----

| (Mark      One) |                                                   |   |
|-----------------|--------------------------------------------------------|--------|
| x               | QUARTERLY      REPORT PURSUANT TO SECTION 13 OR 15(d)  |   |
|            | OF      THE SECURITIES EXCHANGE ACT OF 1934            |   |
|            | For      the quarterly period ended September 30, 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 November 4,2008. |
|-----------------------------------------------------------------------------------------------------------------------------------|

----

| PART      I.  FINANCIAL INFORMATION |
|-----------------------------------------------|
|                                          |   | Page |
|                                          |   |   |   |
| Item      1.                                  | Financial      Statements |   |   |
|                                          |   |   |   |
|                                          | Consolidated Balance Sheets as of September 30,      2008 |   |   |
|                                          | and December 31,      2007                                                                                                 | 3 |   |
|                                          |   |   |   |
|                                          | Consolidated Statements of Operations for the three months and      nine months |   |   |
|                                          | ended September 30, 2008 and      2007                                                                                                 | 5 |   |
|                                          |   |   |   |
|                                          | Consolidated Statement of Stockholders’ Equity for the nine      months |   |   |
|                                          | ended September 30,      2008                                                                                                 | 6 |   |
|                                          |   |   |   |
|                                          | Consolidated Statements of Cash Flows for the nine      months |   |   |
|                                          | ended September 30, 2008 and      2007                                                                                                 | 7 |   |
|                                          |   |   |   |
|                                          | Notes to Consolidated Financial      Statements | 8 |   |
|                                          |   |   |   |
| Item      2.                                  | Management’s Discussion and      Analysis of Financial |   |   |
|                                          | Condition and Results of      Operations                                                                                                 | 23 |   |
|                                          |   |   |   |
| Item      3.                                  | Quantitative and Qualitative      Disclosures About Market Risks | 38 |   |
|                                          |   |   |   |
| Item      4.                                  | Controls and      Procedures | 40 |   |
|                                          |   |   |   |
|                                          |   |   |   |
| PART      II.  OTHER INFORMATION    |
| Item      1A.                                 | Risk      Factors | 41 |   |
|                                          |   |   |   |
| Item      5.                                  | Other      Information | 41 |   |
|                                          |   |   |   |
| Item      6.                                  | Exhibits | 43 |   |
|                                          |   |   |   |
|                                          | Signatures | 44 |   |

----

WILLIA

| ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | September      30, |   |   | December      31, |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 2008 |   |   | 2007 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | (Unaudited) |   |   |   |   |
| CURRENT      ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |   |
| Cash and cash      equivalents                                                                                                                   |   | $ | 34,532 |   |   | $ | 12,344 |   |
| Accounts      receivable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |
| Oil and gas sales,      net                                                                                                                                               |   |   | 40,617 |   |   |   | 36,698 |   |
| Joint interest and other,      net                                                                                                                                        |   |   | 17,507 |   |   |   | 16,666 |   |
| Affiliates                                                                                                                                                                |   |   | 549 |   |   |   | 308 |   |
| Inventory                                                                                                                                        |   |   | 24,908 |   |   |   | 14,348 |   |
| Deferred income      taxes                                                                                                                       |   |   | 3,581 |   |   |   | 3,581 |   |
| Fair value of      derivatives                                                                                                                   |   |   | 3,461 |   |   |   | 7,191 |   |
| Assets held for      sale                                                                                                                        |   |   | - |   |   |   | 17,281 |   |
| Prepaids and      other                                                                                                                          |   |   | 2,642 |   |   |   | 3,962 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 127,797 |   |   |   | 112,379 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |
| PROPERTY      AND EQUIPMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |
| Oil and gas properties,      successful efforts      method                                                                                      |   |   | 1,486,443 |   |   |   | 1,374,090 |   |
| Natural gas gathering and      processing      systems                                                                                           |   |   | 17,946 |   |   |   | 18,404 |   |
| Contract drilling      equipment                                                                                                                 |   |   | 91,639 |   |   |   | 89,956 |   |
| Other                                                                                                                                            |   |   | 14,757 |   |   |   | 14,505 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 1,610,785 |   |   |   | 1,496,955 |   |
| Less accumulated depreciation,      depletion and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | (798,732 | ) |   |   | (765,877 | ) |
| Property and equipment,      net                                                                                                                                          |   |   | 812,053 |   |   |   | 731,078 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |
| OTHER      ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| Debt issue costs,      net                                                                                                                       |   |   | 6,533 |   |   |   | 6,963 |   |
| Fair value of      derivatives                                                                                                                   |   |   | 626 |   |   |   | - |   |
| Other                                                                                                                                            |   |   | 1,795 |   |   |   | 10,676 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 8,954 |   |   |   | 17,639 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $ | 948,804 |   |   | $ | 861,096 |   |

----

| LIABILITIES      AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | September      30, |   |   | December      31, |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2008 |   |   | 2007 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | (Unaudited) |   |   |   |   |
| CURRENT      LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |   |   |   |   |
| Accounts    payable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |
| Trade                                                                                                                                                        |   | $ | 105,913 |   |   | $ | 72,477 |   |
| Oil and gas      sales                                                                                                                                       |   |   | 26,514 |   |   |   | 24,806 |   |
| Affiliates                                                                                                                                                   |   |   | 2,574 |   |   |   | 1,747 |   |
| Current maturities of      long-term      debt                                                                                      |   |   | 18,750 |   |   |   | 22,500 |   |
| Fair value of      derivatives                                                                                                      |   |   | 21,378 |   |   |   | 56,929 |   |
| Accrued liabilities and      other                                                                                                  |   |   | 6,874 |   |   |   | 10,308 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 182,003 |   |   |   | 188,767 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| NON-CURRENT      LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |
| Long-term      debt                                                                                                                 |   |   | 379,113 |   |   |   | 430,175 |   |
| Deferred income      taxes                                                                                                          |   |   | 87,719 |   |   |   | 44,302 |   |
| Fair value of      derivatives                                                                                                      |   |   | 8,517 |   |   |   | - |   |
| Other                                                                                                                               |   |   | 36,720 |   |   |   | 37,046 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 512,069 |   |   |   | 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 –  12,113,898 shares in 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |
|  and 11,354,051 shares in      2007                                                                                            |   |   | 1,211 |   |   |   | 1,135 |   |
| Additional paid-in      capital                                                                                                     |   |   | 136,994 |   |   |   | 121,063 |   |
| Retained      earnings                                                                                                              |   |   | 116,527 |   |   |   | 35,890 |   |
| Accumulated other      comprehensive income, net of tax                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | - |   |   |   | 2,718 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 254,732 |   |   |   | 160,806 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $ | 948,804 |   |   | $ | 861,096 |   |

----

CLAYTON WILLIAMS 

|                                                                                                                                                                                                                                                                                                                                                                                    |   | Three      Months Ended |    |   | Nine      Months Ended |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|--------|------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                    |   | September      30,      |    |   | September      30,     |   |
|                                                                                                                                                                                                                                                                                                                                                                                    |   | 2008                    |    |   | 2007                   |   |   | 2008 |   |   | 2007 |   |
| REVENUES                                                                                                                                                                                                                                                                                                                                                                                |   |                    |    |   |                   |   |   |   |   |   |   |   |
| Oil and gas      sales                                                                                                   |   | $                       | 128,335 |   |                   | $      | 84,639 |   |   | $ | 381,545 |   |   | $ | 220,712 |   |
| Natural gas      services                                                                                                |   |                    | 2,978   |   |                   |   | 2,268 |   |   |   | 9,069 |   |   |   | 7,831 |   |
| Drilling rig      services                                                                                               |   |                    | 12,515  |   |                   |   | 14,806 |   |   |   | 40,050 |   |   |   | 37,451 |   |
| Gain on sales of property and      equipment                                                                                                                                                                                                                                                                                                                                            |   |                    | 3,157   |   |                   |   | 126 |   |   |   | 44,447 |   |   |   | 910 |   |
| Total      revenues                                                                                                                                    |   |                    | 146,985 |   |                   |   | 101,839 |   |   |   | 475,111 |   |   |   | 266,904 |   |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| COSTS      AND EXPENSES                                                                                                                                                                                                                                                                                                                                                                 |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Production                                                                                                               |   |                    | 22,861  |   |                   |   | 20,851 |   |   |   | 65,365 |   |   |   | 55,969 |   |
| Exploration:                                                                                                                                                                                                                                                                                                                                                                            |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Abandonments and      impairments                                                                                                                                                                                                                                                                                                                                                       |   |                    | 43,036  |   |                   |   | 18,802 |   |   |   | 45,266 |   |   |   | 53,426 |   |
| Seismic and      other                                                                                                                                 |   |                    | 5,993   |   |                   |   | 1,236 |   |   |   | 11,230 |   |   |   | 3,706 |   |
| Natural gas      services                                                                                                |   |                    | 2,706   |   |                   |   | 2,121 |   |   |   | 8,465 |   |   |   | 7,438 |   |
| Drilling rig      services                                                                                               |   |                    | 9,763   |   |                   |   | 9,075 |   |   |   | 30,803 |   |   |   | 22,514 |   |
| Depreciation, depletion and      amortization                                                                                                                                                                                                                                                                                                                                           |   |                    | 27,226  |   |                   |   | 23,018 |   |   |   | 82,473 |   |   |   | 56,736 |   |
| Impairment of property and      equipment                                                                                                                                                                                                                                                                                                                                               |   |                    | 9,985   |   |                   |   | 7,979 |   |   |   | 9,985 |   |   |   | 9,023 |   |
| Accretion of abandonment      obligations                                                                                                                                                                                                                                                                                                                                               |   |                    | 654     |   |                   |   | 627 |   |   |   | 1,669 |   |   |   | 1,864 |   |
| General and      administrative                                                                                          |   |                    | 6,501   |   |                   |   | 4,289 |   |   |   | 17,893 |   |   |   | 13,124 |   |
| Loss on sales of property and      equipment                                                                                                                                                                                                                                                                                                                                            |   |                    | 134     |   |                   |   | 92 |   |   |   | 420 |   |   |   | 9,415 |   |
| Total costs and      expenses                                                                                                                          |   |                    | 128,859 |   |                   |   | 88,090 |   |   |   | 273,569 |   |   |   | 233,215 |   |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Operating      income                                                                                                                                  |   |                    | 18,126  |   |                   |   | 13,749 |   |   |   | 201,542 |   |   |   | 33,689 |   |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| OTHER      INCOME (EXPENSE)                                                                                                                                                                                                                                                                                                                                                             |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Interest      expense                                                                                                    |   |                    | (5,406  | )      |                   |   | (8,448 | ) |   |   | (18,929 | ) |   |   | (24,063 | ) |
| Gain (loss) on      derivatives                                                                                          |   |                    | 132,710 |   |                   |   | (2,284 | ) |   |   | (61,986 | ) |   |   | (13,023 | ) |
| Other                                                                                                                    |   |                    | 2,030   |   |                   |   | 366 |   |   |   | 5,699 |   |   |   | 4,693 |   |
| Total other income      (expense)                                                                                                                                                                                                                                                                                                                                                       |   |                    | 129,334 |   |                   |   | (10,366 | ) |   |   | (75,216 | ) |   |   | (32,393 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Income      before income      taxes                                                            |   |                    | 147,460 |   |                   |   | 3,383 |   |   |   | 126,326 |   |   |   | 1,296 |   |
| Income      tax      expense                                                                    |   |                    | (52,829 | )      |                   |   | (1,173 | ) |   |   | (45,409 | ) |   |   | (450 | ) |
| Minority      interest, net of      tax                                                         |   |                    | (2      | )      |                   |   | (1,224 | ) |   |   | (280 | ) |   |   | (3,360 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| NET      INCOME      (LOSS)                                                                     |   | $                       | 94,629  |   |                   | $      | 986 |   |   | $ | 80,637 |   |   | $ | (2,514 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income (loss) per common share:                                                                                                                                                                                                                                                                                                                                                |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                    |   | $                       | 7.81    |   |                   | $      | 0.09 |   |   | $ | 6.79 |   |   | $ | (0.22 | ) |
| Diluted                                                                                                                  |   | $                       | 7.79    |   |                   | $      | 0.09 |   |   | $ | 6.72 |   |   | $ | (0.22 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted      average common shares outstanding:                                                                                                                                                                                                                                                                                                                                        |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                    |   |                    | 12,114  |   |                   |   | 11,352 |   |   |   | 11,874 |   |   |   | 11,286 |   |
| Diluted                                                                                                                  |   |                    | 12,141  |   |                   |   | 11,521 |   |   |   | 12,008 |   |   |   | 11,286 |   |
|                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |

----

CLAYTON WILLIAMS 

|                                                                                                                                                                                                                                                                          |   |              |   |   |       |   |   |    |   |   |     |   |   | Accumulated |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|--------|------------|--------|--------|---------|--------|--------|----------|--------|--------|-------------|---------|
|                                                                                                                                                                                                                                                                          |   |              |   |   |       |   |   |    |   |   |     |   |   | Other       |    |
|                                                                                                                                                                                                                                                                          |   | Common      Stock |   |   | Additional |   |   |    |   |   | Compre-  |   |
|                                                                                                                                                                                                                                                                          |   | No.      of       |   |   | Par        |   |   | Paid-In |   |   | Retained |   |   | hensive     |    |
|                                                                                                                                                                                                                                                                          |   | Shares            |   |   | Value      |   |   | Capital |   |   | Earnings |   |   | Income      |    |
| BALANCE,                                                                                                                                                                                                                                                                      |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |
| December 31,      2007                                           |   |              | 11,354 |   |       | $      | 1,135  |    |   | $      | 121,063  |   |   | $           | 35,890  |   |   | $ | 2,718 |   |
| Net      income                                                                 |   |              | -      |   |       |   | -      |    |   |   | -        |   |   |        | 80,637  |   |   |   | - |   |
| Sale of marketable      securities                                                                                                                                                                                                                                            |   |              | -      |   |       |   | -      |    |   |   | -        |   |   |        | -       |   |   |   | (2,718 | ) |
| Issuance of stock      through                                                                                                                                                                                                                                                |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |   |   |   |   |
|   compensation      plans                                             |   |              | 760    |   |       |   | 76     |    |   |   | 15,931   |   |   |        | -       |   |   |   | - |   |
| BALANCE,                                                                                                                                                                                                                                                                      |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |   |   |   |   |
| September 30,      2008                                          |   |              | 12,114 |   |       | $      | 1,211  |    |   | $      | 136,994  |   |   | $           | 116,527 |   |   | $ | - |   |

----

WILLIAM

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Nine      Months Ended |     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | September      30,     |     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 2008                   |     |   | 2007 |   |
| CASH      FLOWS FROM OPERATING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                   |     |   |   |   |
| Net income      (loss)                                                                                                                              |   | $                      | 80,637   |   |   | $ | (2,514 | ) |
| Adjustments to reconcile net      income (loss) to cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                   |     |   |   |   |   |   |
| provided by operating      activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                   |     |   |   |   |   |   |
| Depreciation, depletion and      amortization                                                                                                                                     |   |                   | 82,473   |   |   |   | 56,736 |   |
| Impairment of property and      equipment                                                                                                                                         |   |                   | 9,985    |   |   |   | 9,023 |   |
| Exploration      costs                                                                                                                                                            |   |                   | 45,266   |   |   |   | 53,426 |   |
| (Gain) loss on sales of      property and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                   | (44,027  | ) |   |   | 8,505 |   |
| Deferred income      taxes                                                                                                                                                        |   |                   | 44,881   |   |   |   | 450 |   |
| Non-cash employee      compensation                                                                                                                                               |   |                   | 3,942    |   |   |   | 1,610 |   |
| Unrealized (gain) loss on      derivatives                                                                                                                                        |   |                   | (23,930  | ) |   |   | 15,163 |   |
| Settlements on derivatives with      financing elements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                   | 40,260   |   |   |   | 18,950 |   |
| Amortization of debt issue      costs                                                                                                                                             |   |                   | 1,049    |   |   |   | 953 |   |
| Accretion of abandonment      obligations                                                                                                                                         |   |                   | 1,669    |   |   |   | 1,864 |   |
| Minority interest, net of      tax                                                                                                                                                |   |                   | 280      |   |   |   | 3,360 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                   |     |   |   |   |   |   |
| Changes in operating working      capital:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                   |     |   |   |   |   |   |
| Accounts      receivable                                                                                                                                                          |   |                   | (5,001   | ) |   |   | (15,089 | ) |
| Accounts      payable                                                                                                                                                             |   |                   | (10,374  | ) |   |   | 15,876 |   |
| Other                                                                                                                                                                             |   |                   | (4,054   | ) |   |   | (6,002 | ) |
| Net cash provided by operating      activities                                                                                                                                                                  |   |                   | 223,056  |   |   |   | 162,311 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                   |     |   |   |   |   |   |
| CASH      FLOWS FROM INVESTING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                   |     |   |   |   |   |   |
| Additions to property and      equipment                                                                                                            |   |                   | (229,633 | ) |   |   | (180,112 | ) |
| Additions to equipment of      Larclay      JV.                                                                                                     |   |                   | (1,683   | ) |   |   | (27,403 | ) |
| Proceeds from sales of property      and      equipment                                                                                             |   |                   | 117,109  |   |   |   | 1,653 |   |
| Change in equipment      inventory                                                                                                                  |   |                   | (11,384  | ) |   |   | 16,265 |   |
| Other                                                                                                                                               |   |                   | 3,880    |   |   |   | (14,217 | ) |
| Net cash used in investing      activities                                                                                                                                                                      |   |                   | (121,711 | ) |   |   | (203,814 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                   |     |   |   |   |   |   |
| CASH      FLOWS FROM FINANCING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                   |     |   |   |   |   |   |
| Proceeds from long-term      debt                                                                                                                   |   |                   | -        |   |   |   | 48,000 |   |
| Proceeds from long-term debt of      Larclay      JV                                                                                                |   |                   | 5,500    |   |   |   | 8,727 |   |
| Repayments of long-term      debt                                                                                                                   |   |                   | (42,500  | ) |   |   | - |   |
| Repayments of long-term debt of      Larclay      JV                                                                                                |   |                   | (17,812  | ) |   |   | (6,562 | ) |
| Proceeds from exercise of stock      options                                                                                                        |   |                   | 15,915   |   |   |   | 5,970 |   |
| Settlements on derivatives with      financing      elements                                                                                        |   |                   | (40,260  | ) |   |   | (18,950 | ) |
| Net cash provided by (used in)      financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                   | (79,157  | ) |   |   | 37,185 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                   |     |   |   |   |   |   |
| NET      INCREASE (DECREASE) IN CASH AND                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                   |     |   |   |   |   |   |
| CASH      EQUIVALENTS                                                                                                                     |   |                   | 22,188   |   |   |   | (4,318 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                   |     |   |   |   |   |   |
| CASH      AND CASH EQUIVALENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                   |     |   |   |   |   |   |
| Beginning of      period                                                                                                                            |   |                   | 12,344   |   |   |   | 13,840 |   |
| End of      period                                                                                                                                  |   | $                      | 34,532   |   |   | $ | 9,522 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                   |     |   |   |   |   |   |
| SUPPLEMENTAL      DISCLOSURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                   |     |   |   |   |   |   |
| Cash paid for interest, net of      amounts      capitalized                                                                                        |   | $                      | 22,239   |   |   | $ | 27,555 |   |

----

CLAYTON WILLIAMS 

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | September      30,  |    |   | December      31, |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | 2008                |    |   | 2007              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | (In      thousands) |    |
| 73⁄4%      Senior Notes, due      2013                                                                                                    |   | $                   | 225,000 |   |              | $      | 225,000 |   |
| Secured      bank credit facility, due May      2012                                                                                         |   |                | 123,300 |   |              |   | 165,800 |   |
| Secured      term loan of Larclay JV, due June      2011                                                                                     |   |                | 49,563  |   |              |   | 61,875 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                | 397,863 |   |              |   | 452,675 |   |
| Less      current maturities(a)                                                                                                              |   |                | (18,750 | )      |              |   | (22,500 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | $                   | 379,113 |   |              | $      | 430,175 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                |    |   |              |   |   |   |
| (a)      Consists      of current portion of term loan of Larclay JV.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                |    |   |              |   |   |   |

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | September      30,  |   |   | December      31, |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | 2008                |   |   | 2007              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | (In      thousands) |   |
| Abandonment      obligations                                                                                          |   | $                   | 30,404 |   |              | $      | 30,994 |   |
| Minority interest, net of      tax                                                                                    |   |                | 5,166  |   |              |   | 4,886 |   |
| Other taxes      payable                                                                                              |   |                | 358    |   |              |   | 358 |   |
| Other                                                                                                                 |   |                | 792    |   |              |   | 808 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | $                   | 36,720 |   |              | $      | 37,046 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | Nine      Months Ended |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | September      30,     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | 2008                   |   |   | 2007 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | (In      thousands)    |   |
| Beginning of      period                                                                                               |   | $                      | 30,994 |   |   | $ | 27,846 |   |
| Additional abandonment      obligations from new      wells                                                                                |   |                   | 975    |   |   |   | 732 |   |
| Sales of      properties                                                                                                                   |   |                   | (1,833 | ) |   |   | (1,602 | ) |
| Revisions of previous      estimates                                                                                                       |   |                   | (1,401 | ) |   |   | - |   |
| Accretion      expense                                                                                                                     |   |                   | 1,669  |   |   |   | 1,864 |   |
| End of      period                                                                                                     |   | $                      | 30,404 |   |   | $ | 28,840 |   |

----

|                                                                                                   |   |   |     |   |     |   |   | 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)                                                                                          |   |   | (759,847 | )      |     | $      | 20.94  |        |   |   |           |   |   |   |
| Outstanding      at September 30, 2008                                                                 |   |   | 55,638   |   |     | $      | 15.02  |        |   |   | 2.81           |   |   | $ | 3,088,675 |   |
|                                                                                                   |   |   |     |   |     |   |   |        |   |   |           |   |   |   |   |   |
| Vested      at September 30, 2008                                                                      |   |   | 55,638   |   |     | $      | 15.02  |        |   |   | 2.81           |   |   | $ | 3,088,675 |   |
| Exercisable      at September 30, 2008                                                                 |   |   | 55,638   |   |     | $      | 15.02  |        |   |   | 2.81           |   |   | $ | 3,088,675 |   |
|                                       |   |   |     |   |     |   |   |        |   |   |           |   |   |   |   |   |
| (a)     Based      on closing price at September 30, 2008 of $70.53 pershare. |   |
| (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 |   | 0.6 |
| $10.00 -      $19.74                                                                | 10,000                                   |   | $                11.93 |   | 2.6 |
| $22.90 -      $41.74                                                                | 18,000                                   |   | $                31.34 |   | 6.4 |
|                                                                                                                                                                                                                                                                                                                                                                                                           | 55,638                                   |   | $                15.02 |   | 2.8 |

|                                                                     |   | Nine      Months Ended                |   |
|--------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                     |   | September      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                                |   | $                                     | 20,423 |   |   | $ | 228 |   |
|                                                                     |   |                                  |   |   |   |   |   |   |
| Stock-based      employee compensation expense                           |   | $                                     | 92     |   |   | $ | 110 |   |
| Tax      benefit                                                         |   |                                  | (32    | ) |   |   | (39 | ) |
| Net      stock-based employee compensation expense                       |   | $                                     | 60     |   |   | $ | 71 |   |

----

----

|                                                                                                                                                                                         |   | Gas            |       |   | Oil    |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|------------|--------|--------|--------|
|                                                                                                                                                                                         |   | MMBtu      (a) |       |   | Price  |   |   | Bbls |   |   | Price |   |
| Production      Period:                                                                                                                                                                      |   |           |       |   |   |   |   |   |   |   |   |   |
| 4th      Quarter      2008                            |   |           | 4,100,000  |   |   | $      | 9.17 |   |   |   | 400,000 |   |   | $ | 82.21 |   |
| 1st      Quarter      2009                            |   |           | 2,800,000  |   |   | $      | 8.46 |   |   |   | 440,000 |   |   | $ | 88.90 |   |
| 2nd      Quarter 2009                                                                                                                                                                        |   |           | 2,700,000  |   |   | $      | 8.47 |   |   |   | 420,000 |   |   | $ | 88.12 |   |
| 3rd      Quarter 2009                                                                                                                                                                        |   |           | 2,600,000  |   |   | $      | 8.48 |   |   |   | 440,000 |   |   | $ | 87.89 |   |
| 4th      Quarter      2009                            |   |           | 2,450,000  |   |   | $      | 8.49 |   |   |   | 425,000 |   |   | $ | 87.29 |   |
| 2010                                                  |   |           | 4,640,000  |   |   | $      | 8.51 |   |   |   | 840,000 |   |   | $ | 97.75 |   |
|                                                                                                                                                                                         |   |           | 19,290,000 |   |   |   |   |   |   |   | 2,965,000 |   |   |   |   |   |
|                                                                                                                                  |   |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (a)     One      MMBtu equals one Mcf at a Btu factor of 1,000.                                                                                                     |   |

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

----

----

|                                                                                                                                                                                                                                           |   | Fair      Value Measurements |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                                                                                                                                           |   | September      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                                                                    |   | $                            | -      |   |   | $ | 4,087 |   |   | $ | - |   |   | $ | 7,191 |   |
| Investment      securities                                                |   |                         | -      |   |   |   | - |   |   |   | 7,188 |   |   |   | - |   |
| Total      assets                                          |   | $                            | -      |   |   | $ | 4,087 |   |   | $ | 7,188 |   |   | $ | 7,191 |   |
| Liabilities:                                                                                                                                                                                                                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair value of      derivatives:                                                                                                                                                                                                                |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commodity      derivatives                                                                                                                                                                                                                     |   | $                            | -      |   |   | $ | 29,553 |   |   | $ | - |   |   | $ | 55,885 |   |
| Interest rate      derivatives                                                                                                                                                                                                                 |   |                         | -      |   |   |   | 342 |   |   |   | - |   |   |   | 1,044 |   |
| Total      liabilities                                     |   | $                            | -      |   |   | $ | 29,895 |   |   | $ | - |   |   | $ | 56,929 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | September      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 |   |

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | September      30,  |      |   | December      31, |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2008                |      |   | 2007              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | (In      thousands) |      |
| Proved      properties                                                                                       |   | $                   | 1,348,597 |   |              | $      | 1,258,166 |   |
| Unproved      properties                                                                                     |   |                | 137,846   |   |              |   | 115,924 |   |
| Total capitalized      costs                                                                                 |   |                | 1,486,443 |   |              |   | 1,374,090 |   |
| Accumulated depreciation,      depletion and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                | (752,825  | )      |              |   | (727,739 | ) |
| Net capitalized      costs                                                                                                            |   | $                   | 733,618   |   |              | $      | 646,351 |   |

| For      the Three Months Ended                   |   |             |     |   |     |   |   |         |   |   |         |   |
|---------------------------------------------------|--------|------------------|----------|--------|----------|--------|--------|--------------|--------|--------|--------------|--------|
| September      30, 2008                           |   |             |     |   |     |   |   |         |   |   |         |   |
| (Unaudited)                                       |   |             |     |   | Contract |   |   | Intercompany |   |   | Consolidated |   |
| (In      thousands)                               |   | Oil      and Gas |     |   | Drilling |   |   | Eliminations |   |   | Total        |   |
|                                              |   |             |     |   |     |   |   |         |   |   |         |   |
| Revenues                                          |   | $                | 134,290  |   |     | $      | 16,708 |         |   | $      | (4,013       | )      |   | $ | 146,985 |   |
| Depreciation,      depletion and amortization (a) |   |             | 35,077   |   |     |   | 2,699  |         |   |   | (565         | )      |   |   | 37,211 |   |
| Other      operating expenses (b)                 |   |             | 81,744   |   |     |   | 12,991 |         |   |   | (3,087       | )      |   |   | 91,648 |   |
| Interest      expense                             |   |             | 4,515    |   |     |   | 891    |         |   |   | -            |   |   |   | 5,406 |   |
| Other      (income) expense                       |   |             | (134,740 | )      |     |   | -      |         |   |   | -            |   |   |   | (134,740 | ) |
| Income      (loss) before income taxes and        |   |             |     |   |     |   |   |         |   |   |         |   |   |   |   |   |
| minorityinterest                                  |   |             | 147,694  |   |     |   | 127    |         |   |   | (361         | )      |   |   | 147,460 |   |
|                                              |   |             |     |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Income      tax (expense) benefit                 |   |             | (53,212  | )      |     |   | 383    |         |   |   | -            |   |   |   | (52,829 | ) |
| Minority      interest, net of tax                |   |             | 2        |   |     |   | (4     | )            |   |   | -            |   |   |   | (2 | ) |
|                                              |   |             |     |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Net      income (loss)                            |   | $                | 94,484   |   |     | $      | 506    |         |   | $      | (361         | )      |   | $ | 94,629 |   |
|                                              |   |             |     |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Total      assets                                 |   | $                | 869,251  |   |     | $      | 87,794 |         |   | $      | (8,241       | )      |   | $ | 948,804 |   |
| Additions      to property and equipment          |   | $                | 125,919  |   |     | $      | 1,066  |         |   | $      | (361         | )      |   | $ | 126,624 |   |
|                                              |   |             |     |   |     |   |   |         |   |   |         |   |   |   |   |   |

----

| For      the Nine Months Ended                    |   |             |    |   |     |   |   |         |   |   |         |   |
|---------------------------------------------------|--------|------------------|---------|--------|----------|--------|--------|--------------|--------|--------|--------------|--------|
| September      30, 2008                           |   |             |    |   |     |   |   |         |   |   |         |   |
| (Unaudited)                                       |   |             |    |   | Contract |   |   | Intercompany |   |   | Consolidated |   |
| (In      thousands)                               |   | Oil      and Gas |    |   | Drilling |   |   | Eliminations |   |   | Total        |   |
|                                              |   |             |    |   |     |   |   |         |   |   |         |   |
| Revenues                                          |   | $                | 434,392 |   |     | $      | 50,745 |         |   | $      | (10,026      | )      |   | $ | 475,111 |   |
| Depreciation,      depletion and amortization (a) |   |             | 85,925  |   |     |   | 7,932  |         |   |   | (1,399       | )      |   |   | 92,458 |   |
| Other      operating expenses (b)                 |   |             | 149,794 |   |     |   | 38,752 |         |   |   | (7,435       | )      |   |   | 181,111 |   |
| Interest      expense                             |   |             | 16,003  |   |     |   | 2,926  |         |   |   | -            |   |   |   | 18,929 |   |
| Other      (income) expense                       |   |             | 56,287  |   |     |   | -      |         |   |   | -            |   |   |   | 56,287 |   |
| Income      (loss) before income taxes and        |   |             |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| minorityinterest                                  |   |             | 126,383 |   |     |   | 1,135  |         |   |   | (1,192       | )      |   |   | 126,326 |   |
|                                              |   |             |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Income      tax (expense) benefit                 |   |             | (45,285 | )      |     |   | (124   | )            |   |   | -            |   |   |   | (45,409 | ) |
| Minority      interest, net of tax                |   |             | 151     |   |     |   | (431   | )            |   |   | -            |   |   |   | (280 | ) |
|                                              |   |             |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Net      income (loss)                            |   | $                | 81,249  |   |     | $      | 580    |         |   | $      | (1,192       | )      |   | $ | 80,637 |   |
|                                              |   |             |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Total      assets                                 |   | $                | 869,251 |   |     | $      | 87,794 |         |   | $      | (8,241       | )      |   | $ | 948,804 |   |
| Additions      to property and equipment          |   | $                | 274,745 |   |     | $      | 1,683  |         |   | $      | (1,192       | )      |   | $ | 275,236 |   |
|                                              |   |             |    |   |     |   |   |         |   |   |         |   |   |   |   |   |

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

----

| For      the Nine Months Ended                                                                                                                                                                                                                                     |   |             |    |   |     |   |    |         |   |   |         |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|---------|--------|----------|--------|---------|--------------|--------|--------|--------------|--------|
| September      30, 2007                                                                                                                                                                                                                                            |   |             |    |   |     |   |    |         |   |   |         |   |
| (Unaudited)                                                                                                                                                                                                                                                        |   |             |    |   | Contract |   |    | Intercompany |   |   | Consolidated |   |
| (In      thousands)                                                                                                                                                                                                                                                |   | Oil      and Gas |    |   | Drilling |   |    | Eliminations |   |   | Total        |   |
|                                                                                                                                                                                                                                                               |   |             |    |   |     |   |    |         |   |   |         |   |
| Revenues                                                                                                                                                                                                                                                           |   | $                | 229,453 |   |     | $      | 46,056  |         |   | $      | (8,605       | )      |   | $ | 266,904 |   |
| Depreciation,      depletion and amortization (a)                                                                                                                                                                                                                  |   |             | 55,403  |   |     |   | 11,454  |         |   |   | (1,098       | )      |   |   | 65,759 |   |
| Other      operating expenses (b)                                                                                                                                                                                                                                  |   |             | 147,209 |   |     |   | 26,213  |         |   |   | (5,966       | )      |   |   | 167,456 |   |
| Interest      expense                                                                                                                                                                                                                                              |   |             | 20,914  |   |     |   | 3,149   |         |   |   | -            |   |   |   | 24,063 |   |
| Other      (income) expense                                                                                                                                                                                                                                        |   |             | 8,330   |   |     |   | -       |         |   |   | -            |   |   |   | 8,330 |   |
| Income      (loss) before income taxes and                                                                                                                                                                                                                         |   |             |    |   |     |   |    |         |   |   |         |   |   |   |   |   |
| minorityinterest                                                                                                                                                                                                                                                   |   |             | (2,403  | )      |     |   | 5,240   |         |   |   | (1,541       | )      |   |   | 1,296 |   |
|                                                                                                                                                                                                                                                               |   |             |    |   |     |   |    |         |   |   |         |   |   |   |   |   |
| Income      tax (expense) benefit                                                                                                                                                                                                                                  |   |             | 1,384   |   |     |   | (1,834  | )            |   |   | -            |   |   |   | (450 | ) |
| Minority      interest, net of tax                                                                                                                                                                                                                                 |   |             | -       |   |     |   | (3,360  | )            |   |   | -            |   |   |   | (3,360 | ) |
|                                                                                                                                                                                                                                                               |   |             |    |   |     |   |    |         |   |   |         |   |   |   |   |   |
| Net      income (loss)                                                                                                                                                                                                                                             |   | $                | (1,019  | )      |     | $      | 46      |         |   | $      | (1,541       | )      |   | $ | (2,514 | ) |
|                                                                                                                                                                                                                                                               |   |             |    |   |     |   |    |         |   |   |         |   |   |   |   |   |
| Total      assets                                                                                                                                                                                                                                                  |   | $                | 750,936 |   |     | $      | 117,388 |         |   | $      | (4,923       | )      |   | $ | 863,401 |   |
| Additions      to property and equipment                                                                                                                                                                                                                           |   | $                | 186,643 |   |     | $      | 22,324  |         |   | $      | (1,541       | )      |   | $ | 207,426 |   |
|                                                                                                                                                                                                   |   |             |    |   |     |   |    |         |   |   |         |   |   |   |   |   |
| (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                                               |   | $      | 158,525 |   |         | $      | 91,872  |      |   | $      | 15,264       |   |   | $            | (137,864 | ) |   | $ | 127,797 |   |
| Property      and equipment, net                                                                                                                                                                                                            |   |   | 391,114 |   |         |   | 341,085 |      |   |   | 79,854       |   |   |         | -        |   |   |   | 812,053 |   |
| Investments      in subsidiaries                                                                                                                                                                                                            |   |   | 73,486  |   |         |   | -       |      |   |   | -            |   |   |         | (73,486  | ) |   |   | - |   |
| Other      assets                                                 |   |   | 18,448  |   |         |   | 371     |      |   |   | 235          |   |   |         | (10,100  | ) |   |   | 8,954 |   |
| Total      assets                                                                     |   | $      | 641,573 |   |         | $      | 433,328 |      |   | $      | 95,353       |   |   | $            | (221,450 | ) |   | $ | 948,804 |   |
|                                                                                                                                                                                                                                        |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
| Current      liabilities                                          |   | $      | 133,418 |   |         | $      | 154,723 |      |   | $      | 31,726       |   |   | $            | (137,864 | ) |   | $ | 182,003 |   |
| Non-current      liabilities:                                                                                                                                                                                                               |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
| Long-term      debt                                                                   |   |   | 348,300 |   |         |   | -       |      |   |   | 40,913       |   |   |         | (10,100  | ) |   |   | 379,113 |   |
| Fair      value of derivatives                                                                                                                                                                                                              |   |   | 8,517   |   |         |   | -       |      |   |   | -            |   |   |         | -        |   |   |   | 8,517 |   |
| Other                                                                                 |   |   | 67,476  |   |         |   | 56,853  |      |   |   | 110          |   |   |         | -        |   |   |   | 124,439 |   |
|                                                                                                                                                                                                                                        |   |   | 424,293 |   |         |   | 56,853  |      |   |   | 41,023       |   |   |         | (10,100  | ) |   |   | 512,069 |   |
|                                                                                                                                                                                                                                        |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
| Stockholders’      equity                                   |   |   | 83,862  |   |         |   | 221,752 |      |   |   | 22,604       |   |   |         | (73,486  | ) |   |   | 254,732 |   |
| Total      liabilities and                                                                                                                                                                                                                  |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
|   stockholders’      equity                                                                                                                                                                                                 |   | $      | 641,573 |   |         | $      | 433,328 |      |   | $      | 95,353       |   |   | $            | (221,450 | ) |   | $ | 948,804 |   |

----

| (Audited)                                                                                                                                                                                                                                   |   |   |    |   |         |   |    | Non-      |   |   |         |   |   |         |     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|----------|
| (Dollars      in thousands)                                                                                                                                                                                                                 |   |   |    |   | 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                                             |   | $      | 82,492  |   |         | $      | 51,973 |      |   | $      | 17,033       |   |   | $            | (4,513 | ) |   | $ | 146,985 |   |
| Costs      and      expenses                                   |   |   | 91,875  |   |         |   | 25,280 |      |   |   | 15,856       |   |   |         | (4,152 | ) |   |   | 128,859 |   |
| Operating      income (loss)                                                                                                                                                                                                             |   |   | (9,383  | )      |         |   | 26,693 |      |   |   | 1,177        |   |   |         | (361   | ) |   |   | 18,126 |   |
| Other      income (expense)                                                                                                                                                                                                              |   |   | 124,799 |   |         |   | 5,348  |      |   |   | (813         | )      |   |         | -      |   |   |   | 129,334 |   |
| Income      tax      benefit                                   |   |   | (52,829 | )      |         |   | -      |      |   |   | -            |   |   |         | -      |   |   |   | (52,829 | ) |
| Minority      interest, net of tax                                                                                                                                                                                                       |   |   | (2      | )      |         |   | -      |      |   |   | -            |   |   |         | -      |   |   |   | (2 | ) |
| Net      income      (loss)                                                        |   | $      | 62,585  |   |         | $      | 32,041 |      |   | $      | 364          |   |   | $            | (361   | ) |   | $ | 94,629 |   |

| (Unaudited)                                                                                                                                                                                                                              |   |   |    |   |         |   |    | Non-      |   |   |         |   |   |         |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|---------|
| (Dollars      in thousands)                                                                                                                                                                                                              |   |   |    |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |    |
|                                                                                                                                                                                                                                     |   | Issuer |    |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |    |
| Total      revenue                                             |   | $      | 290,005 |   |         | $      | 145,215 |      |   | $      | 51,613       |   |   | $            | (11,722 | ) |   | $ | 475,111 |   |
| Costs      and      expenses                                   |   |   | 171,546 |   |         |   | 65,380  |      |   |   | 47,173       |   |   |         | (10,530 | ) |   |   | 273,569 |   |
| Operating      income (loss)                                                                                                                                                                                                             |   |   | 118,459 |   |         |   | 79,835  |      |   |   | 4,440        |   |   |         | (1,192  | ) |   |   | 201,542 |   |
| Other      income (expense)                                                                                                                                                                                                              |   |   | (65,304 | )      |         |   | (7,142  | )         |   |   | (2,770       | )      |   |         | -       |   |   |   | (75,216 | ) |
| Income      tax      benefit                                   |   |   | (45,409 | )      |         |   | -       |      |   |   | -            |   |   |         | -       |   |   |   | (45,409 | ) |
| Minority      interest, net of tax                                                                                                                                                                                                       |   |   | (280    | )      |         |   | -       |      |   |   | -            |   |   |         | -       |   |   |   | (280 | ) |
| Net      income      (loss)                                                        |   | $      | 7,466   |   |         | $      | 72,693  |      |   | $      | 1,670        |   |   | $            | (1,192  | ) |   | $ | 80,637 |   |

----

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

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

| (Unaudited)                                                                                                                                                                                                                     |   |   |    |   |         |   |    | Non-      |   |   |         |   |   |         |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|--------|
| (Dollars      in thousands)                                                                                                                                                                                                     |   |   |    |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                            |   | Issuer |    |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |   |
| Operating      activities                                  |   | $      | 133,386 |   |         | $      | 82,660  |      |   | $      | 5,611        |   |   | $            | 1,399  |   |   | $ | 223,056 |   |
| Investing      activities                                  |   |   | (27,240 | )      |         |   | (91,086 | )         |   |   | (1,986       | )      |   |         | (1,399 | ) |   |   | (121,711 | ) |
| Financing      activities                                  |   |   | (81,010 | )      |         |   | 8,617   |      |   |   | (6,764       | )      |   |         | -      |   |   |   | (79,157 | ) |
| Net      increase (decrease) in                                                                                                                                                                                                 |   |   |    |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| cash      and cash equivalents                                                                                                                                                                                                  |   |   | 25,136  |   |         |   | 191     |      |   |   | (3,139       | )      |   |         | -      |   |   |   | 22,188 |   |
| Cash      at the beginning of                                                                                                                                                                                                   |   |   |    |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| the      period                                                 |   |   | 5,325   |   |         |   | 1,288   |      |   |   | 5,731        |   |   |         | -      |   |   |   | 12,344 |   |
| Cash      at end of the period                                                                                                                                                                                                  |   | $      | 30,461  |   |         | $      | 1,479   |      |   | $      | 2,592        |   |   | $            | -      |   |   | $ | 34,532 |   |

| (Unaudited)                                                                                                                                                                                                                     |   |   |     |   |         |   |    | Non-      |   |   |         |   |   |         |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|--------|
| (Dollars      in thousands)                                                                                                                                                                                                     |   |   |     |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                            |   | Issuer |     |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |   |
| Operating      activities                                  |   | $      | 95,773   |   |         | $      | 47,432  |      |   | $      | 18,009       |   |   | $            | 1097   |   |   | $ | 162,311 |   |
| Investing      activities                                  |   |   | (169,985 | )      |         |   | (10,572 | )         |   |   | (22,660      | )      |   |         | (597   | ) |   |   | (203,814 | ) |
| Financing      activities                                  |   |   | 72,586   |   |         |   | (37,089 | )         |   |   | 2,188        |   |   |         | (500   | ) |   |   | 37,185 |   |
| Net      increase (decrease) in                                                                                                                                                                                                 |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| cash      and cash equivalents                                                                                                                                                                                                  |   |   | (1,626   | )      |         |   | (229    | )         |   |   | (2,463       | )      |   |         | -      |   |   |   | (4,318 | ) |
| Cash      at the beginning of                                                                                                                                                                                                   |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| the      period                                                 |   |   | 6,116    |   |         |   | 1,298   |      |   |   | 6,426        |   |   |         | -      |   |   |   | 13,840 |   |
| Cash      at end of the period                                                                                                                                                                                                  |   | $      | 4,490    |   |         | $      | 1,069   |      |   | $      | 3,963        |   |   | $            | -      |   |   | $ | 9,522 |   |

----

Item 2

| ·   | Our      oil and gas sales for the third quarter increased $43.7 million, or 52%,      from 2007.  Price variances accounted for a $46 million increase      and production variances accounted for a $2.3 million      decrease. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | Our      oil and gas production for the third quarter of 2008 was 9% lower on an      Mcfe basis than in the comparable period in 2007.  Our oil      production was 30% higher than the third quarter of 2007 which was more      than offset by a 32% drop in gas production compared to the 2007      period.  These production variances were affected by the sale of      properties in South Louisiana early in 2008 and production curtailments      during the third quarter of 2008 related to Hurricanes Gustav and      Ike. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | We      recorded a $132.7 million net gain on derivatives in the third      quarter of 2008, consisting of a $36.8 million realized loss on      settled contracts and a $169.5 million gain 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      the third quarter of 2008, we increased borrowings under our revolving      credit facility by $73.3 million from $50 million to $123.3 million in      order to partially finance additions to property and equipment of $111.1      million and to deposit $25 million in a money market fund backed by United      States Treasury obligations. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | At      September 30, 2008, our capitalized unproved oil and gas properties      totaled $137.8 million, of which approximately $61.8 million was      attributable to unproved acreage.  Unproved properties are      subject to a valuation impairment to the extent the carrying cost of a      prospect exceeds its estimated fair value.  Therefore, our      results of operations in future periods may be adversely affected by      unproved propertyimpairments. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | Three      Months Ended |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | September      30,      |    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 2008                    |    |   | 2007 |   |
| Oil      and Gas Production Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                    |    |   |   |   |
| Gas      (MMcf)                                                                                                         |   |                    | 3,920   |   |   |   | 5,750 |   |
| Oil      (MBbls)                                                                                                        |   |                    | 755     |   |   |   | 582 |   |
| Natural gas liquids      (MBbls)                                                                                        |   |                    | 39      |   |   |   | 58 |   |
| Total      (MMcfe)                                                                                                      |   |                    | 8,684   |   |   |   | 9,590 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |   |   |   |   |
| Average      Realized Prices (a):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                    |    |   |   |   |   |   |
| Gas      ($/Mcf)                                                                                                        |   | $                       | 9.88    |   |   | $ | 6.77 |   |
| Oil      ($/Bbl)                                                                                                        |   | $                       | 116.01  |   |   | $ | 72.10 |   |
| Natural gas liquids      ($/Bbl)                                                                                        |   | $                       | 69.90   |   |   | $ | 45.64 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |   |   |   |   |
| Gain      (Losses) on Settled Derivative Contracts (a):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |    |   |   |   |   |   |
| ($ in thousands, except per      unit)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                    |    |   |   |   |   |   |
| Gas:   Net realized gain      (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | $                       | (7,190  | ) |   | $ | 4,802 |   |
| Per      unit produced      ($/Mcf)                                                                                                                        |   | $                       | (1.83   | ) |   | $ | .84 |   |
| Oil:  Net realized      loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $                       | (29,324 | ) |   | $ | (3,180 | ) |
| Per      unit produced      ($/Bbl)                                                                                                                        |   | $                       | (38.84  | ) |   | $ | (5.46 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |   |   |   |   |
| Average      Daily Production:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                    |    |   |   |   |   |   |
| Natural Gas    (Mcf):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                    |    |   |   |   |   |   |
| Permian      Basin                                                                                                                                         |   |                    | 13,536  |   |   |   | 15,469 |   |
| North      Louisiana                                                                                                                                       |   |                    | 16,273  |   |   |   | 12,117 |   |
| South      Louisiana                                                                                                                                       |   |                    | 4,320   |   |   |   | 25,406 |   |
| Austin Chalk      (Trend)                                                                                                                                  |   |                    | 2,271   |   |   |   | 2,176 |   |
| Cotton Valley Reef      Complex                                                                                                                            |   |                    | 5,832   |   |   |   | 6,811 |   |
| Other                                                                                                                                                      |   |                    | 377     |   |   |   | 521 |   |
| Total                                                                                                                                                                                    |   |                    | 42,609  |   |   |   | 62,500 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |   |   |   |   |
| Oil (Bbls):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    |    |   |   |   |   |   |
| Permian      Basin                                                                                                                                         |   |                    | 3,983   |   |   |   | 3,291 |   |
| North      Louisiana                                                                                                                                       |   |                    | 392     |   |   |   | 228 |   |
| South      Louisiana                                                                                                                                       |   |                    | 90      |   |   |   | 1,129 |   |
| Austin Chalk      (Trend)                                                                                                                                  |   |                    | 3,659   |   |   |   | 1,589 |   |
| Other                                                                                                                                                      |   |                    | 83      |   |   |   | 89 |   |
| Total                                                                                                                                                                                    |   |                    | 8,207   |   |   |   | 6,326 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                    |    |   |   |   |   |   |
| Natural Gas Liquids      (Bbls):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                    |    |   |   |   |   |   |
| Permian      Basin                                                                                                                                         |   |                    | 174     |   |   |   | 200 |   |
| Austin Chalk      (Trend)                                                                                                                                  |   |                    | 233     |   |   |   | 229 |   |
| Other                                                                                                                                                      |   |                    | 17      |   |   |   | 201 |   |
| Total                                                                                                                                                                                    |   |                    | 424     |   |   |   | 630 |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | Three      Months Ended |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | September      30,      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 2008                    |   |   | 2007 |   |
| Exploration      Costs (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                    |   |   |   |   |
| Abandonment and impairment      costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                    |   |   |   |   |
| Permian      Basin                                                                                                                                             |   | $                       | 716    |   |   | $ | 332 |   |
| East Texas      Bossier                                                                                                                                        |   |                    | 40,063 |   |   |   | 2,640 |   |
| Other                                                                                                                                                          |   |                    | 2,257  |   |   |   | 15,830 |   |
| Total                                                                                                                                                                                        |   |                    | 43,036 |   |   |   | 18,802 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    |   |   |   |   |   |   |
| Seismic and      other                                                                                                      |   |                    | 5,993  |   |   |   | 1,236 |   |
| Total exploration      costs                                                                                                                                                                 |   | $                       | 49,029 |   |   | $ | 20,038 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    |   |   |   |   |   |   |
| Depreciation,      Depletion and Amortization (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                    |   |   |   |   |   |   |
| Oil and gas      depletion                                                                                                  |   | $                       | 24,881 |   |   | $ | 20,710 |   |
| Contract drilling      depreciation                                                                                         |   |                    | 2,134  |   |   |   | 2,013 |   |
| Other      depreciation                                                                                                     |   |                    | 211    |   |   |   | 295 |   |
| Total      DD&A                                                                                                                                                                          |   | $                       | 27,226 |   |   | $ | 23,018 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    |   |   |   |   |   |   |
| Oil      and Gas Costs ($/Mcfe Produced):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                    |   |   |   |   |   |   |
| Production      costs                                                                                                       |   | $                       | 2.63   |   |   | $ | 2.17 |   |
| Oil and gas      depletion                                                                                                  |   | $                       | 2.87   |   |   | $ | 2.16 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    |   |   |   |   |   |   |
| Net      Wells Drilled (b):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                    |   |   |   |   |   |   |
| Exploratory      Wells                                                                                                      |   |                    | -      |   |   |   | 2.2 |   |
| Developmental      Wells                                                                                                    |   |                    | 21.6   |   |   |   | 8.2 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | Nine      Months Ended |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | September      30,     |    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 2008                   |    |   | 2007 |   |
| Oil      and Gas Production Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                   |    |   |   |   |
| Gas      (MMcf)                                                                                                         |   |                   | 13,645  |   |   |   | 15,228 |   |
| Oil      (MBbls)                                                                                                        |   |                   | 2,142   |   |   |   | 1,702 |   |
| Natural gas liquids      (MBbls)                                                                                        |   |                   | 138     |   |   |   | 161 |   |
| Total      (MMcfe)                                                                                                      |   |                   | 27,325  |   |   |   | 26,406 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                   |    |   |   |   |   |   |
| Average      Realized Prices (a):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                   |    |   |   |   |   |   |
| Gas      ($/Mcf)                                                                                                        |   | $                      | 9.83    |   |   | $ | 6.96 |   |
| Oil      ($/Bbl)                                                                                                        |   | $                      | 111.48  |   |   | $ | 63.56 |   |
| Natural gas liquids      ($/Bbl)                                                                                        |   | $                      | 61.70   |   |   | $ | 41.12 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                   |    |   |   |   |   |   |
| Gain      (Losses) on Settled Derivative Contracts (a):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                   |    |   |   |   |   |   |
| ($ in thousands, except per      unit)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                   |    |   |   |   |   |   |
| Gas:    Net realized gain      (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | $                      | (18,361 | ) |   | $ | 9,784 |   |
|   Per unit produced      ($/Mcf)                                                                                                                 |   | $                      | (1.35   | ) |   | $ | .64 |   |
| Oil:      Net realized      loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | $                      | (65,578 | ) |   | $ | (7,710 | ) |
|   Per unit produced      ($/Bbl)                                                                                                                 |   | $                      | (30.62  | ) |   | $ | (4.53 | ) |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Nine      Months Ended |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | September      30,     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 2008                   |   |   | 2007 |   |
| Average      Daily Production:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                   |   |   |   |   |
| Natural Gas    (Mcf):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                   |   |   |   |   |
| Permian      Basin                                                                                                                                            |   |                   | 14,287 |   |   |   | 14,861 |   |
| North      Louisiana                                                                                                                                          |   |                   | 15,169 |   |   |   | 6,629 |   |
| South      Louisiana                                                                                                                                          |   |                   | 11,682 |   |   |   | 24,255 |   |
| Austin Chalk      (Trend)                                                                                                                                     |   |                   | 2,313  |   |   |   | 2,211 |   |
| Cotton Valley Reef      Complex                                                                                                                               |   |                   | 5,848  |   |   |   | 7,383 |   |
| Other                                                                                                                                                         |   |                   | 500    |   |   |   | 441 |   |
| Total                                                                                                                                                                                       |   |                   | 49,799 |   |   |   | 55,780 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                   |   |   |   |   |   |   |
| Oil (Bbls):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                   |   |   |   |   |   |   |
| Permian      Basin                                                                                                                                            |   |                   | 3,683  |   |   |   | 3,174 |   |
| North      Louisiana                                                                                                                                          |   |                   | 363    |   |   |   | 137 |   |
| South      Louisiana                                                                                                                                          |   |                   | 393    |   |   |   | 1,213 |   |
| Austin Chalk      (Trend)                                                                                                                                     |   |                   | 3,291  |   |   |   | 1,628 |   |
| Other                                                                                                                                                         |   |                   | 88     |   |   |   | 82 |   |
| Total                                                                                                                                                                                       |   |                   | 7,818  |   |   |   | 6,234 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                   |   |   |   |   |   |   |
| Natural Gas Liquids      (Bbls):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                   |   |   |   |   |   |   |
| Permian      Basin                                                                                                                                            |   |                   | 181    |   |   |   | 207 |   |
| Austin Chalk      (Trend)                                                                                                                                     |   |                   | 249    |   |   |   | 250 |   |
| Other                                                                                                                                                         |   |                   | 74     |   |   |   | 133 |   |
| Total                                                                                                                                                                                       |   |                   | 504    |   |   |   | 590 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                   |   |   |   |   |   |   |
| Exploration      Costs (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                   |   |   |   |   |   |   |
| Abandonment and impairment      costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                   |   |   |   |   |   |   |
| Permian      Basin                                                                                                                                            |   | $                      | 716    |   |   | $ | 1,321 |   |
| East Texas      Bossier                                                                                                                                       |   |                   | 40,063 |   |   |   | - |   |
| North      Louisiana                                                                                                                                          |   |                   | 2,162  |   |   |   | 16,642 |   |
| South      Louisiana                                                                                                                                          |   |                   | -      |   |   |   | 28,677 |   |
| Other                                                                                                                                                         |   |                   | 2,325  |   |   |   | 6,786 |   |
| Total                                                                                                                                                                                            |   |                   | 45,266 |   |   |   | 53,426 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                   |   |   |   |   |   |   |
| Seismic and      other                                                                                                     |   |                   | 11,230 |   |   |   | 3,706 |   |
| Total exploration      costs                                                                                                                                                                     |   | $                      | 56,496 |   |   | $ | 57,132 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                   |   |   |   |   |   |   |
| Depreciation,      Depletion and Amortization (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                   |   |   |   |   |   |   |
| Oil and gas      depletion                                                                                                 |   | $                      | 75,220 |   |   | $ | 50,589 |   |
| Contract drilling      depreciation                                                                                        |   |                   | 6,533  |   |   |   | 5,258 |   |
| Other      depreciation                                                                                                    |   |                   | 720    |   |   |   | 889 |   |
| Total      DD&A                                                                                                                                                                              |   | $                      | 82,473 |   |   | $ | 56,736 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                   |   |   |   |   |   |   |
| Oil      and Gas Costs ($/Mcfe Produced):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                   |   |   |   |   |   |   |
| Production      costs                                                                                                      |   | $                      | 2.39   |   |   | $ | 2.12 |   |
| Oil and gas      depletion                                                                                                 |   | $                      | 2.75   |   |   | $ | 1.92 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                   |   |   |   |   |   |   |
| Net      Wells Drilled (b):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                   |   |   |   |   |   |   |
| Exploratory      Wells                                                                                                     |   |                   | 2.7    |   |   |   | 11.4 |   |
| Developmental      Wells                                                                                                   |   |                   | 57.3   |   |   |   | 17.4 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                   |   |   |   |   |   |   |
| (a)    No      derivatives were designated as cash flow hedges in 2008 or 2007. All      gains or losses on settled derivatives were included in gain (loss) on      derivatives.                                                                                                                                                                                                                                                                                                                                                                    |   |
| (b)    Excludes wells      being drilled or completed at the end of each period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |

----

----

----

----

----

----

|                                                                                                                                                                                                                                                                                                   |   | Actual                  |    |   | Planned                |   |    |           |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|--------|------------------------|--------|---------|----------------|--------|
|                                                                                                                                                                                                                                                                                                   |   | Expenditures            |    |   | Expenditures           |   |    | Year      2008 |   |
|                                                                                                                                                                                                                                                                                                   |   | Nine      Months Ended  |    |   | Year      Ending       |   |    | Percentage     |   |
|                                                                                                                                                                                                                                                                                                   |   | September      30, 2008 |    |   | December      31, 2008 |   |    | of      Total  |   |
|                                                                                                                                                                                                                                                                                                   |   | (In      thousands)     |    |   |                   |   |
| Permian      Basin                                                         |   | $                       | 120,000 |   |                   | $      | 147,500 |           |   |   | 42 | % |
| North      Louisiana                                                       |   |                    | 59,800  |   |                   |   | 70,200  |           |   |   | 20 | % |
| Austin      Chalk      (Trend)                                             |   |                    | 48,100  |   |                   |   | 50,300  |           |   |   | 15 | % |
| South      Louisiana                                                       |   |                    | 31,400  |   |                   |   | 36,900  |           |   |   | 11 | % |
| East      Texas      Bossier                                               |   |                    | 22,400  |   |                   |   | 38,700  |           |   |   | 11 | % |
| Utah/California                                                            |   |                    | 2,200   |   |                   |   | 4,700   |           |   |   | 1 | % |
| Other                                                                      |   |                    | 200     |   |                   |   | 200     |           |   |   | - |   |
|                                                                                                                                                                                                                                                                                                   |   | $                       | 284,100 |   |                   | $      | 348,500 |           |   |   | 100 | % |

----

----

|                                                                                            |   | September      30,  |    |   | December      31, |   |
|-------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------|-------------------|--------|
|                                                                                            |   | 2008                |    |   | 2007              |   |
|                                                                                            |   | (In      thousands) |    |
| Working      capital (deficit) per GAAP                                                         |   | $                   | (54,206 | )      |              | $      | (76,388 | ) |
| Add      funds available under the revolving credit facility                                    |   |                | 125,896 |   |              |   | 108,396 |   |
| Exclude      fair value of derivatives classified as current assets or current      liabilities |   |                | 24,839  |   |              |   | 49,738 |   |
| Exclude      current assets and current liabilities of Larclay JV                               |   |                | 17,064  |   |              |   | 21,423 |   |
| Working      capital per loan covenant                                                          |   | $                   | 113,593 |   |              | $      | 103,169 |   |

----

Item 3- 

----

|                                                                                                                                                                                         |   | Gas            |       |   | Oil    |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|------------|--------|--------|--------|
|                                                                                                                                                                                         |   | MMBtu      (a) |       |   | Price  |   |   | Bbls |   |   | Price |   |
| Production      Period:                                                                                                                                                                      |   |           |       |   |   |   |   |   |   |   |   |   |
| 4th      Quarter      2008                            |   |           | 4,100,000  |   |   | $      | 9.17 |   |   |   | 400,000 |   |   | $ | 82.21 |   |
| 1st      Quarter      2009                            |   |           | 2,800,000  |   |   | $      | 8.46 |   |   |   | 440,000 |   |   | $ | 88.90 |   |
| 2nd      Quarter 2009                                                                                                                                                                        |   |           | 2,700,000  |   |   | $      | 8.47 |   |   |   | 420,000 |   |   | $ | 88.12 |   |
| 3rd      Quarter 2009                                                                                                                                                                        |   |           | 2,600,000  |   |   | $      | 8.48 |   |   |   | 440,000 |   |   | $ | 87.89 |   |
| 4th      Quarter      2009                            |   |           | 2,450,000  |   |   | $      | 8.49 |   |   |   | 425,000 |   |   | $ | 87.29 |   |
| 2010                                                  |   |           | 4,640,000  |   |   | $      | 8.51 |   |   |   | 840,000 |   |   | $ | 97.75 |   |
|                                                                                                                                                                                         |   |           | 19,290,000 |   |   |   |   |   |   |   | 2,965,000 |   |   |   |   |   |
|                                                                                                                             |   |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (a)     One      MMBtu equals one Mcf at a Btu factor of 1,000.                                                                                                     |   |

----

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

Item 4-    

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

----

Item 1A

Item 5

----

----

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†                                                                                          |   | Participation      Agreement relating to Sacramento Basin II dated August 12, 2008 filed as      Exhibit 10.1 to our Current Report on Form 8-K filed with the Commission      August 14, 2008. ††                                                                                       |
|                                                                                                   |   |                                                                                                                                                                                                                                                                                                 |
| *10.2                                                                                                  |   | Form      of Director Indemnification Agreement                                                                                                                                                                                                                                                      |
|                                                                                                   |   |                                                                                                                                                                                                                                                                                                 |
| *31.1                                                                                                  |   | Certification      by the President and Chief Executive Officer of the Company pursuant to      Rule 13a - 14(a) of the Securities Exchange Act of      1934                                                                                                                               |
|                                                                                                   |   |                                                                                                                                                                                                                                                                                                 |
| *31.2                                                                                                  |   | Certification      by the Chief Financial Officer of the Company pursuant to Rule      13a - 14(a) of the Securities Exchange Act of    1934                                                                                                                                               |
|                                                                                                   |   |                                                                                                                                                                                                                                                                                                 |
| *32.1                                                                                                  |   | Certifications      by the Chief Executive Officer and Chief Financial Officer of the Company      pursuant to 18 U.S.C. § 1350                                                                                                                                                  |
|                   |   |                                                                                                                                                                                                                                                                                                 |

|   |  *              | Filed      herewith                                                                                               |
|--------|----------------------|------------------------------------------------------------------------------------------------------------------------|
|   |  **             | Incorporated      by reference to the filing indicated                                                            |
|   |  †        | Identifies      an Exhibit that consists of or includes a management contract or      compensatory plan or arrangement |
|   |  †† | Filed      under our Commission File No.001-10924                                                                      |

|   |   |
|--------|--------|

----

WILLIAMS

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

| Date:  | November      7, 2008 | By:    | /s/      L. Paul Latham                 |
|--------|-----------------------|--------|-----------------------------------------|
|   |                  |   | L.      Paul Latham                     |
|   |                  |   | Executive      Vice President and Chief |
|   |                  |   |   Operating      Officer      |

| Date:  | November      7, 2008 | By:    | /s/      Mel G. Riggs                          |
|--------|-----------------------|--------|------------------------------------------------|
|   |                  |   | Mel      G. Riggs                              |
|   |                  |   | Senior      Vice President and Chief Financial |
|   |                  |   |   Officer                            |