----

**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C.  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, 2007** |   |

| ** ̈** | 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 001-10924                                                                                                                                                                                                                                                                                                                                                 |   |

| **CLAYTON                WILLIAMS ENERGY, INC.**                                     |
|--------------------------------------------------------------------------------------|
| (Exact                name of registrant as specified in its                charter) |

| **Delaware**                                                                  |   | **75-2396863**                                      |
|-------------------------------------------------------------------------------|--------|-----------------------------------------------------|
| (State                or other jurisdiction of incorporation or organization) |   | (I.R.S.                Employer Identification No.) |
| **Six                Desta Drive - Suite 6500**                               |   |                                                |
| **Midland,                Texas**                                             |   | **79705-5510**                                      |
| (Address                of principal executive offices)                       |   | (Zip                code)                           |
| Registrant’s                telephone number, including area code:      |   | **(432)                682-6324**                   |

| Indicate                by check mark whether the registrant (1) has filed all reports required                to                be filed by Section 13 or 15(d) of the Securities Exchange Act of                1934                during the preceding 12 months (or for such shorter period that the                Registrant was required to file such reports), and (2) has been subject                to                such filing requirements for the past 90 days. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | x                Yes |   |  ̈                No |   |

| Indicate                by check mark whether the registrant is a large accelerated filer,                an                accelerated filer, or a non-accelerated filer.  See definition                of “accelerated filer and large accelerated filer” in Rule 12b-2 of the                Exchange Act. |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Large                accelerated filer  ̈                                                                                                                                                                                                                                                                                        |   | Accelerated                filer x |   | Non-accelerated                filer   ̈ |

| Indicate                by check mark whether the registrant is a shell company (as defined                in                Rule 12b-2 of the Exchange Act). |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                          |  ̈                Yes |   | x                No |   |

| There                were 11,352,051 shares of Common Stock, $.10 par value, of the registrant                outstanding as of November 7,                2007. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**CLAYTON      WILLIAMS ENERGY, INC**

**TABLE      OF CONTENTS**

| **PART                I.  FINANCIAL INFORMATION** |
|-------------------------------------------------------------|
|                                                        |   | **Page** |
|                                                        |   |   |   |
| Item                1.                                      | Financial                Statements |   |   |
|                                                        |   |   |   |
|                                                        | Consolidated                Balance Sheets as of September 30,                2007 |   |   |
|                                                        | and                December 31,                2006                                                                                                 | 3 |   |
|                                                        |   |   |   |
|                                                        | Consolidated                Statements of Operations for the three months and                nine months |   |   |
|                                                        | ended                September 30, 2007 and                2006                                                                                                 | 5 |   |
|                                                        |   |   |   |
|                                                        | Consolidated                Statements of Stockholders’ Equity                for the nine months |   |   |
|                                                        | ended                September 30,                2007                                                                                                 | 6 |   |
|                                                        |   |   |   |
|                                                        | Consolidated                Statements of Cash Flows for the nine                months |   |   |
|                                                        | ended                September 30, 2007 and                2006                                                                                                 | 7 |   |
|                                                        |   |   |   |
|                                                        | Notes                to Consolidated Financial                Statements                                                                                                     | 8 |   |
|                                                        |   |   |   |
| Item                2.                                      | Management’s                Discussion and Analysis of                Financial |   |   |
|                                                        | Condition                and Results of                Operations                                                                                                 | 23 |   |
|                                                        |   |   |   |
| Item                3.                                      | Quantitative                and Qualitative Disclosures About Market                Risk                                                                                                     | 37 |   |
|                                                        |   |   |   |
| Item                4.                                      | Controls                and                Procedures                                                                                                     | 40 |   |
|                                                        |   |   |   |
|                                                        |   |   |   |
| **PART                II.  OTHER INFORMATION**    |
| Item                1A.                                     | Risk                Factors                                                                                                     | 41 |   |
|                                                        |   |   |   |
| Item                6.                                      | Exhibits                                                                                                     | 41 |   |
|                                                        |   |   |   |
|                                                        | Signatures                                                                                                     | 42 |   |

----

**CLAYTON      WILLIAMS ENERGY, INC.**

**CONSOLIDATED      BALANCE SHEETS**

**(Dollars      in thousands)**

| **ASSETS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **September                30,** |   |   | **December                31,** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **(Unaudited)** |   |   |   |   |
| CURRENT                ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |   |   |
| Cash                and cash                equivalents                                                                                                                             |   | $ | 9,522 |   |   | $ | 13,840 |   |
| Accounts                receivable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Oil                and gas                sales                                                                                                                                                              |   |   | 37,691 |   |   |   | 23,398 |   |
| Joint                interest and other,                net                                                                                                                                                  |   |   | 20,219 |   |   |   | 17,810 |   |
| Affiliates                                                                                                                                                                                                   |   |   | 823 |   |   |   | 2,436 |   |
| Inventory                                                                                                                                                                           |   |   | 15,578 |   |   |   | 40,392 |   |
| Deferred                income                taxes                                                                                                                                 |   |   | 505 |   |   |   | 505 |   |
| Fair                value of                derivatives                                                                                                                             |   |   | 4,872 |   |   |   | 23,729 |   |
| Assets                held for                sale                                                                                                                                  |   |   | 25,484 |   |   |   | - |   |
| Prepaids                and                other                                                                                                                                    |   |   | 6,829 |   |   |   | 3,888 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 121,523 |   |   |   | 125,998 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| PROPERTY                AND EQUIPMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |   |   |
| Oil                and gas properties,                successful efforts                method                                                                                      |   |   | 1,342,377 |   |   |   | 1,226,761 |   |
| Natural                gas gathering and                processing                systems                                                                                           |   |   | 18,140 |   |   |   | 18,068 |   |
| Contract                drilling                equipment                                                                                                                           |   |   | 88,742 |   |   |   | 66,418 |   |
| Other                                                                                                                                                                               |   |   | 16,919 |   |   |   | 15,848 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 1,466,178 |   |   |   | 1,327,095 |   |
| Less                accumulated depreciation,                depletion and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | (738,146 | ) |   |   | (682,286 | ) |
| Property                and equipment,                net                                                                                                                                                    |   |   | 728,032 |   |   |   | 644,809 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| OTHER                ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| Debt                issue costs,                net                                                                                                                                 |   |   | 7,312 |   |   |   | 8,104 |   |
| Fair                value of                derivatives                                                                                                                             |   |   | 51 |   |   |   | 1,785 |   |
| Other                                                                                                                                                                               |   |   | 6,483 |   |   |   | 14,737 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 13,846 |   |   |   | 24,626 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $ | 863,401 |   |   | $ | 795,433 |   |

----

**CLAYTON      WILLIAMS ENERGY, INC.**

**CONSOLIDATED      BALANCE SHEETS**

**(Dollars      in thousands)**

| **LIABILITIES                AND STOCKHOLDERS' EQUITY**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **September                30,** |   |   | **December                31,** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **(Unaudited)** |   |   |   |   |
| CURRENT                LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |   |   |   |   |
| Accounts                payable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |
| Trade                                                                                                                                                                                            |   | $ | 82,435 |   |   | $ | 75,815 |   |
| Oil                and gas                sales                                                                                                                                                  |   |   | 26,969 |   |   |   | 14,222 |   |
| Affiliates                                                                                                                                                                                       |   |   | 2,218 |   |   |   | 1,407 |   |
| Current                maturities of                long-term                debt                                                                                       |   |   | 24,375 |   |   |   | 17,397 |   |
| Fair                value of                derivatives                                                                                                                 |   |   | 41,205 |   |   |   | 29,722 |   |
| Accrued                liabilities and                other                                                                                                             |   |   | 5,299 |   |   |   | 10,503 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   | 182,501 |   |   |   | 149,066 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| NON-CURRENT                LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |   |   |   |   |
| Long-term                debt                                                                                                                                           |   |   | 457,063 |   |   |   | 413,876 |   |
| Deferred                income                taxes                                                                                                                     |   |   | 35,274 |   |   |   | 36,409 |   |
| Fair                value of                derivatives                                                                                                                 |   |   | 4,370 |   |   |   | 21,281 |   |
| Other                                                                                                                                                                   |   |   | 35,647 |   |   |   | 29,821 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   | 532,354 |   |   |   | 501,387 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| COMMITMENTS                AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| STOCKHOLDERS’                EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |   |   |   |   |   |   |
| Preferred                stock, par value                $.10 per share, authorized – 3,000,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |
| shares;                none                issued                                                                                                                                 |   |   | - |   |   |   | - |   |
| Common                stock, par value $.10                per share, authorized – 30,000,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |   |   |   |   |   |   |
| shares;                issued and outstanding                – 11,352,051 shares in 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |   |   |
| and                11,152,051 shares in                2006                                                                                                                       |   |   | 1,135 |   |   |   | 1,115 |   |
| Additional                paid-in                capital                                                                                                                |   |   | 120,025 |   |   |   | 113,965 |   |
| Retained                earnings                                                                                                                                        |   |   | 27,386 |   |   |   | 29,900 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   | 148,546 |   |   |   | 144,980 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | $ | 863,401 |   |   | $ | 795,433 |   |

----

**CLAYTON      WILLIAMS ENERGY, INC.**

**CONSOLIDATED      STATEMENTS OF OPERATIONS**

**(Unaudited)**

**(In      thousands, except per share)**

|                                                                                                                                                                                                                                                                                                                                                                                                        |   | **Three                Months Ended** |    |   | **Nine                Months Ended** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|--------|--------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                        |   | **September                30,**      |    |   | **September                30,**     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   | **2007**                              |    |   | **2006**                             |   |   | **2007** |   |   | **2006** |   |
| REVENUES                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                  |    |   |                                 |   |   |   |   |   |   |   |
| Oil                and gas                sales                                                                                              |   | $                                     | 84,639  |   |                                 | $      | 61,519 |   |   | $ | 220,712 |   |   | $ | 188,143 |   |
| Natural                gas                services                                                                                           |   |                                  | 2,268   |   |                                 |   | 2,905 |   |   |   | 7,831 |   |   |   | 8,890 |   |
| Drilling                rig                services                                                                                          |   |                                  | 14,806  |   |                                 |   | 1,801 |   |   |   | 37,451 |   |   |   | 2,175 |   |
| Gain                on sales of                assets                                                                                        |   |                                  | 126     |   |                                 |   | 164 |   |   |   | 910 |   |   |   | 916 |   |
| Total                revenues                                                                                                                                              |   |                                  | 101,839 |   |                                 |   | 66,389 |   |   |   | 266,904 |   |   |   | 200,124 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                  |    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| COSTS                AND EXPENSES                                                                                                                                                                                                                                                                                                                                                                           |   |                                  |    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Production                                                                                                                                   |   |                                  | 20,851  |   |                                 |   | 16,467 |   |   |   | 55,969 |   |   |   | 47,363 |   |
| Exploration:                                                                                                                                                                                                                                                                                                                                                                                                |   |                                  |    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Abandonments                and                impairments                                                                                                                                                                                                                                                                                                                                                  |   |                                  | 18,802  |   |                                 |   | 19,650 |   |   |   | 53,426 |   |   |   | 35,822 |   |
| Seismic                and                other                                                                                                                            |   |                                  | 1,236   |   |                                 |   | 3,678 |   |   |   | 3,706 |   |   |   | 9,366 |   |
| Natural                gas                services                                                                                           |   |                                  | 2,121   |   |                                 |   | 2,730 |   |   |   | 7,438 |   |   |   | 7,820 |   |
| Drilling                rig                services                                                                                          |   |                                  | 9,075   |   |                                 |   | 1,157 |   |   |   | 22,514 |   |   |   | 1,373 |   |
| Depreciation,                depletion and                amortization                                                                                                                                                                                                                                                                                                                                      |   |                                  | 23,018  |   |                                 |   | 17,686 |   |   |   | 56,736 |   |   |   | 48,378 |   |
| Impairment                of property and                equipment                                                                                                                                                                                                                                                                                                                                          |   |                                  | 7,979   |   |                                 |   | 12,914 |   |   |   | 9,023 |   |   |   | 12,914 |   |
| Accretion                of abandonment                obligations                                                                                                                                                                                                                                                                                                                                          |   |                                  | 627     |   |                                 |   | 428 |   |   |   | 1,864 |   |   |   | 1,224 |   |
| General                and                administrative                                                                                     |   |                                  | 4,289   |   |                                 |   | 3,086 |   |   |   | 13,124 |   |   |   | 11,405 |   |
| Loss                on sales of                assets                                                                                        |   |                                  | 92      |   |                                 |   | 69 |   |   |   | 9,415 |   |   |   | 82 |   |
| Total                costs and                expenses                                                                                                                     |   |                                  | 88,090  |   |                                 |   | 77,865 |   |   |   | 233,215 |   |   |   | 175,747 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                  |    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Operating                income                (loss)                                                                                                                      |   |                                  | 13,749  |   |                                 |   | (11,476 | ) |   |   | 33,689 |   |   |   | 24,377 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                  |    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| OTHER                INCOME (EXPENSE)                                                                                                                                                                                                                                                                                                                                                                       |   |                                  |    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Interest                expense                                                                                                              |   |                                  | (8,448  | )      |                                 |   | (5,328 | ) |   |   | (24,063 | ) |   |   | (14,628 | ) |
| Gain                (loss) on                derivatives                                                                                     |   |                                  | (2,284  | )      |                                 |   | 26,734 |   |   |   | (13,023 | ) |   |   | 25,407 |   |
| Other                                                                                                                                        |   |                                  | 366     |   |                                 |   | (1,583 | ) |   |   | 4,693 |   |   |   | (515 | ) |
| Total                other income                (expense)                                                                                                                                                                                                                                                                                                                                                  |   |                                  | (10,366 | )      |                                 |   | 19,823 |   |   |   | (32,393 | ) |   |   | 10,264 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                  |    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Income                before income                taxes                                                            |   |                                  | 3,383   |   |                                 |   | 8,347 |   |   |   | 1,296 |   |   |   | 34,641 |   |
| Income                tax                expense                                                                    |   |                                  | (1,173  | )      |                                 |   | (2,842 | ) |   |   | (450 | ) |   |   | (7,754 | ) |
| Minority                interest, net of                tax                                                         |   |                                  | (1,224  | )      |                                 |   | (156 | ) |   |   | (3,360 | ) |   |   | (196 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                  |    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| NET                INCOME                (LOSS)                                                                     |   | $                                     | 986     |   |                                 | $      | 5,349 |   |   | $ | (2,514 | ) |   | $ | 26,691 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                  |    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Net                income (loss) per common share:                                                                                                                                                                                                                                                                                                                                                          |   |                                  |    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                        |   | $                                     | 0.09    |   |                                 | $      | 0.49 |   |   | $ | (0.22 | ) |   | $ | 2.46 |   |
| Diluted                                                                                                                                      |   | $                                     | 0.09    |   |                                 | $      | 0.48 |   |   | $ | (0.22 | ) |   | $ | 2.38 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                  |    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Weighted                average common shares outstanding:                                                                                                                                                                                                                                                                                                                                                  |   |                                  |    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                        |   |                                  | 11,352  |   |                                 |   | 10,850 |   |   |   | 11,286 |   |   |   | 10,847 |   |
| Diluted                                                                                                                                      |   |                                  | 11,521  |   |                                 |   | 11,205 |   |   |   | 11,286 |   |   |   | 11,220 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                  |    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |

----

**CLAYTON      WILLIAMS ENERGY, INC.**

**CONSOLIDATED      STATEMENTS OF STOCKHOLDERS' EQUITY**

**(Unaudited)**

**(In      thousands)**

|                                                                                                                                                                                                                                                                                                                                                                                             |   | **Common                Stock** |   |   |      |   |   |        |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|--------|-----------|--------|--------|-------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                             |   | **No.                of**       |   |   | **Par**   |   |   | **Paid-In** |   |   | **Retained** |   |
|                                                                                                                                                                                                                                                                                                                                                                                             |   | **Shares**                      |   |   | **Value** |   |   | **Capital** |   |   | **Earnings** |   |
|                                                                                                                                                                                                                                                                                                                                                                                             |   |                            |   |   |      |   |   |        |   |   |   |   |
| BALANCE,                                                                                                                                                                                                                                                                                                                                                                                         |   |                            |   |   |      |   |   |        |   |   |   |   |
| December                31,                2006                                                          |   |                            | 11,152 |   |      | $      | 1,115  |        |   | $ | 113,965 |   |   | $ | 29,900 |   |
|                                                                                                                                                                                                                                                                                                                                                                                             |   |                            |   |   |      |   |   |        |   |   |   |   |   |   |   |   |
| Net                loss and total comprehensive                loss                                                                                                                                                                                                                                                                                                                              |   |                            | -      |   |      |   | -      |        |   |   | - |   |   |   | (2,514 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                             |   |                            |   |   |      |   |   |        |   |   |   |   |   |   |   |   |
| Issuance                of stock through                compensation                                                                                                                                                                                                                                                                                                                             |   |                            |   |   |      |   |   |        |   |   |   |   |   |   |   |   |
| plans                                                                                                                             |   |                            | 200    |   |      |   | 20     |        |   |   | 6,060 |   |   |   | - |   |
|                                                                                                                                                                                                                                                                                                                                                                                             |   |                            |   |   |      |   |   |        |   |   |   |   |   |   |   |   |
| BALANCE,                                                                                                                                                                                                                                                                                                                                                                                         |   |                            |   |   |      |   |   |        |   |   |   |   |   |   |   |   |
| September                30,                2007                                                         |   |                            | 11,352 |   |      | $      | 1,135  |        |   | $ | 120,025 |   |   | $ | 27,386 |   |

----

**CLAYTON      WILLIAMS ENERGY, INC.**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(In      thousands)**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **Nine                Months Ended** |     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **September                30,**     |     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **2007**                             |     |   | **2006** |   |
| CASH                FLOWS FROM OPERATING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                 |     |   |   |   |
| Net                income                (loss)                                                                                                                                         |   | $                                    | (2,514   | ) |   | $ | 26,691 |   |
| Adjustments                to reconcile net                income (loss) to cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                 |     |   |   |   |   |   |
| provided                by operating                activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                 |     |   |   |   |   |   |
| Depreciation,                depletion and                amortization                                                                                                                                                |   |                                 | 56,736   |   |   |   | 48,378 |   |
| Impairment                of property and                equipment                                                                                                                                                    |   |                                 | 9,023    |   |   |   | 12,914 |   |
| Exploration                costs                                                                                                                                                                                      |   |                                 | 53,426   |   |   |   | 35,822 |   |
| (Gain)                loss on sales of assets,                net                                                                                                                                                     |   |                                 | 8,505    |   |   |   | (834 | ) |
| Deferred                income                taxes                                                                                                                                                                   |   |                                 | 450      |   |   |   | 7,754 |   |
| Non-cash                employee                compensation                                                                                                                                                          |   |                                 | 1,610    |   |   |   | 1,651 |   |
| Unrealized                (gain) loss on                derivatives                                                                                                                                                   |   |                                 | 15,163   |   |   |   | (42,684 | ) |
| Settlements                on derivatives with                financing elements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                 | 18,950   |   |   |   | 23,311 |   |
| Amortization                of debt issue                costs                                                                                                                                                        |   |                                 | 953      |   |   |   | 1,022 |   |
| Accretion                of abandonment                obligations                                                                                                                                                    |   |                                 | 1,864    |   |   |   | 1,224 |   |
| Minority                interest, net of                tax                                                                                                                                                           |   |                                 | 3,360    |   |   |   | 196 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |     |   |   |   |   |   |
| Changes                in operating working                capital:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                 |     |   |   |   |   |   |
| Accounts                receivable                                                                                                                                                                                    |   |                                 | (15,089  | ) |   |   | 116 |   |
| Accounts                payable                                                                                                                                                                                       |   |                                 | 15,876   |   |   |   | 3,073 |   |
| Other                                                                                                                                                                                                                 |   |                                 | (6,002   | ) |   |   | (2,152 | ) |
| Net                cash provided by operating                activities                                                                                                                                                                             |   |                                 | 162,311  |   |   |   | 116,482 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |     |   |   |   |   |   |
| CASH                FLOWS FROM INVESTING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                 |     |   |   |   |   |   |
| Additions                to property and                equipment                                                                                                                       |   |                                 | (180,112 | ) |   |   | (188,606 | ) |
| Additions                to equipment of                Larclay                JV.                                                                                                      |   |                                 | (27,403  | ) |   |   | (46,126 | ) |
| Proceeds                from sales of property                and                equipment                                                                                              |   |                                 | 1,653    |   |   |   | 1,083 |   |
| Change                in equipment                inventory                                                                                                                             |   |                                 | 16,265   |   |   |   | 1,039 |   |
| Other                                                                                                                                                                                   |   |                                 | (14,217  | ) |   |   | 2,626 |   |
| Net                cash used in investing                activities                                                                                                                                                                                 |   |                                 | (203,814 | ) |   |   | (229,984 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |     |   |   |   |   |   |
| CASH                FLOWS FROM FINANCING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                 |     |   |   |   |   |   |
| Proceeds                from long-term                debt                                                                                                                              |   |                                 | 48,000   |   |   |   | 93,700 |   |
| Proceeds                from long-term debt of                Larclay                JV                                                                                                 |   |                                 | 8,727    |   |   |   | 45,761 |   |
| Repayments                of long-term                debt                                                                                                                              |   |                                 | -        |   |   |   | (12 | ) |
| Repayments                of long-term debt of                Larclay                JV                                                                                                 |   |                                 | (6,562   | ) |   |   | - |   |
| Proceeds                from sale of common                stock                                                                                                                        |   |                                 | 5,970    |   |   |   | 175 |   |
| Settlements                on derivatives with                financing                elements                                                                                         |   |                                 | (18,950  | ) |   |   | (23,311 | ) |
| Net                cash provided by financing                activities                                                                                                                                                                             |   |                                 | 37,185   |   |   |   | 116,313 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |     |   |   |   |   |   |
| NET                INCREASE (DECREASE) IN CASH AND                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                 |     |   |   |   |   |   |
| CASH                EQUIVALENTS                                                                                                                                          |   |                                 | (4,318   | ) |   |   | 2,811 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |     |   |   |   |   |   |
| CASH                AND CASH EQUIVALENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                 |     |   |   |   |   |   |
| Beginning                of                period                                                                                                                                       |   |                                 | 13,840   |   |   |   | 5,935 |   |
| End                of                period                                                                                                                                             |   | $                                    | 9,522    |   |   | $ | 8,746 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |     |   |   |   |   |   |
| SUPPLEMENTAL                DISCLOSURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                 |     |   |   |   |   |   |
| Cash                paid for interest, net of                amounts                capitalized                                                                                         |   | $                                    | 27,555   |   |   | $ | 17,996 |   |

----

**CLAYTON      WILLIAMS ENERGY, INC.**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**September      30, 2007**

**(Unaudited)**

**1.                  Nature of Operations**

**2.                  Presentation**

**3.                  Recent Accounting Pronouncements**

*The Fair      Value Option for Financial Assets and Financial Liabilities - Including an      Amendment of FASB Statement No. 115*

----

*Fair Value      Measurements*

*Accounting for Uncertainty      in Income Taxes*

**4.                  Long-Term Debt**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **September                30,**  |    |   | **December                31,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|--------|---------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **2007**                          |    |   | **2006**                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **(In                thousands)** |    |
| 73⁄4%                Senior Notes, due                2013                                                                                                    |   | $                                 | 225,000 |   |                            | $      | 225,000 |   |
| Secured                bank credit facility, due May                2009                                                                                         |   |                              | 188,000 |   |                            |   | 140,000 |   |
| Secured                term loan of Larclay JV, due June                2011                                                                                     |   |                              | 68,438  |   |                            |   | 66,273 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                              | 481,438 |   |                            |   | 431,273 |   |
| Less                current maturities(a)                                                                                                                        |   |                              | (24,375 | )      |                            |   | (17,397 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | $                                 | 457,063 |   |                            | $      | 413,876 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                              |    |   |                            |   |   |   |

*    73⁄4%      Senior Notes due 2013*

----

*Secured      Bank Credit Facility*

*Secured      Term Loan of Larclay JV*

*Consolidation of Variable Interest Entities – an      Interpretation of ARB No. 51 (as amended*

----

**5.            Other      Non-Current Liabilities**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | **September                30,**  |   |   | **December                31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|--------|---------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | **2007**                          |   |   | **2006**                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | **(In                thousands)** |   |
| Abandonment                obligations                                                                                                         |   | $                                 | 28,840 |   |                            | $      | 27,846 |   |
| Minority                interest, net of                tax                                                                                    |   |                              | 4,434  |   |                            |   | 1,074 |   |
| Other                taxes                payable                                                                                              |   |                              | 1,585  |   |                            |   | - |   |
| Other                                                                                                                                          |   |                              | 788    |   |                            |   | 901 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | $                                 | 35,647 |   |                            | $      | 29,821 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **Nine                Months Ended** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **September                30,**     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **2007**                             |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **(In                thousands)**    |   |
| Beginning                of                period                                                                                                                                            |   | $                                    | 27,846 |   |   | $ | 19,447 |   |
| Additional                abandonment                obligations from new                wells                                                                                |   |                                 | 732    |   |   |   | 834 |   |
| Sales                or abandonments of                properties                                                                                                                                                |   |                                 | (1,602 | ) |   |   | (195 | ) |
| Revisions                of previous                estimates                                                                                                                                                    |   |                                 | -      |   |   |   | (17 | ) |
| Accretion                expense                                                                                                                                                                                 |   |                                 | 1,864  |   |   |   | 1,224 |   |
| End                of                period                                                                                                                                                  |   | $                                    | 28,840 |   |   | $ | 21,293 |   |

**6.                  Compensation Plans**

*Stock-Based      Compensation*

----

|                                                                                                                                         |   |       |      |   |         |   |   | **Weighted**                     |   |   |                         |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|-----------|--------|--------------|--------|--------|----------------------------------|--------|--------|------------------------------|--------|
|                                                                                                                                         |   |       |      |   | **Weighted** |   |   | **Average**                      |   |   |                         |   |
|                                                                                                                                         |   |       |      |   | **Average**  |   |   | **Remaining**                    |   |   | **Aggregate**                |   |
|                                                                                                                                         |   |       |      |   | **Exercise** |   |   | **Contractual**                  |   |   | **Intrinsic**                |   |
|                                                                                                                                         |   | **Shares** |      |   | **Price**    |   |   | **Term                in Years** |   |   | **Value                (a)** |   |
|                                                                                                                                         |   |       |      |   |         |   |   |                             |   |   |                         |   |
| Outstanding                at January 1, 2007                                                                                                |   |       | 1,009,485 |   |         | $      | 22.27  |                             |   |   |                         |   |   |   |
| Granted                                                                                                                                      |   |       | 4,000     |   |         | $      | 36.31  |                             |   |   |                         |   |   |   |
| Exercised(b)                                                                                                                                 |   |       | (200,000  | )      |         | $      | 29.85  |                             |   |   |                         |   |   |   |
| Outstanding                at September 30, 2007                                                                                             |   |       | 813,485   |   |         | $      | 20.47  |                             |   |   | 5.3                          |   |   | $ | 10,189,528 |   |
|                                                                                                                                         |   |       |      |   |         |   |   |                             |   |   |                         |   |   |   |   |   |
| Vested                at September 30, 2007                                                                                                  |   |       | 813,485   |   |         | $      | 20.47  |                             |   |   | 5.3                          |   |   | $ | 10,189,528 |   |
| Exercisable                at September 30, 2007                                                                                             |   |       | 813,485   |   |         | $      | 20.47  |                             |   |   | 5.3                          |   |   | $ | 10,189,528 |   |
|                                     |   |       |      |   |         |   |   |                             |   |   |                         |   |   |   |   |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                    | **Outstanding                and Exercisable Options** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                   |   |   |   | **Weighted** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                   |   | **Weighted** |   | **Average** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                   |   | **Average** |   | **Remaining** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                   |   | **Exercise** |   | **Life                in** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                    | **Shares**                                             |   | **Price** |   | **Years** |
| Range                of exercise prices:                                                                                                                                                                                                                                                                                                                                                                                                |                                                   |   |   |   |   |
| $5.50                                                                                                        |                  33,485                           |   | $              5.50 |   |     1.6 |
| $10.00                -                $19.74                                                                | 462,000                                                |   | $                       17.49 |   |     4.6 |
| $22.90                -                $41.74                                                                | 318,000                                                |   | $                       26.38 |   |     6.8 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                    | 813,485                                                |   | $                       20.47 |   |     5.3 |

|                                                                               |   | **Nine                Months Ended**                |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|
|                                                                               |   | **September                30,**                    |   |
|                                                                               |   | **2007**                                            |   |   | **2006** |   |
|                                                                               |   | **(In                thousands, except per share)** |   |
| Weighted                average grant date fair value of options granted per share |   | $                                                   | 27.56  |   |   | $ | 31.91 |   |
| Intrinsic                value of options exercised                                |   | $                                                   | 228    |   |   | $ | 1,374 |   |
| Stock-based                employee compensation expense                           |   | $                                                   | 110    |   |   | $ | 128 |   |
| Tax                benefit                                                         |   | $                                                   | (39    | ) |   | $ | (45 | ) |
| Net                stock-based employee compensation expense                       |   | $                                                   | 71     |   |   | $ | 83 |   |

*         After-Payout Incentive Plan*

----

*SWR      Reward Plan*

**7.                  Assets Held For Sale**

*Accounting for        Impairment or Disposal of Long-Lived Assets*

**8.                    Derivatives**

*         Commodity Derivatives*

----

**Collars:**

|                                           |   | **Gas**                      |      |   | **Oil**   |   |
|------------------------------------------------|--------|------------------------------|-----------|--------|-----------|--------|
|                                           |   | **MMBtu                (a)** |      |   | **Floor** |   |   | **Ceiling** |   |   | **Bbls** |   |   | **Floor** |   |   | **Ceiling** |   |
| Production                Period:              |   |                         |      |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 4th                Quarter                2007 |   |                         | 459,000   |   |      | $      | 4.00 |   |   | $ | 5.18 |   |   |   | 141,000 |   |   | $ | 23.00 |   |   | $ | 25.20 |   |
| 1st                Quarter                2008 |   |                         | 434,000   |   |      | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 132,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |
| 2nd                Quarter                2008 |   |                         | 426,000   |   |      | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 132,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |
| 3rd                Quarter                2008 |   |                         | 419,000   |   |      | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 128,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |
|                                           |   |                         | 1,738,000 |   |      |   |   |   |   |   |   |   |   |   | 533,000 |   |   |   |   |   |   |   |   |   |

**Swaps:**

|                                                                                                                                                                                             |   | **Gas**                      |      |   | **Oil**   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|--------|-----------|--------|
|                                                                                                                                                                                             |   | **MMBtu                (a)** |      |   | **Price** |   |   | **Bbls** |   |   | **Price** |   |
| Production                Period:                                                                                                                                                                |   |                         |      |   |      |   |   |   |   |   |   |   |
| 4th                Quarter                2007                                                                                                                                                   |   |                         | 2,400,000 |   |      | $      | 8.34 |   |   |   | 225,000 |   |   | $ | 72.75 |   |
| 1st                Quarter                2008                                                                                                                                                   |   |                         | 1,800,000 |   |      | $      | 8.26 |   |   |   | - |   |   | $ | - |   |
| 2nd                Quarter                2008                                                                                                                                                   |   |                         | 1,500,000 |   |      | $      | 8.16 |   |   |   | 150,000 |   |   | $ | 65.60 |   |
| 3rd                Quarter                2008                                                                                                                                                   |   |                         | 1,500,000 |   |      | $      | 8.16 |   |   |   | 150,000 |   |   | $ | 65.60 |   |
| 4thQuarter                2008                            |   |                         | 1,500,000 |   |      | $      | 8.16 |   |   |   | 150,000 |   |   | $ | 65.60 |   |
|                                                                                                                                                                                             |   |                         | 8,700,000 |   |      |   |   |   |   |   | 675,000 |   |   |   |   |   |
|                                                                               |   |                         |      |   |      |   |   |   |   |   |   |   |   |   |   |   |

*         Interest Rate Derivatives*

**Interest      Rate Swaps:**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **Principal** |        |   | **Fixed****Libor** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|-------------|--------|--------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **Balance**   |        |   | **Rates**          |   |
| Period:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |          |        |   |               |   |
| October                1, 2007 to September                24,                2008                                                                                     |   | $             | 100,000,000 |   |               |   | 4.73 | % |
| October                1, 2007 to November 1,                2007                                                                                                      |   | $             | 50,000,000  |   |               |   | 5.19 | % |
| November                1, 2007 to November 1,                2008                                                                                                     |   | $             | 45,000,000  |   |               |   | 5.73 | % |

----

*         Accounting For Derivatives*

*Accounting for Derivative Instruments and Hedging Activities*

**9.                  Financial Instruments**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **September                30,**  |    |   | **December                31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|--------|---------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **2007**                          |    |   | **2006**                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **(In                thousands)** |    |
| Assets                (liabilities):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                              |    |   |                            |   |
| Commodity                derivatives                                                                                               |   | $                                 | (40,165 | )      |                            | $      | (25,289 | ) |
| Interest                rate                derivatives                                                                            |   |                              | (487    | )      |                            |   | (200 | ) |
| Net                liabilities                                                                                                                         |   | $                                 | (40,652 | )      |                            | $      | (25,489 | ) |

**10.          Inventory**

**11.               Income Taxes**

----

*Accounting for Uncertainty in      Income Taxes*

**12.               Investments**

*West      Coast Energy Properties, L.P.*

*Larclay      JV*

----

**13.               Oil and Gas Properties**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **September                30,****2007** |      |   | **December                31, 2006** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|-----------|--------|--------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **(In                thousands)**        |      |
| Proved                properties                                                                                                      |   | $                                        | 1,190,490 |   |                                 | $      | 1,097,341 |   |
| Unproved                properties                                                                                                    |   |                                     | 151,887   |   |                                 |   | 129,420 |   |
| Total                capitalized                costs                                                                                 |   |                                     | 1,342,377 |   |                                 |   | 1,226,761 |   |
| Accumulated                depreciation,                depletion and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                     | (702,938  | )      |                                 |   | (654,316 | ) |
| Net                capitalized                costs                                                                                                            |   | $                                        | 639,439   |   |                                 | $      | 572,445 |   |

**14.               Segment Information**

*Disclosures about Segments of an      Enterprise and Related Information*

----

| **For the                Three Months Ended****September                30, 2007** |   | **Oil                and Gas**    |    |    | **Contract                Drilling** |   |    | **Intercompany****Eliminations** |   |   | **Consolidated****Total** |   |
|-----------------------------------------------------------------------------------------|--------|-----------------------------------|---------|---------|--------------------------------------|--------|---------|----------------------------------|--------|--------|---------------------------|--------|
|                                                                                    |   | **(Unaudited)**                   |    |
|                                                                                    |   | **(In                thousands)** |    |
| Revenues                                                                                |   | $                                 | 87,033  |    |                                 | $      | 18,181  |                             |   | $      | (3,375                    | )      |   | $ | 101,839 |   |
| Depreciation,                depletion and amortization (a)                             |   |                              | 23,886  |    |                                 |   | 7,675   |                             |   |   | (564                      | )      |   |   | 30,997 |   |
| Other                operating expenses (b)                                             |   |                              | 48,581  |    |                                 |   | 10,570  |                             |   |   | (2,058                    | )      |   |   | 57,093 |   |
| Interest                expense                                                         |   |                              | 7,180   |    |                                 |   | 1,268   |                             |   |   | -                         |   |   |   | 8,448 |   |
| Other                expense                                                            |   |                              | 1,918   |    |                                 |   | -       |                             |   |   | -                         |   |   |   | 1,918 |   |
| Income                (loss) before income taxes and                                    |   |                              |    |    |                                 |   |    |                             |   |   |                      |   |   |   |   |   |
| minority                interest                                                        |   |                              | 5,468   |    |                                 |   | (1,332  | )                                |   |   | (753                      | )      |   |   | 3,383 |   |
|                                                                                    |   |                              |    |    |                                 |   |    |                             |   |   |                      |   |   |   |   |   |
| Income                tax (expense) benefit                                             |   |                              | (1,638  | )  |                                 |   | 465     |                             |   |   | -                         |   |   |   | (1,173 | ) |
| Minority                interest, net of tax                                            |   |                              | -       |    |                                 |   | (1,224  | )                                |   |   | -                         |   |   |   | (1,224 | ) |
|                                                                                    |   |                              |    |    |                                 |   |    |                             |   |   |                      |   |   |   |   |   |
| Net                income (loss)                                                        |   | $                                 | 3,830   |    |                                 | $      | (2,091  | )                                |   | $      | (753                      | )      |   | $ | 986 |   |
|                                                                                    |   |                              |    |    |                                 |   |    |                             |   |   |                      |   |   |   |   |   |
| Total                assets                                                             |   | $                                 | 750,936 |    |                                 | $      | 117,388 |                             |   | $      | (4,923                    | )      |   | $ | 863,401 |   |
| Additions                to property and equipment                                      |   | $                                 | 66,022  |    |                                 | $      | 2,189   |                             |   | $      | (753                      | )      |   | $ | 67,458 |   |
|                                                                                    |   |                              |    |    |                                 |   |    |                             |   |   |                      |   |   |   |   |   |

| **For                the Nine Months Ended****September                30, 2007** |   | **Oil                and Gas**    |    |   | **Contract                Drilling** |   |    | **Intercompany****Eliminations** |   |   | **Consolidated****Total** |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------------|---------|--------|--------------------------------------|--------|---------|----------------------------------|--------|--------|---------------------------|--------|
|                                                                              |   | **(Unaudited)**                   |    |
|                                                                              |   | **(In                thousands)** |    |
| Revenues                                                                          |   | $                                 | 229,453 |   |                                 | $      | 46,056  |                             |   | $      | (8,605                    | )      |   | $ | 266,904 |   |
| Depreciation,                depletion and amortization (a)                       |   |                              | 55,403  |   |                                 |   | 11,454  |                             |   |   | (1,098                    | )      |   |   | 65,759 |   |
| Other                operating expenses (b)                                       |   |                              | 147,209 |   |                                 |   | 26,213  |                             |   |   | (5,966                    | )      |   |   | 167,456 |   |
| Interest                expense                                                   |   |                              | 20,914  |   |                                 |   | 3,149   |                             |   |   | -                         |   |   |   | 24,063 |   |
| Other                expense                                                      |   |                              | 8,330   |   |                                 |   | -       |                             |   |   | -                         |   |   |   | 8,330 |   |
| Income                (loss) before income taxes and                              |   |                              |    |   |                                 |   |    |                             |   |   |                      |   |   |   |   |   |
| minority                interest                                                  |   |                              | (2,403  | )      |                                 |   | 5,240   |                             |   |   | (1,541                    | )      |   |   | 1,296 |   |
|                                                                              |   |                              |    |   |                                 |   |    |                             |   |   |                      |   |   |   |   |   |
| Income                tax (expense) benefit                                       |   |                              | 1,384   |   |                                 |   | (1,834  | )                                |   |   | -                         |   |   |   | (450 | ) |
| Minority                interest, net of tax                                      |   |                              | -       |   |                                 |   | (3,360  | )                                |   |   | -                         |   |   |   | (3,360 | ) |
|                                                                              |   |                              |    |   |                                 |   |    |                             |   |   |                      |   |   |   |   |   |
| Net                income (loss)                                                  |   | $                                 | (1,019  | )      |                                 | $      | 46      |                             |   | $      | (1,541                    | )      |   | $ | (2,514 | ) |
|                                                                              |   |                              |    |   |                                 |   |    |                             |   |   |                      |   |   |   |   |   |
| Total                assets                                                       |   | $                                 | 750,936 |   |                                 | $      | 117,388 |                             |   | $      | (4,923                    | )      |   | $ | 863,401 |   |
| Additions                to property and equipment                                |   | $                                 | 186,643 |   |                                 | $      | 22,324  |                             |   | $      | (1,541                    | )      |   | $ | 207,426 |   |
|                                                                              |   |                              |    |   |                                 |   |    |                             |   |   |                      |   |   |   |   |   |

----

| **For                the Three Months Ended****September                30, 2006** |   | **Oil                and Gas**    |    |   | **Contract                Drilling** |   |   | **Intercompany****Eliminations** |   |   | **Consolidated****Total** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------|---------|--------|--------------------------------------|--------|--------|----------------------------------|--------|--------|---------------------------|--------|
|                                                                               |   | **(Unaudited)**                   |    |
|                                                                               |   | **(In                thousands)** |    |
| Revenues                                                                           |   | $                                 | 64,588  |   |                                 | $      | 3,398  |                             |   | $      | (1,597                    | )      |   | $ | 66,389 |   |
| Depreciation,                depletion and amortization (a)                        |   |                              | 30,315  |   |                                 |   | 500    |                             |   |   | (215                      | )      |   |   | 30,600 |   |
| Other                operating expenses (b)                                        |   |                              | 46,041  |   |                                 |   | 2,244  |                             |   |   | (1,020                    | )      |   |   | 47,265 |   |
| Interest                expense                                                    |   |                              | 5,154   |   |                                 |   | 174    |                             |   |   | -                         |   |   |   | 5,328 |   |
| Other                income                                                        |   |                              | (25,151 | )      |                                 |   | -      |                             |   |   | -                         |   |   |   | (25,151 | ) |
| Income                (loss) before income taxes and                               |   |                              |    |   |                                 |   |   |                             |   |   |                      |   |   |   |   |   |
| minority                interest                                                   |   |                              | 8,229   |   |                                 |   | 480    |                             |   |   | (362                      | )      |   |   | 8,347 |   |
|                                                                               |   |                              |    |   |                                 |   |   |                             |   |   |                      |   |   |   |   |   |
| Income                tax expense                                                  |   |                              | (2,674  | )      |                                 |   | (168   | )                                |   |   | -                         |   |   |   | (2,842 | ) |
| Minority                interest, net of tax                                       |   |                              | -       |   |                                 |   | (156   | )                                |   |   | -                         |   |   |   | (156 | ) |
|                                                                               |   |                              |    |   |                                 |   |   |                             |   |   |                      |   |   |   |   |   |
| Net                income (loss)                                                   |   | $                                 | 5,555   |   |                                 | $      | 156    |                             |   | $      | (362                      | )      |   | $ | 5,349 |   |
|                                                                               |   |                              |    |   |                                 |   |   |                             |   |   |                      |   |   |   |   |   |
| Total                assets                                                        |   | $                                 | 692,699 |   |                                 | $      | 52,401 |                             |   | $      | (2,182                    | )      |   | $ | 742,918 |   |
| Additions                to property and equipment                                 |   | $                                 | 70,522  |   |                                 | $      | 16,248 |                             |   | $      | (362                      | )      |   | $ | 86,408 |   |

| **For                the Nine Months Ended****September                30, 2006**                                                                               |   | **Oil                and Gas**    |    |   | **Contract                Drilling** |   |   | **Intercompany****Eliminations** |   |   | **Consolidated****Total** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|--------|--------------------------------------|--------|--------|----------------------------------|--------|--------|---------------------------|--------|
|                                                                                                                                                            |   | **(Unaudited)**                   |    |
|                                                                                                                                                            |   | **(In                thousands)** |    |
| Revenues                                                                                                                                                        |   | $                                 | 197,949 |   |                                 | $      | 4,146  |                             |   | $      | (1,971                    | )      |   | $ | 200,124 |   |
| Depreciation,                depletion and amortization (a)                                                                                                     |   |                              | 60,935  |   |                                 |   | 644    |                             |   |   | (287                      | )      |   |   | 61,292 |   |
| Other                operating expenses (b)                                                                                                                     |   |                              | 113,003 |   |                                 |   | 2,688  |                             |   |   | (1,236                    | )      |   |   | 114,455 |   |
| Interest                expense                                                                                                                                 |   |                              | 14,416  |   |                                 |   | 212    |                             |   |   | -                         |   |   |   | 14,628 |   |
| Other                income                                                                                                                                     |   |                              | (24,892 | )      |                                 |   | -      |                             |   |   | -                         |   |   |   | (24,892 | ) |
| Income                (loss) before income taxes and                                                                                                       |   |                              |    |   |                                 |   |   |                             |   |   |                      |   |   |   |   |   |
| minority                interest                                                                                                                                |   |                              | 34,487  |   |                                 |   | 602    |                             |   |   | (448                      | )      |   |   | 34,641 |   |
|                                                                                                                                                            |   |                              |    |   |                                 |   |   |                             |   |   |                      |   |   |   |   |   |
| Income                tax expense                                                                                                                               |   |                              | (7,544  | )      |                                 |   | (210   | )                                |   |   | -                         |   |   |   | (7,754 | ) |
| Minority                interest, net of tax                                                                                                                    |   |                              | -       |   |                                 |   | (196   | )                                |   |   | -                         |   |   |   | (196 | ) |
|                                                                                                                                                            |   |                              |    |   |                                 |   |   |                             |   |   |                      |   |   |   |   |   |
| Net                income (loss)                                                                                                                                |   | $                                 | 26,943  |   |                                 | $      | 196    |                             |   | $      | (448                      | )      |   | $ | 26,691 |   |
|                                                                                                                                                            |   |                              |    |   |                                 |   |   |                             |   |   |                      |   |   |   |   |   |
| Total                assets                                                                                                                                     |   | $                                 | 692,699 |   |                                 | $      | 52,401 |                             |   | $      | (2,182                    | )      |   | $ | 742,918 |   |
| Additions                to property and equipment                                                                                                              |   | $                                 | 190,140 |   |                                 | $      | 47,855 |                             |   | $      | (448                      | )      |   | $ | 237,547 |   |
|                                         |   |                              |    |   |                                 |   |   |                             |   |   |                      |   |   |   |   |   |

**15.               Guarantor Financial Information**

----

**Condensed      Consolidating Balance Sheet**

**September      30, 2007**

| **(Unaudited)**                                                                                                                                                                                                                                       |   |       |    |   |             |   |    | **Non-**      |   |   |             |   |   |             |     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|---------|--------|------------------|--------|---------|---------------|--------|--------|------------------|--------|--------|------------------|----------|
| **(In                thousands)**                                                                                                                                                                                                                     |   |       |    |   | **Guarantor**    |   |    | **Guarantor** |   |   | **Adjustments/** |   |   |             |     |
|                                                                                                                                                                                                                                                  |   | **Issuer** |    |   | **Subsidiaries** |   |    | **Entities**  |   |   | **Eliminations** |   |   | **Consolidated** |     |
| Current                assets                                               |   | $          | 135,684 |   |             | $      | 102,764 |          |   | $      | 18,888           |   |   | $                | (135,813 | ) |   | $ | 121,523 |   |
| Property                and equipment, net                                                                                                                                                                                                            |   |       | 368,877 |   |             |   | 271,860 |          |   |   | 87,295           |   |   |             | -        |   |   |   | 728,032 |   |
| Investments                in subsidiaries                                                                                                                                                                                                            |   |       | 71,715  |   |             |   | -       |          |   |   | -                |   |   |             | (71,715  | ) |   |   | - |   |
| Other                assets                                                 |   |       | 12,932  |   |             |   | 329     |          |   |   | 585              |   |   |             | -        |   |   |   | 13,846 |   |
| Total                assets                                                                     |   | $          | 589,208 |   |             | $      | 374,953 |          |   | $      | 106,768          |   |   | $                | (207,528 | ) |   | $ | 863,401 |   |
|                                                                                                                                                                                                                                                  |   |       |    |   |             |   |    |          |   |   |             |   |   |             |     |   |   |   |   |   |
| Current                liabilities                                          |   | $          | 107,156 |   |             | $      | 168,333 |          |   | $      | 42,825           |   |   | $                | (135,813 | ) |   | $ | 182,501 |   |
| Non-current                liabilities:                                                                                                                                                                                                               |   |       |    |   |             |   |    |          |   |   |             |   |   |             |     |   |   |   |   |   |
| Long-term                debt                                                                   |   |       | 413,000 |   |             |   | -       |          |   |   | 44,063           |   |   |             | -        |   |   |   | 457,063 |   |
| Fair                value of derivatives                                                                                                                                                                                                              |   |       | 2,400   |   |             |   | 1,970   |          |   |   | -                |   |   |             | -        |   |   |   | 4,370 |   |
| Other                                                                                           |   |       | 14,610  |   |             |   | 56,199  |          |   |   | 112              |   |   |             | -        |   |   |   | 70,921 |   |
|                                                                                                                                                                                                                                                  |   |       | 430,010 |   |             |   | 58,169  |          |   |   | 44,175           |   |   |             | -        |   |   |   | 532,354 |   |
|                                                                                                                                                                                                                                                  |   |       |    |   |             |   |    |          |   |   |             |   |   |             |     |   |   |   |   |   |
| Stockholders’                equity                                   |   |       | 52,042  |   |             |   | 148,451 |          |   |   | 19,768           |   |   |             | (71,715  | ) |   |   | 148,546 |   |
| Total                liabilities and                                                                                                                                                                                                                  |   |       |    |   |             |   |    |          |   |   |             |   |   |             |     |   |   |   |   |   |
|   stockholders’                equity                                                                                                                                                                                                 |   | $          | 589,208 |   |             | $      | 374,953 |          |   | $      | 106,768          |   |   | $                | (207,528 | ) |   | $ | 863,401 |   |

**Condensed      Consolidating Balance Sheet**

**December      31, 2006**

| **(In                thousands)**                                                                                                                                                                                                                     |   |       |    |   |             |   |    | **Non-**      |   |   |             |   |   |             |     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|---------|--------|------------------|--------|---------|---------------|--------|--------|------------------|--------|--------|------------------|----------|
|                                                                                                                                                                                                                                                  |   |       |    |   | **Guarantor**    |   |    | **Guarantor** |   |   | **Adjustments/** |   |   |             |     |
|                                                                                                                                                                                                                                                  |   | **Issuer** |    |   | **Subsidiaries** |   |    | **Entities**  |   |   | **Eliminations** |   |   | **Consolidated** |     |
| Current                assets                                               |   | $          | 160,772 |   |             | $      | 96,386  |          |   | $      | 11,781           |   |   | $                | (142,941 | ) |   | $ | 125,998 |   |
| Property                and equipment, net                                                                                                                                                                                                            |   |       | 293,775 |   |             |   | 279,913 |          |   |   | 71,121           |   |   |             | -        |   |   |   | 644,809 |   |
| Investments                in subsidiaries                                                                                                                                                                                                            |   |       | 72,171  |   |             |   | -       |          |   |   | -                |   |   |             | (72,171  | ) |   |   | - |   |
| Other                assets                                                 |   |       | 23,638  |   |             |   | 358     |          |   |   | 630              |   |   |             | -        |   |   |   | 24,626 |   |
| Total                assets                                                                     |   | $          | 550,356 |   |             | $      | 376,657 |          |   | $      | 83,532           |   |   | $                | (215,112 | ) |   | $ | 795,433 |   |
|                                                                                                                                                                                                                                                  |   |       |    |   |             |   |    |          |   |   |             |   |   |             |     |   |   |   |   |   |
| Current                liabilities                                          |   | $          | 89,704  |   |             | $      | 176,876 |          |   | $      | 25,427           |   |   | $                | (142,941 | ) |   | $ | 149,066 |   |
| Non-current                liabilities:                                                                                                                                                                                                               |   |       |    |   |             |   |    |          |   |   |             |   |   |             |     |   |   |   |   |   |
| Long-term                debt                                                                   |   |       | 365,000 |   |             |   | -       |          |   |   | 48,876           |   |   |             | -        |   |   |   | 413,876 |   |
| Fair                value of derivatives                                                                                                                                                                                                              |   |       | 313     |   |             |   | 20,968  |          |   |   | -                |   |   |             | -        |   |   |   | 21,281 |   |
| Other                                                                                           |   |       | 10,257  |   |             |   | 55,870  |          |   |   | 103              |   |   |             | -        |   |   |   | 66,230 |   |
|                                                                                                                                                                                                                                                  |   |       | 375,570 |   |             |   | 76,838  |          |   |   | 48,979           |   |   |             | -        |   |   |   | 501,387 |   |
|                                                                                                                                                                                                                                                  |   |       |    |   |             |   |    |          |   |   |             |   |   |             |     |   |   |   |   |   |
| Stockholders’                equity                                   |   |       | 85,082  |   |             |   | 122,943 |          |   |   | 9,126            |   |   |             | (72,171  | ) |   |   | 144,980 |   |
| Total                liabilities and                                                                                                                                                                                                                  |   |       |    |   |             |   |    |          |   |   |             |   |   |             |     |   |   |   |   |   |
|   stockholders’                equity                                                                                                                                                                                                 |   | $          | 550,356 |   |             | $      | 376,657 |          |   | $      | 83,532           |   |   | $                | (215,112 | ) |   | $ | 795,433 |   |

----

**Condensed      Consolidating Statement of Operations**

**Three      Months Ended September 30, 2007**

| **(Unaudited)**                                                                                                                                                                                                                                              |   |       |    |   |             |   |   | **Non-**      |   |   |             |   |   |             |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|---------|--------|------------------|--------|--------|---------------|--------|--------|------------------|--------|--------|------------------|--------|
| **(In                thousands)**                                                                                                                                                                                                                            |   |       |    |   | **Guarantor**    |   |   | **Guarantor** |   |   | **Adjustments/** |   |   |             |   |
|                                                                                                                                                                                                                                                         |   | **Issuer** |    |   | **Subsidiaries** |   |   | **Entities**  |   |   | **Eliminations** |   |   | **Consolidated** |   |
| Total                revenue                                                       |   | $          | 57,665  |   |             | $      | 29,497 |          |   | $      | 18,394           |   |   | $                | (3,717 | ) |   | $ | 101,839 |   |
| Costs                and                expenses                                   |   |       | 56,495  |   |             |   | 21,307 |          |   |   | 13,252           |   |   |             | (2,964 | ) |   |   | 88,090 |   |
| Operating                income (loss)                                                                                                                                                                                                                       |   |       | 1,170   |   |             |   | 8,190  |          |   |   | 5,142            |   |   |             | (753   | ) |   |   | 13,749 |   |
| Other                income (expense)                                                                                                                                                                                                                        |   |       | (10,134 | )      |             |   | 978    |          |   |   | (1,210           | )      |   |             | -      |   |   |   | (10,366 | ) |
| Income                tax                expense                                   |   |       | (1,173  | )      |             |   | -      |          |   |   | -                |   |   |             | -      |   |   |   | (1,173 | ) |
| Minority                interest, net of tax                                                                                                                                                                                                                 |   |       | (1,224  | )      |             |   | -      |          |   |   | -                |   |   |             | -      |   |   |   | (1,224 | ) |
| Net                income                (loss)                                                        |   | $          | (11,361 | )      |             | $      | 9,168  |          |   | $      | 3,932            |   |   | $                | (753   | ) |   | $ | 986 |   |

**Condensed      Consolidating Statement of Operations**

**Nine      Months Ended September 30, 2007**

| **(Unaudited)**                                                                                                                                                                                                                                              |   |       |    |   |             |   |   | **Non-**      |   |   |             |   |   |             |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|---------|--------|------------------|--------|--------|---------------|--------|--------|------------------|--------|--------|------------------|--------|
| **(In                thousands)**                                                                                                                                                                                                                            |   |       |    |   | **Guarantor**    |   |   | **Guarantor** |   |   | **Adjustments/** |   |   |             |   |
|                                                                                                                                                                                                                                                         |   | **Issuer** |    |   | **Subsidiaries** |   |   | **Entities**  |   |   | **Eliminations** |   |   | **Consolidated** |   |
| Total                revenue                                                       |   | $          | 150,064 |   |             | $      | 79,977 |          |   | $      | 46,530           |   |   | $                | (9,667 | ) |   | $ | 266,904 |   |
| Costs                and                expenses                                   |   |       | 154,745 |   |             |   | 53,641 |          |   |   | 32,955           |   |   |             | (8,126 | ) |   |   | 233,215 |   |
| Operating                income (loss)                                                                                                                                                                                                                       |   |       | (4,681  | )      |             |   | 26,336 |          |   |   | 13,575           |   |   |             | (1,541 | ) |   |   | 33,689 |   |
| Other                expense                                                       |   |       | (28,134 | )      |             |   | (1,220 | )             |   |   | (3,039           | )      |   |             | -      |   |   |   | (32,393 | ) |
| Income                tax expense                                             |   |       | (450    | )      |             |   | -      |          |   |   | -                |   |   |             | -      |   |   |   | (450 | ) |
| Minority                interest, net of tax                                                                                                                                                                                                                 |   |       | (3,360  | )      |             |   | -      |          |   |   | -                |   |   |             | -      |   |   |   | (3,360 | ) |
| Net                income                (loss)                                                        |   | $          | (36,625 | )      |             | $      | 25,116 |          |   | $      | 10,536           |   |   | $                | (1,541 | ) |   | $ | (2,514 | ) |

**Condensed      Consolidating Statement of Operations**

**Three      Months Ended September 30, 2006**

| **(Unaudited)**                                                                                                                                                                                                                                              |   |       |    |   |             |   |   | **Non-**      |   |   |             |   |   |             |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|---------|--------|------------------|--------|--------|---------------|--------|--------|------------------|--------|--------|------------------|--------|
| **(In                thousands)**                                                                                                                                                                                                                            |   |       |    |   | **Guarantor**    |   |   | **Guarantor** |   |   | **Adjustments/** |   |   |             |   |
|                                                                                                                                                                                                                                                         |   | **Issuer** |    |   | **Subsidiaries** |   |   | **Entity**    |   |   | **Eliminations** |   |   | **Consolidated** |   |
| Total                revenue                                                       |   | $          | 37,055  |   |             | $      | 27,844 |          |   | $      | 3,491            |   |   | $                | (2,001 | ) |   | $ | 66,389 |   |
| Costs                and                expenses                                   |   |       | 59,448  |   |             |   | 17,246 |          |   |   | 2,810            |   |   |             | (1,639 | ) |   |   | 77,865 |   |
| Operating                income (loss)                                                                                                                                                                                                                       |   |       | (22,393 | )      |             |   | 10,598 |          |   |   | 681              |   |   |             | (362   | ) |   |   | (11,476 | ) |
| Other                income (expense)                                                                                                                                                                                                                        |   |       | 7,192   |   |             |   | 12,804 |          |   |   | (173             | )      |   |             | -      |   |   |   | 19,823 |   |
| Income                tax                expense                                   |   |       | (2,842  | )      |             |   | -      |          |   |   | -                |   |   |             | -      |   |   |   | (2,842 | ) |
| Minority                interest, net of tax                                                                                                                                                                                                                 |   |       | (156    | )      |             |   | -      |          |   |   | -                |   |   |             | -      |   |   |   | (156 | ) |
| Net                income                (loss)                                              |   | $          | (18,199 | )      |             | $      | 23,402 |          |   | $      | 508              |   |   | $                | (362   | ) |   | $ | 5,349 |   |

**Condensed      Consolidating Statement of Operations**

**Nine      Months Ended September 30, 2006**

| **(Unaudited)**                                                                                                                                                                                                                                              |   |       |    |   |             |   |   | **Non-**      |   |   |             |   |   |             |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|---------|--------|------------------|--------|--------|---------------|--------|--------|------------------|--------|--------|------------------|--------|
| **(In                thousands)**                                                                                                                                                                                                                            |   |       |    |   | **Guarantor**    |   |   | **Guarantor** |   |   | **Adjustments/** |   |   |             |   |
|                                                                                                                                                                                                                                                         |   | **Issuer** |    |   | **Subsidiaries** |   |   | **Entity**    |   |   | **Eliminations** |   |   | **Consolidated** |   |
| Total                revenue                                                       |   | $          | 116,337 |   |             | $      | 83,000 |          |   | $      | 4,238            |   |   | $                | (3,451 | ) |   | $ | 200,124 |   |
| Costs                and                expenses                                   |   |       | 123,973 |   |             |   | 51,380 |          |   |   | 3,397            |   |   |             | (3,003 | ) |   |   | 175,747 |   |
| Operating                income (loss)                                                                                                                                                                                                                       |   |       | (7,636  | )      |             |   | 31,620 |          |   |   | 841              |   |   |             | (448   | ) |   |   | 24,377 |   |
| Other                income (expense)                                                                                                                                                                                                                        |   |       | 3,432   |   |             |   | 7,044  |          |   |   | (212             | )      |   |             | -      |   |   |   | 10,264 |   |
| Income                tax                expense                                   |   |       | (7,754  | )      |             |   | -      |          |   |   | -                |   |   |             | -      |   |   |   | (7,754 | ) |
| Minority                interest, net of tax                                                                                                                                                                                                                 |   |       | (196    | )      |             |   | -      |          |   |   | -                |   |   |             | -      |   |   |   | (196 | ) |
| Net                income                (loss)                                              |   | $          | (12,154 | )      |             | $      | 38,664 |          |   | $      | 629              |   |   | $                | (448   | ) |   | $ | 26,691 |   |

----

**Condensed      Consolidating Statement of Cash Flows**

**Nine      Months Ended September 30, 2007**

| **(Unaudited)**                                                                                                                                                                                                                           |   |       |     |   |             |   |    | **Non-**      |   |   |             |   |   |             |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|----------|--------|------------------|--------|---------|---------------|--------|--------|------------------|--------|--------|------------------|--------|
| **(In                thousands)**                                                                                                                                                                                                         |   |       |     |   | **Guarantor**    |   |    | **Guarantor** |   |   | **Adjustments/** |   |   |             |   |
|                                                                                                                                                                                                                                      |   | **Issuer** |     |   | **Subsidiaries** |   |    | **Entities**  |   |   | **Eliminations** |   |   | **Consolidated** |   |
| Operating                activities                                  |   | $          | 95,773   |   |             | $      | 47,432  |          |   | $      | 18,009           |   |   | $                | 1,097  |   |   | $ | 162,311 |   |
| Investing                activities                                  |   |       | (169,985 | )      |             |   | (10,572 | )             |   |   | (22,660          | )      |   |             | (597   | ) |   |   | (203,814 | ) |
| Financing                activities                                  |   |       | 72,586   |   |             |   | (37,089 | )             |   |   | 2,188            |   |   |             | (500   | ) |   |   | 37,185 |   |
| Net                decrease in cash and                                                                                                                                                                                                   |   |       |     |   |             |   |    |          |   |   |             |   |   |             |   |   |   |   |   |   |
| cash                equivalents                                           |   |       | (1,626   | )      |             |   | (229    | )             |   |   | (2,463           | )      |   |             | -      |   |   |   | (4,318 | ) |
| Cash                at the beginning of                                                                                                                                                                                                   |   |       |     |   |             |   |    |          |   |   |             |   |   |             |   |   |   |   |   |   |
| the                period                                                 |   |       | 6,116    |   |             |   | 1,298   |          |   |   | 6,426            |   |   |             | -      |   |   |   | 13,840 |   |
| Cash                at end of the period                                                                                                                                                                                                  |   | $          | 4,490    |   |             | $      | 1,069   |          |   | $      | 3,963            |   |   | $                | -      |   |   | $ | 9,522 |   |

**Condensed      Consolidating Statement of Cash Flows**

**Nine      Months Ended September 30, 2006**

| **(Unaudited)**                                                                                                                                                                                                                                 |   |       |     |   |             |   |    | **Non-**      |   |   |             |   |   |             |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|----------|--------|------------------|--------|---------|---------------|--------|--------|------------------|--------|--------|------------------|--------|
| **(In                thousands)**                                                                                                                                                                                                               |   |       |     |   | **Guarantor**    |   |    | **Guarantor** |   |   | **Adjustments/** |   |   |             |   |
|                                                                                                                                                                                                                                            |   | **Issuer** |     |   | **Subsidiaries** |   |    | **Entity**    |   |   | **Eliminations** |   |   | **Consolidated** |   |
| Operating                activities                                   |   | $          | 49,841   |   |             | $      | 61,907  |          |   | $      | 4,446            |   |   | $                | 288    |   |   | $ | 116,482 |   |
| Investing                activities                                   |   |       | (160,497 | )      |             |   | (15,387 | )             |   |   | (54,312          | )      |   |             | 212    |   |   |   | (229,984 | ) |
| Financing                activities                                   |   |       | 110,952  |   |             |   | (47,101 | )             |   |   | 52,962           |   |   |             | (500   | ) |   |   | 116,313 |   |
| Net                increase (decrease) in                                                                                                                                                                                                       |   |       |     |   |             |   |    |          |   |   |             |   |   |             |   |   |   |   |   |   |
|  cash                and cash equivalents                                                                                                                                                                                                  |   |       | 296      |   |             |   | (581    | )             |   |   | 3,096            |   |   |             | -      |   |   |   | 2,811 |   |
| Cash                at beginning of                                                                                                                                                                                                             |   |       |     |   |             |   |    |          |   |   |             |   |   |             |   |   |   |   |   |   |
|   the                period                                      |   |       | 4,302    |   |             |   | 1,633   |          |   |   | -                |   |   |             | -      |   |   |   | 5,935 |   |
| Cash                at end of the period                                                                                                                                                                                                        |   | $          | 4,598    |   |             | $      | 1,052   |          |   | $      | 3,096            |   |   | $                | -      |   |   | $ | 8,746 |   |

----

**Item      2-                 Management's      Discussion and Analysis of Financial Condition and Results of      Operations**

**Overview**

**Key      Factors to Consider**

| ·   | Our                oil and gas production for the three months ended September 30, 2007                was                33% higher on an Mcfe basis than in the comparable period in 2006                and 20%                higher for the nine months ended September 30, 2007 compared to the                same                period in 2006.  A significant portion of our fiscal 2006 and                fiscal 2007 expenditures relate to (a) unproved exploratory prospects,                (b)                drilling or completion activities that are in progress, or (c)                non-productive leasing and drilling                activities. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Exploration                costs related to abandonments and impairments were $18.8 million                in the                third quarter of 2007, of which approximately $7.8 million related to                unsuccessful well costs and $11 million related to impairment of                unproved acreage.  Most of the abandonment and impairment costs                in the third quarter of 2007 related to prospects in North and South                Louisiana. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | We                recorded a non-cash charge during the third quarter of 2007 of $8                million                for impairments pursuant to Statement of Financial Accounting Standards                No. 144 *Accounting for Impairment or Disposal of Long-Lived                Assets*, of which $5.1 million related to the write-down of two 2,000                horsepower drilling rigs and related components to their estimated                fair                market value.  The remaining $2.9 million impairment related to                producing properties in West Texas. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | We                spent $184.3 million on exploration and development activities during                the                first nine months of 2007, of which approximately 58% was on exploratory                prospects.  We currently plan to spend approximately                $251.4 million on exploration and development for fiscal 2007, an                increase of $16.3 million from our previous estimate of $235.1                million.  Most of the increase relates to developmental drilling                in the Austin Chalk (Trend) and the Permian Basin.  As a result,                our planned expenditures for fiscal 2007 are expected to be more                balanced,                with approximately 52% applied to exploratory                activities. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Our                expenditures on exploration and development activities for the first                nine                months of 2007 exceeded cash flow from operating activities, excluding                cash flow from our contract drilling segment, by approximately                $33.7 million, and our expenditures for the remainder of 2007 are                also expected to exceed our operating cash flow, although not by                as large                a margin.  We cannot predict our drilling success on exploratory                prospects, and our future results of operations and financial condition                could be adversely affected by unsuccessful exploratory drilling                results. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | During                the first nine months of 2007, we increased borrowings under our                revolving                credit facility by $48 million from $140 million at December 31,                2006 to $188 million at September 30, 2007 to partially finance our                exploration and development                activities. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | At                September 30, 2007, our capitalized unproved oil and gas properties                totaled $151.9 million, of which approximately $89.8 million was                attributable to unproved acreage.  Unproved properties are                subject to a valuation impairment to the extent the carrying cost                of a                prospect exceeds its estimated fair value.  Therefore, our                results of operations in future periods may be adversely affected                by                unproved property impairments. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | We                recorded a $2.3 million net loss on derivatives in the third quarter                of 2007.  We recorded a $1.6 million realized gain on settled                contracts and a $3.9 million loss for changes in mark-to-market                valuations.  Since we do not presently designate our derivatives                as cash flow hedges under applicable accounting standards, we recognize                the full effect of changing prices on mark-to-market valuations as                a                current charge or credit to our results of                operations. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Recent      Exploration and Developmental Activities**

***Overview***

----

***South      Louisiana***

|                         |   |                                                    |   | **Working**  |   | **Current** |
|------------------------------|--------|---------------------------------------------------------|--------|--------------|--------|-------------|
| **Spud                Date** |   | **Well                Name (Prospect)**                 |   | **Interest** |   | **Status**  |
| January                2007  |   | SL                195 QQ #7 (Floyd)                     |   | 100%         |   | Producing   |
| February                2007 |   | SL                195 QQ #10 (Floyd)                    |   | 75%          |   | Producing   |
| February                2007 |   | Orleans                Levee District #2 (American Bay) |   | 45%          |   | Producing   |
| March                2007    |   | Bowie                Lumber Co. #1 (Bayou Boeuf)        |   | 100%         |   | Dry         |
| April                2007    |   | Pivach                Agency #1 (Elsa)                  |   | 94%          |   | Dry         |
| June                2007     |   | SL                195 QQ #12 (Floyd)                    |   | 100%         |   | Producing   |
| June                2007     |   | SL                16849 #2 (Dolly)                      |   | 94%          |   | Producing   |

***North      Louisiana***

|                            |   |                                          |   | **Working**  |   | **Current**                             |
|---------------------------------|--------|-----------------------------------------------|--------|--------------|--------|-----------------------------------------|
| **Spud                  Date**  |   | **Well                  Name (Prospect)**     |   | **Interest** |   | **Status**                              |
| October                  2006   |   | P.                  Benoit #1 (Sarepta)       |   | 91%          |   | Completion                  in progress |
| January                  2007   |   | J.L.                  Hood #1 (Terryville)    |   | 86%          |   | Producing                               |
| February                  2007  |   | J.                  Huey #1 (Terryville)      |   | 86%          |   | Producing                               |
| March                  2007     |   | David                  Barton #1 (Winnsboro)  |   | 100%         |   | Dry                                     |
| March                  2007     |   | George                  Staton #1 (Sarepta)   |   | 68%          |   | Producing                               |
| April                  2007     |   | C.M.                  Bice #1 (Terryville)    |   | 86%          |   | Producing                               |
| May                  2007       |   | C.                  Dugdale #1 (Choudrant)    |   | 99%          |   | Producing                               |
| June                  2007      |   | Stephenson                  #1 (Terryville)   |   | 86%          |   | Producing                               |
| June                  2007      |   | John                  Warren #1 (Terryville)  |   | 86%          |   | Producing                               |
| July                  2007      |   | Burks                  #1 (Terryville)        |   | 86%          |   | Producing                               |
| July                  2007      |   | Henry                  #2 (Terryville)        |   | 86%          |   | Dry                                     |
| July                  2007      |   | Allen                  Estate #1 (Terryville) |   | 86%          |   | Producing                               |
| August                  2007    |   | McCrary                  #1 (Terryville)      |   | 86%          |   | Producing                               |
| August                  2007    |   | Henry                  #1 (Terryville)        |   | 86%          |   | Producing                               |
| September                  2007 |   | LA                  Minerals #1 (Ruston)      |   | 66%          |   | Waiting                  on completion  |
| October                  2007   |   | Barnett                  #1 (Terryville)      |   | 86%          |   | Drilling                                |

----

***East      Texas Bossier***

***Other***

----

**Supplemental      Information**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **Three                Months Ended** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **September                30,**      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **2007**                              |   |   | **2006** |   |
| **Oil                and Gas Production Data:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                  |   |   |   |   |
| Gas                (MMcf)                                                                                                                         |   |                                  | 5,750  |   |   |   | 3,738 |   |
| Oil                (MBbls)                                                                                                                        |   |                                  | 582    |   |   |   | 532 |   |
| Natural                gas liquids                (MBbls)                                                                                         |   |                                  | 58     |   |   |   | 51 |   |
| Total                (MMcfe)                                                                                                                      |   |                                  | 9,590  |   |   |   | 7,236 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                  |   |   |   |   |   |   |
| **Average                Realized Prices (a):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                  |   |   |   |   |   |   |
| Gas                ($/Mcf)                                                                                                                        |   | $                                     | 6.77   |   |   | $ | 6.26 |   |
| Oil                ($/Bbl)                                                                                                                        |   | $                                     | 72.10  |   |   | $ | 67.27 |   |
| Natural                gas liquids                ($/Bbl):                                                                                        |   | $                                     | 45.64  |   |   | $ | 43.79 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                  |   |   |   |   |   |   |
| **Gain                (Loss) on Settled Derivative Contracts (a):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                  |   |   |   |   |   |   |
| ($                in thousands, except per                unit)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                  |   |   |   |   |   |   |
| Gas:  Net                realized                gain                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $                                     | 4,802  |   |   | $ | 5,543 |   |
| Per                unit produced                ($/Mcf)                                                                                                                              |   | $                                     | .84    |   |   | $ | 1.48 |   |
| Oil:   Net                realized loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | $                                     | (3,180 | ) |   | $ | (7,328 | ) |
| Per                unit produced                ($/Bbl)                                                                                                                              |   | $                                     | (5.46  | ) |   | $ | (13.77 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                  |   |   |   |   |   |   |
| **Average                Daily Production:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |   |   |   |   |   |   |
| Natural                Gas                (Mcf):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                  |   |   |   |   |   |   |
| Permian                Basin                                                                                                                                                         |   |                                  | 15,469 |   |   |   | 13,804 |   |
| Louisiana                                                                                                                                                                            |   |                                  | 37,523 |   |   |   | 15,059 |   |
| Austin                Chalk                (Trend)                                                                                                                                   |   |                                  | 2,176  |   |   |   | 2,102 |   |
| Cotton                Valley Reef                Complex                                                                                                                             |   |                                  | 6,811  |   |   |   | 9,083 |   |
| Other                                                                                                                                                                                |   |                                  | 521    |   |   |   | 582 |   |
| Total                                                                                                                                                                                                              |   |                                  | 62,500 |   |   |   | 40,630 |   |
| Oil                (Bbls):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                  |   |   |   |   |   |   |
| Permian                Basin                                                                                                                                                         |   |                                  | 3,291  |   |   |   | 3,102 |   |
| Louisiana                                                                                                                                                                            |   |                                  | 1,357  |   |   |   | 899 |   |
| Austin                Chalk                (Trend)                                                                                                                                   |   |                                  | 1,589  |   |   |   | 1,719 |   |
| Other                                                                                                                                                                                |   |                                  | 89     |   |   |   | 63 |   |
| Total                                                                                                                                                                                                              |   |                                  | 6,326  |   |   |   | 5,783 |   |
| Natural                Gas Liquids                (Bbls):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                  |   |   |   |   |   |   |
| Permian                Basin                                                                                                                                                         |   |                                  | 200    |   |   |   | 230 |   |
| Austin                Chalk                (Trend)                                                                                                                                   |   |                                  | 229    |   |   |   | 260 |   |
| Other                                                                                                                                                                                |   |                                  | 201    |   |   |   | 64 |   |
| Total                                                                                                                                                                                                              |   |                                  | 630    |   |   |   | 554 |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **Three                Months Ended** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **September                30,**      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **2007**                              |   |   | **2006** |   |
| **Exploration                Costs (in thousands):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |   |   |   |   |
| Abandonment                and impairment                costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                  |   |   |   |   |
| South                Louisiana                                                                                                                                                          |   | $                                     | 7,280  |   |   | $ | 10,863 |   |
| North                Louisiana                                                                                                                                                          |   |                                  | 7,657  |   |   |   | - |   |
| Other                                                                                                                                                                                   |   |                                  | 3,865  |   |   |   | 8,787 |   |
| Total                                                                                                                                                                                                                 |   |                                  | 18,802 |   |   |   | 19,650 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |   |   |   |   |   |   |
| Seismic                and                other                                                                                                      |   |                                  | 1,236  |   |   |   | 3,678 |   |
| Total                exploration                costs                                                                                                                                                                 |   | $                                     | 20,038 |   |   | $ | 23,328 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |   |   |   |   |   |   |
| **Depreciation,                Depletion and Amortization (in thousands):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                  |   |   |   |   |   |   |
| Oil                and gas                depletion                                                                                                  |   | $                                     | 20,710 |   |   | $ | 16,645 |   |
| Contract                drilling                depreciation                                                                                         |   |                                  | 2,013  |   |   |   | 357 |   |
| Other                depreciation                                                                                                                    |   |                                  | 295    |   |   |   | 684 |   |
| Total                DD&A                                                                                                                                                                                         |   | $                                     | 23,018 |   |   | $ | 17,686 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |   |   |   |   |   |   |
| **Oil                and Gas Costs ($/Mcfe Produced):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                  |   |   |   |   |   |   |
| Production                costs                                                                                                                      |   | $                                     | 2.17   |   |   | $ | 2.28 |   |
| Oil                and gas                depletion                                                                                                  |   | $                                     | 2.16   |   |   | $ | 2.30 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |   |   |   |   |   |   |
| **Net                Wells Drilled (b):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                  |   |   |   |   |   |   |
| Exploratory                wells                                                                                                                     |   |                                  | 2.2    |   |   |   | 9.1 |   |
| Developmental                wells                                                                                                                   |   |                                  | 8.2    |   |   |   | - |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                  |   |   |   |   |   |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **Nine                Months Ended** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **September                30,**     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **2007**                             |   |   | **2006** |   |
| **Oil                and Gas Production Data:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |   |   |   |   |
| Gas                (MMcf)                                                                                                                          |   |                                 | 15,228 |   |   |   | 11,217 |   |
| Oil                (MBbls)                                                                                                                         |   |                                 | 1,702  |   |   |   | 1,642 |   |
| Natural                gas liquids                (MBbls)                                                                                          |   |                                 | 161    |   |   |   | 151 |   |
| Total                (MMcfe)                                                                                                                       |   |                                 | 26,406 |   |   |   | 21,975 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                 |   |   |   |   |   |   |
| **Average                Realized Prices (a):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |   |   |   |   |   |   |
| Gas                ($/Mcf)                                                                                                                         |   | $                                    | 6.96   |   |   | $ | 6.74 |   |
| Oil                ($/Bbl)                                                                                                                         |   | $                                    | 63.56  |   |   | $ | 64.70 |   |
| Natural                gas liquids                ($/Bbl):                                                                                         |   | $                                    | 41.12  |   |   | $ | 40.15 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                 |   |   |   |   |   |   |
| **Gain                (Loss) on Settled Derivative Contracts (a):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                 |   |   |   |   |   |   |
| ($                in thousands, except per                unit)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                 |   |   |   |   |   |   |
| Gas:  Net                realized                gain                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | $                                    | 9,784  |   |   | $ | 2,478 |   |
|                       Per unit produced                ($/Mcf)                                                                                          |   | $                                    | .64    |   |   | $ | .22 |   |
| Oil:   Net                realized loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $                                    | (7,710 | ) |   | $ | (19,923 | ) |
|                       Per unit produced                ($/Bbl)                                                                                          |   | $                                    | (4.53  | ) |   | $ | (12.13 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                 |   |   |   |   |   |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **Nine                Months Ended** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **September                30,**     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **2007**                             |   |   | **2006** |   |
| **Average                Daily Production:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                 |   |   |   |   |
| Natural                Gas                (Mcf):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                 |   |   |   |   |
| Permian                Basin                                                                                                             |   |                                 | 14,861 |   |   |   | 14,455 |   |
| Louisiana                                                                                                                                |   |                                 | 30,884 |   |   |   | 13,339 |   |
| Austin                Chalk                (Trend)                                                                                       |   |                                 | 2,211  |   |   |   | 2,704 |   |
| Cotton                Valley Reef                Complex                                                                                 |   |                                 | 7,383  |   |   |   | 10,073 |   |
| Other                                                                                                                                    |   |                                 | 441    |   |   |   | 517 |   |
| Total                                                                                                                                                                  |   |                                 | 55,780 |   |   |   | 41,088 |   |
| Oil                (Bbls):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                 |   |   |   |   |   |   |
| Permian                Basin                                                                                                             |   |                                 | 3,174  |   |   |   | 3,196 |   |
| Louisiana                                                                                                                                |   |                                 | 1,350  |   |   |   | 975 |   |
| Austin                Chalk                (Trend)                                                                                       |   |                                 | 1,628  |   |   |   | 1,789 |   |
| Other                                                                                                                                    |   |                                 | 82     |   |   |   | 55 |   |
| Total                                                                                                                                                                  |   |                                 | 6,234  |   |   |   | 6,015 |   |
| Natural                Gas Liquids                (Bbls):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                 |   |   |   |   |   |   |
| Permian                Basin                                                                                                             |   |                                 | 207    |   |   |   | 238 |   |
| Austin                Chalk                (Trend)                                                                                       |   |                                 | 250    |   |   |   | 271 |   |
| Other                                                                                                                                    |   |                                 | 133    |   |   |   | 44 |   |
| Total                                                                                                                                                                  |   |                                 | 590    |   |   |   | 553 |   |

| **Exploration                Costs (in thousands):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Abandonment                and impairment                costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |
| South                Louisiana                                                                                                                                                          |   | $      | 28,677 |   |   | $      | 21,749 |   |
| North                Louisiana                                                                                                                                                          |   |   | 16,642 |   |   |   | - |   |
| Permian                Basin                                                                                                                                                            |   |   | 1,321  |   |   |   | 5,167 |   |
| Other                                                                                                                                                                                   |   |   | 6,786  |   |   |   | 8,906 |   |
| Total                                                                                                                                                                                                                 |   |   | 53,426 |   |   |   | 35,822 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| Seismic                and                other                                                                                                      |   |   | 3,706  |   |   |   | 9,366 |   |
| Total                exploration                costs                                                                                                                                                                 |   | $      | 57,132 |   |   | $      | 45,188 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| **Depreciation,                Depletion and Amortization (in thousands):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| Oil                and gas                depletion                                                                                                  |   | $      | 50,589 |   |   | $      | 45,781 |   |
| Contract                drilling                depreciation                                                                                         |   |   | 5,258  |   |   |   | 357 |   |
| Other                depreciation                                                                                                                    |   |   | 889    |   |   |   | 2,240 |   |
| Total                DD&A                                                                                                                                                                                         |   | $      | 56,736 |   |   | $      | 48,378 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| **Oil                and Gas Costs ($/Mcfe Produced):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |
| Production                costs                                                                                                                      |   | $      | 2.12   |   |   | $      | 2.16 |   |
| Oil                and gas                depletion                                                                                                  |   | $      | 1.92   |   |   | $      | 2.08 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| **Net                Wells Drilled (b):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |
| Exploratory                wells                                                                                                                     |   |   | 11.4   |   |   |   | 21.9 |   |
| Developmental                wells                                                                                                                   |   |   | 17.4   |   |   |   | 1.7 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |

----

**Operating      Results – Three-Month Periods**

***Oil      and gas operating results***

***Exploration      costs***

***Contract      Drilling Services***

----

***General      and Administrative***

***Interest      expense***

***Gain/loss      on derivatives***

***Income      tax expense***

**Operating      Results – Nine-Month Periods**

***Oil      and gas operating results***

----

***Exploration      costs***

***Contract      Drilling Services***

***General      and Administrative***

----

***Interest      expense***

***Gain/loss      on derivatives***

***Other***

***Income      tax expense***

**Liquidity      and Capital Resources**

***Overview***

----

***Capital      expenditures***

|                                                                                                                                                                                                                                                                                                                       |   | **Actual**                            |    |   | **Planned**                          |   |    |                         |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|--------|--------------------------------------|--------|---------|------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                       |   | **Expenditures**                      |    |   | **Expenditures**                     |   |    | **Year                2007** |   |
|                                                                                                                                                                                                                                                                                                                       |   | **Nine                Months Ended**  |    |   | **Year                Ending**       |   |    | **Percentage**               |   |
|                                                                                                                                                                                                                                                                                                                       |   | **September                30, 2007** |    |   | **December                31, 2007** |   |    | **of                Total**  |   |
|                                                                                                                                                                                                                                                                                                                       |   | **(In                thousands)**     |    |   |                                 |   |
| North                Louisiana                                                                 |   | $                                     | 60,700  |   |                                 | $      | 81,200  |                         |   |   | 32 | % |
| South                Louisiana                                                                 |   |                                  | 61,900  |   |                                 |   | 64,800  |                         |   |   | 26 | % |
| East                Texas                Bossier                                               |   |                                  | 27,200  |   |                                 |   | 39,900  |                         |   |   | 16 | % |
| Permian                Basin                                                                   |   |                                  | 21,700  |   |                                 |   | 35,000  |                         |   |   | 14 | % |
| Austin                Chalk                (Trend)                                             |   |                                  | 8,000   |   |                                 |   | 22,900  |                         |   |   | 9 | % |
| Utah/California                                                                                |   |                                  | 4,200   |   |                                 |   | 7,000   |                         |   |   | 3 | % |
| Other                                                                                          |   |                                  | 600     |   |                                 |   | 600     |                         |   |   | - |   |
|                                                                                                                                                                                                                                                                                                                       |   | $                                     | 184,300 |   |                                 | $      | 251,400 |                         |   |   | 100 | % |

----

***Cash      flow provided by operating activities***

***Credit      facility***

----

|                                                                                                                |   | **September                30,**  |    |   | **December                31,** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|--------|---------------------------------|--------|
|                                                                                                                |   | **2007**                          |    |   | **2006**                        |   |
|                                                                                                                |   | **(In                thousands)** |    |
| Working                capital (deficit) per GAAP                                                                   |   | $                                 | (60,978 | )      |                            | $      | (23,068 | ) |
| Add                funds available under the revolving credit facility                                              |   |                              | 86,196  |   |                            |   | 40,196 |   |
| Exclude                fair value of derivatives classified as current assets or current                liabilities |   |                              | 36,333  |   |                            |   | 5,993 |   |
| Exclude                current assets and current liabilities of Larclay JV                                         |   |                              | 24,158  |   |                            |   | 13,759 |   |
| Working                capital per loan covenant                                                                    |   | $                                 | 85,709  |   |                            | $      | 36,880 |   |

***73⁄4%      Senior Notes due 2013***

----

***Secured      Term Loan of Larclay JV***

*Consolidation of Variable Interest Entities – an Interpretation of ARB      No. 51 (as amended*

***Alternative      capital resources***

**Item      3 -       Quantitative      and Qualitative Disclosures About Market      Risk**

----

**Oil      and Gas Prices**

**Collars:**

|                                           |   | **Gas**                      |      |   | **Oil**   |   |
|------------------------------------------------|--------|------------------------------|-----------|--------|-----------|--------|
|                                           |   | **MMBtu                (a)** |      |   | **Floor** |   |   | **Ceiling** |   |   | **Bbls** |   |   | **Floor** |   |   | **Ceiling** |   |
| Production                Period:              |   |                         |      |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 4th                Quarter                2007 |   |                         | 459,000   |   |      | $      | 4.00 |   |   | $ | 5.18 |   |   |   | 141,000 |   |   | $ | 23.00 |   |   | $ | 25.20 |   |
| 1st                Quarter                2008 |   |                         | 434,000   |   |      | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 132,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |
| 2nd                Quarter                2008 |   |                         | 426,000   |   |      | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 132,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |
| 3rd                Quarter                2008 |   |                         | 419,000   |   |      | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 128,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |
|                                           |   |                         | 1,738,000 |   |      |   |   |   |   |   |   |   |   |   | 533,000 |   |   |   |   |   |   |   |   |   |

----

**Swaps:**

|                                                                                                               |   | **Gas**                      |      |   | **Oil**   |   |
|--------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|--------|-----------|--------|
|                                                                                                               |   | **MMBtu                (a)** |      |   | **Price** |   |   | **Bbls** |   |   | **Price** |   |
| Production                Period:                                                                                  |   |                         |      |   |      |   |   |   |   |   |   |   |
| 4th                Quarter                2007                                                                     |   |                         | 2,400,000 |   |      | $      | 8.34 |   |   |   | 225,000 |   |   | $ | 72.75 |   |
| 1st                Quarter                2008                                                                     |   |                         | 1,800,000 |   |      | $      | 8.26 |   |   |   | - |   |   | $ | - |   |
| 2nd                Quarter                2008                                                                     |   |                         | 1,500,000 |   |      | $      | 8.16 |   |   |   | 150,000 |   |   | $ | 65.60 |   |
| 3rd                Quarter                2008                                                                     |   |                         | 1,500,000 |   |      | $      | 8.16 |   |   |   | 150,000 |   |   | $ | 65.60 |   |
| 4th                Quarter                2008                                                                     |   |                         | 1,500,000 |   |      | $      | 8.16 |   |   |   | 150,000 |   |   | $ | 65.60 |   |
|                                                                                                               |   |                         | 8,700,000 |   |      |   |   |   |   |   | 675,000 |   |   |   |   |   |
|                     |   |                         |      |   |      |   |   |   |   |   |   |   |   |   |   |   |

**Interest      Rates**

**Interest      Rate Swaps:**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **Principal** |        |   | **Fixed****Libor** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|-------------|--------|--------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **Balance**   |        |   | **Rates**          |   |
| Period:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |          |        |   |               |   |
| October                1, 2007 to September                24,                2008                                                                                     |   | $             | 100,000,000 |   |               |   | 4.73 | % |
| October                1, 2007 to November 1,                2007                                                                                                      |   | $             | 50,000,000  |   |               |   | 5.19 | % |
| November                1, 2007 to November 1,                2008                                                                                                     |   | $             | 45,000,000  |   |               |   | 5.73 | % |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |          |        |   |               |   |   |   |

----

**Item      4      -                 Controls      and Procedures**

**Disclosure      Controls and Procedures**

| ·   | Management                has evaluated the effectiveness of our disclosure controls and procedures                as of the end of the period covered by this                report; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | This                evaluation was conducted under the supervision and with the participation                of our management, including our chief executive and chief financial                officers; and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | It                is the conclusion of our chief executive officer and our chief financial                officer that these disclosure controls and procedures are effective                in                ensuring that information that is required to be disclosed by the                Company                in reports filed or submitted with the SEC is recorded, processed,                summarized and reported within the time periods specified in the                rules and                forms established by the SEC. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Changes      in Internal Control Over Financial Reporting**

----

**PART      II.  OTHER INFORMATION**

**Item      1A-             Risk Factors**

**Item      6      -                 Exhibits**

**Exhibits**

|                  **3.1 |   | Second                Restated Certificate of Incorporation of the Company, filed as Exhibit                3.1                to our Form S-2 Registration Statement, Commission File No.                333-13441                                                                                                                                                    |
|-----------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                        |   |                                                                                                                                                                                                                                                                                                                                                                   |
|                  **3.2 |   | Certificate                of Amendment of Second Restated Certificate of Incorporation of Clayton                Williams Energy, Inc., filed as Exhibit 3.1 to our Form 10-Q for                the                period ended September 30, 2000††                                                                                                     |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                   |
|                  **3.3 |   | Corporate                Bylaws of Clayton Williams Energy, Inc., as amended, filed as                Exhibit 3.1 to our Current Report on Form 8-K filed with the                Commission on March 8, 2007††                                                                                                                                  |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                   |
|                  **4.1 |   | Indenture,                dated July 20, 2005, among Clayton Williams Energy, Inc., the Subsidiary                Guarantors and Wells Fargo Bank, National Association, as Trustee,                filed                as Exhibit 4.1 to our Current Report on Form 8-K filed with the                Commission on July 22, 2005††            |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                   |
|                  **4.2 |   | Registration                Rights Agreement dated July 20, 2005, among Clayton Williams Energy,                Inc.,                the Subsidiary Guarantors and J.P. Morgan Securities Inc., filed                as                Exhibit 4.2 to our Current Report on Form 8-K filed with the                Commission on July 22, 2005†† |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                   |
| **10.1†               |   | Southwest                Royalties Reward Plan dated January 15, 2007, filed as Exhibit 10.1                to the Company’s Current Report on Form 8-K filed with Commission on                January 18, 2007††                                                                                                                    |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                   |
|                  *31.1 |   | Certification                by the President and Chief Executive Officer of the Company pursuant                to                Rule 13a - 14(a) of the Securities Exchange Act of                1934                                                                                                                                                    |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                   |
|                  *31.2 |   | Certification                by the Chief Financial Officer of the Company pursuant to Rule                13a - 14(a) of the Securities Exchange Act of                1934                                                                                                                                                                                 |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                   |
|                  *32.1 |   | Certifications                by the Chief Executive Officer and Chief Financial Officer of the                Company                pursuant to                18 U.S.C. § 1350                                                                                                                                                                  |

----

**CLAYTON      WILLIAMS ENERGY, INC.**

**SIGNATURES**

|   |   | **CLAYTON                WILLIAMS ENERGY, INC.** |
|--------|--------|--------------------------------------------------|

| Date:  | November                9, 2007 | By:    | */s/                L. Paul Latham*               |
|--------|---------------------------------|--------|---------------------------------------------------|
|   |                            |   | L.                Paul Latham                     |
|   |                            |   | Executive                Vice President and Chief |
|   |                            |   |   Operating                Officer      |

| Date:  | November                9, 2007 | By:    | */s/                Mel G. Riggs*                        |
|--------|---------------------------------|--------|----------------------------------------------------------|
|   |                            |   | Mel                G. Riggs                              |
|   |                            |   | Senior                Vice President and Chief Financial |
|   |                            |   |   Officer                                      |