25
                    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, 2001

     or

?    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, 2001  for
Southwest Royalties, Inc                                              100.
Number  of shares of common and redeemable common stock outstanding  as  of
September 30, 2001 for Southwest Royalties Holdings, Inc        1,075,534.


<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, 2001
          (unaudited) and December 31, 2000                3

          Consolidated Statements of Operations for the
          three and  nine months ended September 30, 2001
          and 2000 (unaudited)                             5

          Consolidated Statements of Cash Flows for the three
          and nine months ended September 30, 2001
          and 2000 (unaudited)                             7

          Notes to Consolidated Financial Statements      10


Item 2.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations             22

Item 3.   Quantitative and Qualitative Disclosures About
          Market Risk                                     27

                        PART II - OTHER INFORMATION

Item 6.   Reports on Form 8-K and Exhibits                28














<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,
                                                     2001       2000
                                                 -----------------------
                                                 (unaudited)
ASSETS
---------------------------------------------------------
Current assets
  Cash and cash equivalents                       $ 12,329   $  17,217
  Restricted cash                                    3,982       4,558
  Accounts receivable, net of allowance of
   $818 and $559, respectively                       9,210      10,302
  Receivables from related parties                   1,733       1,941
  Other current assets                               4,200       3,166
                                                   -------     -------
     Total current assets                           31,454      37,184
                                                   -------     -------
Oil and gas properties, using the full cost
  method of accounting
  Proved                                           225,881     204,751
  Unproved                                           1,042         625
                                                   -------     -------
                                                   226,923     205,376
  Less accumulated depletion, depreciation
   and amortization                                139,109     131,734
                                                   -------     -------
  Oil and gas properties, net                       87,814      73,642
                                                   -------     -------
Rental property, net                               130,674     133,385
                                                   -------     -------
Rental property - construction in progress           6,536       2,926
                                                   -------     -------
Other property and equipment, net                    4,493       4,612
                                                   -------     -------
Other assets
  Real estate investments                            1,864       3,024
  Deferred debt costs, net of accumulated
   amortization of $7,787 and $5,698, respectively               5,043
7,043
  Noncompete covenants, net of accumulated
   amortization of $1,272 and $877, respectively             2,175
727
  Other, net                                         2,121       1,258
                                                   -------     -------
     Total other assets                             11,203      12,052
                                                   -------     -------
Total assets                                      $272,174   $ 263,801
                                                   =======     =======
                                                             (continued)

<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES

                  CONSOLIDATED BALANCE SHEETS (continued)
                   (in thousands, except per share data)

                                                September 30,December 31,
                                                     2001       2000
                                                  --------- -----------
                                                 (unaudited)
LIABILITIES, MINORITY INTEREST, REDEEMABLE
COMMON STOCK AND STOCKHOLDERS' EQUITY
---------------------------------------------------------
Current liabilities
  Current maturities of long-term debt            $147,129   $  56,231
  Accounts payable                                   6,664       7,045
  Accounts payable to related parties                  848       1,543
  Accrued expenses                                   7,412       6,477
  Accrued interest payable                           7,558       4,612
                                                   -------     -------
  Total current liabilities                        169,611      75,908
                                                   -------     -------
Long-term debt                                     199,457     281,034
                                                   -------     -------
Other long-term liabilities                          1,296       1,645
                                                   -------     -------
Redeemable common stock - 129,046 shares issued              8,290
8,290
                                                   -------     -------
Stockholders' equity
  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 at September 30, 2001
   and December 31, 2000                               116         116
  Additional paid-in capital                         2,196       2,196
  Accumulated deficit                             (104,431)  (100,662)
  Accumulated other comprehensive income:
  Transition adjustment on implementation of
  SFAS 133 net of reclassification to earnings
   of $691 and none, respectively                      339           -
  Note receivable from an officer and stockholder            (1,590)
(1,616)
  Less:  treasury stock - at cost; 214,549 shares
   at September 30, 2001 and December 31, 2000     (3,110)     (3,110)
                                                   -------     -------
  Total stockholders' deficit                     (106,480)  (103,076)
                                                   -------     -------
Total liabilities, redeemable common stock
 and stockholders' equity                         $272,174   $ 263,801
                                                   =======     =======















           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 ended  Nine months ended
                                     September 30,       September 30,
                                   ------------------  -----------------
                                     2001      2000      2001      2000
                                    ------    ------    ------    ------
Operating revenues
  Oil and gas                      $10,585   $14,955   $42,088   $39,297
  Real estate                        8,217     7,933    24,154    23,391
  Other                                 54       118       187       291
                                    ------    ------    ------    ------
     Total operating revenues       18,856    23,006    66,429    62,979
                                    ------    ------    ------    ------
Operating expenses
  Oil and gas production             4,555     3,969    13,265    11,152
  Real estate                        4,978     4,558    14,390    13,714
  General and administrative, net of
   related party management and
   administrative fees of $804, $798,
   $2,384 and $2,467, respectively           1,032     1,242     3,145
3,243
  Depreciation, depletion and
   amortization                      3,958     2,644    12,303     7,825
  Other                                 53       165       179       754
                                    ------    ------    ------    ------
     Total operating expenses       14,576    12,578    43,282    36,688
                                    ------    ------    ------    ------

Operating income                     4,280    10,428    23,147    26,291
                                    ------    ------    ------    ------
Other income (expense)
  Interest and dividend income         303       327       783       841
  Interest expense                 (9,735)   (10,922)  (29,553)  (32,398)
  Other                              1,664       405     1,944     1,030
                                    ------    ------    ------    ------
                                   (7,768)   (10,190)  (26,826)  (30,527)
                                    ------    ------    ------    ------

(continued)


<PAGE>

            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
                   (in thousands, except per share data)
                                (unaudited)

                                   Three months ended  Nine months ended
                                     September 30,       September 30,
                                   -----------------   -----------------
                                     2001      2000      2001      2000
                                    ------    -----     -----     -----
Income (Loss) before income taxes,
   minority interest and extraordinary
   item                          $ (3,488) $     238 $ (3,679) $ (4,236)
   Income tax benefit (provision)            -         -         -
-
                                   --------- --------- --------- ---------
Income (Loss) before minority interest
   and extraordinary item          (3,488)       238   (3,679)   (4,236)
   Minority interest in subsidiaries,
     net of tax                       (30)      (33)      (90)     1,139
                                   --------- --------- --------- ---------
Income (Loss) before extraordinary
   item                            (3,518)       205   (3,769)   (3,097)
   Extraordinary gain (loss) from
     early extinguishment of debt            -         (1,374)         -
12,622
                                   --------- --------- --------- ---------
Net income (loss)                $ (3,518) $ (1,169) $ (3,769) $   9,525
                                   ========= ========= ========= =========

Income (Loss) per common share before
   extraordinary item            $    (3.27)       $ .19   $(3.51)     $
(2.88)
   Extraordinary gain (loss) from
     early extinguishment of debt            -         (1.27)    -
11.74
                                   --------- --------- --------- ---------

Income (loss) per common share   $    (3.27)     $   (1.08)$   (3.51)  $
8.86
                                   ========= ========= ========= =========
Weighted average shares outstanding          1,075,534 1,075,868 1,075,534
1,075,868
                                   ========= ========= ========= =========
























           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 ended  Nine months ended
                                     September 30,       September 30,
                                   -----------------   -----------------
                                     2001      2000      2001      2000
                                    ------    -----     -----     -----
Cash flows from operating activities
  Net income (loss)                $(3,518)  $(1,169)  $(3,769)  $ 9,525
  Adjustments to reconcile net income
   (loss) to net cash provided by
   operating activities:
  Depreciation, depletion and
   amortization                      3,958     2,644    12,303     7,825
  Noncash interest expense           1,667     2,314     5,201     7,492
  Noncash reclassification of
     unrealized gain                 (257)         -     (691)         -
  Noncash unrealized gain on
     oil and gas hedges              (412)         -     (115)         -
  Extraordinary (gain) loss from early
   extinguishment of debt                -     1,374         -   (12,622)
  Gain on sale of assets           (1,049)     (208)   (1,115)     (456)
  Other noncash items                    -       153         -       492
  Amortization of lease commissions               40        41       123
145
  Bad debt expense                     150       100       396       240
  Minority interest (income) loss
   of subsidiary                         -        33         -   (1,139)
  Changes in operating assets
   and liabilities -
   Accounts receivable               2,587   (2,178)       904   (4,664)
   Other current assets              1,439     (736)     1,787   (1,205)
   Accounts payable and accrued
     expenses                          865     2,153     (141)     (195)
   Change in restricted cash         (765)     2,744       440     4,956
   Accrued interest payable          3,354     3,202     2,946     2,998
                                    ------    ------    ------    ------
Net cash provided by operating
  activities                         8,059    10,467    18,269    13,392
                                    ------    ------    ------    ------
Cash flows from investing activities
  Proceeds from sale of oil and
   gas properties                        6       162        53       498
  Investment in oil and gas properties       (5,737)   (2,934)   (21,600)
(6,744)
  Purchase of other property and
   equipment and rental property             (1,991)   (2,120)   (5,636)
(6,419)
  Purchase of other assets           (406)     (586)   (2,597)     (622)
  Proceeds from sale of real estate
   investments                         662       410       874     1,053
  Proceeds from sale of other assets             114        27       147
46

                                                              (continued)
<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
                              (in thousands)
                                (unaudited)

                                   Three months ended  Nine months ended
                                     September 30,       September 30,
                                   -----------------   -----------------
                                     2001      2000      2001      2000
                                    ------    -----     -----     -----
  Proceeds from sale of other property
   equipment and rental property         $   446   $   7     $   469   $
87
  Change in restricted cash          (393)      (61)       136     (896)
  Other                                  8         8        26        24
                                    ------    ------    ------    ------
Net cash used in investing activities        (7,291)   (5,087)   (28,128)
(12,973)
                                    ------    ------    ------    ------
Cash flows from financing activities
  Proceeds from borrowings           1,683    54,403    25,248    75,922
  Payments on debt                   (450)   (51,893)  (19,481)  (75,655)
  Change in other long-term
   liabilities                       (502)       (2)     (349)      (47)
  Deferred debt cost                     -   (1,264)     (447)   (1,395)
  Refund of debt issue costs            -     1,500         -     1,500
  Dividends paid to minority interest
   owners                                -      (30)         -      (90)
  Purchase of minority interest of
   subsidiary                            -       (8)         -       (8)
  Other                                  -         -         -         1
                                    ------    ------    ------    ------
Net cash provided by financing
  activities                           731     2,706     4,971       228
                                    ------    ------    ------    ------
Net increase (decrease) in
  unrestricted cash and cash
  equivalents                        1,499     8,086   (4,888)       647

Unrestricted cash and cash equivalents -
  beginning of period               10,830     9,544    17,217    16,983
                                    ------    ------    ------    ------
Unrestricted cash and cash equivalents -
  end of period                    $12,329   $17,630   $12,329   $17,630
                                    ======    ======    ======    ======
                                                              (continued)

<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
                              (in thousands)
                                (unaudited)

                                   Three months ended  Nine months ended
                                     September 30,       September 30,
                                   -----------------   -----------------
                                     2001      2000      2001      2000
                                    ------    -----     -----     -----
Non-cash investing and financing activities

  Deferred debt cost incurred      $     -   $ 1,000   $     -   $ 1,000
  Increase in other long-term
   liabilities associated with
   deferred debt costs             $     -   $   500   $     -   $   500
  Increase in accrued expenses
    associated with deferred debt costs       $     -   $   500    $      -
$ 500
  Unrealized gain on oil and gas
   commodity hedges-taken to other
   comprehensive income            $     -   $     -   $ 1,030   $     -
  Note payable issued to fund
   non-compete agreement           $     -   $     -   $   800   $     -

Supplemental disclosures of cash flow
 information

  Interest paid                    $ 4,714   $ 5,693   $21,406   $21,908


































           The accompanying notes are an 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"), Midland Red Oak Realty, Inc. ("Red Oak") (collectively,
the  "Company")  and  an equity investment in Basic  Energy  Service,  Inc.
("Basic")  (formerly  Sierra  Well Services, Inc.).   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 Basic were subsidiaries
of  Southwest.  Southwest paid a dividend of the shares it owned in Red Oak
and  Basic to SRH. After the formation of SRH, Southwest and Red Oak became
subsidiaries of SRH and, as of July 1, 1997, Basic was deconsolidated.

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

Principles of Consolidation

   The  consolidated financial statements include the accounts of  SRH  and
its  subsidiaries.  As  of September 30, 2001, the Company  owned  100%  of
Southwest and 81% of Red Oak.  As of September 30, 2001, Southwest had only
one  subsidiary, Blue Heel Company ("Blue Heel").  Effective  August  2000,
Midland  Southwest Software ("MSS"), a former subsidiary of Southwest,  was
merged  into  Southwest. Blue Heel holds a nominal interest in certain  oil
and gas properties owned by Southwest.

   As  of  September 30, 2001 Red Oak has 4 wholly owned subsidiaries,  MRO
Management,   Inc.   ("MRO   Management"),  MRO  Commercial,   Inc.   ("MRO
Commercial"),  MRO  N Cross, Inc. ("Northcross"), and MRO  Southwest,  Inc.
("MRO Southwest").  MRO Commercial, Northcross and MRO Southwest each  hold
titles  to  certain real estate properties and are the borrowers under  the
credit agreements related to such properties.  These credit agreements  are
non-recourse  to  Red Oak. MRO Management performs real  estate  management
services  for  Red Oak, MRO Commercial, Northcross, MRO Southwest  and  for
third party clients.

  The    consolidated   financial   statements   include   the    Company's
proportionate share of the assets, liabilities, income and expenses of  the
oil  and  gas  limited partnerships for which Southwest serves as  managing
general  partner.   Southwest  accounts for its  investments  in  Southwest
Partners  II  and III using the equity method, as they exercise significant
influence  over  the  operations  of these partnerships.   All  significant
intercompany transactions have been eliminated.

Estimates and Uncertainties

  Preparation  of  the  accompanying consolidated financial  statements  in
conformity   with   generally  accepted  accounting   principles   requires
management  to  make  estimates and assumptions that  affect  the  reported
amounts of assets and liabilities and disclosures 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 those estimates.

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

Cash and Cash Equivalents

  The  Company considers all highly liquid debt instruments purchased  with
a  maturity  of three months or less to be cash equivalents.  In  addition,
the  Company maintains its excess cash in several interest bearing accounts
in various financial institutions.

Restricted Cash

  Restricted  cash represents amounts required to be reserved  in  separate
accounts  by  financial  lenders.   Restricted  cash  accounts  have   been
established for the following purposes (in thousands):

                                                  September 30,December 31,
                                                       2001        2000
                                                       ----        ----
     Certificate of Deposits - Red Oak              $      -   $    118
     Tenant security deposits - Red Oak                  582        536
     Capital expenditures account - Red Oak              688        824
     Tax and insurance reserve - Red Oak               1,840      2,034
     Lockbox - Red Oak                                   222        160
     Customer service reserve - Red Oak                   10         12
     Interest reserve - Red Oak                            -        115
     Escrow fund - Southwest                             640        759
                                                       -----     ------
                                                    $  3,982   $  4,558
                                                       =====     ======
Real Estate Revenue Recognition

  The   Company   leases   offices  and  retail  shopping   centers   under
noncancelable  operating leases.  The Company reports base  rental  revenue
for  financial  statement purposes straight-line  over  the  terms  of  the
respective  leases.  Accrued straight-line rents represent the amount  that
straight-line rental revenue exceeds rents collected in accordance with the
lease  agreements. Management, considering current information  and  events
regarding   the  tenants'  ability  to  fulfill  their  lease  obligations,
considers accrued straight-line rents to be impaired if it is probable that
the  Company  will  be  unable to collect all rents due  according  to  the
contractual lease terms.  If accrued straight-line rents associated with  a
tenant  are  considered to be impaired, the amount  of  the  impairment  is
measured  based  on  the  present  value of  expected  future  cash  flows.
Impairment losses, if any, are recorded through a loss on the write-off  of
assets.   Cash receipts on impaired accrued straight-line rents are applied
to  reduce  the  remaining  outstanding  balance  and  as  rental  revenue,
thereafter.

  Some  leases provide for percentage rents based on the tenant's  revenue.
Percentage  rents are accrued monthly based on prior experience or  current
tenant financial information.  Some leases require tenants to reimburse the
Company   for   certain   expenses  of  operating  the   property.   Tenant
reimbursements are accrued and billed to the tenants monthly based on prior
experience or certain identifiable costs.

Concentrations of Credit Risk

  The  Company  is  subject  to  credit risk  through  oil  and  gas  trade
receivables  and  real  estate lease receivables.  Although  a  substantial
portion  of  its customers' ability to pay is dependent upon conditions  in
the  oil  and  gas industry as well as general economic conditions,  credit
risk is reduced due to a large customer base.

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

Commodity Hedging and Derivative Financial Instruments

  The  Company  has  only  limited involvement  with  derivative  financial
instruments and generally does not use them for trading purposes.  They are
used  to  manage commodity price risks.  The Company is exposed  to  credit
losses  in  the  event  of  nonperformance by the  counter-parties  to  its
commodity  hedges.   The Company anticipates, however, that  such  counter-
parties  will  be  able  to  fully  satisfy  their  obligations  under  the
contracts.   The  Company does not obtain collateral or other  security  to
support  financial  instruments subject to credit  risk  but  monitors  the
credit standing of the counter-parties.

  Through  December 31, 2000, premiums paid for commodity option  contracts
which  qualified as hedges under Statement of Accounting Standards ("SFAS")
No.  80  "Accounting for Futures Contracts", were 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  or
payable under the commodity option contracts are accrued as an increase  or
decrease  in  oil  and  gas  sales for the applicable  periods.   Effective
January  1,  2001,  derivative financial instruments are accounted  for  in
accordance with SFAS 133 as amended by SFAS 138.

  In  June  1998, the Financial Accounting Standards Board ("FASB")  issued
SFAS   No.133,   "Accounting  for  Derivative   Instruments   and   Hedging
Activities."   SFAS  No.  133,  as amended by  SFAS  No.  138,  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  an
entity to 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 changes in the fair value of a
recognized  asset  or liability or an unrecognized firm commitment,  (b)  a
hedge  of  the  exposure to changes in the fair value 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.   Special  accounting   for
qualifying hedges allows a derivative's gains and losses to offset  related
results  on the hedged item in the Company's statement of operations.   The
Company  recorded  a  net  transition  adjustment  gain  of  $1,030,000  in
accumulated  other comprehensive income on January 1, 2001. The  transition
adjustment  is being amortized to oil and gas sales over the  term  of  the
agreements.

Oil and Gas Properties

  All  of  the  Company's oil and gas properties are located in the  United
States  and  are accounted for at cost under the full cost  method.   Under
this  method, all productive and nonproductive costs incurred in connection
with  the  acquisition, exploration and development of oil and gas reserves
are  capitalized.  No gain or loss is recognized on the sale of oil and gas
properties unless nonrecognition would significantly alter the relationship
between  capitalized costs and remaining proved reserves for  the  affected
amortization  base.  When gain or loss is not recognized, the  amortization
base is reduced by the amount of sales proceeds.


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

  Net  capitalized costs of oil and gas properties, including the estimated
future  costs to develop proved reserves, are amortized using the units  of
revenue  method, whereby the provision is computed on the basis of  current
gross  revenues from production in relation to future gross revenues, based
on  current  prices,  from  estimated production  of  proved  oil  and  gas
reserves.  Should the net capitalized costs net of related deferred  income
taxes exceed the estimated present value of oil and gas reserves discounted
at  10%  and adjusted for related income taxes, such excess costs would  be
charged to expense in the Consolidated Statements of Operations.

  It  is reasonably possible that the estimates of anticipated future gross
revenues,  the  remaining estimated economic life of the product,  or  both
could  change significantly in the near term due to the fluctuation of  oil
and  gas  prices or production.  Depletion estimates would also be affected
by such changes.

  Management  and  service fees received for contractual  arrangements,  if
any,  are  treated as reimbursement of costs, offsetting the costs incurred
to  provide those services, with any excess of fees over costs credited  to
the  full cost pool and recognized through lower cost amortization only  as
production occurs.

Property and Equipment

  Rental  property  and other property and equipment are  stated  at  cost.
Repairs  and maintenance are charged to expense as incurred, with additions
and  improvements  being  capitalized.  Upon sale or  other  retirement  of
depreciable  property,  the cost and accumulated depreciation  are  removed
from  the  related  accounts  and any gain or  loss  is  reflected  in  the
Consolidated Statements of Operations.

  Depreciation  is  provided  on  the straight-line  method  based  on  the
estimated useful lives of the depreciable assets as follows:

     Building and improvements                    20 to 30 years
     Rental property and improvements             5 to 30 years
     Leasehold improvements                       2 to 10 years
     Machinery and equipment                      3 to 5 years
     Furniture and fixtures                       3 to 5 years
     Equipment under capital lease                3 to 5 years

Rental Property - Construction in Progress

  All  costs  associated with construction in progress are capitalized  and
subject  to  depreciation  when each project  is  completed.   Interest  is
capitalized  for  construction in progress.  The  capitalized  interest  is
recorded as part of the asset to which it relates and is amortized over the
assets useful life.  In 2001 and 2000 no interest costs were capitalized.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

  In  accordance  with the provisions of SFAS No. 121, Accounting  for  the
Impairment  of Long-Lived Assets and for Long-Lived Assets to  Be  Disposed
Of,  the  Company  reviews its long-lived assets,  excluding  oil  and  gas
properties  accounted  for using the full cost method  of  accounting,  and
certain  identifiable intangibles for impairment whenever events or changes
in  circumstances indicate that the carrying amount of an asset may not  be
recoverable.   In this circumstance, the Company recognizes  an  impairment
loss  for the amount by which the carrying amount of the asset exceeds  the
estimated fair value of the asset.

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

Deferred Debt Costs

  The  Company  capitalizes  certain  costs  incurred  in  connection  with
issuing debt.  These costs are being amortized to interest expense  on  the
straight-line method over the term of the related debt.

Gas Balancing

  The  Company  utilizes the sales method of accounting for over  or  under
deliveries of natural gas.  Under this method, the Company recognizes sales
revenue on all natural gas sold.

Income Taxes

  Deferred  tax  assets and liabilities are recognized  for  the  estimated
future  tax  effects  attributable  to differences  between  the  financial
statement  carrying  amount of existing assets and  liabilities  and  their
respective  tax  basis.  Deferred tax assets and liabilities  are  measured
using enacted tax rates expected to apply to taxable income in the years in
which  those temporary differences are expected to be recovered or settled.
The  effect on deferred tax assets and liabilities of a change in tax  rate
is  recognized  in income in the period that includes the  enactment  date.
Deferred tax assets are reduced, if necessary, by a valuation allowance for
the amount of tax benefits that may not be realized.

  SRH  and  its  eligible  subsidiaries file a  consolidated  U.S.  federal
income  tax  return.  Basic  (through  June  30,  1997)  and  Red  Oak  are
consolidated  for  financial reporting purposes, but beginning  January  1,
1996,  were  not eligible to be included in the consolidated  U.S.  federal
income  tax  return.   Separate  provisions  for  income  taxes  have  been
determined for these entities. Effective January 1, 2001 Red Oak has become
eligible to be included in the consolidated U.S. federal income tax return.

Reclassifications

  Certain  reclassifications have been made to the 2000 amounts to  conform
to the 2001 presentation.

Income (loss) per share

  Basic  net  income  (loss)  per  share is  computed  by  dividing  income
available  to common stockholders by the weighted average number of  common
shares  outstanding for the period.  The computation of diluted net  income
(loss)  per  share  reflects the potential dilution  that  could  occur  if
securities  or  other  contracts to issue common stock  were  exercised  or
converted  into  common stock or resulted in the issuance of  common  stock
that  would then share in the earnings of the entity.  For 2001  and  2000,
the  computation  of diluted net income (loss) per share was  antidilutive;
therefore, the amounts reported for basic and diluted net income (loss) per
share were the same.

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.

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

Interim Financial Statements

  In  the  opinion  of  management,  the unaudited  consolidated  financial
statements  of  the Company as of September 30, 2001 and 2000  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  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 2000 Form 10-K of the Company.

2. Liquidity

  The accompanying consolidated financial statements have been prepared  on
a going concern basis, which contemplates the realization of assets and the
satisfaction  of  liabilities  in  the  normal  course  of  business.   The
consolidated  financial statements do not include any adjustments  relating
to  the  recoverability  and classification of liabilities  that  might  be
necessary should the Company be unable to continue as a going concern.

  SRH  has a highly leveraged capital structure with, approximately,  $31.5
million  of cash interest and $147.1 million of principal (net of a related
party  note of $798,000 between Southwest and Red Oak) due within the  next
twelve  months.   The majority, $14.0 million of cash interest  and  $147.1
million  of  principal  (which  includes the $798,000  related  party  note
between  Southwest and Red Oak) due within the next twelve months, pertains
to  Red  Oak.  Management is currently in the process of renegotiating  the
terms  of SRH's various obligations with its debt holders and/or attempting
to  seek  new  lenders  or  equity investors. Additionally,  management  is
considering  the  disposition  of certain  assets  in  order  to  meet  its
obligations.

  There  can be no assurance that SRH's debt-restructuring efforts will  be
successful  or  that  the debt holders will agree to  a  course  of  action
consistent with SRH's requirements in restructuring the obligations.   Even
if such agreement is reached, it may require approval of other creditors of
SRH, none of which is assured.  Furthermore, there can be no assurance that
the sales of assets can be successfully accomplished on terms acceptable to
SRH.

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

3. 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.

  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
flows or financial position.

4.  Long-term Debt

  Long-term debt consists of the following (in thousands):
                                                 September 30,December 31,
                                                      2001        2000
                                                     -----       -----
     10.5% Senior Notes, interest payable semi-annually due
      October 15, 2004, net of discount of $788 and $945,
      respectively                                  $122,897  $122,740
     Revolving Loan Facility with variable rate interest,
      due August 2003. Collateralized by oil and gas
      properties                                      49,970    50,000
     Variable Rate Notes Payables:
     Variable notes due July 2001, accrued interest due and
      payable monthly at 8.7% at December 31, 2000 with
      additional 1% payable in cash or additional
      notes beginning July 1, 1998
        Net   of  discount  of  $0  and  $279,  respectively              -
17,802
     Variable notes due December 2001, accrued interest due
      and payable monthly at 7.1% and 8.9% at
      September 30, 2001 and December 31, 2000, with
      additional 1.5% payable in cash or additional
      notes beginning January 1, 1999
       Net  of  discount  of $222 and $1,222, respectively           36,146
33,373
     Variable notes due July 2002, interest at 8.6% and 10.4%
      at September 30, 2001 and December 31, 2000, accrued
      interest due and payable monthly beginning July 1, 1999
       Net  of  discount  of $1,172 and $2,491, respectively        106,269
103,690
     Variable notes due November 2002, interest at 8.0% at
      September 30, 2001, principal and interest due
      and payable monthly beginning July 10, 2001     19,720         -
     Other                                            11,584     9,660
                                                     -------   -------
                                                     346,586   337,265
     Less current maturities, net of discount of $1,394 and
      $1,500                                         147,129    56,231
                                                     -------   -------
                                                    $199,457  $281,034
                                                     =======   =======

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

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 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.

Revolving Loan Facility

  In  December 1999, Southwest entered into a Revolving Loan Facility  with
Bank One Texas, N.A., which provided a borrowing base of $50 million with a
maturity date of December 29, 2000.  Funds from the Revolving Loan Facility
may  be  used  for  working capital and other general  corporate  purposes,
including  the  repurchase  of a portion of Southwest's  outstanding  10.5%
Senior  Notes  due  2004.  Advances on the  Revolving  Loan  Facility  bear
interest  at the option of Southwest, based on the prime rate of  Bank  One
Texas,  N.A.  (8.5% at December 31, 1999) plus one fourth  of  one  percent
(.25%),  when the borrowing base usage is equal to or greater than  80%  or
zero  percent  (0%) when the borrowing base usage is less than  80%  or,  a
Eurodollar  rate (substantially equal to the London InterBank Offered  Rate
("LIBOR"))  plus  1.25%  up  to  2.0% based on  the  borrowing  base  usage
percentage.  The Revolving Loan Facility is secured by no less than 85%  of
Southwest's oil and gas properties.  As of December 31, 1999 Southwest  had
drawn  $35.0  million.  The remaining $15.0 million was  drawn  in  January
2000.

  The  Revolving Loan Facility imposes certain limitations on  the  ability
of Southwest 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 Revolving Loan Facility required  Southwest  to
establish  a sinking fund account with an initial deposit of $3.5  million.
Southwest  is  to  transfer  monthly one-twelfth  of  the  annual  interest
payments  on the 10.5% Senior Notes beginning December 31, 1999  into  this
sinking  fund  account for the purpose of making interest payments  on  the
10.5% Senior Notes.

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

  Southwest  successfully completed a refinancing of their  Revolving  Loan
Facility  in  the  amount of $50.0 million on August 17, 2000  with  a  new
lender. The Amended and Restated Loan and Security Agreement allows  for  a
prime  rate of interest (9.50% at December 31, 2000) plus one and  one-half
percent  (1.5%).   The  new  lender continues to  impose  the  above  noted
limitations,   however,  the  sinking  fund  requirement  was   eliminated.
Southwest was able to extend the due date from December 29, 2000 to  August
17,  2003.   Southwest, in recording the refinancing of the Revolving  Loan
Facility, recorded an extraordinary loss from early extinguishment of  debt
in the amount of approximately $1.4 million.

Variable Rate Notes Payable

  In  June  1998, MRO N Cross, Inc., a wholly owned subsidiary of  Red  Oak
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  was  reserved  for  capital
improvements to the rental property purchased and had been utilized  as  of
June  30,  2001.  The notes were collateralized by the property  purchased.
The notes were paid in full as of June 30, 2001.

  In  June  2001, MRO N Cross, Inc., a wholly owned subsidiary of  Red  Oak
negotiated  a  note  payable in the amount of $22.1 million.   The  initial
funding  of $18.8 million was utilized to retire the existing debt  on  the
collateralized  property.  The additional $3.3 million will  be  funded  as
necessary to make capital improvements to the property.

  In  December 1998, MRO Commercial, Inc., a wholly owned subsidiary of Red
Oak  negotiated two notes payable in the amount of $21.7 million, net of  a
$4 million discount, and $9.7 million.  The $21.7 million note was used for
the  acquisition  of  a retail shopping center and the funding  of  various
escrow balances.  The $9.7 million note is for capital improvements to  the
rental  property purchased and had been utilized as of June 30,  2001.  The
notes are collateralized by the property purchased.

  In  June 1999, MRO Southwest, Inc., a wholly owned subsidiary of Red  Oak
negotiated  two  notes  payable in the amount of  $97.5  million  and  $8.0
million, net of discounts of $5.3 million. Borrowings for both notes accrue
interest  in arrears at a rate per annum equal to the greater  of  8.6%  or
LIBOR plus 360 basis points.  The interest rate includes a servicing fee of
 .10%.  Approximately $91.4 million of the $97.5 million note  was  used  to
retire existing debt on properties contributed to MRO Southwest by Red Oak,
$1.5  million was deposited into various restricted cash accounts  and  the
remaining  proceeds  were  used for general corporate  purposes.  The  $8.0
million  note  is  for  capital improvements to rental  property  and  $6.3
million  has  been  utilized  as of September  30,  2001.   The  notes  are
collateralized by the properties owned by MRO Southwest.

  The  real  estate  notes impose certain restrictive  covenants  including
restrictions  on  the  incurrence of additional indebtedness,  dissolution,
termination  or  liquidation of all or substantially  all  of  the  assets,
changes  in the legal structure of the assets, making any loans or advances
to any third party and commingling its assets with the assets of any of its
affiliates or of any other person or entity.

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

Extinguishment of Debt

  In   January   of  2000,  Southwest  purchased  approximately   19%,   or
approximately $38.4 million original face amount, of its 10.5% Senior Notes
with   the  proceeds  from  the  aforementioned  Revolving  Loan  Facility.
Southwest paid approximately $23.0 million, including all fees, to purchase
the  10.5%  Senior Notes and wrote off approximately $980,000  of  deferred
loan  issue costs and approximately $349,000 of the original issue discount
to  recognize  a  $14.1 million extraordinary gain on the purchase  of  the
Notes.  The tax benefit of $6.0 million recognized in 2000 results from the
reversal  of  a  portion  of  the Company's deferred  tax  asset  valuation
allowance.  In accordance with Statement of Financial Accounting  Standards
("SFAS")  No.  109,  none of this amount is allocated to the  extraordinary
gain.  The extraordinary gain per share is approximately $13.01.

  On  August  17, 2000, Southwest refinanced their Revolving Loan  Facility
and recorded an extraordinary loss from early extinguishment of debt in the
amount  of  approximately $1.4 million.  There is  no  income  tax  benefit
recognized on the extraordinary loss.  The extraordinary loss per share  is
approximately $(1.27).

  Aggregate  maturities of all long-term debt as of December 31,  2000  are
as follows (in thousands):

     2001                                           $ 57,731
     2002                                            106,688
     2003                                             52,791
     2004                                            123,731
     2005                                                408
     Thereafter                                          853
                                                     -------
                                                     342,202
     Less unamortized discount                         4,937
                                                     -------
                                                    $337,265
                                                     =======

  Aggregate maturities of all long-term debt as of September 30,  2001  are
as follows (in thousands):

     For the twelve
     months ended
     --------------
     September 30, 2002                             $148,523
     September 30, 2003                               73,780
     September 30, 2004                                1,240
     September 30, 2005                              124,268
     September 30, 2006                                  103
     Thereafter                                          854
                                                     -------
                                                     348,768
     Less unamortized discount                         2,182
                                                     -------
                                                    $346,586
                                                     =======
<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

5. Lines of Business

  The  Company operates in two 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)  and  Real Estate Investment and Management (owns  and  manages
retail  shopping  centers  and  office  buildings).   Other  items  include
eliminations,  computer service and the holding Company.  Effective  August
2000,  Midland  Southwest  Software ("MSS") a 100%  wholly  owned  software
subsidiary was merged into Southwest.

                              Three months ended Nine months ended
                                September 30,      September 30,
                              ------------------ -----------------
                                 2001     2000      2001      2000
                                -----    -----     -----     -----
                                (in thousands)     (in thousands)
                                 (unaudited)        (unaudited)
 Operating Revenue
   Oil and gas              $  10,593   $14,965   $42,115   $39,326
   Real estate                  8,217     7,933    24,154    23,391
   Other and eliminations               46        108       160       262
                              -------    ------    ------    ------
                            $  18,856   $23,006   $66,429   $62,979
                              =======    ======    ======    ======
 Operating profit (loss)
   Oil and gas              $   3,178   $ 9,074   $19,418   $22,351
   Real estate                  1,143     1,785     3,853     4,918
   Other and eliminations               (41)      (431)     (124)     (978)
                              -------    ------    ------    ------
                            $   4,280   $10,428   $23,147   $26,291
                              =======    ======    ======    ======
 Interest Expense
   Oil and gas              $   4,868   $ 5,528   $14,714   $16,837
   Real Estate                  4,876     5,404    14,867    15,592
   Other and eliminations               (9)       (10)      (28)      (31)
                              -------    ------    ------    ------
                            $   9,735   $10,922   $29,553   $32,398
                              =======    ======    ======    ======

 Depreciation, depletion and
   amortization
   Oil and gas              $   2,391   $ 1,394   $ 7,720   $ 4,161
   Real Estate                  1,541     1,222     4,506     3,555
   Other and eliminations               26        28        77        109
                              -------    ------    ------    ------
                            $   3,958   $ 2,644   $12,303   $ 7,825
                              =======    ======    ======    ======

 Capital expenditures
   Oil and gas              $   5,737   $ 2,934   $21,600   $ 6,744
   Oil and gas, other             109       162       304       294
   Real Estate                  1,882     1,957     5,332     6,046
   Other                            -         1         -        79
                              -------    ------    ------    ------
                            $   7,728   $ 5,054   $27,236   $13,163
                              =======    ======    ======    ======
<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

                                           September 30, December 31,
                                                 2001         2000
                                              ----------   ----------
Identifiable assets
  Oil and gas                                 $ 126,809   $ 119,357
  Real estate                                   149,850     151,231
  Other and eliminations                        (4,485)     (6,787)
                                                -------     -------
                                              $ 272,174   $ 263,801
                                                =======     =======
6. Comprehensive Income

  Comprehensive income consists of net income (loss), as reflected  on  the
consolidated statement of operations, and other gains and losses  affecting
stockholders' equity that are excluded from net income (loss).  The Company
recorded  other  comprehensive income during the  first  quarter  of  2001.
Total comprehensive income for the nine months ended September 30, 2001  is
as follows (in thousand):

Net income (loss)                                   $(3,769)

Other comprehensive income, net of tax:
 Transition adjustment on implementation of
  SFAS 133 - January 1, 2001                           1,030
 Reclassification of transition adjustment             (691)
                                                       -----
   Other comprehensive income                            339
                                                       -----
Comprehensive income (loss)                         $(3,430)
                                                       =====

7. Related Party Transactions

  An   affiliate  of  the  Company  issued  a  Notice  to  Stockholders  of
Preemptive Rights dated May 21, 2001.  Three individuals, two of  whom  are
officers of the Company, contributed $110,000 toward the purchase of  5,500
shares of stock from the affiliate using the Company as both purchaser  and
holder of the stock via a Purchase Right Agreement dated June 6, 2001.  The
transferability of the shares is restricted by the Stockholders'  Agreement
dated December 21, 2000 according to Article 4 which states that the shares
are  not  transferable until the seventh anniversary of the  date  of  said
Stockholders'  Agreement  and until such time as the  cancellation  of  the
Pledge  Agreement dated October 14, 1997 by and among SRH and State  Street
Bank,  as  Trustee.  Therefore, the Company recorded a long-term  liability
for  the  5,500  shares  held on behalf of the  three  individuals  in  the
purchase  price amount of $110,000. The 5,500 shares are recorded in  other
assets at September 30, 2001.


<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.,
Midland  Red  Oak  Realty, Inc. and an equity investment  in  Basic  Energy
Services,  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  owns  and manages real estate properties  through  its
subsidiary, Red Oak.


Results of Operations

Three months and nine months ended September 30, 2001 compared to three
months and nine months September 30, 2000

  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 ended  Nine months ended
                                   September 30,       September 30,
                                ------------------- -------------------
                                  2001       2000     2001       2000
                                 -----      -----    -----      -----
                                   (in thousands)      (in thousands)
                                    (unaudited)         (unaudited)
Production volumes:
      Oil and condensate (MBbls)               317       312       944
928
      Natural gas (MMcf)           1,305     1,213     3,769     3,605
Average sales prices:
      Oil and condensate (per Bbl)        $  23.72  $  30.36  $  26.51
$     27.85
      Natural gas (per Mcf)     $   2.30  $   4.37  $   4.40  $   3.64

  Revenues.  Revenues for the Company decreased 18% to  $18.9  million  for
the three months ended September 30, 2001 and increased 5% to $66.4 million
for  the nine months ended September 30, 2000, as compared to $23.0 million
and $63.0 million for the same periods in 2000.

  Oil  and gas revenues decreased 29% to $10.6 million for the three months
ended  September 30, 2001 and increased 7% to $42.1 million  for  the  nine
months  ended  September 30, 2001, as compared to $15.0 million  and  $39.3
million for the same periods in 2000.  The decrease in oil and gas revenues
for  the  three  months  ended September 30, 2001 is  due  primarily  to  a
decrease  in  oil and gas prices and was partially offset by  increases  in
both oil and gas production.  The increase in oil and gas revenues for  the
nine  months ended September 30, 2001 is due to increases in both  oil  and
gas  production  as well as an increase in gas prices which were  partially
offset by a decrease in oil prices.

  Oil  and gas production increased 4% to 5,815 BOEPD for the three  months
ended  September 30, 2001 and 3% to 5,758 BOEPD for the nine  months  ended
September 30, 2001 as compared to 5,590 BOEPD and 5,580 BOEPD for the  same
periods in 2000.

  Real  estate  revenues increased 4% to $8.2 million for the three  months
ended  September 30, 2001 and 3% to $24.2 million for the nine months ended
September 30, 2001, as compared to $7.9 million and $23.4 million  for  the
same periods in 2000.


<PAGE>
  Other  Operating  revenues decreased 54% to $0.1 million  for  the  three
months ended September 30, 2001 and 36% to $0.2 million for the nine months
ended September 30, 2001, as compared to $0.1 million and $0.3 million  for
the  same  periods in 2000.  The decrease is due primarily to cut backs  in
computer outsourcing services provided by Southwest.

  Operating    Expenses.   Operating   expenses,   before    general    and
administrative  expense  and  depreciation,  depletion  and   amortization,
increased 10% to $9.6 million for the three months ended September 30, 2001
and  9%  to $27.8 million for the nine months ended September 30, 2001,  as
compared to $8.7 million and $25.6 million for the same periods in 2000.

  Oil  and  gas  operating  expense increased  approximately  15%  to  $4.6
million  for  the three months ended September 30, 2001 and  19%  to  $13.3
million  for the nine months ended September 30, 2001, as compared to  $4.0
million  and  $11.2 million for the same periods in 2000.  The increase  in
oil  and gas operating expenses for the three and nine month periods  ended
September  30, 2001 is due primarily to bringing higher lifting cost  wells
back  on  line  and  to  work  over expense  and  repairs  associated  with
maintaining  and/or increasing existing production.  The average  operating
expense increased 10% to $8.52 per BOE for the three months ended September
30,  2001 and 16% to $8.44 per BOE for the nine months ended September  30,
2001 from $7.72 and $7.29 per BOE for the same periods in 2000.

  Real  estate operating expense increased 9% to $5.0 million for the three
months ended September 30, 2001 and 5% to $14.4 million for the nine months
ended September 30, 2001, as compared to $4.6 million and $13.7 million for
the same periods in 2000. The increase is due primarily to the purchase  of
two additional property management companies in 2001.

  Other  operating  expense decreased 68% to $0.1  million  for  the  three
months ended September 30, 2001 and 76% to $0.2 million for the nine months
ended September 30, 2001, as compared to $0.2 million and $0.8 million  for
the  same  periods in 2000.  The decrease is due to cut backs  in  computer
outsourcing services provided by Southwest.

  General  and Administrative ("G&A") Expense. G&A expense for the  Company
decreased 17% to $1.0 million for the three months ended September 30, 2001
and  approximately 3% to $3.1 million for the nine months  ended  September
30, 2001, as compared to $1.2 million and $3.2 million for the same periods
in 2000.

  Oil  and gas G&A expense remained constant at $0.5 million for the  three
months ended September 30, 2001 and $1.7 million for the nine months  ended
September  30,  2001,  as compared to $0.5 and $1.7 million  for  the  same
periods in 2000.  Oil and gas G&A expense per BOE decreased 15% to $.88 for
the  three months ended September 30, 2001 and remained constant  at  $1.09
per  BOE for the nine months ended September 30, 2001, as compared to  1.03
per BOE and 1.09 per BOE for the same periods in 2000.

  Real  estate  G&A  expense increased 51% to $0.6 million  for  the  three
months ended September 30, 2001 and 17% to $1.4 million for the nine months
ended September 30, 2001, as compared to $0.4 million and $1.2 million  for
the same periods in 2000.  The increase is due primarily to the purchase of
two additional property management companies in 2001.

  Other  G&A  expense  decreased 100% for both the three  and  nine  months
ended  September 30, 2001, from $0.3 million for the three and nine  months
ended  September  30, 2000.  The decrease is due to cut backs  in  computer
outsourcing services provided by Southwest.

  Depreciation, Depletion and Amortization ("DD&A") Expense.  DD&A  expense
for  the  Company increased 50% to $4.0 million for the three months  ended
September  30,  2001  and 57% to $12.3 million for the  nine  months  ended
September  30, 2001, as compared to $2.6 million and $7.8 million  for  the
same periods in 2000.


<PAGE>
  Oil  and  gas  DD&A  increased 71% to $2.4 million for the  three  months
ended  September 30, 2001 and 83% to $7.7 million for the nine months ended
September  30, 2001, as compared to $1.4 million and $4.2 million  for  the
same  periods in 2000.   Depletion, which comprises the largest  percentage
of  DD&A,  is calculated using the units of revenue method of amortization.
This method is calculated by dividing current period gross revenues by  the
total  estimated  future  gross  revenues  and  multiplying  the  resulting
percentage  by  the  net  book value of the oil and  gas  properties  being
depleted.  The current period gross revenues are the result of the  average
commodity prices actually received during the amortization period.   Future
gross revenues are based on the commodity prices being received on the date
of  the  reserve  estimate.   Therefore large fluctuations  between  actual
average  prices  received during the amortization  period  and  the  prices
received  on the date of the reserve estimate can result in large increases
or  decreases in the computation of depletion expense for the period.   The
average  price received for oil and gas for the nine months ended September
30,  2001 was $26.51 per bbl of oil and $4.40 per mcf of gas as opposed  to
the prices required to be used in determining the future gross revenues  in
the  reserve estimate of $22.40 per bbl of oil and $2.10 per mcf of gas;  a
difference of 18% in the price per bbl of oil and 110% in the price per mcf
of  gas.   Oil and gas depletion expense on a BOE basis, increased  72%  to
$4.25  per  BOE for the three months ended September 30, 2001  and  88%  to
$4.69 per BOE for the nine months ended September 30, 2001, as compared  to
$2.47 per BOE and $2.49 per BOE for the same periods in 2000.

  Real  estate  DD&A expense increased 26% to $1.5 million  for  the  three
months ended September 30, 2001 and 27% to $4.5 million for the nine months
ended September 30, 2001, as compared to $1.2 million and $3.6 million  for
the  same periods in 2000.  The increase in DD&A expense for the three  and
nine  months  ended September 30, 2001 is due to the impact of  capitalized
improvements and amortization of noncompete agreements associated with  the
acquisition of two property management company's in 2000 and 2001.

  Interest Expense. Interest expense for the Company decreased 11% to  $9.7
million  for  the  three months ended September 30, 2001 and  9%  to  $29.6
million for the nine months ended September 30, 2001, as compared to  $10.9
million and $32.4 million for the same periods in 2000.

  Oil  and gas interest expense decreased 12% to $4.9 million for the three
months  ended  September 30, 2001 and 13% to $14.7  million  for  the  nine
months  ended  September 30, 2001, as compared to $5.5  million  and  $16.8
million for the same periods in 2000. The reduction is due primarily to the
decreases  in  the  prime  rate  associated with  Southwest's  $50  million
Revolving Loan Facility and the reduction of the deferred debt costs  being
amortized due to the refinance of the Revolving Loan Facility in August  of
2000.

  Real  estate interest expense decreased 10% to $4.9 million for the three
months ended September 30, 2001 and 5% to $14.9 million for the nine months
ended September 30, 2001, as compared to $5.4 million and $15.6 million for
the  same periods in 2000.  The reduction is due primarily to the decreases
in the prime rates associated with Red Oak's variable rate notes.

  Other  Income. Other income increased 311% to $1.7 million for the  three
months ended September 30, 2001 and 89% to $1.9 million for the nine months
ended September 30, 2001, as compared to $0.4 million and $1.0 million  for
the  same  periods  in 2000.  The increases are due primarily  to  payments
received on oil and gas hedges at Southwest.

  Net  Income (Loss). Due to the factors described above, net loss for  the
Company was $3.5 million for the three months ended September 30, 2001  and
$3.8 million for the nine months ended September 30, 2001, as compared to a
net  loss of $1.2 million and net income $9.5 million for the same  periods
in  2000.   Included in net income for the nine months ended September  30,
2000, is a net extraordinary gain of approximately $12.7 million associated
with  the  repurchase  of  approximately 19% of the  original  issue,  $200
million  face  10.5%  Senior  Notes  and  the  refinancing  of  Southwest's
Revolving  Loan  Facility.  Included in the net loss for the  three  months
ended  September  30, 2001 was an extraordinary loss of approximately  $1.4
million  associated  with  the refinancing of  Southwest's  Revolving  Loan
Facility.

  Net  income  at  Southwest was approximately $0.0 million for  the  three
months ended September 30, 2001 and $4.4 million for the nine months  ended
September 30, 2001, as compared to $2.0 million and $18.0 million  for  the
same periods in 2000.

<PAGE>
  Real  estate  net  losses were $3.5 million for the  three  months  ended
September  30,  2001 $10.3 million for the nine months ended September  30,
2001  as  compared $3.2 million and $9.5 million for the  same  periods  in
2000.

Liquidity and Capital Resources

  Funding  for  the  Company's business activities  has  historically  been
provided by operating cash flows, bank borrowings, debt issuances, reserve-
based  financings  and  sales of equity.  Any future capital  expenditures,
other than those with previously arranged and set-aside lines of financing,
will  most  likely  require  additional equity or  financing  and  will  be
dependent   upon  financing  arrangements  available  at  the   time.   The
significant  decrease  in oil and gas prices experienced  during  the  last
quarter  of  1997  and extending through the first half of  1999,  severely
limited  cash  flow from operations, depleted working capital and  rendered
most  other  financing  sources  unavailable,  or  if  available,  on  very
unattractive terms to Southwest.  With the upturn in commodity prices  that
began  in  the  last half of 1999 and continued through the first  half  of
2001, Southwest's operating cash flows improved allowing for the investment
of  capital  expenditures.   However, Southwest's  cash  flows  are  highly
dependent  on commodity prices and, beginning in the 3rd quarter  of  2001,
commodity  prices  began to fall precipitously. Based on current  commodity
prices,  Southwest's ability to generate cash flow from operations is  very
limited  thereby  creating an inability to invest in  capital  projects  to
maintain  or  increase  production at current levels  for  the  foreseeable
future.

  SRH  has a highly leveraged capital structure with, approximately,  $31.5
million  of cash interest and $147.1 million of principal (net of a related
party  note of $798,000 between Southwest and Red Oak) due within the  next
twelve  months.   The majority, $14.0 million of cash interest  and  $147.1
million  of  principal  (which  includes the $798,000  related  party  note
between  Southwest and Red Oak) due within the next twelve months, pertains
to  Red  Oak.  Management is currently in the process of renegotiating  the
terms  of SRH's various obligations with its debt holders and/or attempting
to  seek  new  lenders  or  equity investors. Additionally,  management  is
considering  the  disposition  of certain  assets  in  order  to  meet  its
obligations.

  There  can be no assurance that SRH's debt-restructuring efforts will  be
successful  or  that  the debt holders will agree to  a  course  of  action
consistent with SRH's requirements in restructuring the obligations.   Even
if such agreement is reached, it may require approval of other creditors of
SRH, none of which is assured.  Furthermore, there can be no assurance that
the sales of assets can be successfully accomplished on terms acceptable to
SRH.

  SRH,    Red   Oak   and   Southwest   regularly   pursue   and   evaluate
recapitalization   strategies  and  acquisition  opportunities   (including
opportunities  to  engage  in  mergers, consolidations  or  other  business
combinations) and at any given time may be in various stages of  evaluating
such  opportunities.  SRH has engaged Friedman, Billings, Ramsey  and  Co.,
Inc.  to  explore  all  strategic options  for  the  company,  including  a
potential recapitalization.

Net Cash Provided By Operating Activities

  Net  cash  provided  by operating activities was $8.1 million  and  $18.3
million   for  the  three  and  nine  months  ended  September  30,   2001,
respectively,  as compared to net cash provided by operating activities  of
$10.5  million and $13.4 million for the same periods in 2000. The decrease
in  cash  provided  by operating activities, is primarily  attributable  to
decreased  oil and gas commodity prices and increased operating  costs  for
both  the  real  estate and the oil and gas businesses, such as  electrical
pumping costs, drilling costs, and work-over rig expenses.

  Based  on  current commodity prices, Southwest may be unable to  maintain
certain  debt  covenants, including its interest coverage  ratio  and  will
probably need to obtain waivers or restructure its Revolving Loan Facility.

  Based  on Red Oak's current debt structure, Red Oak will not be  able  to
generate  sufficient  cash flow from operations without  restructuring  its
debt or selling assets.



<PAGE>
Net Cash Used In Investing Activities

  Net  cash  used in investing activities by the Company were $7.3  million
and  $28.1 million for the three and nine months ended September 30,  2001,
as  compared  to net cash used in investing activities of $5.1 million  and
$13.0 million for the comparable periods in 2000.  Purchase of oil and  gas
properties  and developmental drilling, as well as capital improvements  to
Real Estate holdings, were the primary uses of funds in 2001 and in 2000.

     The   following  table  sets  forth  capital  expenditures,  including
acquisitions, made by Southwest during the periods indicated.

                                Three months Ended  Nine months Ended
                                  September 30,       September 30,
                                ------------------   ----------------
                                  2001       2000      2001     2000
                                 -----      -----     -----    -----
                                               (in thousands)
Oil and gas properties
  Development                    $ 3,383   $ 2,631   $13,303   $ 5,464
  Exploration                        390       242       661       449
  Acquisitions                     1,964        61     7,636       831
                                  ------     -----    ------    ------
     Total                       $ 5,737   $ 2,934   $21,600   $ 6,744
======                           =====     ======    ======

  Based  on  current commodity prices, SRH has stopped all  non-contractual
capital  expenditures  at Southwest for oil and gas  development  projects.
This  budget  is subject to change based on financial strategies  currently
being  developed,  including  hedging  strategies,  divestitures  and  debt
restructuring, as well as the level of oil and gas prices in the future.

  SRH  has  budgeted  $3.8 million, for the remainder of 2001,  in  capital
improvements  on Real Estate holdings at Red Oak.  The capital improvements
will  be  funded  through additional borrowings on  existing  notes.   This
budget  is subject to change based on financial strategies currently  being
developed  which  include  the  sale  of  non-strategic  assets  and   debt
restructurings.

Net Cash Provided by Financing Activities.

  Net  cash provided by the Company's financing activities was $0.7 million
and $5.0 million for the three and nine months ended September 30, 2001 and
$2.7  million  and $0.2 million for the same periods in 2000, respectively.
For  the  three  months ended September 30, 2001, proceeds from  borrowings
were $1.7 million and were used to fund capital improvements on Real Estate
holdings.   For  the  nine months ended September 30, 2001,  proceeds  from
borrowings  were $25.2 million and were used to fund payments  on  debt  of
$19.0 million and to fund capital improvements on Real Estate holdings.


<PAGE>
Other Issues

Derivative Instruments and Hedging Activities.

  In  June  1998, the Financial Accounting Standards Board ("FASB")  issued
Statement  of  Financial Accounting Standards ("SFAS") No.133,  "Accounting
for  Derivative  Instruments and Hedging Activities."   SFAS  No.  133,  as
amended by SFAS No. 138, 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 an entity to 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
changes  in  the  fair  value of a recognized  asset  or  liability  or  an
unrecognized firm commitment, (b) a hedge of the exposure to changes in the
fair  value  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.    Special   accounting  for  qualifying   hedges   allows   a
derivative's gains and losses to offset related results on the hedged  item
in  the  Company's  statement of operations.  The Company  recorded  a  net
transition   adjustment  gain  of  $1.0  million   in   accumulated   other
comprehensive income on January 1, 2001. The transition adjustment is being
amortized  to  oil  and  gas sales over the term of  the  agreements.   The
Company recorded a net gain of $115,000 to adjust the carrying value of its
oil  and  gas  derivatives  to fair market value  of  $3.2  million  as  of
September 30, 2001.

Recent Accounting Pronouncements

   In  July of 2001, the Financial Accounting Standards Boards (the "FASB")
issued  Statement  of  Financial  Accounting  Standards  ("SFAS")  No.  141
"Business  Combinations",  which requires that  all  business  combinations
initiated  after  June 30, 2001 be accounted under the purchase  method  of
accounting.   The  Company regularly pursues and evaluates recapitalization
strategies and acquisition opportunities (including opportunities to engage
in mergers, consolidations or other business combinations) and at any given
time  may  be  in  various  stages of evaluating such  opportunities.   The
company  is assessing the impact, if any, of this FASB in relation  to  any
such recapitalization strategies and acquisition opportunities.

  Additionally,  in  July of 2001, the FASB issued SFAS No.  142  "Goodwill
and  Other  Intangible Assets", which requires that goodwill no  longer  be
amortized to earnings, but instead be reviewed for impairment.  The Company
is currently assessing the impact of SFAS No. 142, which must be adopted in
the first quarter of 2002.

  Also,  the  FASB  has voted to issue SFAS No. 143 "Accounting  for  Asset
Retirement  Obligations", which establishes requirements for  the  removal-
type  costs  associated with asset retirements.  The Company  is  currently
assessing  the impact of SFAS No. 143, which must be adopted in  the  first
quarter of 2003.

  In  October 2001, FASB issued SFAS No. 144 "Accounting for the Impairment
of  Long-Lived  Assets and for Long-Lived Assets to Be Disposed  Of"  which
addresses financial accounting and reporting for the impairment or disposal
of  long-lived  assets.   SFAS No. 144 superseded  SFAS  No.  121  and  the
accounting and reporting provisions of APB Opinion No. 30.  SFAS No. 144 is
effective  for  fiscal years beginning after December  15,  2001.   SRH  is
currently  in the process of evaluating the impact that SFAS No.  144  will
have on its financial position and results of operations, if any.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

  The  information  included in "Quantitative and  Qualitative  Disclosures
About  Market  Risk"  in Item 7A of SRH's 2000 Form  10-K  is  incorporated
herein  by  reference.   Such information includes a description  of  SRH's
potential  exposure  to market risks, including commodity  price  risk  and
SRH's  interest rate risk.  As of September 30, 2001, there  have  been  no
material changes in SRH's market risk exposure from that disclosed  in  the
2000 Form 10-K.

<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
  --------------                            ------------
  None

<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 26, 2001

  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    November 26, 2001

  /s/ Bill E. Coggin
  ---------------------------
  Bill E. Coggin           Vice President/Chief
                           Financial Officer     November 26, 2001

  /s/ H. Allen Corey
  ---------------------------
  H. Allen Corey           Director/Secretary    November 26, 2001


<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 26, 2001

  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    November 26, 2001

  /s/ Bill E. Coggin
  ---------------------------
  Bill E. Coggin           Vice President/Chief
                           Financial Officer     November 26, 2001

  /s/ H. Allen Corey
  ---------------------------
  H. Allen Corey           Director/Secretary    November 26, 2001


<PAGE>