company acquired an unsecured Revolving Note and an exploration agreement with Alpine Energy, LP (“Alpine”) as a result of acquiring Knight II. The unsecured Revolving Note has a maturity date of September 30, 2010. Under the terms of the note and subject to approval by the Company, Alpine may borrow up to $10,000,000 at a floating interest rate equal to the ninety day LIBOR plus 4.00% per annum. At September 30, 2008, the outstanding balance of $10,000,000 was included in other assets in the consolidated balance sheets. The interest rate at September 30, 2008 was 7.93%. Interest is due and payable monthly, in arrears, on the first day of each month. As a condition to the agreement, Alpine must use all advances from the note for expenditures related to certain prospects, as defined in the agreement. If Alpine fails to repay the note, the Company’s only source of repayment is limited to the oil and gas sales from certain oil and gas properties, as defined in the agreement.

The Alpine exploration agreement, covering certain prospects, calls for monthly payments of $200,000 through June 2009. Future commitments related to this agreement are as follows: $600,000 for the remainder of the year 2008 and $1,200,000 for the year ended December 31, 2009.

Unsecured Standby Letters of Credit (“Letters”) are used in lieu of surety bonds with various city, state and federal agencies for liabilities of the operation of oil and gas properties and to our derivative counter party. The Company had various Letters outstanding totaling $1,270,000 as of September 30, 2008, which were issued by a bank where our cash and cash equivalents reside.

25

Crusader Energy Group Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 9: Commitments and Contingencies — Continued

The Company is involved in certain litigation arising in the normal course of business. Management does not believe that the outcome of these matters will have a material impact on the financial position or results of operations of the Company.

Note 10: Subsequent Events

In October 2008, the Company entered into the following derivative instruments to raise or eliminate the ceiling on the following collars (instruments not indicating a premium were cashless transactions):

• 11,200 barrels of oil per month from October 2008 through December 2008 with a original ceiling of $67.00 and was increased to $71.60 per Bbl;

• 6,000 barrels of oil per month from October 2008 through December 2008 with a original ceiling of $92.00 and was increased to $99.90 per Bbl;

• 60,000 MCF of gas per month from October 2008 through December 2008 with a original ceiling of $8.00 and was increased to $10.10 per MCF;

• Removed the ceiling on 1,000 MCF of gas per day from January 2009 through March 2009 with a original ceiling of $12.50 per MCF with a total premium of $11,250;

• Removed the ceiling on 2,500 MCF of gas per day from January 2009 through February 2009 with a original ceiling of $10.35 per MCF with a total premium of $33,925;

• 4,000 barrels of oil per month from January 2009 through December 2009 with a original ceiling of $80.00 and was increased to $102.65 per Bbl;

• 6,000 barrels of oil per month from January 2009 through December 2009 with a original ceiling of $67.00 and was increased to $79.00 per Bbl;

• 17,000 MCF of gas per month from January 2009 through December 2009 with a original ceiling of $8.00 and was increased to $10.05 per MCF;

• 130,000 MCF of gas per month from January 2009 through December 2009 with a original ceiling of $9.50 and was increased to $10.00 per MCF with a total premium of $195,000; and

• Removed the ceiling on 17,000 MCF of gas per day from January 2009 through December 2009 with a original ceiling of $10.05 per MCF with a total premium of $96,900.

26

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     You should read the following information together with the information presented elsewhere in this Quarterly Report on Form 10-Q and with the audited financial statements as of December 31, 2007 and notes thereto, included in the proxy statement filed with the Securities and Exchange Commission (“SEC”) on May 28, 2008.

Overview

     Crusader is an oil and gas company with assets focused in various producing domestic basins. The Company has a primary focus on the development of unconventional resource plays which includes the application of horizontal drilling and cutting edge completion technology aimed at developing shale and tight sand reservoirs. The Crusader assets are located in various domestic basins, the majority of which are in the Anadarko Basin and Central Uplift, Ft. Worth Basin Barnett Shale, Delaware Basin, Val Verde Basin, and the Bakken Shale of the Williston Basin.

     Segment reporting is not applicable to Crusader as it has a single company-wide management team that administers all properties as a whole rather than by discrete operating segments. Crusader tracks only basic operational data by area. Crusader does not maintain complete separate financial statement information by area. Crusader measures financial performance as a single enterprise and not on an area-by-area basis. Crusader seeks to increase reserves and production through internally generated drilling projects, coupled with complementary acquisitions. Crusader uses the full cost method of accounting for its oil and gas activities.

     On December 31, 2007, Westside Energy Corporation (“Westside”), a public company traded on the American Stock Exchange, entered into a definitive agreement to combine with several affiliated privately-held entities, including Knight, Knight Energy Group II, LLC (“Knight II”), RCH Upland Acquisition, LLC (“RCH”), Hawk Energy Fund I, LLC (“Hawk”) and other entities acquired (consisting of Knight Energy Management, LLC, Crusader Energy Group, LLC and Crusader Management Corporation) (with Knight II, Hawk, RCH and the other entities acquired collectively referred to as the “Crusader Entities”). On June 26, 2008, the business combination contemplated by the contribution agreement (the “Westside Transaction”) was completed and Westside changed its name to Crusader Energy Group Inc. (“Crusader” or the “Company”). For accounting purposes, the Westside Transaction was treated as a reverse acquisition with Knight as the acquirer and Westside and the Crusader Entities as the acquired parties. As such, the historical financial statements of Crusader are Knight’s historical financial statements which were included in the proxy statement filed with the Securities and Exchange Commission on May 28, 2008. The acquisitions have been accounted for using the purchase method and the results of operations for Westside and Crusader Entities are included subsequent to June 26, 2008.

     The aggregate purchase price paid by Knight in the Westside Transaction was approximately $229.6 million, consisting of unregistered common stock (valued at the closing price ($2.27) of Westside common stock on January 2, 2008, the announcement date of the Westside Transaction), cash and warrants assumed. The contribution agreement also called for certain Crusader employees to receive stock options totaling 35 million shares with an exercise price of $3.00 which were granted on June 26, 2008 and resulted in a non-cash stock compensation expense of approximately $106.7 million. When the contribution agreement was executed in December 2007 and the grant of 35 million options to management at an exercise price of $3.00 was agreed to, Westside stock closed at $1.92 per share; 36% below the $3.00 strike price. In addition, because the market price of the Westside stock was above $3.00 per share at closing, rather than being exercisable immediately, the options are exercisable over 4 years beginning in 2009. We believe that the structuring of management’s consideration and incentive in the form of stock options benefits the combined Company by resulting in the contribution of $105.0 million in capital to the Company in the event all of the options are exercised and aligning the interests of our employees, management team and stockholders.

27

The operations of Westside and the Crusader Entities consist of the acquisition, exploration, production and sale of crude oil and natural gas currently with an area of production concentration in Oklahoma and Texas. Knight completed the business combinations for the following reasons:

• additional opportunities to transfer its horizontal drilling expertise;

• attractive acreage in areas such as the Barnett Shale in the Fort Worth Basin, Bakken Shale in the Williston Basin and various shale plays in the Permian Basin;

• expected synergies (elimination of Westside G&A and Knight II management fee);

• appealing route to becoming a publicly-traded company; and

• enhanced access to public markets to execute its business strategy.

The following summary presents unaudited pro forma consolidated production volumes for the three and nine months ended September 30, 2008 and 2007, respectively, as if the acquisitions comprising the Westside Transaction had occurred as of January 1, 2007. The pro forma results are for illustrative purposes only. The unaudited pro forma information is not necessarily indicative of the operating results that would have occurred if the acquisitions had been consummated at that date, nor is it necessarily indicative of future operating results.

	Three Months Ended September 30,
	Actual				Pro Forma
	2008		2007		2008		2007
Production volumes
Gas (Mcf)		2,208,667		809,653		2,208,667		1,272,140
Oil (Bbl)		120,766		79,489		120,766		98,717
Total (Mcfe*)		2,933,263		1,286,587		2,933,263		1,864,442

	Nine Months Ended September 30,
	Actual				Pro Forma
	2008		2007		2008		2007
Production volumes
Gas (Mcf)		4,373,077		2,213,065		5,832,085		3,431,416
Oil (Bbl)		318,693		191,554		343,237		229,200
Total (Mcfe*)		6,285,235		3,362,389		7,891,507		4,806,616	��

* Oil and NGLs are converted to Mcfe at the rate of one barrel equals six Mcfe.

28

Revenue and Expense Drivers

Revenue Drivers

     Crude Oil and Natural Gas Sales.Crusader’s revenues are generated from production of crude oil and natural gas which are substantially dependent on prevailing prices. Crusader’s future production is impacted by its drilling success, acquisitions and decline curves on existing production. Prices for oil and gas are subject to large fluctuations in response to relatively minor changes in the supply of or demand for oil and gas, market uncertainty and a variety of additional factors beyond Crusader’s control. Crusader enters into derivative instruments for a portion of its oil and gas production to achieve a more predictable cash flow and to reduce its exposure to adverse fluctuations in the prices of oil and gas.

     Crusader generally sells its oil and gas at current market prices determined at the wellhead. Crusader is required to pay gathering and transportation costs with respect to substantially all of its products. Crusader markets its products in several different ways depending upon a number of factors, including the availability of purchasers for the product at the wellhead, the availability and cost of pipelines near the well, market prices, pipeline constraints and operational flexibility. Also see “Risk Management” below which discusses Crusader’s mitigation of some of the price risk associated with oil and natural gas sales.

Operating Expenses

     Crusader’s operating expenses primarily involve the expense of operating and maintaining its wells.

• Lease Operating.Crusader’s lease operating expenses include repair and maintenance costs, contract labor and supervision, workover costs, electrical power and fuel costs and other expenses necessary to maintain its operations. Crusader’s lease operating expenses are driven in part by the type of commodity produced, the level of maintenance activity and the geographical location of its properties. Ad valorem taxes represent property taxes.

• Production Taxes.Production taxes represent the taxes paid on produced oil and gas based on a percentage of market prices (price received from purchaser) or at fixed rates established by federal, state or local taxing authorities.

• General and Administrative Expenses.General and administrative expenses include employee compensation and benefits, professional fees for legal, accounting and other advisory services and corporate overhead.

• Depreciation, Depletion and Amortization.Depreciation, depletion and amortization represent the expensing of the capitalized costs of Crusader’s oil and gas properties, using a units of production method, and Crusader’s other property and equipment.

Other Expenses and Income

     Other Expenses and Income consist of the following:

     Interest Income. Crusader generates interest income from its cash deposits.

     Interest Expense.Crusader’s interest expense reflects its borrowing costs under its revolving line of credit and its subordinated term facility.

     Risk Management.The results of operations and operating cash flows are impacted by changes in market prices for oil and gas and interest rates. To mitigate a portion of this exposure, Crusader has entered into certain derivative instruments which have not been elected to be designated as cash flow hedges for financial reporting purposes. Generally, Crusader’s derivative instruments are comprised of collars, fixed price swaps or premium puts as defined by the instrument. These instruments are recorded at fair value and changes in fair value, including settlements, have been reported as risk management in the statement of operations.

Oil and Natural Gas Properties — Impact of Petroleum Prices on Ceiling Test

     We review the carrying value of our oil and natural gas properties under the full-cost accounting rules of the SEC on a quarterly and annual basis. This review is referred to as a ceiling test. Under the ceiling test, capitalized costs, less accumulated amortization and related deferred

29

income taxes, may not exceed an amount equal to the sum of the present value of estimated future net revenues less estimated future expenditures to be incurred in developing and producing the proved reserves, less any related income tax effects. Any excess of the net book value, less deferred income taxes, is generally written off as an expense.

     In calculating future net revenues, prices and costs used are those as of the end of the appropriate quarterly period. Based on spot prices for oil and natural gas as of September 30, 2008, we had a significant cushion in the ceiling test. If the September 30, 2008 spot prices for oil and natural gas were substituted with $65 per bbl and $6 per mcf and the ceiling test at September 30, 2008 was recomputed, our cushion was reduced however an impairment did not occur. Currently, it is not possible to determine what the calculated ceiling will be for future quarter periods. The calculated ceiling at December 31, 2008 will be based on estimated proved reserves as of that date and the associated commodity prices, including regional price differentials, operating expenses and future development costs on that date.

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Results of Operations

     The following schedule reflects the historical operations of Crusader for the three months ended September 30, 2008 and 2007, respectively. The operations of the acquired entities (Westside, Knight II, Hawk, RCH and the other entities acquired) are included in the historical operations subsequent to June 27, 2008.

	Three Months Ended September 30,
	2008			2007
OPERATING REVENUES
Gas sales	$	19,461,726		$	5,236,783
Oil sales		13,682,006			5,508,222
Other		368,873			271,747
Total operating revenue		33,512,605			11,016,752
OPERATING COSTS AND EXPENSES
Lease operating		3,176,995			1,102,303
Production taxes		2,531,769			763,536
General and administrative		3,227,305			952,426
Depreciation, depletion and amortization		10,885,522			4,523,575
Accretion of asset retirement obligations		20,637			21,471
Total operating costs and expenses		19,842,228			7,363,311
Income from operations		13,670,377			3,653,441
OTHER (EXPENSE) INCOME
Interest expense		(8,283,932	)		(862,468	)
Interest income and other		480,469			24,862
Risk management		19,008,980			832,160
Total other (expense) income		11,205,517			(5,446	)
Income before income taxes		24,875,894			3,647,995
Income tax expense		8,456,038			—
NET INCOME	$	16,419,856		$	3,647,995

30

     Revenues. Revenues for the three months ended September 30, 2008 increased $22.5 million, to $33.5 million as compared to $11.0 million for the three months ended September 30, 2007. Revenue growth was due primarily to continued drilling success, increase of realized prices received and activities related to the Westside Transaction. Production of oil and gas increased by 41,277 bbls of oil and 1,399,014 Mcf of gas, respectively, (52% and 173%) during the same three month period in 2008 to 120,766 Bbls of oil and 2,208,667 Mcf of gas, respectively. Production related to acquiring producing properties associated with the Westside Transaction amounted to approximately 9,300 Bbls of oil and 783,000 Mcf of gas, respectively, which approximates 23% and 56% of the increase in oil and gas production for the three months ended September 30, 2008.

     The following table highlights production growth by certain projects.

			Three Months ended September 30,
			2008				2007
Project	Operations	Basin	Mcf		Bbls		Mcf		Bbls
Cleveland Sand	Operated	Anadarko		481,888		55,881		236,489		33,171
SE Barnett	Operated	Ft. Worth		470,375		—		—		—
Mayfield	Non-Operated	Anadarko		204,430		1,298		71,618		353
Eureka	Non-Operated	Anadarko		186,327		861		25,225		19
Lard Ranch	Non-Operated	Anadarko		166,081		2,916		167,496		3,317
Biscuit Hill	Operated	Anadarko		3,905		16,206		1,537		17,822
N. Barnett	Operated	Ft. Worth		154,808		16,570		61,068		12,328
				1,667,814		93,732		563,433		67,010
Production from remaining projects				540,853		27,034		246,220		12,479
Total production for the period				2,208,667		120,766		809,653		79,489

     Prices received for oil and gas increased by 64% and 36%, respectively. The average sales price for oil and gas for the three months ended September 30, 2008 were $113.29 per Bbl and $8.81 per Mcf, respectively, as compared to average sales price for oil and gas for the three months ended September 30, 2007 of $69.30 per Bbl and $6.47 per Mcf, respectively. Comparatively, the average NYMEX prices for oil and gas for the three months ended September 30, 2008 were $118.01 per Bbl and $8.97 per Mcf, respectively. The average NYMEX prices for oil and gas for the corresponding period in 2007 were $75.23 per Bbl and $6.25 per Mcf, respectively.

     Lease Operating Expenses. Lease operating expenses for the three months ended September 30, 2008 increased $2.1 million, or 188%, to $3.2 million as compared to $1.1 million for the three months ended September 30, 2007 and increased 26% per Mcfe during the three months ended September 30, 2008 to $1.08 per Mcfe as compared to $0.86 per Mcfe during the three months ended September 30, 2007. The increase in lease operating expenses on a gross dollar basis is primarily a result of increased well count, while the increase on an Mcfe basis was primarily due to increases in produced water volumes and associated hauling and disposal costs related to oil production acquired and to a lesser extent third-party vendor costs rising due to demand for services and general increase in cost of fuel, raw materials, and labor during 2008 compared to 2007.

     Production Taxes.Production taxes for the three months ended September 30, 2008 increased $1.7 million, or 232%, to $2.5 million as compared to $.8 million for the three months ended September 30, 2007 due to increased oil and gas sales during 2008. Production taxes as a percentage of revenues were 7.6% and 7.1% for the three months ended September 30, 2008 and 2007, respectively.

     General and Administrative Expenses. G&A for the three months ended September 30, 2008 increased $2.2 million, or 239%, to $3.2 million as compared to $1.0 million for the three months ended September 30, 2007. The increase in G&A was driven primarily by employee count and employee-related costs as a result of hiring additional professional staff (petroleum engineers, geologists, landmen and other professionals) which resulted in an increase of approximately 20 employees, awarding of annual compensation increases and increase in benefit costs (primarily health insurance premiums) during the last half of 2007 and continuing into 2008 which totaled approximately $1.3 million, an increase in professional fees of approximately $.5 million and an increase in rent expense of $.3 million.

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     Depreciation, Depletion and Amortization. DD&A for the three months ended September 30, 2008 increased $6.4 million, or 141%, to $10.9 million as compared to $4.5 million for the three months ended September 30, 2007. DD&A on a per Mcfe basis for the three months ended September 30, 2008 increased 6% to $3.71 per Mcfe, as compared to $3.52 per Mcfe for the three months ended September 30, 2007. The gross increase in DD&A expense for the three months ended September 30, 2008 was due to an increase in volumes.

     Income from Operations.Due to the factors described above, income from operations increased $10.0 million, or 274%, to $13.7 million for the three months ended September 30, 2008 compared to income from operations of $3.7 million for the three months ended September 30, 2007.

Other (Expense) Income.

     The increase in interest expense of approximately $7.4 million for the three months ended September 30, 2008 compared to the same period in 2007 was a result of Knight’s weighted average outstanding debt balance, for the respective periods, increasing from $54.8 million to $217.9 million.

     The increase in risk management income for the three months ended September 30, 2008 compared to the same period in 2007 was a result of the change in fair value of Knight’s open derivative contracts during the respective periods, as a result of decreasing commodity prices and expectations of commodity prices less than the prices in our derivative agreements.

     Income before income taxes.Due to the factors described above, income before income taxes increased $21.3 million, or 582%, to $24.9 million for the three months ended September 30, 2008 compared to income before income taxes of $3.6 million for the three months ended September 30, 2007.

     Income Tax Expense.Increase in income tax expense was a result of a charge of approximately $8.5 million related to deferred taxes generated during the quarter ended September 30, 2008. During the 2007 quarter, the Company was reported as a partnership for income tax reporting purposes and thus did not recognize any income tax expense.

     Net Income. Due to the factors described above, net income of $16.4 million was recognized for the three months ended September 30, 2008 compared to net income of $3.6 million for the three months ended September 30, 2007.

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Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Results of Operations

     The following schedule reflects the historical operations of Crusader for the nine months ended September 30, 2008 and 2007, respectively. The operations of the acquired entities (Westside, Knight II, Hawk, RCH and other entities acquired) are included in the historical operations from June 27, 2008 to September 30, 2008.

	Nine Months Ended September 30,
	2008			2007
OPERATING REVENUES
Gas sales	$	40,291,425		$	14,789,573
Oil sales		35,337,557			12,127,594
Other		1,097,661			614,319
Total operating revenue		76,726,643			27,531,486
OPERATING COSTS AND EXPENSES
Lease operating		6,227,443			2,347,783
Production taxes		5,303,388			1,766,532
General and administrative		113,599,183			2,715,870
Depreciation, depletion and amortization		22,392,645			11,809,640
Accretion of asset retirement obligations		48,181			32,823
Total operating costs and expenses		147,570,840			18,672,648
Income (loss) from operations		(70,844,197	)		8,858,838
OTHER (EXPENSE) INCOME
Interest expense		(11,384,422	)		(1,797,650	)
Interest income and other		603,926			68,182
Risk management		(1,197,988	)		115,030
Total other (expense) income		(11,978,484	)		(1,614,438	)
Income (loss) before income taxes		(82,822,681	)		7,244,400
Income tax expense		20,282,862			—
NET INCOME (LOSS)	$	(103,105,543	)	$	7,244,400

     Revenues. Revenues for the nine months ended September 30, 2008 increased $49.2 million, or 179%, to $76.7 million as compared to $27.5 million for the nine months ended September 30, 2007. Revenue growth was due primarily to continued drilling success, increase of realized prices received and production related to the Westside Transaction. Production of oil and gas increased by 127,139 bbls of oil and 2,160,012 Mcf of gas, respectively, (66% and 98%) during the same nine month period in 2008 to 318,693 Bbls of oil and 4,373,077 Mcf of gas, respectively. Production related to acquiring producing properties associated with the Westside Transaction amounted to approximately 9,300 Bbls of oil and 783,000 Mcf of gas, respectively, which approximates 7% and 36% of the increase in oil and gas production for the nine months ended September 30, 2008.

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     The following table highlights production growth by certain projects.

			Nine Months Ended September 30,
			2008				2007
Project	Operations	Basin	Mcf		Bbls		Mcf		Bbls
Cleveland Sand	Operated	Anadarko		1,204,923		145,480		580,060		81,506
Lard Ranch	Non-Operated	Anadarko		490,337		8,761		583,787		11,710
SE Barnett	Operated	Ft. Worth		470,375		—		—		—
Eureka	Non-Operated	Anadarko		406,929		2,501		81,731		79
N. Barnett	Operated	Ft. Worth		381,144		47,342		93,834		18,360
Mayfield	Non-Operated	Anadarko		331,058		1,708		210,373		912
Biscuit Hill	Operated	Anadarko		12,831		59,644		5,576		55,819
				3,297,597		265,436		1,555,361		168,386
Production from remaining projects				1,075,480		53,257		657,704		23,168
Total production for the period				4,373,077		318,693		2,213,065		191,554

     Prices received for oil and gas increased by 75% and 38%, respectively. The average sales price for oil and gas for the nine months ended September 30, 2008 were $110.88 per Bbl and $9.21 per Mcf, respectively, as compared to average sales price for oil and gas for the nine months ended September 30, 2007 of $63.31 per Bbl and $6.68 per Mcf, respectively. Comparatively, the average NYMEX prices for oil and gas for the nine months ended September 30, 2008 were $113.34 per Bbl and $9.74 per Mcf, respectively. The average NYMEX prices for oil and gas for the corresponding period in 2007 were $66.25 per Bbl and $7.03 per Mcf, respectively.

     Lease Operating Expenses. Lease operating expenses for the nine months ended September 30, 2008 increased $3.9 million, or 165%, to $6.2 million as compared to $2.3 million for the nine months ended September 30, 2007 and increased 42% per Mcfe during the nine months ended September 30, 2008 to $.99 per Mcfe as compared to $.70 per Mcfe during the nine months ended September 30, 2007. The increase in lease operating expenses on a gross dollar basis is primarily a result of increased well count, while the increase on an Mcfe basis was primarily due to increases in produced water volumes and associated hauling and disposal costs related to oil production acquired and to a lesser extent third-party vendor costs rising due to demand for services and general increase in cost of fuel, raw materials, and labor during 2008 compared to 2007.

     Production Taxes.Production taxes for the nine months ended September 30, 2008 increased $3.5 million, or 200%, to $5.3 million as compared to $1.8 million for the nine months ended September 30, 2007 due to increased oil and gas sales during 2008. Production taxes as a percentage of revenues were 7.0% and 6.6% for the nine months ended September 30, 2008 and 2007, respectively.

     General and Administrative Expenses. G&A for the nine months ended September 30, 2008 increased $110.9 million, or 4,083%, to $113.6 million as compared to $2.7 million for the nine months ended September 30, 2007. The increase in G&A was driven primarily by a non-cash stock compensation expense of approximately $106.9 million, employee count and employee-related costs as a result of hiring additional professional staff (petroleum engineers, geologists, landmen and other professionals) which resulted in an increase of approximately 20 employees, awarding of annual compensation increases and increase in benefit costs (primarily health insurance premiums) during the last half of 2007 and continuing into 2008 which totaled approximately $2.5 million, an increase in professional fees of approximately $.9 million and an increase in rent expense of $.3 million.

     Depreciation, Depletion and Amortization. DD&A for the nine months ended September 30, 2008 increased $10.6 million, or 90%, to $22.4 million as compared to $11.8 million for the nine months ended September 30, 2007. DD&A on a per Mcfe basis for the nine months ended September 30, 2008 increased 1% to $3.56 per Mcfe, as compared to $3.51 per Mcfe for the nine months ended September 30, 2007. The gross increase in DD&A expense for the nine months ended September 30, 2008 was due to an increase in volumes.

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     Income (loss) from Operations.Due to the factors described above, loss from operations increased $79.7 million, or 900%, to $(70.8) million for the nine months ended September 30, 2008 compared to income from operations of $8.9 million for the nine months ended September 30, 2007.

     Excluding the effect of stock compensation expense, income from operations increased $27.1 million, or 307%, to $36.0 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.

Other (Expense) Income.

     The increase in interest expense for the nine months ended September 30, 2008 compared to the same period in 2007 was a result of Knight’s weighted average outstanding debt balance, for the respective periods, increasing from $54.8 million to $237.8 million.

     The increase in risk management expense for the nine months ended September 30, 2008 compared to the same period in 2007 was a result of the change in fair value of Knight’s open derivative contracts during the respective periods, as a result of increasing commodity prices and expectations of commodity prices less than the prices in our derivative agreements.

     Income (loss) before income taxes.Due to the factors described above, loss before income taxes increased $90.1 million, or 1243%, to $(82.8) million for the nine months ended September 30, 2008 compared to income before income taxes of $7.2 million for the nine months ended September 30, 2007.

     Income Tax Expense.Increase in income tax expense was a result of a one-time charge of approximately $35.2 million due to a change in tax status from a partnership to a corporation. This was partially offset by the deferred tax benefit of approximately $(16.4) million related to stock option expense.

     Net Income (Loss). Due to the factors described above, net loss of $(103.1) million was recognized for the nine months ended September 30, 2008 compared to net income of $7.2 million for the nine months ended September 30, 2007.

     Excluding the effect of stock compensation expense and the change in tax status, net income of $24.0 million would have been recognized for the nine months ended September 30, 2008, primarily due to the increase in operating revenues (production and realized prices received) while operating margins remained steady.

Liquidity and Capital Resources

Overview

     Crusader’s business is capital intensive. Historically, Crusader has funded its operations through private equity offerings, bank debt and cash flows from operations. Our sources of cash for the nine months ended September 30, 2008 were from operations and financing activities.

     On July 18, 2008, the Company entered into a five-year $250.0 million second lien term facility with JPMorgan Chase Bank, N.A., as administrative agent. The second lien term facility replaced our existing $30.0 million second lien term facility with UnionBanCal Equities, Inc. The second lien term loan facility bears interest at the lesser of: (a) LIBOR (subject to a floor of 3.50%) plus 7.75% or (b) the reference rate, as defined, plus 6.75% and matures on July 18, 2013.

     The second lien term facility proceeds were used to refinance a portion of the outstanding debt under the revolving line of credit with Union Bank of California and to retire the subordinated term facilities and will be used to fund the Company’s drilling activity, acquisitions and general corporate purposes. In connection with this transaction, the revolving line of credit was amended to equal the lesser of $140.0 million or the borrowing base, as defined and reduced the borrowing base to $70.0 million. The reduction in the loan commitment and borrowing base was a result of one of our participating banks leaving the syndication. As a result, the Company expensed deferred financing costs related to its

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previous revolving and term credit facilities of approximately $1.1 million as a loss on debt extinguished during the third quarter of 2008. Management is currently waiting for lenders’ approval related to a replacement and anticipates the loan commitment to be increased to its original amount and borrowing base increased to approximately $85 million when the replacement facility is closed.

     Crusader’s consummation of the $250.0 million second lien term facility and its availability under the senior revolving line of credit (current borrowing base of $70.0 million) is expected to provide the necessary capital, along with cash flows generated from operating activities, to grow our production, reserve base and enhance future cash flows from operating activities for the foreseeable future.

     Virtually all of Crusader’s capital expenditures are made based on current economic conditions and expected future oil and gas prices. Crusader monitors its exploration and development capital expenditure levels according to liquidity and the other sources of operating capital as economic conditions change. Currently, Crusader operates 6 drilling rigs, of which, only 1 rig is under contract through the third quarter of 2009 with the remaining drilling rigs on a well by well contract. As such, Crusader has the flexibility to reduce its capital expenditures if the current pricing environment for petroleum products does not improve. Additionally, Crusader believes that our non-operated drilling activity will decrease due to the recent cuts in capital expenditures announced by others. We may also improve our liquidity and reduce future capital expenditures in certain projects by either selling a portion of our working interest where we currently own a working interest greater than 50% to a third party or by monetizing non-core assets.

     Crusader’s cash flows from operating activities are significantly affected by changes in oil and gas prices. Accordingly, its cash flows from operating activities would be significantly reduced by lower oil and gas prices, which may reduce its exploration and development capital expenditure levels. Lower oil and gas prices also may reduce Crusader’s borrowing base under its senior credit facility which may further reduce its ability to obtain funds. Consequently, in an effort to minimize fluctuations in Crusader’s cash flows and to reduce its exposure to adverse fluctuations in the prices of oil and gas, Crusader enters into derivative instrument arrangements for a portion of its forecasted oil and gas production. Currently, Crusader has hedged a portion of its oil and gas production through 2010. Additionally, based on our third quarter 2008 production volumes, our hedges in place for the fourth quarter 2008 protect approximately 42% of our gas volumes with an weighted average floor of $8.10 and approximately 47% of our oil volumes with an weighted average floor of $77.74, respectively.

Cash Flows

Operating Activities.

     For the nine months ended September 30, 2008, net cash provided by operating activities increased $2.5 million to $17.8 million as compared to $15.3 million for the nine months ended September 30, 2007. The increase in net cash provided by operating activities was primarily due to increased production and commodity prices, partially offset by increased general and administrative expense (employee count and professional fees), production taxes paid and general increase in lease operating expenses due to well count and increased demand for services.

Investing Activities.

     For the nine months ended September 30, 2008, net cash used in investing activities increased $82.7 million, or 156%, to $135.7 million as compared to $53.0 million of net cash used in investing activities for the nine months ended September 30, 2007. Net cash used in investing activities in 2008 was comprised of $(1.7) million obtained in the Westside Transaction, $(.3) million obtained in oil and gas property divestitures and $137.6 million of expenditures on oil and gas properties as compared to $53.0 million of expenditures on oil and gas properties in 2007. We participated in the drilling of 89 gross wells (37.34 net wells), which includes 3 gross (2.57 net) injector wells, in the 2008 period compared to 55 gross wells (15.33 net wells) in the 2007 period, respectively.

Financing Activities.

     For the nine months ended September 30, 2008, net cash provided by financing activities increased $99.2 million, or 258%, to $137.7 million as compared to $38.5 million of net cash provided by financing activities for the nine months ended September 30, 2007. This increase was due to increased borrowings related to our second lien term facility.

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Critical Accounting Policies

     Our discussion and analysis of our financial condition and results of operations are based upon the 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 audited financial statements for the year ended December 31, 2007, and notes thereto, included in the proxy statement filed with the SEC on May 28, 2008.

Recently Issued Accounting Standards

     In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133(“SFAS No. 161”). SFAS No. 161 requires additional disclosures about derivative and hedging activities and is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is evaluating the impact the adoption of SFAS No. 161 will have on its financial statement disclosures. However, the Company’s adoption of SFAS No. 161 will not affect its current accounting for derivative and hedging activities.

     In December 2007, the FASB issued SFAS No. 141(R),Business Combinations. This statement requires assets acquired and liabilities assumed to be measured at fair value as of the acquisition date, acquisition-related costs incurred prior to the acquisition to be expensed and contractual contingencies to be recognized at fair value as of the acquisition date. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. We are currently assessing the impact, if any, the adoption of this statement will have on our financial position, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

          Not applicable.

Item 4T. Controls and Procedures.

          (a)Evaluation of Disclosure Controls and Procedures

          We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing the disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

          Based on an evaluation as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

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(b)Changes in Internal Controls

          On June 26, 2008, the business combination with Westside and the Crusader Entities was concluded. The Crusader Entities used the same accounting system and were supervised by the same personnel as the Company. We are in the process of integrating Westside’s accounting and other information into our systems. As a result, we are reviewing our systems and controls to address any changes required for changes in transaction volume or type. We believe we are taking the necessary steps for our internal control environment to be effective.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

          Not applicable.

Item 1A. Risk Factors

          There have been no material changes to the risk factors described in our quarterly report on Form 10-Q for the quarterly period ended June 30, 2008, except for the following which shall be added as a risk factor:

The global financial crisis may have impacts on our business and financial condition that we currently cannot predict.

The continued credit crisis and related turmoil in the global financial system may have an impact on our business and our financial condition, and we may face challenges if conditions in the financial markets do not improve. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise financing, which could have an impact on our flexibility to react to changing economic and business conditions. The economic situation could have an impact on our lenders or customers, causing them to fail to meet their obligations to us. Additionally, market conditions could have an impact on our commodity hedging arrangements if our counterparties are unable to perform their obligations or seek bankruptcy protection. Additionally, the current economic situation could lead to reduced demand for oil and natural gas, or lower prices for oil and natural gas, or both, which could have a negative impact on our revenues.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

          (a) Not applicable.

          (b) Not applicable.

          (c) Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

Item 5. Other Information.

          (a) Not applicable.

          (b) Not applicable.

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Item 6. Exhibits.

No.	Description of Exhibit
31.1	Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		CRUSADER ENERGY GROUP, INC.(Registrant)
Date: November 10, 2008	By:	/S/ David D. Le Norman
		David D. Le Norman
		President and Chief Executive Officer (Principal Executive Officer)
Date: November 10, 2008	By:	/S/ John G. Heinen
		John G. Heinen
		Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)

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INDEX TO EXHIBITS

No.	Description of Exhibit
31.1	Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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