3
               SECURITIES AND EXCHANGE COMMISSION
                      WASHINGTON, DC  20549
                                
                            FORM 10-Q

(Mark One)
x    Quarterly report pursuant to Section 13 or 15(d) of the
     Securities Exchange Act of 1934
     For the quarterly period ended September 30, 1998

     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 number:  000-23701

     SOUTHWEST ROYALTIES, INC.                    SOUTHWEST
ROYALTIES
     (Exact Name of Registrant as                 HOLDINGS, INC.
     Specified in Its Charter)                         (Exact
Name of Registrant as
                                        Specified in Its Charter)
     
     Delaware                           Delaware
     (State or Other Jurisdiction of                   (State or
Other Jurisdiction of
     Incorporation or Organization)
     Incorporation or Organization)

     75-1917432                              75-2724264
     (I.R.S. Employer                             (I.R.S.
Employer
     Identification Number)             Identification Number)

     407 North Big Spring, Suite 300
     Midland, Texas                               79701
     (Address of Principal Executive Offices)               (Zip
Code)
                         (915) 686-9927
      Registrants' Telephone Number, Including Area Code:
                    
                         Not Applicable
 (Former name, former address and former fiscal year, if changed
                       since last report)


Indicate  by  check 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.  Yes  X  No ___


Number of shares of common stock outstanding as of September  30,
1998 for Southwest Royalties, Inc........................100.
Number of shares of common stock outstanding as of September  30,
1998 for Southwest Royalties Holdings, Inc...1,075,868.


<PAGE>

                    SOUTHWEST ROYALTIES, INC.
                                
               SOUTHWEST ROYALTIES HOLDINGS, INC.
                                
                                
                                
                        TABLE OF CONTENTS


                  PART I - FINANCIAL INFORMATION          Page

Item 1.   Consolidated Financial Statements

     Consolidated Balance Sheets as of September 30, 1998
(unaudited)
         and December 31, 1997                             3

     Consolidated Statements of Operations for the three and
nine months ended
         September 30, 1998 and 1997 (unaudited)           5

     Consolidated Statements of Cash Flows for the three and nine
months ended
         September 30, 1998 and 1997 (unaudited)           7

     Notes to Consolidated Financial Statements            9


Item 2.   Management's Discussion and Analysis of  Financial
Condition and
         Results of Operations                            18


                   PART II - OTHER INFORMATION

Item 6.                                              Reports on
Form 8-K and Exhibits                                     24














<PAGE>
                 PART I - FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS

       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
                                
                   CONSOLIDATED BALANCE SHEETS
              (in thousands, except per share data)

                                           September 30,December
31,
                                               ASSETS   1998
1997
-----------------------------------------------------------------
---------------------------------------------------------------
                                            (unaudited)
Current assets
 Cash and cash equivalents                    $20,027  $27,365
  Accounts  receivable,  net  of  allowance  of  $265  and  $254,
respectively                                   6,813    8,376
 Receivables from related parties                673    2,556
 Other current assets                          1,778    1,209
                                                       ----------
----------
   Total current assets                       29,291   39,506
                                                       ----------
----------

Oil and gas properties, using the full cost method of accounting
 Proved                                       193,344  188,432
 Unproved                                      4,735    4,554
                                                       ----------
----------
                                              198,079  192,986
   Less  accumulated  depletion,  depreciation  and  amortization
79,877                                        42,240
                                                       ----------
----------
   Oil and gas properties, net                118,202  150,746
                                                       ----------
----------
Rental property, net                          109,577  81,373
                                                       ----------
----------
Other property and equipment, net              5,916    5,556
                                                       ----------
----------
Other assets
 Restricted cash                               6,502    8,064
 Equity investment in subsidiaries             2,443    2,443
 Real estate investments                       4,013    4,203
 Deferred debt costs, net of accumulated amortization of
   $2,542 and $903, respectively               8,585    9,382
 Noncompete covenants, net of accumulated amortization
   of $196                                     1,407        -
 Other, net                                    2,338    4,170
                                                       ----------
----------
 Total other assets                           25,288   28,262
                                                       ----------
----------
Total assets                                  $288,274 $305,443
                                              ======   ======
                                                  (continued)


<PAGE>
       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
                                
             CONSOLIDATED BALANCE SHEETS (continued)
              (in thousands, except per share data)

LIABILITIES, MINORITY INTEREST, REDEEMABLE September 30,December
31,
 COMMON STOCK AND STOCKHOLDERS' DEFICIT         1998     1997
-----------------------------------------------------------------
-------------------------------            ----------------------
--------
                                                     (unaudited)
Current liabilities
 Current maturities of long-term debt         $78,450  $1,878
 Accounts payable                              4,087    7,119
 Accounts payable to related parties               -       64
 Accrued expenses                              7,680    4,049
 Accrued interest payable                     10,808    5,401
 Deferred income taxes                             -      254
                                                       ----------
----------
   Total current liabilities                  101,025  18,765
                                                       ----------
----------
Long-term debt                                233,168  281,764
                                                       ----------
----------
Other long-term liabilities                    1,795    1,809
                                                       ----------
----------
Deferred income taxes                              -    2,094
                                                       ----------
----------
Minority interest                                864    1,861
                                                       ----------
----------
Redeemable common stock of subsidiary          2,777    2,666
                                                       ----------
----------
Redeemable common stock                        8,290    8,290
                                                       ----------
----------
Stockholders' deficit
 Preferred stock - $1 par value; 5,000,000 shares authorized;
   none issued                                     -        -
 Common stock - $.10 par value; 5,000,000 shares authorized;
   1,161,037 issued                              116      116
 Additional paid-in capital                    2,196    2,196
 Accumulated deficit                          (57,181) (9,321)
  Note  receivable from an officer and stockholder        (1,686)
(1,707)
  Less:   treasury stock - at cost; 214,215 shares        (3,090)
(3,090)
                                                       ----------
----------
   Total stockholders' deficit                (59,645) (11,806)
                                                        ---------
---------
Total liabilities, minority interest, redeemable common stock
   and stockholders' deficit                  $288,274 $305,443
                                              ======   ======









The accompanying notes are an integral part of these consolidated
                      financial statements.
<PAGE>
       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
                                
              CONSOLIDATED STATEMENTS OF OPERATIONS
              (in thousands, except per share data)
                           (unaudited)
                                
                             Three months endedNine months ended
                               September 30,    September 30,
                        -----------------------------------------
------------
                               1998     1997     1998     1997
                             -------   ------   ------   ------
Operating revenues
 Oil and gas                $ 7,357  $7,073   $26,188  $24,919
 Well servicing                   -       -        -    7,789
 Real estate                  6,965   1,899   17,759    5,029
 Other                          366     347    1,155      888
                                ------------         ------------
------------                ------------
      Total    operating   revenues            14,688       9,319
45,102             38,625
                                ------------         ------------
------------                ------------
Operating expenses
 Oil and gas production       4,234   4,005   14,896   12,166
 Well servicing                   -       -        -    5,600
 Real estate                  3,534     685    8,786    1,907
 General and administrative, net of related
   party management and administrative
   fees of $905, $695, $2,752 and
   $3,000, respectively       1,106     912    3,708    3,850
  Depreciation,  depletion and amortization       1,707     2,215
11,195                      8,093
  Impairment  of oil and gas properties               -         -
29,000                      -
 Other                          325     352    1,052    1,003
                                ------------         ------------
------------                ------------
    Total  operating expenses          10,906     8,169    68,637
32,619
                                ------------         ------------
------------                ------------

Operating income (loss)       3,782   1,150   (23,535)  6,006
                                ------------         ------------
------------                ------------
Other income (expense)
  Interest  and dividend income           346       156     1,143
545
 Interest expense           (9,584)  (4,131)  (26,502) (10,950)
 Other                           26      59      306     (66)
                                ------------         ------------
------------                ------------
                            (9,212)  (3,916)  (25,053) (10,471)
                                ------------         ------------
------------                ------------
                                                           (conti
nued)


<PAGE>

       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
                                
        CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
              (in thousands, except per share data)
                           (unaudited)
                                
                             Three months endedNine months ended
                               September 30,    September 30,
                        -----------------------------------------
------------
                               1998     1997     1998     1997
                             -------   ------   ------   ------
Loss before income taxes, minority interest,
  equity  loss and extraordinary item       $   (5,430)  $(2,766)
$  (48,588)             $   (4,465)
 Income tax benefit               -   1,022    2,348    1,526
                                ------------         ------------
------------                ------------
Loss before minority interest, equity loss and
 extraordinary item         (5,430)  (1,744)  (46,240) (2,939)
  Minority  interest in subsidiaries, net of  tax             290
100                         489      322
  Equity  in loss of subsidiary, net of tax      (1,028)        -
(2,109)                     -
                                ------------         ------------
------------                ------------
Loss  before extraordinary item       (6,168)  (1,644)   (47,860)
(2,617)
  Extraordinary item, net of tax            -         -         -
(490)
                                ------------         ------------
------------                ------------
Net  loss                     $(6,168) $(1,644)  $(47,860)      $
(3,107)
                            =======  =======  =======  =======

Loss per common share before extraordinary
 item                       $(5.74)  $(1.53)  $(44.49) $(2.43)
 Extraordinary loss from early extinguishment
   of debt                        -       -        -    (.45)
                                ------------         ------------
------------                ------------

Loss per common share       $(5.74)  $(1.53)  $(44.49) $(2.88)
                            =======  =======  =======  =======
Weighted    average   shares   outstanding              1,075,868
1,075,868                   1,075,868         1,078,454
                            =======  =======  =======  =======



















The accompanying notes are an integral part of these consolidated
                      financial statements
<PAGE>
       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
                                
              CONSOLIDATED STATEMENTS OF CASH FLOWS
                         (in thousands)
                           (unaudited)

                             Three months endedNine months ended
                               September 30,    September 30,
                        -----------------------------------------
------------
                               1998     1997     1998     1997
                             -------   ------   ------   ------
Cash flows from operating activities
 Net loss                   $(6,168) $(1,644) $(47,860)     $
(3,107)
 Adjustments to reconcile net loss to net cash
   provided by operating activities:
 Depreciation, depletion and amortization      1,707    2,215
11,195                      8,093
 Impairment of oil and gas properties              -        -
29,000                      -
 Noncash interest expense            800      1,117    2,025
1,660
 Extraordinary loss from early extingushment
   of debt                        -       -        -      490
 Loss (gain) on sale of assets         (23)      (6)    (284)
119
 Equity loss of subsidiary           1,028    -        2,109
-
 Other noncash items             97   (341)      174    (169)
 Bad debt expense                32       -      187        -
 Deferred income taxes            -   (813)   (2,348)  (1,284)
 Minority interest in loss of subsidiary       (290)    (100)
(489)                       (322)
 Changes in operating assets and liabilities-
   Accounts receivable          909   (560)    3,279   (6,048)
   Other current assets          46    (27)    (207)    (613)
   Accounts payable and accrued expenses       1,177      876
5,408                       6,723
   Accrued interest payable          5,430    3,917    534
4,230
   Income taxes payable           -       5        -     (25)
                            ------------      ------------
------------                ------------
Net cash provided by operating activities      4,745    4,639
2,723                       9,747
                            ------------      ------------
------------                ------------

Cash flows from investing activities
 Proceeds from sale of oil and gas properties          738
1,064                       3,796    1,146
 Purchase of oil and gas properties           (2,323)  (7,432)
(8,889)                     (26,522)
 Purchase of other property and equipment
   and rental property      (3,211)  (18,535) (29,662) (34,944)
 Purchase of other assets            (1,095)       -   (3,242)
(2,660)
 Purchase of noncompete covenants        -        -   (1,602)
 -
 Proceeds from sale of real estate investments             -
 -                   764         -
 Proceeds from sale of other assets          77       -
 1,137                     -
 Proceeds from sale of other property and
  equipment and rental property         27        -       51
 -
 Purchase of real estate investments         (328)    (4)
 (328)                     (57)
 Change in restricted cash          506      (2,369)   1,562
 (4,828)
 Purchase of treasury stock by subsidiary         -        -
 -               (1,174)
 Other                           7   (543)       15      306
                            ------------      ------------
------------                ------------
 Net cash used by investing activities       (5,602)  (27,819)
 (36,398)                  (68,733)
                           ------------      ------------   ---
 ---------                 ------------
                                                  (continued)

<PAGE>
       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES

        CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
                         (in thousands)
                           (unaudited)
                                
                             Three months endedNine months ended
                               September 30,    September 30,
                        -----------------------------------------
------------
                               1998     1997     1998     1997
                             -------   ------   ------   ------
Cash flows from financing activities
 Proceeds from borrowings         $  2,330$   27,087   $29,295
$  87,119
 Payments on debt             (869)  (2,174)  (1,706)  (31,987)
 Payments on other long-term liabilities           -     (58)
(57)                        (101)
 Increase in other long-term liabilities          21       96
43                    724
 Cash received on subscriptions receivable         -        -
-                   2,807
 Purchase of treasury stock          -        (30)     -
(582)
 Issuance of redeemable common stock,
   net of issue costs             -       -        -       33
 Deferred debt cost            (61)   (529)    (841)   (1,464)
 Dividends paid to minority interest owners            (28)
(29)                        (89)     (91)
 Purchase of minority interest in subsidiary           -
-                   (305)         -
 Net proceeds from sale of minority interest           -
904                         -        904
 Prepayment penalty on early extinguishment
   of debt                        -   (336)        -    (336)
 Other                            -     (5)      (3)        -
                            ------------      ------------
------------                ------------
Net cash provided by financing activities      1,393   24,926
26,337                      57,026
                            ------------      ------------
------------                ------------
Net increase (decrease) in unrestricted cash and
 cash equivalents               536   1,746   (7,338)  (1,960)

Unrestricted cash and cash equivalents -
 beginning of period         19,491   4,578   27,365    8,284
                            ------------      ------------
------------                ------------
Unrestricted cash and cash equivalents -
 end of period              $20,027  $6,324   $20,027  $6,324
                            =======  =======  =======  =======
Supplemental disclosures of cash flow information
 Interest paid              $ 3,390  $2,806   $19,106  $8,704
 Income taxes received      $     -  $(162)   $    -   $ (74)











                                
      The accompanying notes are and integral part of these
               consolidated financial statements.
<PAGE>
       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Business
   
   Southwest   Royalties  Holdings,  Inc.  ("SRH"),  a   Delaware
corporation was formed in June 1997 to serve as a holding company
for  Southwest Royalties Inc. ("Southwest"), Sierra Well  Service
Inc.  ("Sierra")  and Midland Red Oak Realty,  Inc.  ("Red  Oak")
(collectively, the "Company").  Each shareholder of Southwest was
issued  one share in SRH for each share of Southwest stock  held.
Prior  to  the  formation  of  SRH,  Red  Oak  and  Sierra   were
subsidiaries  of  Southwest.  Southwest paid a  dividend  of  the
shares  it  owned  in  Red  Oak and Sierra  to  SRH.   After  the
formation  of  SRH, Southwest and Red Oak became subsidiaries  of
SRH and, as of July 1, 1997, Sierra was deconsolidated.

  Southwest  is principally involved in the business of  oil  and
gas development and production.  Southwest is the general partner
of  Southwest  Partners II and III, which  own  common  stock  in
Sierra.   Southwest sells its oil and gas production to a variety
of  purchasers, with the prices it receives being dependent  upon
oil and gas commodity prices. Red Oak is principally involved  in
real  estate  investment and development.  Sierra is  principally
involved in the business of oil and gas well services.

Principles of Consolidation

  The  consolidated financial statements include the accounts  of
SRH  and its subsidiaries, each of which are wholly owned, except
for  Red Oak, Sierra, Midland Southwest Software ("Software") and
Threading Products International, LLC ("TPI").  Software and  TPI
are  subsidiaries of Southwest.  As of September  30,  1998,  the
Company owned approximately 81% of Red Oak, 39% of Sierra, 99% of
Software  and  98%  of TPI.  Effective July 1, 1997,  Sierra  was
deconsolidated and is accounted for using the equity method.  The
consolidated   financial   statements   include   the   Company's
proportionate  share  of  the  assets,  liabilities,  income  and
expenses of oil and gas limited partnerships for which it  serves
as  managing  general  partner.  The  Company  accounts  for  its
investments  in Sierra, Southwest Partners II and III  using  the
equity  method.   All significant intercompany transactions  have
been eliminated.

Commodity Hedging and Derivative Financial Instruments

   The  financial  instruments that the Company accounts  for  as
hedging   contracts  must  meet  the  following  criteria:    the
underlying  asset must expose the Company to price risk  that  is
not  offset  in another asset or liability, the hedging  contract
must  reduce  that  price  risk,  and  the  instrument  must   be
designated  as  a  hedge at the inception  of  the  contract  and
throughout the contract period.  In order to qualify as a  hedge,
there  must  be a clear correlation between changes in  the  fair
value  of  the  financial instrument and the fair  value  of  the
underlying  asset such that changes in the market  value  of  the
financial  instrument  will be offset  by  the  effect  of  price
changes on the exposed items.
   
   Since  the  contracts  are accounted for as  hedges,  premiums
paid  for such contracts are amortized to oil and gas sales  over
the term of the agreements.  Unamortized premiums are included in
other   assets  in  the  consolidated  balance  sheet.    Amounts
receivable under the commodity option contracts are accrued as an
increase in oil and gas sales for the applicable periods.


<PAGE>
       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies -
continued

Noncompete covenants
  
   Noncompete  covenants  are carried at  cost  less  accumulated
amortization.   The  covenants are  being  amortized  over  their
contractual lives, generally three to five years.
   
Reporting Comprehensive income
   
   In   June   1997,  the  FASB  issued  Statement  of  Financial
Accounting  Standards  No. 130 "Reporting  Comprehensive  Income"
("SFAS  130")  which  establishes  standards  for  reporting  and
display of comprehensive income and its components in a full  set
of  general-purpose financial statements.  Specifically, SFAS 130
requires   that  an  enterprise  (i)  classify  items  of   other
comprehensive income by their nature in a financial statement and
(ii)  display  the  accumulated balance  of  other  comprehensive
income  separately from retained earnings and additional  paid-in
capital  in  the  equity  section of  a  statement  of  financial
position.  This statement has no effect on the Company.
   
Segment Reporting

   In   June   1997,  the  FASB  issued  Statement  of  Financial
Accounting  Standards No. 131 "Disclosures about Segments  of  an
Enterprise   and   Related  Information"   ("SFAS   131")   which
establishes   standards  for  public  business  enterprises   for
reporting   information  about  operating  segments   in   annual
financial  statements and requires that such  enterprises  report
selected   information  about  operating  segments   in   interim
financial  reports issued to shareholders.  This  statement  also
establishes standards for related disclosures about products  and
services,  geographic  areas, and major customers.   The  Company
implemented SFAS 131 during 1997.
  
Interim Financial Statements

   In  the  opinion  of  management, the  unaudited  consolidated
financial statements of the Company as of September 30, 1998  and
1997  include  all adjustments and accruals, consisting  only  of
normal recurring accrual adjustments, which are necessary  for  a
fair  presentation of the results for the interim periods.  These
interim results are not necessarily indicative of results  for  a
full  year.   Certain  amounts  in  the  prior  period  financial
statements  have  been reclassified to conform with  the  current
period presentation.

   Certain   information   and  footnote   disclosures   normally
included  in  financial statements prepared  in  accordance  with
generally  accepted accounting principles have been condensed  or
omitted  in this Report pursuant to the rules and regulations  of
the  Securities  and  Exchange  Commission.   These  consolidated
financial  statements  should be read  in  conjunction  with  the
consolidated financial statements and notes thereto  included  in
the 1997 Form 10-K of the Company.
  
2.   Subsidiaries, Acquisitions and Dispositions
  
  During  the  nine  months ended September  30,  1998,  Red  Oak
acquired four office buildings one real estate fee management and
brokerage  company, two retail shopping malls and two retail  pad
sites  for  approximately  $28 million.   The  transactions  were
accounted  for  using  the  purchase  method.   The  results   of
operations  of  the acquired properties and the real  estate  fee
management and brokerage company are included in the Consolidated
Statements of Operations as of the close of each acquisition.

<PAGE>
       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
3. Property and Equipment
  
  Property  and equipment, including oil and gas, well servicing,
rental  property  and  other,  consists  of  the  following   (in
thousands):
                             September 30, 1998December 31,
                               ----------------------------------
                                (unaudited)   1997      1996
                                             ------    ------

     Land                       $  2,287  $  2,157  $  2,157
       Building   and  improvements             1,419       1,413
1,326
     Machinery and equipment       2,952     2,277     7,365
     Furniture and fixtures        2,365     1,743     1,714
      Equipment  under capital  lease               56        614
1,000
     Rental property             113,675    83,696    30,287
                                   ----------            --------
--------
                                 122,754    91,900    43,849
      Less  accumulated  depreciation            7,261      4,971
5,171
                                   ----------            --------
--------
                                $115,493  $ 86,929  $ 38,678
                                  ======     =====     =====
4. Long-term Debt
  
   Long-term debt consists of the following (in thousands):

                             September 30, 1998December 31,
                               ----------------------------------
                                (unaudited)   1997      1996
                                             ------    ------
     10.5% Senior Notes, interest payable
      semi-annually due October 15, 2004,
      net of discount of $2,182 and $2,346,
      respectively              $197,818  $197,654  $      -
     13% Notes payable, due April 2000.
      Cash interest of 10% payable monthly
      with additional interest payable based
      on excess cash flow or through
      the issuance of additional notes.
       Collateralized  by  real estate.         71,927     70,628
-
     Revolving line of credit with variable-
      rate interest, due February 1999.
       Collateralized  by oil and  gas  properties             40
100   28,125
     9% Notes payable, with variable
      quarterly payments including interest,
      due December 2003.               -         -    27,649

<PAGE>

       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Long-term Debt - continued
                             September 30, 1998December 31,
                               ----------------------------------
                                (unaudited)   1997      1996
                                             ------    ------
     10% Note payable, interest payable monthly,
      due June 1998.                   -         -     9,000
     12% Note payable, interest payable
       semi-annually  due November  2001.            -          -
7,143
       Capital   lease   obligations              286         473
352
     Note payable at 3-year U.S. Treasury plus
      3.875%, monthly payments of $41
       including  interest, due  February  2002                 -
-     4,428
     Note payable at 3-year U.S. Treasury plus
      3.5%, monthly payments of $46
       including  interest, due  November  2002                 -
-     4,954
     Note payable, at prime plus 1.5%, monthly
      payments of $68 including interest,
      due September 2003..             -         -     7,106
     Notes payable due July 2001.  Variable rate
      interest due and payable monthly with
      additional 1% payable based on the lock
       box  agreement.   Net of discount of  $1,778.       13,690
-     -
     Other                        27,857    14,787     5,048
                                                       ----------
----------                      --------
                                              311,618     283,642
93,805
     Less current maturities      78,450     1,878    10,216
                                                       ----------
----------                      --------
                                             $233,168    $281,764
$    83,589
                                               ======      ======
=====
10.5% Senior Notes
  
  In  October  1997,  the Company issued $200  million  aggregate
principal amount of 10.5% Senior Notes due October 15, 2004  (the
"Notes").   The  Notes were sold at a discount  and  interest  is
payable  April  15 and October 15 of each year, commencing  April
15, 1998.  The Notes are general unsecured senior obligations  of
the  Company and rank equally in right of payment with all  other
senior indebtedness of the Company and senior in right of payment
of  all  existing future subordinated indebtedness of the issuer.
Net  proceeds from the issuance of the Notes were used  primarily
to repay existing debt of approximately $84 million, purchase oil
and  gas  properties  for  approximately  $72  million,  purchase
additional stock in Red Oak for approximately $10 million, invest
$1.7  million in an affiliate, with the remaining balance  to  be
used for working capital.
  
  The  Indenture  imposes certain limitations on the  ability  of
the  Company  and  its restricted subsidiaries  to,  among  other
things,  incur  additional  indebtedness  or  issue  disqualified
capital  stock, make payments in respect to capital stock,  enter
into  transactions  with affiliates, incur  liens,  sell  assets,
change the nature of its business, merge or consolidate with  any
other  person and sell, lease, transfer or otherwise  dispose  of
substantially  all  of its properties or assets.   The  indenture
requires   the   issuer   to  repurchase  notes   under   certain
circumstances  with the excess cash of certain asset  sales.  The
limitations  are subject to a number of important  qualifications
and  exceptions.   The  issuer must  report  to  the  Trustee  on
compliance with such limitations on a quarterly basis.
  
<PAGE>
       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Long-term Debt - continued

13% Note Payable
       
  In  April  1997  MRO  Properties Inc. ("MROP"),  a  100%  owned
subsidiary of Red Oak entered into a $42 million credit  facility
maturing  in April 2000 with an institutional lender  (the  "MROP
Facility").   The  MROP  Facility  was  executed  in   order   to
consolidate nine mortgage loans, originally incurred to  complete
the  acquisition of certain Red Oak properties and to finance the
acquisition  of  an additional real estate property.   Borrowings
under  the  facility bear interest at a rate  of  13%,  with  10%
payable  in  cash  and  the  remaining  3%  payable  in  cash  or
additional  notes.  The facility contains a number  of  covenants
that,  among other things, restrict the ability of MROP to  incur
additional  indebtedness and dispose of assets.  The facility  is
secured   by  a  first  lien  on  substantially  all  of   MROP's
properties.   In  September  1997,  the  Company  negotiated   an
additional  $30.5  million in loan proceeds  which  was  used  to
acquire  a retail shopping center and office building in Oklahoma
City,  Oklahoma  and  a retail shopping center  in  San  Antonio,
Texas.   The  loan is collateralized by the properties purchased,
and  by  properties contributed by the Company.  At December  31,
1997  and  September 30, 1998, the Company was not in  compliance
with  certain  covenants  of the term loan.   Under  the  capital
reserve clause of the Agreement, MROP was required to deposit  in
escrow with the creditor $1 million by September 30, 1998 and  an
additional $1 million by October 23, 1998, to be used for  future
capital improvements to the properties.  Subsequently, the lender
extended   the  deposit  due  dates  until  December   1,   1998.
Management  is currently negotiating with the lender as  well  as
other  lenders to restructure or refinance the loan  to  free  up
working  capital and make funds available for capital improvement
expenditures, as they become necessary.  However, there can be no
assurance  that  management  will  be  able  to  renegotiate   or
refinance  the  current  facility  and  therefore  under  general
accepted   accounting  principles  (GAAP)  the  entire  principal
balance  outstanding has been classified as  current  debt.   The
facility is non-recourse to Red Oak.

Revolving Line of Credit
  
  The  revolving  credit  line allows  Southwest  to  borrow  the
lesser of $75 million or the borrowing base which is redetermined
periodically.   As of December 31, 1996, the borrowing  base  was
$28.1 million and as of December 31, 1997, the borrowing base was
$40  million.  As of September 30, 1998, the borrowing  base  was
$40,000.  The revolving line of credit agreement provides for the
revolver to become due and payable on February 28, 1999.  Fees on
the  unused  portion of the revolving line of credit  are  three-
eighths  of one percent (3/8%) per annum on the daily average  of
the unadvanced amount of the borrowing base.
       
  Southwest  has  the option to elect an interest rate  based  on
LIBOR plus the applicable Eurodollar Margin or Prime plus a  base
rate  margin.   Both margins are based on the percentage  of  the
revolving  commitment outstanding.  The Eurodollar Margin  ranges
from  a minimum of 1.75% to a maximum of 2.50% and the Prime base
rate margin ranges from a minimum of .25% to a maximum of 1.00%.
  
  Certain  covenants of the revolving line of  credit  require  a
tangible  net worth of not less than $2 million, a current  ratio
of  1.0  to  1,  a  minimum fixed coverage ratio  of  1.1  to  1,
restrictions  on  cash  dividends,  additional  indebtedness  and
purchases of investments. The covenants that the Company violated
as  of December 31, 1997 consisted of minimum tangible net worth,
sale of assets and minimum interest coverage ratio which were all
subsequently  waived.   On  March 27, 1998,  the  covenants  were
amended  to  remove the tangible net worth requirement,  increase
allowable  sales of assets from $250,000 to at least $10  million
and  revise  the minimum interest coverage ratio to  .7  to  1.0.
Substantially  all  of Southwest's assets are  collateralized  in
connection with this debt.
  
<PAGE>
       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Long-term Debt - continued

9% Note Payable
       
  In  August 1995, a subsidiary of Southwest entered into a  note
agreement  which provided for $30.3 million to purchase  oil  and
gas  properties.  In October 1997, this note was  repaid  with  a
portion of the proceeds from the aforementioned Note.

10% Note Payable
       
  In  October 1996, Red Oak, through a subsidiary, issued a  term
note  of $9 million to finance the purchase of real estate.  This
note  was  repaid  with  a  portion  of  the  proceeds  from  the
aforementioned 13% note payable.

12% Note Payable
  
  In  November 1996, Southwest entered into a senior subordinated
note  agreement  which provided for $8 million  to  be  used  for
developmental drilling.  This note was repaid with a  portion  of
the proceeds from the aforementioned 10.5% Senior Notes.
  
Variable Rate Notes Payable
  
  In  June 1998, MRO N Cross, Inc., a wholly owned subsidiary  of
Midland Red Oak Realty, Inc. negotiated two notes payable in  the
amount  of $13.5 million, net of a $2 million discount, and  $2.5
million.  The $13.5 million note was used for the acquisition  of
rental property in the amount of $12.9 million with the remaining
$600,000  to  be  used  for capital improvements  to  the  rental
property  purchased.   The  $2.5  million  note  is  for  capital
improvements  to the rental property purchased and has  not  been
utilized  as of September 30, 1998.  The notes are collateralized
by the property purchased.
  
Extinguishment of Debt
  
  In   1997,  the  Company  repaid  the  aforementioned  9%  Note
Payable,  10%  Note Payable and 12% Note Payable.  The  remaining
unamortized  deferred  debt  costs associated  with  these  notes
resulted  in  an  extraordinary  charge  of  $4,350,000,  net  of
$1,241,000 of tax benefit, or $2.88 per share.
  

  Aggregate maturities of all long-term debt as of September  30,
1998, including capital leases, are as follows (in thousands):
         For the twelve
         months ended
         September 30, 1999                   $78,450
         September 30, 2000                      581
         September 30, 2001                    14,308
         September 30, 2002                      333
         September 30, 2003                    8,305
         Thereafter                           209,641

<PAGE>


       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Commitments and Contingencies
       
  The  Company is subject to extensive federal, state  and  local
environmental  laws  and  regulations.   These  laws,  which  are
constantly changing, regulate the discharge of materials into the
environment and may require the Company to remove or mitigate the
environmental effects of the disposal or release of petroleum  or
chemical substances at various sites.  Environmental expenditures
are  expensed  or capitalized depending on their future  economic
benefit.   Expenditures  that relate  to  an  existing  condition
caused  by  past  operations and that  have  no  future  economic
benefits  are  expensed.   Liabilities  for  expenditures  of   a
noncapital  nature  are  expensed when  environmental  assessment
and/or  remediation is probable and the costs can  be  reasonably
estimated.
  
  Management  recognizes a financial exposure  that  may  require
future expenditures presently existing for oil and gas properties
and other operations.   As of September 30, 1998, the Company has
not been fined, cited or notified of any environmental violations
which   would  have  a  material  adverse  effect  upon   capital
expenditures, earnings or the competitive position in the oil and
gas  industry.  However, management does recognize  that  by  the
very  nature of its business, significant costs could be incurred
to  bring the Company into total compliance.  The amount of  such
future  expenditures is not readily determinable due  to  several
factors,    including   the   unknown   magnitude   of   possible
contaminations, the unknown timing and extent of  the  corrective
actions which may be required, the determination of the Company's
liability  in  proportion to other responsible  parties  and  the
extent  to which such expenditures are recoverable from insurance
or   indemnifications  from  prior  owners   of   the   Company's
properties.  It is reasonably possible this estimate could change
materially in the near term.
  
  In  the  normal course of its business, the Company is  subject
to  pending  or  threatened  legal actions;  in  the  opinion  of
management,  any  such matters will be resolved without  material
effect  on  the  Company's operations,  cash  flow  or  financial
position.
  
6.   Commodity Hedging and Derivative Financial Instruments
  
   The  Company,  from  time to time, uses  option  contracts  to
mitigate  the  volatility  of price changes  on  commodities  the
Company  produces  and  sells as well as to  lock  in  prices  to
protect the economics related to certain capital projects.  Prior
to  September  30, 1998, the Company purchased put options  on  a
total  of  13,000  MMBtu of natural gas per day.   These  options
expire on October 31, 1998 and have a strike price, based on  the
El Paso Natural Gas Co. - Permian Basin Index, of $1.90 for 6,500
MMBtu  per day and $1.70 for the remaining 6,500 MMBtu  per  day.
In  May  1998, the Company purchased a collar for 1,500 MMBtu  of
natural  gas  per  day which expires on October  31,  1998.   The
collar  has  a  call strike price of $2.63 per MMBtu  and  a  put
strike  price  of  $1.95 per MMBtu based on the NYMEX  Henry  Hub
Natural Gas Futures Contract.
  
  In  August 1998, the Company purchased an additional put option
on  a  total of 15,000 MMBtu of natural gas per day with a strike
price  of  $2.00 per MMBtu.  The option is based on the  El  Paso
Natural Gas Co. - Permian Basin Index and is for the period  from
November 1, 1998 through March 31, 1999.
  
<PAGE>
  
       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Impairment of Oil and Gas Properties
  
  Southwest  uses  the  full cost method of  accounting  for  its
investment in oil and gas properties. Under the full cost  method
of   accounting,  all  costs  of  acquisition,  exploration   and
development of oil and gas reserves are capitalized into a ''full
cost  pool'' as incurred, and properties in the pool are depleted
and  charged to operations using the gross revenues method  based
on  the  ratio  of current gross revenues to total proved  future
gross revenues, computed based on current prices.  Should the net
capitalized costs exceed the estimated present value of  oil  and
gas  reserves,  discounted at 10%, such  excess  costs  would  be
charged  to  current  expense.  As of  June  30,  1998,  the  net
capitalized cost exceeded the estimated present value of oil  and
gas reserves, thus a noncash adjustment of $29.0 million was made
to  the  financial statement.  Once incurred, a writedown of  oil
and gas properties is not reversible at a later date, even if oil
or natural gas prices increase.

8. Lines of Business
  
  The  Company  operates  in three major segments:  Oil  and  Gas
Activities (oil and gas acquisition, development, exploration and
production, as well as organizing and serving as managing general
partner  for  various  public  and private  limited  partnerships
engaged  in oil and gas development and production), Oil and  Gas
Well  Servicing  (provides  well  completion,  recompletion   and
production equipment, transportation services, tank supply rental
services  and  other  support and well  maintenance  services  to
operating  oil and gas companies) and Real Estate Investment  and
Management  (owns and manages retail shopping centers and  office
buildings).   Other  items  include eliminations,  manufacturing,
computer  service  and  broker/dealer and  the  holding  company.
Effective  July  1, 1997, Sierra, the oil and gas well  servicing
business,   was   deconsolidated,  therefore   income   statement
information for the nine months ended September 30, 1998  is  not
displayed  in  the  tables and no balance  sheet  information  is
displayed as of September 30, 1998.

                             Three months endedNine months ended
                               September 30,    September 30,
                        -----------------------------------------
------------
                               1998     1997     1998     1997
                             -------   ------   ------   ------
                              (in thousands)   (in thousands)
                               (unaudited)      (unaudited)
 Operating profit (loss)
    Oil  and  gas              $ 1,685  $  451   $(29,289)      $
4,274
   Well service                   -       -        -      184
   Real estate                2,094     755    5,774    1,831
    Other  and  eliminations             3         (56)      (20)
(283)
                            ----------        ----------
----------                  ----------
                             $  3,782   $1,150   $(23,535)      $
6,006
                             ======  ======   ======   ======
 Interest Expense
   Oil and gas              $ 5,719  $2,375   $16,846  $6,855
   Well Service                   -       -        -      184
   Real Estate                3,882   1,749    9,628    3,880
     Other  and  eliminations             (17)      7          28
31
                            ----------        ----------
----------                  ----------
                            $ 9,584  $4,131   $26,502  $10,950
                             ======  ======   ======   ======

<PAGE>
       SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Lines of Business - continued
  
                             Three months endedNine months ended
                               September 30,    September 30,
                        -----------------------------------------
------------
                               1998     1997     1998     1997
                             -------   ------   ------   ------
                              (in thousands)   (in thousands)
                               (unaudited)      (unaudited)
 Depreciation, depletion and amortization
   Oil and gas              $   852  $1,883   $9,021   $6,395
   Well service                   -       -        -      747
   Real estate                  808     293    2,034      826
     Other  and  eliminations             47        39        140
125
                            ----------        ----------
----------                  ----------
                            $ 1,707  $2,215   $11,195  $8,093
                             ======  ======   ======   ======

 Capital expenditures
   Oil and gas              $ 2,534  $5,431   $9,489   $27,153
   Well service                   -       -        -    6,905
   Real estate                4,174  20,507   30,042   27,309
     Other  and  eliminations             106       29        300
99
                            ----------        ----------
----------                  ----------
                            $ 6,814  $25,967  $39,831  $61,466
                             ======  ======   ======   ======
  
                                           September  30,December
31,
                                               1998    1997
                                             --------------------
-----
 Identifiable assets
   Oil and gas                                $162,909 $205,054
   Real estate                                126,837  98,890
    Other  and eliminations                               (1,472)
1,499
                                              ----------
----------
                                              $288,274 $305,443
                                              ======   ======
  
9. Subsequent Events

  In  October  1998,  Red  Oak purchased an  office  building  in
Midland, TX for a purchase price of $1.1 million.  Subsequent  to
September  30, 1998, Red Oak escrowed approximately $1.5  million
to  be  used  towards  the purchase price of approximately  $21.0
million for a retail mall in Victoria, TX.
  
  
<PAGE>
ITEM  2.    MANAGEMENT'S  DISCUSSION AND  ANALYSIS  OF  FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
  
General
  
  Southwest  Royalties  Holdings, Inc., a  Delaware  corporation,
was  formed  in 1997 to serve as a holding company for  Southwest
Royalties,  Inc., Sierra Well Service, Inc. and Midland  Red  Oak
Realty,  Inc.  SRH is an independent oil and gas company  engaged
in  the  acquisition, development and production of oil  and  gas
properties,  primarily in the Permian Basin  of  West  Texas  and
Southeastern  New  Mexico,  through its wholly-owned  subsidiary,
Southwest.    Since  1983, Southwest has grown primarily  through
selective acquisitions of producing oil and gas properties,  both
directly and through the oil and gas partnerships it manages. SRH
also  participates  in  the well servicing industry  through  its
affiliate,  Sierra, and owns and manages real  estate  properties
through  its subsidiary, Red Oak.  References in this  report  to
the  "Company"  are  to  SRH  and its consolidated  subsidiaries,
including  Southwest,  Red  Oak  and  Sierra,  an  unconsolidated
affiliate.
  
  Southwest  has  grown principally through  the  acquisition  of
producing   properties,  establishing  a  substantial   base   of
producing  and undeveloped properties in the Permian  Basin.   In
the  nine  months ended September 30, 1998, Southwest drilled  15
gross  (5.72  net)  development wells  and  8  gross  (3.53  net)
exploratory  wells.   Southwest successfully completed  15  gross
(5.72  net)  development wells and 7 gross (2.53 net) exploratory
wells, achieving 100% and 88% drilling success in its development
and exploration activities, respectively.  The Company expects to
invest  $1.2  million  in capital expenditures  during  the  last
quarter  of 1998 on continuous development commitments  and  non-
operated property development.
  
  The   Company   places   emphasis  on  profitable   acquisition
opportunities as long as such opportunities exist.  However,  the
Company  understands  the cyclical nature  of  the  oil  and  gas
industry.  Therefore, the Company also actively seeks to  develop
its  inventory  of  existing proved developed  non-producing  and
proved  undeveloped reserves.  The Company's staff and operations
can  easily  shift  emphasis  between  acquisitions  and  reserve
development   depending  on  market  conditions.   A  significant
portion of the Company's reserves are proved undeveloped and  are
therefore available for development.
  
  Southwest's   revenue,  profitability   and   cash   flow   are
substantially dependent upon prevailing prices for crude oil  and
natural  gas  and  the volumes of crude oil and  natural  gas  it
produces.  Throughout 1998 and currently, the company as well  as
the  oil  and  gas  industry as a whole, is  experiencing  severe
decreases  in oil and gas commodity prices.  The severe  decrease
in  the  commodity prices has drastically affected  revenues  and
cashflows  from  operations received by the  company.   Based  on
current  commodity prices and production, the company is  limited
in  its ability to meet operating and capital needs beyond  1999.
Management  is  constantly monitoring its cash position  and  its
ability to meet its financial obligations as they become due, and
in  this  effort, is exploring various strategies for  addressing
its current and future liquidity needs.  In addition, Southwest's
proved reserves and oil and gas production will decline as  crude
oil  and natural gas are produced, unless Southwest is successful
in   acquiring   producing  properties  or  conducts   successful
exploration and development activities.

  Southwest  uses  the  full cost method of  accounting  for  its
investment in oil and gas properties. Under the full cost  method
of   accounting,  all  costs  of  acquisition,  exploration   and
development of oil and gas reserves are capitalized into a ''full
cost  pool'' as incurred, and properties in the pool are depleted
and  charged to operations using the gross revenues method  based
on  the  ratio  of current gross revenues to total proved  future
gross  revenues,  computed based on current  prices.  Significant
downward revisions of quantity estimates or declines in  oil  and
gas prices that are not offset by other factors could result in a
writedown  for  impairment  of  oil  and  gas  properties.   Once
incurred, a writedown of oil and gas properties is not reversible
at  a  later  date,  even if oil or natural gas prices  increase.
During  most of 1996 and 1997, the Company benefited from  higher
oil  prices  as compared to previous years.  However, during  the
second  quarter  of  1998,  oil prices were  significantly  lower
causing  the  Company  to incur a $29.0 million  noncash  charge.
Also,  further declines in oil prices could result in  additional
decreases  in  the carrying value of the Company's  oil  and  gas
properties.

<PAGE>
   Red  Oak  was  formed by the Company in 1992  to  acquire  and
manage  neighborhood and community shopping centers, other retail
and  commercial properties and office buildings. These properties
are  primarily  leased,  on a long-term basis,  to  major  retail
companies,   local  specialty  retailers  and  professional   and
business  tenants  throughout  secondary  urban  markets  in  the
southwestern  United States. As of September 30,  1998,  Red  Oak
owns and operates 16 shopping centers, eight office buildings and
raw land held for future development.
   
   Effective  July  1, 1997, Sierra was deconsolidated  from  the
financial  statements of SRH and is subsequently  reported  using
the equity method of accounting.  As such, comparisons of revenue
and  expenses for the nine months ended 1998 to the  nine  months
ended  1997 are not relevant and therefore no discussion of  such
results of operations are provided.

Results of Operations

  The  following  table  summarizes production  volumes,  average
sales  prices and period to period comparisons for the  Company's
oil and gas operations, including the effect on revenues, for the
periods indicated:
  
                             Three months endedNine months ended
                               September 30,    September 30,
                        -----------------------------------------
------------
                               1998     1997     1998     1997
                             -------   ------   ------   ------
  Production volumes:
  Oil and condensate (MBbls)           412      264    1,341
818
  Natural gas (MMcf)         1,325   1,277    4,336    4,142
  
  Average sales prices:
  Oil and condensate (per Bbl)      $12.04   $17.00   $13.16
$  19.39
  Natural gas (per Mcf)    $  1.66  $ 1.99   $ 1.85   $ 2.01
  
  Revenues.  Revenues for the Company increased to $14.7  million
and  $45.1  million for the three and nine months ended September
30,  1998,  respectively, as compared to $9.3 million  and  $38.6
million for the same periods in 1997. Revenues increased in  each
segment, with the exception of Sierra which was deconsolidated.
  
  Oil  and  gas  revenues increased 4% to $7.4  million  for  the
three months ended September 30, 1998 and 5% to $26.3 million for
the  nine  months ended September 30, 1998, as compared  to  $7.1
million  and  $25.0  million for the same periods  in  1997.  The
increase  for the three and nine months ended September 30,  1998
is  primarily due to increases in oil and gas production,  offset
by a decrease in average oil and natural gas prices. The majority
of the increased production is a direct result of a large oil and
gas acquisition in October 1997.
  
  The  Company,  from  time  to time, uses  option  contracts  to
mitigate  the  volatility  of price changes  on  commodities  the
Company  produces  and  sells as well as to  lock  in  prices  to
protect the economics related to certain capital projects.  Prior
to  September  30, 1998, the Company purchased put options  on  a
total of 13,000 MMBtu per day, which represents approximately 80%
of the Company's gas production.  These options expire on October
31,1998 and have a strike price, based on the El Paso Natural Gas
Co.  - Permian Basin Index, of $1.90 for 6,500 MMBtu per day  and
$1.70  for  the remaining 6,500 MMBTU per day.  In May 1998,  the
Company purchased a collar for 1,500 MMBtu of natural gas per day
which expires on October 31, 1998.  The collar has a strike price
of  $2.63  per  MMBtu and a put strike price of $1.95  per  MMBtu
based  on  the NYMEX Henry Hub Natural Gas Futures Contract.   In
August 1998, the Company purchased an additional put option on  a
total of 15,000 MMBtu of natural gas per day based on the El Paso
Natural  Gas Co. - Permian Basin Index.  The option  is  for  the
period  from November 1, 1998 through March 31, 1999  and  has  a
strike price $2.00 per MMBtu.

<PAGE>
  Real  estate  revenues increased 267% to $7.0 million  for  the
three  months ended September 30, 1998 and 253% to $17.8  million
for the nine months ended September 30, 1998, as compared to $1.9
million and $5.0 million for the same periods in 1997.
  
  Operating  Expenses.  Operating expenses,  before  general  and
administrative expense, impairment of oil and gas properties  and
depreciation,  depletion  and  amortization,  increased  to  $8.1
million  and  $24.7 million for the three and nine  months  ended
September 30, 1998, respectively, as compared to $5.0 million and
$20.7  million for the same periods in 1997. The increase relates
primarily  to  costs associated with the growth in the  Company's
businesses through acquisitions, offset by the deconsolidation of
Sierra on July 1, 1997.
  
  Oil  and  gas operating expense per Boe decreased 20% to  $6.69
for  the three months ended September 30, 1998 from $8.40 per Boe
for the same period in 1997.  For the nine months ended September
30,  1998, operating expense per Boe decreased 11% to $7.22  from
$8.10  per  Boe  for  the same period in 1997.   Lease  operating
expense, the primary oil and gas operating expense, decreased  8%
to  $5.82  per Boe for the nine months ended September  30,  1998
from $6.34 per Boe for the same period in 1997.  The decreases on
a  Boe  basis is due to the Company's ongoing efforts to decrease
operating  costs  coupled  with  divestitures  of  oil  and   gas
properties with high operating costs.
  
  Real  estate  operating expense increased 416% to $3.5  million
for  the  three months ended September 30, 1998 and 361% to  $8.8
million for the nine months ended September 30, 1998, as compared
to $685,000 and $1.9 million for the same periods in 1997.  These
increases were due primarily to acquisitions.
  
  General  and Administrative (''G&A'') Expense. G&A expense  for
the  Company  increased 21% to $1.1 million for the three  months
ended September 30, 1998 and decreased 4% to $3.7 million for the
nine months ended September 30, 1998, as compared to $912,000 and
$3.8 million for the same periods in 1997.  The decrease for  the
nine  months  is primarily due to the deconsolidation  of  Sierra
which  accounted  for $1.3 million for the first  half  of  1997,
offset by an increase in the Company's activities resulting  from
recent  acquisitions.  Oil and gas G&A expense per Boe  decreased
38%  to  $.99 for the three months ended September 30, 1998  from
$1.60  per Boe for the same period in 1997.  For the nine  months
ended  September  30, 1998, G&A expense per Boe decreased  9%  to
$1.29  from  $1.42  per Boe for the same period  in  1997.   Real
estate G&A expense increased to $529,000 and $1.2 million for the
three and nine months ended September 30, 1998, respectively from
$166,000  and $465,000 for the comparable periods of  1997.   The
increases  are directly related to administrative staff increases
necessitated by Red Oak's significant growth.
  
  Depreciation,  Depletion and Amortization  (''DD&A'')  Expense.
DD&A  expense for the Company increased to $1.7 million and $11.2
million  for the three and nine months ended September 30,  1998,
respectively,  as compared to $2.2 million and $8.1  million  for
the  same periods in 1997, due to growth in each of the Company's
businesses. Oil and gas depletion expense decreased 70% to  $1.14
per  Boe for the three months ended September 30, 1998 from $3.76
per Boe for the same period in 1997.  The decrease in oil and gas
depletion expense for the three months ended September  30,  1998
is  due  to  the  non-cash charge of $29 million  in  the  second
quarter  of 1998 which reduced the property base being  depleted.
For  the  nine months ended September 30, 1998, depletion expense
per  Boe  increased 3% to $4.19 from $4.08 per Boe for  the  same
period in 1997.  The increase in oil and gas depletion expense on
an  overall basis and per Boe is due primarily to the decrease in
the  oil  price  used  in  the period  end  reserve  reports  for
September 30, 1998 compared to the reserve reports used  for  the
same  period in 1997, which led to a higher depletion rate  using
the  units of revenue depreciation method.  The increase, due  to
price  declines  was  partially offset by the  reduction  of  the
depletion base of the $29 million impairment recognized  in  June
of  1998.  Real estate DD&A expense increased to $808,000 and  $2
million from $293,000 and $826,000 for the three and nine  months
ended  September  30, 1998, respectively, due to  the  impact  of
acquisitions.

<PAGE>
  Impairment of Oil and Gas Properties. Southwest uses  the  full
cost  method  of  accounting for its investment in  oil  and  gas
properties. Under the full cost method of accounting,  all  costs
of  acquisition,  exploration and  development  of  oil  and  gas
reserves  are capitalized into a ''full cost pool'' as  incurred,
and properties in the pool are depleted and charged to operations
using  the  gross revenues method based on the ratio  of  current
gross  revenues  to total proved future gross revenues,  computed
based  on  current  prices.  Significant  downward  revisions  of
quantity estimates or declines in oil and gas prices that are not
offset  by  other  factors  could  result  in  a  writedown   for
impairment of oil and gas properties.  Once incurred, a writedown
of oil and gas properties is not reversible at a later date, even
if  oil or natural gas prices increase.  The net capitalized cost
at June 30, 1998, exceeded the estimated present value of oil and
gas  reserves,  discounted  at 10%, primarily  due  to  depressed
commodity  prices.   The  Company  due  to  writedown   for   the
impairment incurred a noncash charge of $29 million for the  nine
months ended September 30, 1998.

  Interest  Expense.  Interest expense for the Company  increased
to  $9.6 million and $26.5 million for the three and nine  months
ended  September  30,  1998, respectively, as  compared  to  $4.1
million  and  $10.9 million for the same periods  in  1997.   The
increases  result from increased borrowings incurred  to  fund  a
portion   of   the  Company's  acquisitions  and  oil   and   gas
development.   Oil  and gas interest expense increased  to   $5.7
million  and  $16.8 million for the three and nine  months  ended
September  30,  1998 from $2.3 million and $6.9 million  for  the
comparable  periods  in 1997 as a result of increased  borrowings
for  development drilling and acquisitions made  in  1997.   Real
estate  interest expense increased 122% to $3.9 million  for  the
three  months  ended September 30, 1998 and 148% to $9.6  million
for the nine months ended September 30, 1998, as compared to $1.7
million  and  $3.9  million for the same periods  in  1997.   The
increases   were   due  to  additional  debt  used   to   finance
acquisitions.
  
  Income  Taxes.  The Company recorded an income tax  benefit  of
$2.3  million  for the nine months ended September  30,  1998  as
compared  to $1 million for the three months ended September  30,
1997  and  $1.5  million for the nine months ended September  30,
1997.   As  of  June  1998, the Company established  a  valuation
allowance  for its deferred tax asset, consisting mainly  of  net
operating loss carryforwards and a temporary difference  relating
to  net  oil  and gas properties.  Future benefits  will  not  be
available  henceforth;  however,  the  amount  of  the  valuation
allowance could be reduced if estimates of future taxable  income
during the carryforward periods are increased.
  
  Equity  in  Loss of Subsidiary.  Equity in Loss  of  Subsidiary
resulted  in a charge of $1.0 and $2.1 million for the three  and
nine  months ended September 30, 1998.  These amounts  relate  to
the  Company's 39% investment in Sierra, which was deconsolidated
on July 1, 1997.
  
  Net  Income. Due to the factors described above, net  loss  for
the  Company  increased $44.8 million to  a  net  loss  of  $47.9
million for the nine months ended September 30, 1998, as compared
to a net loss of $3.1 million for the same period in 1997.
  
Liquidity and Capital Resources
  
  As  of  September  30,  1998, the Company's  consolidated  cash
balance  was  $20  million,  of  which  $19.6  was  available  to
Southwest.   Funding  for the Company's business  activities  has
historically  been  provided  by  operating  cash   flows,   bank
borrowings and debt issuance, reserve-based financing  and  sales
of  equity;  however, a continuation of the oil price environment
experienced  during the first nine months of 1998  will  have  an
adverse affect on the Company's revenues and operating cash flow.
Any future acquisitions may require additional financing and will
be  dependent upon financing arrangements available at the  time.
The  Company  sold $3.8 million of oil and gas properties  during
the  first  nine months of 1998 in an ongoing effort to  decrease
its  production costs and improve its cash position.   Throughout
1998  and  currently, the Company as well  as  the  oil  and  gas
industry as a whole, is experiencing severe decreases in oil  and
gas  commodity  prices.   The severe decrease  in  the  commodity
prices  has  drastically  affected revenues  and  cashflows  from
operations  received by the company.  Based on current  commodity
prices  and production, the company is limited in its ability  to
meet  operating  and  capital needs beyond 1999.   Management  is
constantly monitoring its cash position and its ability  to  meet
its financial obligations as they become due, and in this effort,
is  exploring various strategies for addressing its  current  and
future liquidity needs.

<PAGE>
  As  discussed  previously,  as of July  1,  1997,  Sierra  Well
Service  was  deconsolidated  from SRH  and  is  currently  being
accounted  for using the equity method of accounting;  therefore,
cash  flow information for Sierra is reported for the nine months
ended September 30, 1997.  For the comparable period in 1998,  no
cash flow information for Sierra is reported.
  
  Net Cash Provided by Operating Activities

   Net  cash  provided by operating activities was  $4.7  million
and  $2.7  million for the three and nine months ended  September
30,  1998,  respectively, as compared to  net  cash  provided  by
operating  activities of $4.6 million and $9.7  million  for  the
same periods in 1997.  The changes are primarily attributable  to
decreases  in  average  oil prices and an  increase  in  interest
expense  resulting  principally  from  acquisitions  in  all  the
Company's  businesses, which was offset by increases in  oil  and
gas production.
  
Net Cash Used in Investing Activities

   Net  cash  used  in investing activities by the  Company  were
$5.6  million  and $36.4 million for the three  and  nine  months
ended  September 30, 1998, as compared to $27.8 million and $68.7
for the comparable periods in 1997.  Acquisitions and oil and gas
development  activities  and  commercial  real  estate  were  the
primary uses of funds for both periods.
  
  The  Company  has  increased  its  1998  oil  and  gas  capital
expenditure  budget to $10.2 million, of which $8.9  million  was
expended  during the first nine months of 1998 for  oil  and  gas
acquisitions  and developmental activities.  The Company  expects
to invest approximately $1.2 million during the remainder of 1998
to  satisfy  continuous development  commitments and non-operated
property development.  Further revisions may be necessary for the
remainder of the year in response to market conditions. No amount
has  been  budgeted  for oil and gas acquisitions,  although  the
Company  will  continue to search for strategic and complementary
oil  and  gas  acquisitions.  The Company anticipates  Red  Oak's
capital improvement budget to approximate $10.4 million, of which
$4.1 million was expended for the first nine months of 1998.  For
the  remainder  of  1998, Red Oak intends to acquire  one  retail
shopping  mall.  The acquisition will be funded by  sources  that
are non-recourse to SRH and Southwest.
  
Net Cash Provided by Financing Activities.

   Net  cash  provided by the Company's financing activities  was
$1.4  million  and  $26.3  million  for  the  nine  months  ended
September 30, 1998 and 1997, respectively.  Net cash provided  by
financing  activities was primarily used  to  fund   real  estate
acquisitions in 1998.
  
  Southwest  Credit Facility. The Southwest Credit  Facility  was
amended  to  provide for a $75 million revolving line  of  credit
maturing in February 1999, subject to semi-annual borrowing  base
redetermination.  The initial borrowing base of  $40  million  is
subject  to  a $15 million available sub-limit for  oil  and  gas
acquisitions,  with the balance of the borrowing  base  available
for  general  corporate purposes. Borrowings accrue  interest  at
LIBOR  plus a margin ranging from 1.75% to 2.50% and the facility
incurs a quarterly commitment fee of three-eighths of one percent
(3/8%) per annum on the daily average of the unadvanced amount of
the borrowing base.  The Southwest Credit Facility is secured  by
substantially  all of Southwest's proved oil and gas  properties.
The  facility contains a number of covenants that limit loans and
advances,  investments,  and dividends,  as  well  as  setting  a
minimum  interest  coverage ratio for SRH.  In  March  1998,  the
covenants   were  amended  to  remove  the  tangible  net   worth
requirement, increase allowable sales of assets from $250,000  to
at  least  $10  million and revise the minimum interest  coverage
ratio from 1.0 to 0.7.  During the second quarter, in response to
the  sustained low oil price environment, the lender issued lower
pricing parameters for the computation of the borrowing base  for
all   of  its  oil  and  gas  customers.   Using  the  new  price
parameters, Southwest has no current availability under its  line
of credit.  Scheduled redetermination will occur again at the end
of  the  year.   The lender schedules quarterly  reviews  of  its
pricing policy and should oil prices strengthen, the Company  can
request a redetermination at that time.

<PAGE>
  The   Company  believes  the  availability  of  the   Red   Oak
Acquisition  Facilities  and  current  cash  balances   will   be
sufficient   for   planned  operating  and  capital   expenditure
requirements for the remainder of 1998.  However, if the  Company
identifies  acquisitions  in  any of its  businesses,  additional
financing will be needed and the Company expects to evaluate  all
available  funding  sources including equity and  debt  financing
alternatives.

Other Issues
  
Information Systems for the Year 2000
  
  The  Company uses a program designed and implemented by Midland
Southwest  Software, ("Software") a subsidiary of SRH.   Software
currently  has  a year 2000 plan in effect.  They  have  surveyed
existing programs and hardware and estimate a compliance date  of
early  1999.  Determination of the total cost in connection  with
the  year 2000 compliance issue is difficult to determine due  to
the  fact  that they are in the process of developing  their  new
1998  version of marketed oil and gas software, which  has,  from
inception,  included year 2000 compliance.  Third party  software
programs  utilized  by SRH are either in compliance  or  are  not
affected  by  the year 2000, with the exception  of  the  payroll
service,  which is currently modifying its system  to  accurately
handle the Year 2000 issue.

  Effective  July 1998, Red Oak initiated the use of real  estate
software  that  is apart from SRH.  Red Oak is currently  in  the
process of evaluating year 2000 compliance issues.

  Neither SRH or Red Oak has completed evaluations of vendors  or
suppliers  systems  to determine the effect,  if  any,  the  non-
compliance of such systems would have on operations.   Plans  are
under  way  to  perform an audit in late 1998 or  early  1999  to
determine  the effect of non-compliance of vendors and  suppliers
on SRH and Red Oak and thus formulate a contingency plan.

  A  potential  source of risk includes, but is not  limited  to,
the  inability of principal purchasers and suppliers to  be  year
2000  compliant,  which  could have  a  material  effect  on  SRH
production,   cash   flow   and  overall   financial   condition,
notwithstanding  the SRH actions to prepare its  own  information
systems.  SRH currently does not have a contingency plan in place
to  cover any unforeseen problems encountered that relate to  the
year  2000,  but  intends to produce one before the  end  of  the
fiscal year.

<PAGE>
Derivative Instruments and Hedging Activities

  In   June   1998,  The  FASB  issued  Statement  of   Financial
Accounting   Standards   No.  133  "Accounting   for   Derivative
Instruments and Hedging Activities" which establishes  accounting
and  reporting  standards for derivative  instruments,  including
certain  derivative  instruments  embedded  in  other  contracts,
(collectively  referred  to  as  derivatives)  and  for   hedging
activities.  It requires that an entity recognize all derivatives
as  either  assets or liabilities in the statement  of  financial
position and measure those instruments at fair value.  If certain
conditions  are met, a derivative may be specifically  designated
as (a) a hedge of the exposure to charges in the fair value of  a
recognized asset or liability or an unrecognized firm commitment,
(b)  a  hedge  of  the  exposure to  variable  cash  flows  of  a
forecasted  transaction, or (c) a hedge of the  foreign  currency
exposure  of  a  net  investment  in  a  foreign  operation,   an
unrecognized firm commitment, an available-for-sale security,  or
a foreign-currency-denominated forecasted transaction.
  
  Under  this  Statement, an entity that elects  to  apply  hedge
accounting is required to establish at the inception of the hedge
the  method  it will use for assessing the effectiveness  of  the
hedging  derivative and the measurement approach for  determining
the  ineffective  aspect of the hedge.   Those  methods  must  be
consistent with the entity's approach to managing risk.
  
  This  Statement  applies to all entities and is  effective  for
all  fiscal  quarters of fiscal years beginning  after  June  15,
1999.  Initial application of this Statement should be as of  the
beginning  of  an entity's fiscal quarter; on that date,  hedging
relationships must be designated anew and documented pursuant  to
the provisions of this Statement.  Earlier application of all  of
the  provisions  of  this  Statement is  encouraged,  but  it  is
permitted  only  as of the beginning of any fiscal  quarter  that
begins  after issuance of this Statement.  This Statement  should
not  be  applied retroactively to financial statements  of  prior
periods.

<PAGE>
                   PART II - OTHER INFORMATION

ITEM 6.   REPORTS ON FORM 8K AND EXHIBITS

Reports on Form 8-K
  
  None.
  
  
Exhibits
  
  The  following  instruments  and  documents  are  included   as
Exhibits to this Report.  Exhibits incorporated by reference  are
so indicated by parenthetical information.
  
  
  Exhibit Number                            Description
  --------------------       ----------------
  
   
   27*        Financial Data Schedule.

   * Filed herewith.

  
  <PAGE>
                           SIGNATURES
                    SOUTHWEST ROYALTIES, INC.
  
  Pursuant  to  the requirements of Section 13 or  15(d)  of  the
Securities  Exchange Act of 1934, the registrant has duly  caused
this  report  to  be  signed on its behalf  by  the  undersigned,
thereto duly authorized.
  
                            SOUTHWEST ROYALTIES, INC.

                      By:   /s/ H. H. Wommack, III
                            -------------------------------------
--------------
                               H.H.   Wommack,   III,   Chairman,
President,
                            Chief Executive Officer, and Director

                      Date: November 13, 1998
  
  Pursuant to the requirements of the Securities Exchange Act  of
1934,  this report has been signed below by the following persons
on  behalf  of the registrant and in the capacities  and  on  the
dates indicated.
  
  SIGNATURE                TITLE                 DATE
  -----------------        --------              --------
  
  /s/ H.H. Wommack, III
  -----------------------------
  H. H. Wommack, III       Chairman/President/
                             Chief   Executive   Officer/Director
November 13, 1998
  
  /s/ Bill E. Coggin
  -----------------------------
  Bill E. Coggin           Vice President/Chief
                            Financial  Officer      November  13,
1998
  
  /s/ H. Allen Corey
  -----------------------------
  H.  Allen  Corey           Director/Secretary     November  13,
1998
  
  
  <PAGE>
                           SIGNATURES
             SOUTHWEST ROYALTIES HOLDINGS, INC.
  
  Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereto duly authorized.
  
                            SOUTHWEST ROYALTIES HOLDINGS, INC.

                      By:   /s/ H. H. Wommack, III
                            -------------------------------------
--------------
                               H.H.   Wommack,   III,   Chairman,
President,
                            Chief Executive Officer, and Director

                      Date: November 13, 1998
  
  Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
  
  SIGNATURE                TITLE                 DATE
  -----------------        --------              --------
  
  /s/ H.H. Wommack, III
  -----------------------------
  H. H. Wommack, III       Chairman/President/
                             Chief   Executive   Officer/Director
November 13, 1998
  
  /s/ Bill E. Coggin
  -----------------------------
  Bill E. Coggin           Vice President/Chief
                            Financial  Officer      November  13,
1998
  
  /s/ H. Allen Corey
  -----------------------------
  H.  Allen  Corey           Director/Secretary     November  13,
1998
  
  
  <PAGE>