----

| (Mark      One) |                                                  |   |
|-----------------|-------------------------------------------------------|--------|
| x               | QUARTERLY      REPORT PURSUANT TO SECTION 13 OR 15(d) |   |
|            | OF      THE SECURITIES EXCHANGE ACT OF 1934           |   |
|            | For      the quarterly period ended June 30, 2008     |   |

|  ̈ | 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 itscharter) |

| 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, a non-accelerated filer, or a smaller reporting      company.  See definition of “large accelerated filer,”      “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the      Exchange Act. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                   | Large      accelerated filer   ̈ |   | Accelerated      filer  x |   |
|                                                                                                                                                                                                                                                                                                                                                                   | Non-accelerated      filer   ̈ |   | Smaller      reporting company  ̈ |   |

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

| There      were 12,113,898 shares of Common Stock, $.10 par value, of the registrant      outstanding as of August 6,2008. |
|---------------------------------------------------------------------------------------------------------------------------------|

----

| PART      I.  FINANCIAL INFORMATION |
|-----------------------------------------------|
|                                          |   | Page |
|                                          |   |   |   |
| Item      1.                                  | Financial      Statements |   |   |
|                                          |   |   |   |
|                                          | Consolidated Balance Sheets as of June 30,    2008 |   |   |
|                                          | and December 31,      2007                                                                                                 | 3 |   |
|                                          |   |   |   |
|                                          | Consolidated Statements of Operations for the three months and      six months |   |   |
|                                          | ended June 30, 2008 and      2007                                                                                                 | 5 |   |
|                                          |   |   |   |
|                                          | Consolidated Statement of Stockholders’ Equity for the six      months |   |   |
|                                          | ended June 30,      2008                                                                                                 | 6 |   |
|                                          |   |   |   |
|                                          | Consolidated Statements of Cash Flows for the six      months |   |   |
|                                          | ended June 30, 2008 and      2007                                                                                                 | 7 |   |
|                                          |   |   |   |
|                                          | Notes to Consolidated Financial Statements | 8 |   |
|                                          |   |   |   |
| Item2.                                        | Management’s Discussion and      Analysis of Financial |   |   |
|                                          | Condition and Results of      Operations                                                                                                 | 23 |   |
|                                          |   |   |   |
| Item3.                                        | Quantitative and Qualitative      Disclosures About Market Risks | 37 |   |
|                                          |   |   |   |
| Item4.                                        | Controls and      Procedures | 39 |   |
|                                          |   |   |   |
|                                          |   |   |   |
| PART      II.  OTHER INFORMATION    |
| Item    1A.                                   | Risk      Factors | 40 |   |
|                                          |   |   |   |
| Item      4.                                  | Submission of Matters to a      Vote of Security Holders | 40 |   |
|                                          |   |   |   |
| Item6.                                        | Exhibits | 40 |   |
|                                          |   |   |   |
|                                          | Signatures | 42 |   |

----

WILLIAM

| ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | June      30, |   |   | December      31, |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 2008 |   |   | 2007 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | (Unaudited) |   |   |   |   |
| CURRENT      ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |   |
| Cash and cash      equivalents                                                                                                                   |   | $ | 17,492 |   |   | $ | 12,344 |   |
| Accounts      receivable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |
| Oil and gas sales,      net                                                                                                                                               |   |   | 55,904 |   |   |   | 36,698 |   |
| Joint interest and other,      net                                                                                                                                        |   |   | 16,829 |   |   |   | 16,666 |   |
| Affiliates                                                                                                                                                                |   |   | 601 |   |   |   | 308 |   |
| Inventory                                                                                                                                        |   |   | 19,770 |   |   |   | 14,348 |   |
| Deferred income      taxes                                                                                                                       |   |   | 3,581 |   |   |   | 3,581 |   |
| Fair value of      derivatives                                                                                                                   |   |   | - |   |   |   | 7,191 |   |
| Assets held for      sale                                                                                                                        |   |   | - |   |   |   | 17,281 |   |
| Prepaids and      other                                                                                                                          |   |   | 10,346 |   |   |   | 3,962 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 124,523 |   |   |   | 112,379 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |
| PROPERTY      AND EQUIPMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |
| Oil and gas properties,      successful efforts      method                                                                                      |   |   | 1,404,221 |   |   |   | 1,374,090 |   |
| Natural gas gathering and      processing      systems                                                                                           |   |   | 17,808 |   |   |   | 18,404 |   |
| Contract drilling      equipment                                                                                                                 |   |   | 90,573 |   |   |   | 89,956 |   |
| Other                                                                                                                                            |   |   | 14,619 |   |   |   | 14,505 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 1,527,221 |   |   |   | 1,496,955 |   |
| Less accumulated depreciation,      depletion and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | (760,957 | ) |   |   | (765,877 | ) |
| Property and equipment,      net                                                                                                                                          |   |   | 766,264 |   |   |   | 731,078 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |
| OTHER      ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| Debt issue costs,      net                                                                                                                       |   |   | 6,840 |   |   |   | 6,963 |   |
| Other                                                                                                                                            |   |   | 14,814 |   |   |   | 10,676 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 21,654 |   |   |   | 17,639 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $ | 912,441 |   |   | $ | 861,096 |   |

----

| LIABILITIES      AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | June      30, |   |   | December      31, |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2008 |   |   | 2007 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | (Unaudited) |   |   |   |   |
| CURRENT      LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |   |   |   |   |
| Accounts    payable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |
| Trade                                                                                                                                                        |   | $ | 106,961 |   |   | $ | 72,477 |   |
| Oil and gas      sales                                                                                                                                       |   |   | 28,350 |   |   |   | 24,806 |   |
| Affiliates                                                                                                                                                   |   |   | 2,930 |   |   |   | 1,747 |   |
| Current maturities of      long-term      debt                                                                                      |   |   | 18,750 |   |   |   | 22,500 |   |
| Fair value of      derivatives                                                                                                      |   |   | 147,506 |   |   |   | 56,929 |   |
| Accrued liabilities and      other                                                                                                  |   |   | 10,610 |   |   |   | 10,308 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 315,107 |   |   |   | 188,767 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| NON-CURRENT      LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |
| Long-term      debt                                                                                                                 |   |   | 309,000 |   |   |   | 430,175 |   |
| Deferred income      taxes                                                                                                          |   |   | 38,565 |   |   |   | 44,302 |   |
| Fair value of      derivatives                                                                                                      |   |   | 47,853 |   |   |   | - |   |
| Other                                                                                                                               |   |   | 35,383 |   |   |   | 37,046 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 430,801 |   |   |   | 511,523 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| 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 – 12,112,898 shares in 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |
|  and 11,354,051 shares in      2007                                                                                            |   |   | 1,211 |   |   |   | 1,135 |   |
| Additional paid-in      capital                                                                                                     |   |   | 136,963 |   |   |   | 121,063 |   |
| Retained      earnings                                                                                                              |   |   | 21,898 |   |   |   | 35,890 |   |
| Accumulated other      comprehensive income, net of tax                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 6,461 |   |   |   | 2,718 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 166,533 |   |   |   | 160,806 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $ | 912,441 |   |   | $ | 861,096 |   |

----

WILLIAMS

|                                                                                                                                                                                                                                                                                                                                                                                    |   | Three      Months Ended |     |   | Six      Months Ended |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|----------|--------|-----------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                    |   | June      30,           |     |   | June      30,         |   |
|                                                                                                                                                                                                                                                                                                                                                                                    |   | 2008                    |     |   | 2007                  |   |   | 2008 |   |   | 2007 |   |
| REVENUES                                                                                                                                                                                                                                                                                                                                                                                |   |                    |     |   |                  |   |   |   |   |   |   |   |
| Oil and gas      sales                                                                                                   |   | $                       | 134,291  |   |                  | $      | 74,893 |   |   | $ | 253,210 |   |   | $ | 136,073 |   |
| Natural gas      services                                                                                                |   |                    | 3,553    |   |                  |   | 2,909 |   |   |   | 6,091 |   |   |   | 5,563 |   |
| Drilling rig      services                                                                                               |   |                    | 12,703   |   |                  |   | 14,228 |   |   |   | 27,535 |   |   |   | 22,645 |   |
| Gain on sales of property and      equipment                                                                                                                                                                                                                                                                                                                                            |   |                    | 40,721   |   |                  |   | 534 |   |   |   | 41,290 |   |   |   | 784 |   |
| Total      revenues                                                                                                                                    |   |                    | 191,268  |   |                  |   | 92,564 |   |   |   | 328,126 |   |   |   | 165,065 |   |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |     |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| COSTS      AND EXPENSES                                                                                                                                                                                                                                                                                                                                                                 |   |                    |     |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Production                                                                                                               |   |                    | 21,925   |   |                  |   | 17,840 |   |   |   | 42,504 |   |   |   | 35,118 |   |
| Exploration:                                                                                                                                                                                                                                                                                                                                                                            |   |                    |     |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Abandonments and      impairments                                                                                                                                                                                                                                                                                                                                                       |   |                    | 1,933    |   |                  |   | 23,519 |   |   |   | 2,230 |   |   |   | 34,624 |   |
| Seismic and      other                                                                                                                                 |   |                    | 1,562    |   |                  |   | 1,580 |   |   |   | 5,237 |   |   |   | 2,470 |   |
| Natural gas      services                                                                                                |   |                    | 3,244    |   |                  |   | 2,904 |   |   |   | 5,759 |   |   |   | 5,317 |   |
| Drilling rig      services                                                                                               |   |                    | 9,923    |   |                  |   | 8,506 |   |   |   | 21,040 |   |   |   | 13,439 |   |
| Depreciation, depletion and      amortization                                                                                                                                                                                                                                                                                                                                           |   |                    | 24,974   |   |                  |   | 18,487 |   |   |   | 55,247 |   |   |   | 33,718 |   |
| Impairment of property and      equipment                                                                                                                                                                                                                                                                                                                                               |   |                    | -        |   |                  |   | 479 |   |   |   | - |   |   |   | 1,044 |   |
| Accretion of abandonment      obligations                                                                                                                                                                                                                                                                                                                                               |   |                    | 485      |   |                  |   | 619 |   |   |   | 1,015 |   |   |   | 1,237 |   |
| General and      administrative                                                                                          |   |                    | 7,944    |   |                  |   | 4,932 |   |   |   | 11,392 |   |   |   | 8,835 |   |
| Loss on sales of property and      equipment                                                                                                                                                                                                                                                                                                                                            |   |                    | 277      |   |                  |   | - |   |   |   | 286 |   |   |   | 9,323 |   |
| Total costs and      expenses                                                                                                                          |   |                    | 72,267   |   |                  |   | 78,866 |   |   |   | 144,710 |   |   |   | 145,125 |   |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |     |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Operating      income                                                                                                                                  |   |                    | 119,001  |   |                  |   | 13,698 |   |   |   | 183,416 |   |   |   | 19,940 |   |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |     |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| OTHER      INCOME (EXPENSE)                                                                                                                                                                                                                                                                                                                                                             |   |                    |     |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Interest      expense                                                                                                    |   |                    | (6,077   | )      |                  |   | (7,986 | ) |   |   | (13,523 | ) |   |   | (15,615 | ) |
| Gain (loss) on      derivatives                                                                                          |   |                    | (148,587 | )      |                  |   | 6,110 |   |   |   | (194,696 | ) |   |   | (10,739 | ) |
| Other                                                                                                                    |   |                    | 3,014    |   |                  |   | 3,614 |   |   |   | 3,669 |   |   |   | 4,327 |   |
| Total other income      (expense)                                                                                                                                                                                                                                                                                                                                                       |   |                    | (151,650 | )      |                  |   | 1,738 |   |   |   | (204,550 | ) |   |   | (22,027 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |     |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Income      (loss) before income taxes                                                                                                                                                                                                                                                                                                                                                  |   |                    | (32,649  | )      |                  |   | 15,436 |   |   |   | (21,134 | ) |   |   | (2,087 | ) |
| Income      tax (expense)      benefit                                                          |   |                    | 11,642   |   |                  |   | (5,357 | ) |   |   | 7,420 |   |   |   | 723 |   |
| Minority      interest, net of      tax                                                         |   |                    | (164     | )      |                  |   | (1,269 | ) |   |   | (278 | ) |   |   | (2,136 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |     |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| NET      INCOME      (LOSS)                                                                     |   | $                       | (21,171  | )      |                  | $      | 8,810 |   |   | $ | (13,992 | ) |   | $ | (3,500 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |     |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Net      income (loss) per common share:                                                                                                                                                                                                                                                                                                                                                |   |                    |     |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                    |   | $                       | (1.75    | )      |                  | $      | 0.78 |   |   | $ | (1.19 | ) |   | $ | (0.31 | ) |
| Diluted                                                                                                                  |   | $                       | (1.75    | )      |                  | $      | 0.77 |   |   | $ | (1.19 | ) |   | $ | (0.31 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |     |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Weighted      average common shares outstanding:                                                                                                                                                                                                                                                                                                                                        |   |                    |     |   |                  |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                    |   |                    | 12,111   |   |                  |   | 11,352 |   |   |   | 11,749 |   |   |   | 11,236 |   |
| Diluted                                                                                                                  |   |                    | 12,111   |   |                  |   | 11,507 |   |   |   | 11,749 |   |   |   | 11,236 |   |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |     |   |                  |   |   |   |   |   |   |   |   |   |   |   |

----

ILLIAM

|                                                                                                                                                                                                                                                                         |   |              |   |   |       |   |   |    |   |   |     |   |   | Accumulated |    |   |    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|--------|------------|--------|--------|---------|--------|--------|----------|--------|--------|-------------|---------|--------|---------|--------|
|                                                                                                                                                                                                                                                                         |   |              |   |   |       |   |   |    |   |   |     |   |   | Other       |    |   | Total   |   |
|                                                                                                                                                                                                                                                                         |   | Common      Stock |   |   | Additional |   |   |    |   |   | Compre-  |   |   | Compre-     |    |
|                                                                                                                                                                                                                                                                         |   | No.      of       |   |   | Par        |   |   | Paid-In |   |   | Retained |   |   | hensive     |    |   | hensive |   |
|                                                                                                                                                                                                                                                                         |   | Shares            |   |   | Value      |   |   | Capital |   |   | Earnings |   |   | Income      |    |   | Loss    |   |
| BALANCE,                                                                                                                                                                                                                                                                     |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |
| December 31,      2007                                          |   |              | 11,354 |   |       | $      | 1,135  |    |   | $      | 121,063  |   |   | $           | 35,890  |   |    | $      | 2,718 |   |   |   |   |
| Net      loss                                                                  |   |              | -      |   |       |   | -      |    |   |   | -        |   |   |        | (13,992 | )      |    |   | - |   |   | $ | (13,992 | ) |
| Unrealized gain    on                                                                                                                                                                                                                                                        |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   marketable      securities,                                                                                                                                                                                                                                      |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   net of tax of      $2,015                                          |   |              | -      |   |       |   | -      |    |   |   | -        |   |   |        | -       |   |    |   | 3,743 |   |   |   | 3,743 |   |
| Total    comprehensive                                                                                                                                                                                                                                                       |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   loss                                                               |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   | $ | (10,249 | ) |
| Issuance of stock      through                                                                                                                                                                                                                                               |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   compensation      plans                                            |   |              | 759    |   |       |   | 76     |    |   |   | 15,900   |   |   |        | -       |   |    |   | - |   |   |   |   |   |
| BALANCE,                                                                                                                                                                                                                                                                     |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
| June 30,      2008                                              |   |              | 12,113 |   |       | $      | 1,211  |    |   | $      | 136,963  |   |   | $           | 21,898  |   |    | $      | 6,461 |   |   |   |   |   |

----

 WILLIAMS ENERGY

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Six      Months Ended |     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | June      30,         |     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 2008                  |     |   | 2007 |   |
| CASH      FLOWS FROM OPERATING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                  |     |   |   |   |
| Net      loss                                                                                                                                       |   | $                     | (13,992  | ) |   | $ | (3,500 | ) |
| Adjustments to reconcile net      loss to cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                  |     |   |   |   |   |   |
| provided by operating      activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                  |     |   |   |   |   |   |
| Depreciation, depletion and      amortization                                                                                                                                     |   |                  | 55,247   |   |   |   | 33,718 |   |
| Impairment of property and      equipment                                                                                                                                         |   |                  | -        |   |   |   | 1,044 |   |
| Exploration      costs                                                                                                                                                            |   |                  | 2,230    |   |   |   | 34,624 |   |
| (Gain) loss on sales of      property and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                  | (41,004  | ) |   |   | 8,539 |   |
| Deferred income      taxes                                                                                                                                                        |   |                  | (7,752   | ) |   |   | (723 | ) |
| Non-cash employee      compensation                                                                                                                                               |   |                  | 1,910    |   |   |   | 1,110 |   |
| Unrealized loss on      derivatives                                                                                                                                               |   |                  | 145,621  |   |   |   | 11,236 |   |
| Settlements on derivatives with      financing elements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                  | 24,789   |   |   |   | 12,005 |   |
| Amortization of debt issue      costs                                                                                                                                             |   |                  | 785      |   |   |   | 625 |   |
| Accretion of abandonment      obligations                                                                                                                                         |   |                  | 1,015    |   |   |   | 1,237 |   |
| Minority interest, net of      tax                                                                                                                                                |   |                  | 278      |   |   |   | 2,136 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                  |     |   |   |   |   |   |
| Changes in operating working      capital:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                  |     |   |   |   |   |   |
| Accounts      receivable                                                                                                                                                          |   |                  | (19,662  | ) |   |   | (10,657 | ) |
| Accounts      payable                                                                                                                                                             |   |                  | 398      |   |   |   | (1,005 | ) |
| Other                                                                                                                                                                             |   |                  | (442     | ) |   |   | (453 | ) |
| Net cash provided by operating      activities                                                                                                                                                                  |   |                  | 149,421  |   |   |   | 89,936 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                  |     |   |   |   |   |   |
| CASH      FLOWS FROM INVESTING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                  |     |   |   |   |   |   |
| Additions to property and      equipment                                                                                                            |   |                  | (118,491 | ) |   |   | (120,435 | ) |
| Additions to equipment of      Larclay      JV.                                                                                                     |   |                  | (9       | ) |   |   | (23,415 | ) |
| Proceeds from sales of property      and      equipment                                                                                             |   |                  | 114,049  |   |   |   | 1,602 |   |
| Change in equipment      inventory                                                                                                                  |   |                  | (6,777   | ) |   |   | 11,835 |   |
| Other                                                                                                                                               |   |                  | 785      |   |   |   | (8,269 | ) |
| Net cash used in investing      activities                                                                                                                                                                      |   |                  | (10,443  | ) |   |   | (138,682 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                  |     |   |   |   |   |   |
| CASH      FLOWS FROM FINANCING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                  |     |   |   |   |   |   |
| Proceeds from long-term      debt                                                                                                                   |   |                  | -        |   |   |   | 40,500 |   |
| Proceeds from long-term debt of      Larclay      JV                                                                                                |   |                  | 4,000    |   |   |   | 8,727 |   |
| Repayments of long-term      debt                                                                                                                   |   |                  | (115,800 | ) |   |   | - |   |
| Repayments of long-term debt of      Larclay      JV                                                                                                |   |                  | (13,125  | ) |   |   | - |   |
| Proceeds from exercise of stock      options                                                                                                        |   |                  | 15,884   |   |   |   | 5,970 |   |
| Settlements on derivatives with      financing      elements                                                                                        |   |                  | (24,789  | ) |   |   | (12,005 | ) |
| Net cash provided by (used in)      financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                  | (133,830 | ) |   |   | 43,192 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                  |     |   |   |   |   |   |
| NET      INCREASE (DECREASE) IN CASH AND                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                  |     |   |   |   |   |   |
| CASH      EQUIVALENTS                                                                                                                     |   |                  | 5,148    |   |   |   | (5,554 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                  |     |   |   |   |   |   |
| CASH      AND CASH EQUIVALENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                  |     |   |   |   |   |   |
| Beginning of      period                                                                                                                            |   |                  | 12,344   |   |   |   | 13,840 |   |
| End of      period                                                                                                                                  |   | $                     | 17,492   |   |   | $ | 8,286 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                  |     |   |   |   |   |   |
| SUPPLEMENTAL      DISCLOSURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                  |     |   |   |   |   |   |
| Cash paid for interest, net of      amounts      capitalized                                                                                        |   | $                     | 13,123   |   |   | $ | 15,283 |   |

----

CLAYTON WILLIAMS 

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | June      30,       |    |   | December      31, |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | 2008                |    |   | 2007              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | (In      thousands) |    |
| 73⁄4%      Senior Notes, due      2013                                                                                                    |   | $                   | 225,000 |   |              | $      | 225,000 |   |
| Secured      bank credit facility, due May      2012                                                                                         |   |                | 50,000  |   |              |   | 165,800 |   |
| Secured      term loan of Larclay JV, due June      2011                                                                                     |   |                | 52,750  |   |              |   | 61,875 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                | 327,750 |   |              |   | 452,675 |   |
| Less      current maturities(a)                                                                                                              |   |                | (18,750 | )      |              |   | (22,500 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | $                   | 309,000 |   |              | $      | 430,175 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                |    |   |              |   |   |   |
| (a)      Consists      of current portion of term loan of Larclay JV.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                |    |   |              |   |   |   |

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | June      30,       |   |   | December      31, |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | 2008                |   |   | 2007              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | (In      thousands) |   |
| Abandonment      obligations                                                                                          |   | $                   | 29,062 |   |              | $      | 30,994 |   |
| Minority interest, net of      tax                                                                                    |   |                | 5,164  |   |              |   | 4,886 |   |
| Other taxes      payable                                                                                              |   |                | 358    |   |              |   | 358 |   |
| Other                                                                                                                 |   |                | 799    |   |              |   | 808 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | $                   | 35,383 |   |              | $      | 37,046 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | Six      Months Ended |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | June      30,         |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | 2008                  |   |   | 2007 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | (In      thousands)   |   |
| Beginning of      period                                                                                               |   | $                     | 30,994 |   |   | $ | 27,846 |   |
| Additional abandonment      obligations from new      wells                                                                                |   |                  | 228    |   |   |   | 451 |   |
| Sales of      properties                                                                                                                   |   |                  | (1,784 | ) |   |   | (1,036 | ) |
| Revisions of previous      estimates                                                                                                       |   |                  | (1,391 | ) |   |   | - |   |
| Accretion      expense                                                                                                                     |   |                  | 1,015  |   |   |   | 1,237 |   |
| End of      period                                                                                                     |   | $                     | 29,062 |   |   | $ | 28,498 |   |

----

|                                                                                      |   |   |     |   |     |   |   | Weighted    |   |   |           |   |
|-------------------------------------------------------------------------------------------|--------|--------|----------|--------|----------|--------|--------|-------------|--------|--------|----------------|--------|
|                                                                                      |   |   |     |   | Weighted |   |   | Average     |   |   |           |   |
|                                                                                      |   |   |     |   | Average  |   |   | Remaining   |   |   | Aggregate      |   |
|                                                                                      |   |   |     |   | Exercise |   |   | Contractual |   |   | Intrinsic      |   |
|                                                                                      |   | Shares |     |   | Price    |   |   | Term        |   |   | Value      (a) |   |
| Outstanding      at January 1, 2008                                                       |   |   | 811,485  |   |     | $      | 20.49  |        |   |   |           |   |   |   |
| Granted                                                                                   |   |   | 4,000    |   |     | $      | 31.16  |        |   |   |           |   |   |   |
| Exercised (b)                                                                             |   |   | (758,847 | )      |     | $      | 20.93  |        |   |   |           |   |   |   |
| Outstanding      at June 30, 2008                                                         |   |   | 56,638   |   |     | $      | 15.30  |        |   |   | 3.16           |   |   | $ | 5,360,715 |   |
|                                                                                      |   |   |     |   |     |   |   |        |   |   |           |   |   |   |   |   |
| Vested      at June 30, 2008                                                              |   |   | 56,638   |   |     | $      | 15.30  |        |   |   | 3.16           |   |   | $ | 5,360,715 |   |
| Exercisable      at June 30, 2008                                                         |   |   | 56,638   |   |     | $      | 15.30  |        |   |   | 3.16           |   |   | $ | 5,360,715 |   |
|                                              |   |   |     |   |     |   |   |        |   |   |           |   |   |   |   |   |
| (a)   Based on closing      price at June 30, 2008 of $109.95 per share.   |   |
| (b)   Cash received for      options exercised totaled $15.9 million. |   |

|                                                                                                                                                                                                                                                                                                                                                                                                           | Outstanding      and Exercisable Options |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                           |                                     |   |   |   | Weighted |
|                                                                                                                                                                                                                                                                                                                                                                                                           |                                     |   | Weighted |   | Average |
|                                                                                                                                                                                                                                                                                                                                                                                                           |                                     |   | Average |   | Remaining |
|                                                                                                                                                                                                                                                                                                                                                                                                           |                                     |   | Exercise |   | Life      in |
|                                                                                                                                                                                                                                                                                                                                                                                                           | Shares                                   |   | Price |   | Years |
| Range      of exercise prices:                                                                                                                                                                                                                                                                                                                                                                                 |                                     |   |   |   |   |
| $5.50                                                                               | 27,638                                   |   | $                   5.50 |   | 0.8 |
| $10.00 -      $19.74                                                                | 10,000                                   |   | $            11.93 |   | 2.8 |
| $22.90 -      $41.74                                                                | 19,000                                   |   | $            31.33 |   | 6.8 |
|                                                                                                                                                                                                                                                                                                                                                                                                           | 56,638                                   |   | $            15.30 |   | 3.2 |

|                                                                     |   | Six      Months Ended                 |   |
|--------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                     |   | June      30,                         |   |
|                                                                     |   | 2008                                  |   |   | 2007 |   |
|                                                                     |   | (In      thousands, except per share) |   |
| Weighted      average grant date fair value of options granted per share |   | $                                     | 23.06  |   |   | $ | 27.56 |   |
| Intrinsic      value of options exercised                                |   | $                                     | 20,344 |   |   | $ | 228 |   |
|                                                                     |   |                                  |   |   |   |   |   |   |
| Stock-based      employee compensation expense                           |   | $                                     | 92     |   |   | $ | 110 |   |
| Tax      benefit                                                         |   |                                  | (32    | ) |   |   | (39 | ) |
| Net      stock-based employee compensation expense                       |   | $                                     | 60     |   |   | $ | 71 |   |

----

----

|                    |   | Gas            |    |   | Oil    |   |
|-------------------------|--------|----------------|---------|--------|--------|--------|
|                    |   | MMBtu      (a) |    |   | Floor  |   |   | Ceiling |   |   | Bbls |   |   | Floor |   |   | Ceiling |   |
| Production      Period: |   |           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 3rd      Quarter 2008   |   |           | 419,000 |   |   | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 128,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |

|                                                                                                                                                                                         |   | Gas            |       |   | Oil    |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|------------|--------|--------|--------|
|                                                                                                                                                                                         |   | MMBtu      (a) |       |   | Price  |   |   | Bbls |   |   | Price |   |
| Production      Period:                                                                                                                                                                      |   |           |       |   |   |   |   |   |   |   |   |   |
| 3rd      Quarter 2008                                                                                                                                                                        |   |           | 4,000,000  |   |   | $      | 9.19 |   |   |   | 310,000 |   |   | $ | 78.96 |   |
| 4th      Quarter      2008                            |   |           | 4,100,000  |   |   | $      | 9.17 |   |   |   | 400,000 |   |   | $ | 82.21 |   |
| 2009                                                  |   |           | 3,600,000  |   |   | $      | 9.33 |   |   |   | 1,440,000 |   |   | $ | 85.30 |   |
|                                                                                                                                                                                         |   |           | 11,700,000 |   |   |   |   |   |   |   | 2,150,000 |   |   |   |   |   |
|                                                                                                                                                 |   |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (a)   One MMBtu equals      one Mcf at a Btu factor of 1,000.                                                                                                                 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |      |       |   | Fixed  |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|------------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Principal |       |   | Libor  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Balance   |       |   | Rates  |   |
| Period:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |      |       |   |   |   |
| July 1, 2008 to November 3,      2008                                                                                     |   | $         | 45,000,000 |   |   |   | 5.73 | % |

----

|     Level 1      - | Inputs      are unadjusted, quoted prices in active markets for identical assets or      liabilities at the measurementdate. |
|----------------------------------------|------------------------------------------------------------------------------------------------------------------------------|

|     Level 2      - | Inputs      (other than quoted prices included in Level 1) are either directly or      indirectly observable for the asset or liability through correlation with      market data at the measurement date and for the duration of the      instrument’s anticipated life. |
|----------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|     Level 3      - | Inputs      reflect management’s best estimate of what market participants would use      in pricing the asset or liability at the measurement date. Consideration      is given to the risk inherent in the valuation technique and the risk      inherent in the inputs to themodel. |
|----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                                                                                                                                                                           |   | Fair      Value Measurements |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                                                                                                                                           |   | June      30, 2008           |   |   | December 31,      2007 |   |
|                                                                                                                                                                                                                                           |   | Quoted      Prices In        |   |   | Significant |   |   | Quoted      Prices In |   |   | Significant |   |
|                                                                                                                                                                                                                                           |   | Active      Markets For      |   |   | Other |   |   | Active      Markets For |   |   | Other |   |
|                                                                                                                                                                                                                                           |   | Identical                    |   |   | Observable |   |   | Identical |   |   | Observable |   |
|                                                                                                                                                                                                                                           |   | Assets/Liabilities           |   |   | Inputs |   |   | Assets/Liabilities |   |   | Inputs |   |
| Description                                                                                                                                                                                                                                    |   | Level      1                 |   |   | Level      2 |   |   | Level      1 |   |   | Level      2 |   |
|                                                                                                                                                                                                                                           |   | (In      thousands)          |   |
| Assets:                                                                                                                                                                                                                                        |   |                         |   |   |   |   |   |   |   |   |   |   |
| Fair value of      commodity                                                                                                                                                                                                                   |   |                         |   |   |   |   |   |   |   |   |   |   |
| derivatives                                                                    |   | $                            | -      |   |   | $ | - |   |   | $ | - |   |   | $ | 7,191 |   |
| Investment      securities                                                |   |                         | 12,946 |   |   |   | - |   |   |   | 7,188 |   |   |   | - |   |
| Total      assets                                          |   | $                            | 12,946 |   |   | $ | - |   |   | $ | 7,188 |   |   | $ | 7,191 |   |
| Liabilities:                                                                                                                                                                                                                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair value of      derivatives:                                                                                                                                                                                                                |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commodity      derivatives                                                                                                                                                                                                                     |   | $                            | -      |   |   | $ | 194,701 |   |   | $ | - |   |   | $ | 55,885 |   |
| Interest      derivatives                                                      |   |                         | -      |   |   |   | 658 |   |   |   | - |   |   |   | 1,044 |   |
| Total      liabilities                                     |   | $                            | -      |   |   | $ | 195,359 |   |   | $ | - |   |   | $ | 56,929 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | June      30,       |   |   | December      31, |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 2008                |   |   | 2007              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | (In      thousands) |   |
| Balance      at beginning of      period                                                                                    |   | $                   | 358    |   |              | $      | - |   |
| Adoption of FIN 48 on January 1,      2007                                                                                                 |   |                | -      |   |              |   | 1,585 |   |
| Reductions for tax positions of      prior      years                                                                                      |   |                | -      |   |              |   | (1,227 | ) |
| Balance      at end of      period                                                                                          |   | $                   | 358    |   |              | $      | 358 |   |

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | June      30,       |      |   | December      31, |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2008                |      |   | 2007              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | (In      thousands) |      |
| Proved      properties                                                                                       |   | $                   | 1,248,832 |   |              | $      | 1,258,166 |   |
| Unproved      properties                                                                                     |   |                | 155,389   |   |              |   | 115,924 |   |
| Total capitalized      costs                                                                                 |   |                | 1,404,221 |   |              |   | 1,374,090 |   |
| Accumulated depreciation,      depletion and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                | (717,960  | )      |              |   | (727,739 | ) |
| Net capitalized      costs                                                                                                            |   | $                   | 686,261   |   |              | $      | 646,351 |   |

| For      the Three Months Ended                   |   |                |    |   | Contract |   |   | Intercompany |   |   | Consolidated |   |
|---------------------------------------------------|--------|---------------------|---------|--------|----------|--------|--------|--------------|--------|--------|--------------|--------|
| June      30, 2008                                |   | Oil      and Gas    |    |   | Drilling |   |   | Eliminations |   |   | Total        |   |
|                                              |   | (In      thousands) |    |
| Revenues                                          |   | $                   | 178,076 |   |     | $      | 16,874 |         |   | $      | (3,682       | )      |   | $ | 191,268 |   |
| Depreciation,      depletion and amortization (a) |   |                | 22,860  |   |     |   | 2,623  |         |   |   | (509         | )      |   |   | 24,974 |   |
| Other      operating expenses (b)                 |   |                | 37,235  |   |     |   | 12,753 |         |   |   | (2,695       | )      |   |   | 47,293 |   |
| Interest      expense                             |   |                | 5,136   |   |     |   | 941    |         |   |   | -            |   |   |   | 6,077 |   |
| Other      (income) expense                       |   |                | 145,573 |   |     |   | -      |         |   |   | -            |   |   |   | 145,573 |   |
| Income      (loss) before income taxes and        |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| minorityinterest                                  |   |                | (32,728 | )      |     |   | 557    |         |   |   | (478         | )      |   |   | (32,649 | ) |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Income      tax (expense) benefit                 |   |                | 11,891  |   |     |   | (249   | )            |   |   | -            |   |   |   | 11,642 |   |
| Minority      interest, net of tax                |   |                | 87      |   |     |   | (251   | )            |   |   | -            |   |   |   | (164 | ) |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Net      income (loss)                            |   | $                   | (20,750 | )      |     | $      | 57     |         |   | $      | (478         | )      |   | $ | (21,171 | ) |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Total      assets                                 |   | $                   | 826,711 |   |     | $      | 95,304 |         |   | $      | (9,574       | )      |   | $ | 912,441 |   |
| Additions      to property and equipment          |   | $                   | 93,395  |   |     | $      | 608    |         |   | $      | (478         | )      |   | $ | 93,525 |   |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |

----

| For      the Six Months Ended                     |   |                |    |   | Contract |   |   | Intercompany |   |   | Consolidated |   |
|---------------------------------------------------|--------|---------------------|---------|--------|----------|--------|--------|--------------|--------|--------|--------------|--------|
| June      30, 2008                                |   | Oil      and Gas    |    |   | Drilling |   |   | Eliminations |   |   | Total        |   |
|                                              |   | (In      thousands) |    |
| Revenues                                          |   | $                   | 300,102 |   |     | $      | 34,037 |         |   | $      | (6,013       | )      |   | $ | 328,126 |   |
| Depreciation,      depletion and amortization (a) |   |                | 50,848  |   |     |   | 5,233  |         |   |   | (834         | )      |   |   | 55,247 |   |
| Other      operating expenses (b)                 |   |                | 68,050  |   |     |   | 25,761 |         |   |   | (4,348       | )      |   |   | 89,463 |   |
| Interest      expense                             |   |                | 11,488  |   |     |   | 2,035  |         |   |   | -            |   |   |   | 13,523 |   |
| Other      (income) expense                       |   |                | 191,027 |   |     |   | -      |         |   |   | -            |   |   |   | 191,027 |   |
| Income      (loss) before income taxes and        |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| minorityinterest                                  |   |                | (21,311 | )      |     |   | 1,008  |         |   |   | (831         | )      |   |   | (21,134 | ) |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Income      tax (expense) benefit                 |   |                | 7,927   |   |     |   | (507   | )            |   |   | -            |   |   |   | 7,420 |   |
| Minority      interest, net of tax                |   |                | 149     |   |     |   | (427   | )            |   |   | -            |   |   |   | (278 | ) |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Net      income (loss)                            |   | $                   | (13,235 | )      |     | $      | 74     |         |   | $      | (831         | )      |   | $ | (13,992 | ) |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Total      assets                                 |   | $                   | 826,711 |   |     | $      | 95,304 |         |   | $      | (9,574       | )      |   | $ | 912,441 |   |
| Additions      to property and equipment          |   | $                   | 148,826 |   |     | $      | 617    |         |   | $      | (831         | )      |   | $ | 148,612 |   |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |

| For      the Three Months Ended                   |   |                |    |   | Contract |   |   | Intercompany |   |   | Consolidated |   |
|---------------------------------------------------|--------|---------------------|---------|--------|----------|--------|--------|--------------|--------|--------|--------------|--------|
| June      30, 2007                                |   | Oil      and Gas    |    |   | Drilling |   |   | Eliminations |   |   | Total        |   |
|                                              |   | (In      thousands) |    |
| Revenues                                          |   | $                   | 78,336  |   |     | $      | 16,939 |         |   | $      | (2,711       | )      |   | $ | 92,564 |   |
| Depreciation,      depletion and amortization (a) |   |                | 17,104  |   |     |   | 2,172  |         |   |   | (310         | )      |   |   | 18,966 |   |
| Other      operating expenses (b)                 |   |                | 52,182  |   |     |   | 9,816  |         |   |   | (2,098       | )      |   |   | 59,900 |   |
| Interest      expense                             |   |                | 6,939   |   |     |   | 1,047  |         |   |   | -            |   |   |   | 7,986 |   |
| Other      (income) expense                       |   |                | (9,724  | )      |     |   | -      |         |   |   | -            |   |   |   | (9,724 | ) |
| Income      (loss) before income taxes and        |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| minorityinterest                                  |   |                | 11,835  |   |     |   | 3,904  |         |   |   | (303         | )      |   |   | 15,436 |   |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Income      tax (expense) benefit                 |   |                | (3,991  | )      |     |   | (1,366 | )            |   |   | -            |   |   |   | (5,357 | ) |
| Minority      interest, net of tax                |   |                | -       |   |     |   | (1,269 | )            |   |   | -            |   |   |   | (1,269 | ) |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Net      income (loss)                            |   | $                   | 7,844   |   |     | $      | 1,269  |         |   | $      | (303         | )      |   | $ | 8,810 |   |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Total      assets                                 |   | $                   | 746,953 |   |     | $      | 97,866 |         |   | $      | (3,389       | )      |   | $ | 841,430 |   |
| Additions      to property and equipment          |   | $                   | 59,097  |   |     | $      | 4,066  |         |   | $      | (303         | )      |   | $ | 62,860 |   |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |

----

| For      the Six Months Ended                                                                                                                                                                                                                          |   |                |    |   | Contract |   |   | Intercompany |   |   | Consolidated |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------|----------|--------|--------|--------------|--------|--------|--------------|--------|
| June      30, 2007                                                                                                                                                                                                                                     |   | Oil      and Gas    |    |   | Drilling |   |   | Eliminations |   |   | Total        |   |
|                                                                                                                                                                                                                                                   |   | (In      thousands) |    |
| Revenues                                                                                                                                                                                                                                               |   | $                   | 142,420 |   |     | $      | 27,875 |         |   | $      | (5,230       | )      |   | $ | 165,065 |   |
| Depreciation,      depletion and amortization (a)                                                                                                                                                                                                      |   |                | 31,517  |   |     |   | 3,779  |         |   |   | (534         | )      |   |   | 34,762 |   |
| Other      operating expenses (b)                                                                                                                                                                                                                      |   |                | 98,628  |   |     |   | 15,643 |         |   |   | (3,908       | )      |   |   | 110,363 |   |
| Interest      expense                                                                                                                                                                                                                                  |   |                | 13,734  |   |     |   | 1,881  |         |   |   | -            |   |   |   | 15,615 |   |
| Other      (income) expense                                                                                                                                                                                                                            |   |                | 6,412   |   |     |   | -      |         |   |   | -            |   |   |   | 6,412 |   |
| Income      (loss) before income taxes and                                                                                                                                                                                                             |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| minorityinterest                                                                                                                                                                                                                                       |   |                | (7,871  | )      |     |   | 6,572  |         |   |   | (788         | )      |   |   | (2,087 | ) |
|                                                                                                                                                                                                                                                   |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Income      tax (expense) benefit                                                                                                                                                                                                                      |   |                | 3,023   |   |     |   | (2,300 | )            |   |   | -            |   |   |   | 723 |   |
| Minority      interest, net of tax                                                                                                                                                                                                                     |   |                | -       |   |     |   | (2,136 | )            |   |   | -            |   |   |   | (2,136 | ) |
|                                                                                                                                                                                                                                                   |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Net      income (loss)                                                                                                                                                                                                                                 |   | $                   | (4,848  | )      |     | $      | 2,136  |         |   | $      | (788         | )      |   | $ | (3,500 | ) |
|                                                                                                                                                                                                                                                   |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Total      assets                                                                                                                                                                                                                                      |   | $                   | 746,953 |   |     | $      | 97,866 |         |   | $      | (3,389       | )      |   | $ | 841,430 |   |
| Additions      to property and equipment                                                                                                                                                                                                               |   | $                   | 120,621 |   |     | $      | 20,135 |         |   | $      | (788         | )      |   | $ | 139,968 |   |
|                                                                                                                                                                                                           |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| (a)  Includes impairment      of property and equipment.                                                                                                                                                                                     |   |
| (b)  Includes the      following expenses: production, exploration, natural gas services,      drilling rig services, accretion of abandonment obligations, general and      administrative and loss on sales of property andequipment. |   |

| (Unaudited)                                                                                                                                                                                                                                 |   |   |    |   |         |   |    | Non-      |   |   |         |   |   |         |     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|----------|
| (Dollars      in thousands)                                                                                                                                                                                                                 |   |   |    |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |     |
|                                                                                                                                                                                                                                        |   | Issuer |    |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |     |
| Current      assets                                               |   | $      | 127,770 |   |         | $      | 116,405 |      |   | $      | 20,853       |   |   | $            | (140,505 | ) |   | $ | 124,523 |   |
| Property      and equipment, net                                                                                                                                                                                                            |   |   | 378,977 |   |         |   | 305,810 |      |   |   | 81,477       |   |   |         | -        |   |   |   | 766,264 |   |
| Investments      in subsidiaries                                                                                                                                                                                                            |   |   | 86,533  |   |         |   | -       |      |   |   | -            |   |   |         | (86,533  | ) |   |   | - |   |
| Other      assets                                                 |   |   | 29,645  |   |         |   | 353     |      |   |   | 256          |   |   |         | (8,600   | ) |   |   | 21,654 |   |
| Total      assets                                                                     |   | $      | 622,925 |   |         | $      | 422,568 |      |   | $      | 102,586      |   |   | $            | (235,638 | ) |   | $ | 912,441 |   |
|                                                                                                                                                                                                                                        |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
| Current      liabilities                                          |   | $      | 241,652 |   |         | $      | 176,451 |      |   | $      | 37,509       |   |   | $            | (140,505 | ) |   | $ | 315,107 |   |
| Non-current      liabilities:                                                                                                                                                                                                               |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
| Long-term      debt                                                                   |   |   | 275,000 |   |         |   | -       |      |   |   | 42,600       |   |   |         | (8,600   | ) |   |   | 309,000 |   |
| Fair      value of derivatives                                                                                                                                                                                                              |   |   | 47,853  |   |         |   | -       |      |   |   | -            |   |   |         | -        |   |   |   | 47,853 |   |
| Other                                                                                 |   |   | 17,431  |   |         |   | 56,411  |      |   |   | 106          |   |   |         | -        |   |   |   | 73,948 |   |
|                                                                                                                                                                                                                                        |   |   | 340,284 |   |         |   | 56,411  |      |   |   | 42,706       |   |   |         | (8,600   | ) |   |   | 430,801 |   |
|                                                                                                                                                                                                                                        |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
| Stockholders’      equity                                   |   |   | 40,989  |   |         |   | 189,706 |      |   |   | 22,371       |   |   |         | (86,533  | ) |   |   | 166,533 |   |
| Total      liabilities and                                                                                                                                                                                                                  |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
|   stockholders’      equity                                                                                                                                                                                                 |   | $      | 622,925 |   |         | $      | 422,568 |      |   | $      | 102,586      |   |   | $            | (235,638 | ) |   | $ | 912,441 |   |

----

| (Dollars      in thousands)                                                                                                                                                                                                                 |   |   |    |   |         |   |    | Non-      |   |   |         |   |   |         |     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|----------|
|                                                                                                                                                                                                                                        |   |   |    |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |     |
|                                                                                                                                                                                                                                        |   | Issuer |    |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |     |
| Current      assets                                               |   | $      | 127,668 |   |         | $      | 109,010 |      |   | $      | 21,225       |   |   | $            | (145,524 | ) |   | $ | 112,379 |   |
| Property      and equipment, net                                                                                                                                                                                                            |   |   | 369,421 |   |         |   | 275,609 |      |   |   | 86,048       |   |   |         | -        |   |   |   | 731,078 |   |
| Investments      in subsidiaries                                                                                                                                                                                                            |   |   | 81,583  |   |         |   | -       |      |   |   | -            |   |   |         | (81,583  | ) |   |   | - |   |
| Other      assets                                                 |   |   | 21,354  |   |         |   | 340     |      |   |   | 545          |   |   |         | (4,600   | ) |   |   | 17,639 |   |
| Total      assets                                                                     |   | $      | 600,026 |   |         | $      | 384,959 |      |   | $      | 107,818      |   |   | $            | (231,707 | ) |   | $ | 861,096 |   |
|                                                                                                                                                                                                                                        |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
| Current      liabilities                                          |   | $      | 112,536 |   |         | $      | 179,243 |      |   | $      | 42,512       |   |   | $            | (145,524 | ) |   | $ | 188,767 |   |
| Non-current      liabilities:                                                                                                                                                                                                               |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
| Long-term      debt                                                                   |   |   | 390,800 |   |         |   | -       |      |   |   | 43,975       |   |   |         | (4,600   | ) |   |   | 430,175 |   |
| Other                                                                                 |   |   | 24,708  |   |         |   | 56,528  |      |   |   | 112          |   |   |         | -        |   |   |   | 81,348 |   |
|                                                                                                                                                                                                                                        |   |   | 415,508 |   |         |   | 56,528  |      |   |   | 44,087       |   |   |         | (4,600   | ) |   |   | 511,523 |   |
|                                                                                                                                                                                                                                        |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
| Stockholders’      equity                                   |   |   | 71,982  |   |         |   | 149,188 |      |   |   | 21,219       |   |   |         | (81,583  | ) |   |   | 160,806 |   |
| Total      liabilities and                                                                                                                                                                                                                  |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
|   stockholders’      equity                                                                                                                                                                                                 |   | $      | 600,026 |   |         | $      | 384,959 |      |   | $      | 107,818      |   |   | $            | (231,707 | ) |   | $ | 861,096 |   |

| (Unaudited)                                                                                                                                                                                                                              |   |   |     |   |         |   |   | Non-      |   |   |         |   |   |         |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------------|--------|--------|-----------|--------|--------|--------------|--------|--------|--------------|--------|
| (Dollars      in thousands)                                                                                                                                                                                                              |   |   |     |   | Guarantor    |   |   | Guarantor |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                                     |   | Issuer |     |   | Subsidiaries |   |   | Entities  |   |   | Eliminations |   |   | Consolidated |   |
| Total      revenue                                             |   | $      | 127,281  |   |         | $      | 51,269 |      |   | $      | 17,217       |   |   | $            | (4,499 | ) |   | $ | 191,268 |   |
| Costs      and      expenses                                   |   |   | 39,800   |   |         |   | 20,972 |      |   |   | 15,516       |   |   |         | (4,021 | ) |   |   | 72,267 |   |
| Operating      income (loss)                                                                                                                                                                                                             |   |   | 87,481   |   |         |   | 30,297 |      |   |   | 1,701        |   |   |         | (478   | ) |   |   | 119,001 |   |
| Other      income (expense)                                                                                                                                                                                                              |   |   | (141,834 | )      |         |   | (8,912 | )         |   |   | (904         | )      |   |         | -      |   |   |   | (151,650 | ) |
| Income      tax      benefit                                   |   |   | 11,642   |   |         |   | -      |      |   |   | -            |   |   |         | -      |   |   |   | 11,642 |   |
| Minority      interest, net of tax                                                                                                                                                                                                       |   |   | (164     | )      |         |   | -      |      |   |   | -            |   |   |         | -      |   |   |   | (164 | ) |
| Net      income      (loss)                                                        |   | $      | (42,875  | )      |         | $      | 21,385 |      |   | $      | 797          |   |   | $            | (478   | ) |   | $ | (21,171 | ) |

| (Unaudited)                                                                                                                                                                                                                              |   |   |     |   |         |   |    | Non-      |   |   |         |   |   |         |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|--------|
| (Dollars      in thousands)                                                                                                                                                                                                              |   |   |     |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                                     |   | Issuer |     |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |   |
| Total      revenue                                             |   | $      | 207,513  |   |         | $      | 93,242  |      |   | $      | 34,580       |   |   | $            | (7,209 | ) |   | $ | 328,126 |   |
| Costs      and      expenses                                   |   |   | 79,671   |   |         |   | 40,100  |      |   |   | 31,317       |   |   |         | (6,378 | ) |   |   | 144,710 |   |
| Operating      income (loss)                                                                                                                                                                                                             |   |   | 127,842  |   |         |   | 53,142  |      |   |   | 3,263        |   |   |         | (831   | ) |   |   | 183,416 |   |
| Other      income (expense)                                                                                                                                                                                                              |   |   | (190,103 | )      |         |   | (12,490 | )         |   |   | (1,957       | )      |   |         | -      |   |   |   | (204,550 | ) |
| Income      tax      benefit                                   |   |   | 7,420    |   |         |   | -       |      |   |   | -            |   |   |         | -      |   |   |   | 7,420 |   |
| Minority      interest, net of tax                                                                                                                                                                                                       |   |   | (278     | )      |         |   | -       |      |   |   | -            |   |   |         | -      |   |   |   | (278 | ) |
| Net      income      (loss)                                                        |   | $      | (55,119  | )      |         | $      | 40,652  |      |   | $      | 1,306        |   |   | $            | (831   | ) |   | $ | (13,992 | ) |

----

| (Unaudited)                                                                                                                                                                                                                              |   |   |   |   |         |   |   | Non-      |   |   |         |   |   |         |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------------|--------|--------|-----------|--------|--------|--------------|--------|--------|--------------|--------|
| (Dollars      in thousands)                                                                                                                                                                                                              |   |   |   |   | Guarantor    |   |   | Guarantor |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                                     |   | Issuer |   |   | Subsidiaries |   |   | Entities  |   |   | Eliminations |   |   | Consolidated |   |
| Total      revenue                                             |   | $      | 52,272 |   |         | $      | 26,311 |      |   | $      | 17,098       |   |   | $            | (3,117 | ) |   | $ | 92,564 |   |
| Costs      and      expenses                                   |   |   | 53,357 |   |         |   | 16,195 |      |   |   | 12,128       |   |   |         | (2,814 | ) |   |   | 78,866 |   |
| Operating      income (loss)                                                                                                                                                                                                             |   |   | (1,085 | )      |         |   | 10,116 |      |   |   | 4,970        |   |   |         | (303   | ) |   |   | 13,698 |   |
| Other      income (expense)                                                                                                                                                                                                              |   |   | 1,557  |   |         |   | 1,204  |      |   |   | (1,023       | )      |   |         | -      |   |   |   | 1,738 |   |
| Income      tax      expense                                   |   |   | (5,357 | )      |         |   | -      |      |   |   | -            |   |   |         | -      |   |   |   | (5,357 | ) |
| Minority      interest, net of tax                                                                                                                                                                                                       |   |   | (1,269 | )      |         |   | -      |      |   |   | -            |   |   |         | -      |   |   |   | (1,269 | ) |
| Net      income      (loss)                                                        |   | $      | (6,154 | )      |         | $      | 11,320 |      |   | $      | 3,947        |   |   | $            | (303   | ) |   | $ | 8,810 |   |

| (Unaudited)                                                                                                                                                                                                                              |   |   |    |   |         |   |   | Non-      |   |   |         |   |   |         |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|--------|-----------|--------|--------|--------------|--------|--------|--------------|--------|
| (Dollars      in thousands)                                                                                                                                                                                                              |   |   |    |   | Guarantor    |   |   | Guarantor |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                                     |   | Issuer |    |   | Subsidiaries |   |   | Entities  |   |   | Eliminations |   |   | Consolidated |   |
| Total      revenue                                             |   | $      | 92,399  |   |         | $      | 50,480 |      |   | $      | 28,136       |   |   | $            | (5,950 | ) |   | $ | 165,065 |   |
| Costs      and      expenses                                   |   |   | 98,250  |   |         |   | 32,334 |      |   |   | 19,703       |   |   |         | (5,162 | ) |   |   | 145,125 |   |
| Operating      income (loss)                                                                                                                                                                                                             |   |   | (5,851  | )      |         |   | 18,146 |      |   |   | 8,433        |   |   |         | (788   | ) |   |   | 19,940 |   |
| Other      income (expense)                                                                                                                                                                                                              |   |   | (18,000 | )      |         |   | (2,198 | )         |   |   | (1,829       | )      |   |         | -      |   |   |   | (22,027 | ) |
| Income      tax      benefit                                   |   |   | 723     |   |         |   | -      |      |   |   | -            |   |   |         | -      |   |   |   | 723 |   |
| Minority      interest, net of tax                                                                                                                                                                                                       |   |   | (2,136  | )      |         |   | -      |      |   |   | -            |   |   |         | -      |   |   |   | (2,136 | ) |
| Net      income      (loss)                                                        |   | $      | (25,264 | )      |         | $      | 15,948 |      |   | $      | 6,604        |   |   | $            | (788   | ) |   | $ | (3,500 | ) |

| (Unaudited)                                                                                                                                                                                                                     |   |   |     |   |         |   |    | Non-      |   |   |         |   |   |         |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|--------|
| (Dollars      in thousands)                                                                                                                                                                                                     |   |   |     |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                            |   | Issuer |     |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |   |
| Operating      activities                                  |   | $      | 72,828   |   |         | $      | 72,085  |      |   | $      | 3,675        |   |   | $            | 833    |   |   | $ | 149,421 |   |
| Investing      activities                                  |   |   | 37,709   |   |         |   | (46,480 | )         |   |   | (839         | )      |   |         | (833   | ) |   |   | (10,443 | ) |
| Financing      activities                                  |   |   | (103,553 | )      |         |   | (25,166 | )         |   |   | (5,111       | )      |   |         | -      |   |   |   | (133,830 | ) |
| Net      increase (decrease) in                                                                                                                                                                                                 |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| cash      and cash equivalents                                                                                                                                                                                                  |   |   | 6,984    |   |         |   | 439     |      |   |   | (2,275       | )      |   |         | -      |   |   |   | 5,148 |   |
|                                                                                                                                                                                                                            |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| Cash      at the beginning of                                                                                                                                                                                                   |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| the      period                                                 |   |   | 5,325    |   |         |   | 1,288   |      |   |   | 5,731        |   |   |         | -      |   |   |   | 12,344 |   |
|                                                                                                                                                                                                                            |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| Cash      at end of the period                                                                                                                                                                                                  |   | $      | 12,309   |   |         | $      | 1,727   |      |   | $      | 3,456        |   |   | $            | -      |   |   | $ | 17,492 |   |

| (Unaudited)                                                                                                                                                                                                                     |   |   |     |   |         |   |    | Non-      |   |   |         |   |   |         |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|--------|
| (Dollars      in thousands)                                                                                                                                                                                                     |   |   |     |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                            |   | Issuer |     |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |   |
| Operating      activities                                  |   | $      | 58,415   |   |         | $      | 21,692  |      |   | $      | 9,295        |   |   | $            | 534    |   |   | $ | 89,936 |   |
| Investing      activities                                  |   |   | (110,585 | )      |         |   | (7,652  | )         |   |   | (20,411      | )      |   |         | (34    | ) |   |   | (138,682 | ) |
| Financing      activities                                  |   |   | 49,095   |   |         |   | (14,124 | )         |   |   | 8,721        |   |   |         | (500   | ) |   |   | 43,192 |   |
| Net      increase (decrease) in                                                                                                                                                                                                 |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| cash      and cash equivalents                                                                                                                                                                                                  |   |   | (3,075   | )      |         |   | (84     | )         |   |   | (2,395       | )      |   |         | -      |   |   |   | (5,554 | ) |
| Cash      at the beginning of                                                                                                                                                                                                   |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| the      period                                                 |   |   | 6,116    |   |         |   | 1,298   |      |   |   | 6,426        |   |   |         | -      |   |   |   | 13,840 |   |
| Cash      at end of the period                                                                                                                                                                                                  |   | $      | 3,041    |   |         | $      | 1,214   |      |   | $      | 4,031        |   |   | $            | -      |   |   | $ | 8,286 |   |

----

Management'sDiscussion 

| ·   | Our      oil and gas sales for the second quarter increased $59.4 million, or 79%,      from 2007.  Price variances accounted for 98% of this increase,      and incremental production accounted for the remaining  2%. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | We      recorded a net gain on the sale of property and equipment of $40.4 million      during the second quarter of 2008.  We sold all of our interests      in 16 producing wells in South Louisiana resulting in a gain of      approximately $33.1 million.  We also sold two drillings and a      surplus well servicing unit for a net gain of approximately $5.7 million      in the second quarter of 2008. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Our      oil and gas production for the second quarter of 2008 was 4% lower on an      Mcfe basis than in the comparable period in 2007.  Our oil      production was 22% higher than the second quarter of 2007 and gas      production was 19% lower compared to the 2007 period.  The      growth in oil production was attributed to in-fill drilling in the Austin      Chalk (Trend) and increased drilling activities in the Permian      Basin.  As adjusted for the South Louisiana asset sale, gas      production was favorably impacted by incremental production from drilling      activities in North Louisiana. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | We      recorded a $148.6 million net loss on derivatives in the second      quarter of 2008.  We recorded a $35 million realized loss      on settled contracts and a $113.6 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. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | During      2008, we decreased borrowings under our revolving credit facility by      $115.8 million from $165.8 million at December 31, 2007 to $50      million at June 30, 2008 due primarily from proceeds from the sale of      assets. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | At      June 30, 2008, our capitalized unproved oil and gas properties totaled      $155.4 million, of which approximately $86.1 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. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | Three      Months Ended |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | June      30,           |    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 2008                    |    |   | 2007 |   |
| Oil      and Gas Production Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                    |    |   |   |   |
| Gas      (MMcf)                                                                                                         |   |                    | 4,177   |   |   |   | 5,151 |   |
| Oil      (MBbls)                                                                                                        |   |                    | 703     |   |   |   | 577 |   |
| Natural gas liquids      (MBbls)                                                                                        |   |                    | 41      |   |   |   | 57 |   |
| Total      (MMcfe)                                                                                                      |   |                    | 8,641   |   |   |   | 8,955 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |   |   |   |   |
| Average      Realized Prices (a):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                    |    |   |   |   |   |   |
| Gas      ($/Mcf)                                                                                                        |   | $                       | 11.07   |   |   | $ | 7.20 |   |
| Oil      ($/Bbl)                                                                                                        |   | $                       | 121.51  |   |   | $ | 62.51 |   |
| Natural gas liquids      ($/Bbl)                                                                                        |   | $                       | 63.63   |   |   | $ | 42.84 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |   |   |   |   |
| Gain      (Losses) on Settled Derivative Contracts (a):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |    |   |   |   |   |   |
| ($ in thousands, except per      unit)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                    |    |   |   |   |   |   |
| Gas:  Net realized gain      (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | $                       | (10,287 | ) |   | $ | 473 |   |
| Per unit produced      ($/Mcf)                                                                                                                             |   | $                       | (2.46   | ) |   | $ | .09 |   |
| Oil:    Net      realized loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $                       | (23,348 | ) |   | $ | (1,971 | ) |
| Per unit produced      ($/Bbl)                                                                                                                             |   | $                       | (33.21  | ) |   | $ | (3.42 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |   |   |   |   |
| Average      Daily Production:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                    |    |   |   |   |   |   |
| Natural Gas    (Mcf):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                    |    |   |   |   |   |   |
| Permian      Basin                                                                                                                                         |   |                    | 14,284  |   |   |   | 13,724 |   |
| North      Louisiana                                                                                                                                       |   |                    | 15,233  |   |   |   | 5,229 |   |
| South      Louisiana                                                                                                                                       |   |                    | 7,347   |   |   |   | 27,206 |   |
| Austin Chalk      (Trend)                                                                                                                                  |   |                    | 2,133   |   |   |   | 2,445 |   |
| Cotton Valley Reef      Complex                                                                                                                            |   |                    | 6,277   |   |   |   | 7,651 |   |
| Other                                                                                                                                                      |   |                    | 627     |   |   |   | 349 |   |
| Total                                                                                                                                                                                    |   |                    | 45,901  |   |   |   | 56,604 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |   |   |   |   |
| Oil (Bbls):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    |    |   |   |   |   |   |
| Permian      Basin                                                                                                                                         |   |                    | 3,568   |   |   |   | 3,135 |   |
| North      Louisiana                                                                                                                                       |   |                    | 386     |   |   |   | 153 |   |
| South      Louisiana                                                                                                                                       |   |                    | 105     |   |   |   | 1,333 |   |
| Austin Chalk      (Trend)                                                                                                                                  |   |                    | 3,575   |   |   |   | 1,627 |   |
| Other                                                                                                                                                      |   |                    | 91      |   |   |   | 93 |   |
| Total                                                                                                                                                                                    |   |                    | 7,725   |   |   |   | 6,341 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |   |   |   |   |
| Natural Gas Liquids      (Bbls):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                    |    |   |   |   |   |   |
| Permian      Basin                                                                                                                                         |   |                    | 153     |   |   |   | 226 |   |
| Austin Chalk      (Trend)                                                                                                                                  |   |                    | 241     |   |   |   | 251 |   |
| Other                                                                                                                                                      |   |                    | 57      |   |   |   | 149 |   |
| Total                                                                                                                                                                                    |   |                    | 451     |   |   |   | 626 |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | Three      Months Ended |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | June      30,           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 2008                    |   |   | 2007 |
| Exploration      Costs (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                    |   |   |   |
| Abandonment and impairment      costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                    |   |   |   |
| North      Louisiana                                                                                                                                           |   | $                       | 1,865 |   |   | $ | 8,679 |   |
| South      Louisiana                                                                                                                                           |   |                    | - |   |   |   | 14,217 |   |
| Other                                                                                                                                                          |   |                    | 68 |   |   |   | 623 |   |
| Total                                                                                                                                                                                        |   |                    | 1,933 |   |   |   | 23,519 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    |   |   |   |   |   |   |   |
| Seismic and      other                                                                                                      |   |                    | 1,562 |   |   |   | 1,580 |   |
| Total exploration      costs                                                                                                                                                                 |   | $                       | 3,495 |   |   | $ | 25,099 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    |   |   |   |   |   |   |   |
| Depreciation,      Depletion and Amortization (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                    |   |   |   |   |   |   |   |
| Oil and gas      depletion                                                                                                  |   | $                       | 22,598 |   |   | $ | 16,331 |   |   |
| Contract drilling      depreciation                                                                                         |   |                    | 2,115 |   |   |   | 1,862 |   |   |
| Other      depreciation                                                                                                     |   |                    | 261 |   |   |   | 294 |   |   |
| Total      DD&A                                                                                                                                                                          |   | $                       | 24,974 |   |   | $ | 18,487 |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    |   |   |   |   |   |   |   |
| Oil      and Gas Costs ($/Mcfe Produced):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                    |   |   |   |   |   |   |   |
| Production      costs                                                                                                       |   | $                       | 2.54 |   |   | $ | 1.99 |   |   |
| Oil and gas      depletion                                                                                                  |   | $                       | 2.62 |   |   | $ | 1.82 |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    |   |   |   |   |   |   |   |
| Net      Wells Drilled (b):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                    |   |   |   |   |   |   |   |
| Exploratory      Wells                                                                                                      |   |                    | 1.0 |   |   |   | 4.2 |   |   |
| Developmental      Wells                                                                                                    |   |                    | 22.7 |   |   |   | 5.7 |   |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | Six      Months Ended |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | June      30,         |    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 2008                  |    |   | 2007 |   |
| Oil      and Gas Production Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                  |    |   |   |   |
| Gas      (MMcf)                                                                                                         |   |                  | 9,725   |   |   |   | 9,478 |   |
| Oil      (MBbls)                                                                                                        |   |                  | 1,387   |   |   |   | 1,120 |   |
| Natural gas liquids      (MBbls)                                                                                        |   |                  | 99      |   |   |   | 103 |   |
| Total      (MMcfe)                                                                                                      |   |                  | 18,641  |   |   |   | 16,816 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                  |    |   |   |   |   |   |
| Average      Realized Prices (a):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                  |    |   |   |   |   |   |
| Gas      ($/Mcf)                                                                                                        |   | $                     | 9.81    |   |   | $ | 7.06 |   |
| Oil      ($/Bbl)                                                                                                        |   | $                     | 109.05  |   |   | $ | 58.95 |   |
| Natural gas liquids      ($/Bbl)                                                                                        |   | $                     | 58.47   |   |   | $ | 38.58 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                  |    |   |   |   |   |   |
| Gain      (Losses) on Settled Derivative Contracts (a):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                  |    |   |   |   |   |   |
| ($ in thousands, except per      unit)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                  |    |   |   |   |   |   |
| Gas:  Net realized gain      (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | $                     | (11,171 | ) |   | $ | 4,982 |   |
| Per unit produced      ($/Mcf)                                                                                                                             |   | $                     | (1.15   | ) |   | $ | .53 |   |
| Oil:    Net      realized loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $                     | (36,254 | ) |   | $ | (4,530 | ) |
| Per unit produced      ($/Bbl)                                                                                                                             |   | $                     | (26.14  | ) |   | $ | (4.04 | ) |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Six      Months Ended |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | June      30,         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 2008                  |   |   | 2007 |
| Average      Daily Production:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                  |   |   |   |
| Natural Gas    (Mcf):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                  |   |   |   |
| Permian      Basin                                                                                                                                            |   |                  | 14,665 |   |   |   | 14,552 |   |
| North      Louisiana                                                                                                                                          |   |                  | 14,611 |   |   |   | 3,815 |   |
| South      Louisiana                                                                                                                                          |   |                  | 15,405 |   |   |   | 23,695 |   |
| Austin Chalk      (Trend)                                                                                                                                     |   |                  | 2,333 |   |   |   | 2,228 |   |
| Cotton Valley Reef      Complex                                                                                                                               |   |                  | 5,857 |   |   |   | 7,674 |   |
| Other                                                                                                                                                         |   |                  | 563 |   |   |   | 401 |   |
| Total                                                                                                                                                                                       |   |                  | 53,434 |   |   |   | 52,365 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                  |   |   |   |   |   |   |   |
| Oil (Bbls):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                  |   |   |   |   |   |   |   |
| Permian      Basin                                                                                                                                            |   |                  | 3,532 |   |   |   | 3,117 |   |
| North      Louisiana                                                                                                                                          |   |                  | 365 |   |   |   | 91 |   |
| South      Louisiana                                                                                                                                          |   |                  | 545 |   |   |   | 1,256 |   |
| Austin Chalk      (Trend)                                                                                                                                     |   |                  | 3,104 |   |   |   | 1,647 |   |
| Other                                                                                                                                                         |   |                  | 75 |   |   |   | 77 |   |
| Total                                                                                                                                                                                       |   |                  | 7,621 |   |   |   | 6,188 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                  |   |   |   |   |   |   |   |
| Natural Gas Liquids      (Bbls):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                  |   |   |   |   |   |   |   |
| Permian      Basin                                                                                                                                            |   |                  | 185 |   |   |   | 211 |   |
| Austin Chalk      (Trend)                                                                                                                                     |   |                  | 258 |   |   |   | 259 |   |
| Other                                                                                                                                                         |   |                  | 101 |   |   |   | 99 |   |
| Total                                                                                                                                                                                       |   |                  | 544 |   |   |   | 569 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                  |   |   |   |   |   |   |   |
| Exploration      Costs (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                  |   |   |   |   |   |   |   |
| Abandonment and impairment      costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                  |   |   |   |   |   |   |   |
| Permian      Basin                                                                                                                                            |   | $                | - |   |   | $  | 989 |   |
| North      Louisiana                                                                                                                                          |   |                  | 2,162 |   |   |   | 8,985 |   |
| South      Louisiana                                                                                                                                          |   |                  | - |   |   |   | 21,396 |   |
| Other                                                                                                                                                         |   |                  | 68 |   |   |   | 3,254 |   |
| Total                                                                                                                                                                                            |   |                  | 2,230 |   |   |   | 34,624 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                  |   |   |   |   |   |   |   |
| Seismic and      other                                                                                                     |   |                  | 5,237 |   |   |   | 2,470 |   |
| Total exploration      costs                                                                                                                                                                     |   | $                     | 7,467 |   |   | $ | 37,094 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                  |   |   |   |   |   |   |   |
| Depreciation,      Depletion and Amortization (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                  |   |   |   |   |   |   |   |
| Oil and gas      depletion                                                                                                 |   | $                     | 50,339 |   |   | $ | 29,879 |   |   |
| Contract drilling      depreciation                                                                                        |   |                  | 4,400 |   |   |   | 3,245 |   |   |
| Other      depreciation                                                                                                    |   |                  | 508 |   |   |   | 594 |   |   |
| Total      DD&A                                                                                                                                                                              |   | $                     | 55,247 |   |   | $ | 33,718 |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                  |   |   |   |   |   |   |   |
| Oil      and Gas Costs ($/Mcfe Produced):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                  |   |   |   |   |   |   |   |
| Production      costs                                                                                                      |   | $                     | 2.28 |   |   | $ | 2.09 |   |   |
| Oil and gas      depletion                                                                                                 |   | $                     | 2.70 |   |   | $ | 1.78 |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                  |   |   |   |   |   |   |   |
| Net      Wells Drilled (b):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                  |   |   |   |   |   |   |   |
| Exploratory      Wells                                                                                                     |   |                  | 2.7 |   |   |   | 9.2 |   |   |
| Developmental      Wells                                                                                                   |   |                  | 35.7 |   |   |   | 9.2 |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                  |   |   |   |   |   |   |   |
| (a)  No derivatives were designated as cash flow hedges in 2008 or      2007. All gains or losses on settled derivatives were included in      loss on derivatives.                                                                                                                                                                                                                                                                                                                                                                                            |   |                  |
| (b)  Excludes wells      being drilled or completed at the end of each period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                  |

----

----

----

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|                                                                                                                                                                                                                                                                                                   |   | Actual                |    |   | Planned                |   |    |           |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|--------|------------------------|--------|---------|----------------|--------|
|                                                                                                                                                                                                                                                                                                   |   | Expenditures          |    |   | Expenditures           |   |    | Year      2008 |   |
|                                                                                                                                                                                                                                                                                                   |   | Six      Months Ended |    |   | Year      Ending       |   |    | Percentage     |   |
|                                                                                                                                                                                                                                                                                                   |   | June      30, 2008    |    |   | December      31, 2008 |   |    | of      Total  |   |
|                                                                                                                                                                                                                                                                                                   |   | (In      thousands)   |    |   |                   |   |
| Permian      Basin                                                         |   | $                     | 60,400  |   |                   | $      | 184,100 |           |   |   | 46 | % |
| North      Louisiana                                                       |   |                  | 34,600  |   |                   |   | 83,400  |           |   |   | 21 | % |
| Austin      Chalk      (Trend)                                             |   |                  | 28,600  |   |                   |   | 57,500  |           |   |   | 14 | % |
| South      Louisiana                                                       |   |                  | 17,000  |   |                   |   | 35,700  |           |   |   | 9 | % |
| East      Texas      Bossier                                               |   |                  | 11,800  |   |                   |   | 30,300  |           |   |   | 8 | % |
| Utah/California                                                            |   |                  | 1,900   |   |                   |   | 8,700   |           |   |   | 2 | % |
| Other                                                                      |   |                  | 400     |   |                   |   | 1,000   |           |   |   | - |   |
|                                                                                                                                                                                                                                                                                                   |   | $                     | 154,700 |   |                   | $      | 400,700 |           |   |   | 100 | % |

----

----

|                                                                                            |   | June      30,       |     |   | December      31, |   |
|-------------------------------------------------------------------------------------------------|--------|---------------------|----------|--------|-------------------|--------|
|                                                                                            |   | 2008                |     |   | 2007              |   |
|                                                                                            |   | (In      thousands) |     |
| Working      capital (deficit) per GAAP                                                         |   | $                   | (190,584 | )      |              | $      | (76,388 | ) |
| Add      funds available under the revolving credit facility                                    |   |                | 199,196  |   |              |   | 108,396 |   |
| Exclude      fair value of derivatives classified as current assets or current      liabilities |   |                | 147,506  |   |              |   | 49,738 |   |
| Exclude      current assets and current liabilities of Larclay JV                               |   |                | 17,039   |   |              |   | 21,423 |   |
| Working      capital per loan covenant                                                          |   | $                   | 173,157  |   |              | $      | 103,169 |   |

----

titative

----

|                    |   | Gas            |    |   | Oil    |   |
|-------------------------|--------|----------------|---------|--------|--------|--------|
|                    |   | MMBtu      (a) |    |   | Floor  |   |   | Ceiling |   |   | Bbls |   |   | Floor |   |   | Ceiling |   |
| Production      Period: |   |           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 3rd      Quarter 2008   |   |           | 419,000 |   |   | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 128,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |

|                                                                                                                                                                                         |   | Gas            |       |   | Oil    |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|------------|--------|--------|--------|
|                                                                                                                                                                                         |   | MMBtu      (a) |       |   | Price  |   |   | Bbls |   |   | Price |   |
| Production      Period:                                                                                                                                                                      |   |           |       |   |   |   |   |   |   |   |   |   |
| 3rd      Quarter 2008                                                                                                                                                                        |   |           | 4,000,000  |   |   | $      | 9.19 |   |   |   | 310,000 |   |   | $ | 78.96 |   |
| 4th      Quarter      2008                            |   |           | 4,100,000  |   |   | $      | 9.17 |   |   |   | 400,000 |   |   | $ | 82.21 |   |
| 2009                                                  |   |           | 3,600,000  |   |   | $      | 9.33 |   |   |   | 1,440,000 |   |   | $ | 85.30 |   |
|                                                                                                                                                                                         |   |           | 11,700,000 |   |   |   |   |   |   |   | 2,150,000 |   |   |   |   |   |
|                                                                                                                                                 |   |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (a)  One      MMBtu equals one Mcf at a Btu factor of 1,000.                                                                                                                       |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |      |       |   | Fixed  |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|------------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Principal |       |   | Libor  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Balance   |       |   | Rates  |   |
| Period:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |      |       |   |   |   |
| July 1, 2008 to November 3,      2008                                                                                     |   | $         | 45,000,000 |   |   |   | 5.73 | % |

Controls andProcedures

| ·   | 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. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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RiskFactors

missio

|   |   | Results      of Voting |                                            | Votes      For |           |       | Withheld |     |   |
|--------|--------|------------------------|-------------------------------------------------|----------------|----------------|------------|----------|----------|--------|
|   | 1.     |                   | Election      of Directors                      |           |           |       |     |     |   |   |
|   |   |                   | Davis L. Ford.                                  |           |           | 8,994,080  |     |     |   | 1,099,592 |   |   |
|   |   |                   | Robert L.    Parker                             |           |           | 6,108,955  |     |     |   | 3,984,717 |   |   |
|   |   |                   | Jordan R.Smith                                  |           |           | 8,832,194  |     |     |   | 1,261,478 |   |   |
|   |   |                   |                                            |           |           |       |     |     |   |   |   |   |
|   |   |                   |                                            |           | Votes      For |       |     | Withheld |   | Abstentions |
|   | 2.     |                   | Advisory      vote on the selection of KPMG LLP |           |           | 10,061,587 |     |     |   | 24,985 |   | 7,100 |

Item 6-                 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 14, 2008††                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                     |
| **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††     |
|   |   |                                                                                                                                                                                                                                                                                                     |
| **10.1 |   | Fifth      Amendment to Amended and Restated, dated June 13, 2008, among Clayton      Williams Energy, Inc., JP Morgan Chase Bank, N.A. and the other      signatories thereto, filed as Exhibit 10.1 to our Current Report on Form      8-K filed with the Commission on June 18, 2008.  †† |

----

|           |   |                                                                                                                                                                                                                                  |
|----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **10.2†  |   | Amaker-Tippet      Reward Plan dated June 19, 2008 filed as Exhibit 10.1 to our Current      Report on Form 8-K with the Commission on June 25, 2008.  ††                                                                 |
|           |   |                                                                                                                                                                                                                                  |
| **10.3†  |   | Austin      Chalk Reward Plan dated June 19, 2008 filed as Exhibit 10.2 to our Current      Report on Form 8-K with the Commission on June 25, 2008.  ††                                                                  |
|           |   |                                                                                                                                                                                                                                  |
| **10.4†  |   | Barstow      Area Reward Plan dated June 19, 2008 filed as Exhibit 10.3 to our Current      Report on Form 8-K with the Commission on June 25, 2008.  ††                                                                  |
|           |   |                                                                                                                                                                                                                                  |
| **10.5†  |   | Participation      Agreement relating to Andrews Area dated June 19, 2008 filed as Exhibit      10.1 to our Current Report on Form 8-K filed with the Commission June 25,      2008. ††                                   |
|           |   |                                                                                                                                                                                                                                  |
| **10.6†  |   | Participation      Agreement relating to Crockett County Area dated June 19, 2008 filed as      Exhibit 10.2 to our Current Report on Form 8-K filed with the Commission      June 25, 2008. ††                           |
|           |   |                                                                                                                                                                                                                                  |
| **10.7†  |   | Participation      Agreement relating to North Louisiana Bossier III dated June 19, 2008      filed as Exhibit 10.3 to our Current Report on Form 8-K filed with the      Commission June 25, 2008.  ††         |
|           |   |                                                                                                                                                                                                                                  |
| **10.8†  |   | Participation      Agreement relating to North Louisiana Hosston/Cotton Valley III dated      June 19, 2008 filed as Exhibit 10.4 to our Current Report on Form 8-K      filed with the Commission June 25, 2008. †† |
|           |   |                                                                                                                                                                                                                                  |
| **10.9†  |   | Participation      Agreement relating to South Louisiana VI dated June 19, 2008 filed as      Exhibit 10.5 to our Current Report on Form 8-K filed with the Commission      June 25, 2008. ††                             |
|           |   |                                                                                                                                                                                                                                  |
| **10.10† |   | Participation      Agreement relating to Utah dated June 19, 2008 filed as Exhibit 10.6 to      our Current Report on Form 8-K filed with the Commission June 25, 2008.      ††                                           |
|           |   |                                                                                                                                                                                                                                  |
| *21            |   | Subsidiaries      of the registrant                                                                                                                                                                                                   |
|           |   |                                                                                                                                                                                                                                  |
| *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 to18 U.S.C. § 1350                                                                                    |

|   | * | Filed      herewith |
|--------|---|---------------------|

|     ** | Incorporated      by reference to the filingindicated |
|----------------------------|-------------------------------------------------------|

|   | † | Identifies      an Exhibit that consists of or includes a management contract or      compensatory plan or arrangement |
|--------|---------|------------------------------------------------------------------------------------------------------------------------|

|     †† | Filed      under our Commission FileNo. 001-10924 |
|----------------------------------------|--------------------------------------------------------|

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NAT

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

| Date:  | August      8, 2008 | By:    | /s/      L. Paul Latham                 |
|--------|---------------------|--------|-----------------------------------------|
|   |                |   | L.      Paul Latham                     |
|   |                |   | Executive      Vice President and Chief |
|   |                |   |   Operating      Officer      |

| Date:  | August      8, 2008 | By:    | /s/      Mel G. Riggs                          |
|--------|---------------------|--------|------------------------------------------------|
|   |                |   | Mel      G. Riggs                              |
|   |                |   | Senior      Vice President and Chief Financial |
|   |                |   |   Officer                            |