8

                    SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, DC  20549

                                FORM 10-K/A

(Mark One)
X    Annual report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934
     For the Fiscal year ended December 31, 1999

     or

?    Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934
     For the transition period from __________ to _______________

     Commission file number:  000-23701

     SOUTHWEST ROYALTIES, INC.                  SOUTHWEST ROYALTIES
     (Exact Name of Registrant as               HOLDINGS, INC.
     Specified in Its Charter)                  (Exact Name of Registrant
as
                                                Specified in Its Charter)

     Delaware                                   Delaware
     (State or Other Jurisdiction of            (State or Other
Jurisdiction of
     Incorporation or Organization)             Incorporation or
     Organization)

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

     407 North Big Spring, Suite 300
     Midland, Texas                             79701
     (Address of Principal Executive            (Zip Code)
     Offices)

    Registrants' Telephone Number, Including Area Code:  (915) 686-9927

Securities to be registered pursuant to Section 12(b) of the Act:  None

Securities to be registered pursuant to Section 12(g) of the Act:

                        10.5% Senior Notes due 2004
                             (Title of Class)

     Indicate  by check whether the registrant:  (1) has filed all  reports
required to be filed by Section 13 or 15(d) of the Securities Exchange  Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject  to
such filing requirements for the past 90 days.  Yes X  No
     Indicate  by check mark if disclosure of delinquent files pursuant  to
Item  405  of  Regulation  S-K is not contained herein,  and  will  not  be
contained,  to the best of registrant's knowledge, in definitive  proxy  or
information statements incorporated by reference in Part III of  this  Form
10-K or any amendment to this Form 10-K.  X

<PAGE>
     As of December 31, 1999, Southwest Royalties, Inc. had outstanding 100
shares  of common stock, $.10 par value, which is its only class of  stock.
As of December 31, 1999, Southwest Royalties Holdings, Inc. had outstanding
1,075,868  shares of common stock, $.10 par value, which is its only  class
of  stock.  The common stock of Southwest Royalties Holdings, Inc.  is  not
traded  on any exchange and, therefore, its aggregate market value and  the
value  of  shares held by nonaffiliates cannot be determined.  All  of  the
outstanding  shares  of  Southwest Royalties, Inc. are  held  by  Southwest
Royalties Holdings, Inc.

EXPLANATION FOR THIS AMENDMENT:

      Southwest Royalties Holdings, Inc. and Southwest Royalties, Inc. file
this  Amendment No. 1 to the Annual Report, Form 10-K, for the fiscal  year
ended  December 31, 1999 in order to correct a date disclosed  in  Item  8,
Independent Auditor's Report.




<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                Index to Consolidated Financial Statements

                                                              Page
                                                             -----

Consolidated Financial Statements of Southwest Royalties
  Holdings, Inc. and Subsidiaries
Independent Auditors' Report                                   42
Consolidated Balance Sheets as of December 31, 1999 and 1998          43
Consolidated Statements of Operations for the Years Ended
  December 31, 1999, 1998 and 1997                             45
Consolidated Statements of Stockholders' Equity for the Years
  Ended December 31, 1999, 1998 and 1997                       47
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1999, 1998 and 1997                             48
Notes to Consolidated Financial Statements                     50




<PAGE>
                       INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Southwest Royalties Holdings, Inc.:


     We  have  audited  the  accompanying consolidated  balance  sheets  of
Southwest Royalties Holdings, Inc. and subsidiaries as of December 31, 1999
and   1998,   and  the  related  consolidated  statements  of   operations,
stockholders' equity and cash flows for each of the years in the three-year
period  ended  December 31, 1999.  These consolidated financial  statements
are the responsibility of the Company's management.  Our responsibility  is
to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the  audit  to
obtain reasonable assurance about whether the financial statements are free
of  material  misstatement. An audit includes examining, on a  test  basis,
evidence   supporting  the  amounts  and  disclosures  in   the   financial
statements.   An  audit  also includes assessing the accounting  principles
used  and  significant estimates made by management, as well as  evaluating
the  overall financial statement presentation.  We believe that our  audits
provide a reasonable basis for our opinion.

     In  our  opinion,  the consolidated financial statements  referred  to
above  present fairly, in all material respects, the financial position  of
Southwest Royalties Holdings, Inc. and subsidiaries as of December 31, 1999
and 1998, and the results of their operations and their cash flows for each
of  the  years  in  the  three-year period  ended  December  31,  1999,  in
conformity with generally accepted accounting principles.

     The  accompanying consolidated financial statements have been prepared
assuming  that the Company will continue as a going concern.  As  discussed
in  Note  2  to  the  consolidated financial  statements,  the  Company  is
experiencing  difficulty in generating sufficient cash  flow  to  meet  its
obligations and sustain its operations which raises substantial doubt about
its  ability to continue as a going concern.  Management's plans in  regard
to  these matters are also described in Note 2.  The consolidated financial
statements  do  not  include any adjustments that  might  result  from  the
outcome of this uncertainty.






                                     KPMG LLP

Midland, Texas
March 15, 2000




<PAGE>

            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES

                        CONSOLIDATED BALANCE SHEETS

                              (in thousands)

                                                        December 31,
                                                  ------------------------
ASSETS                                                1999      1998
----------------------------------------------------------     -----  -----
Current assets
  Cash and cash equivalents                         $ 16,983  $ 13,801
  Restricted cash                                     10,003     5,050
  Accounts receivable, net of allowance of
   $440 and $342, respectively                         7,134     5,248
  Receivables from related parties                       836     1,594
  Other current assets                                 1,179     1,624
                                                     -------   -------
     Total current assets                             36,135    27,317
                                                     -------   -------

Oil and gas properties, using the full cost
 method of accounting
  Proved                                             193,319   194,096
  Unproved                                             2,059     3,230
                                                     -------   -------
                                                     195,378   197,326
  Less accumulated depletion, depreciation
   and amortization                                  126,742   121,841
                                                     -------   -------
     Oil and gas properties, net                      68,636    75,485
                                                     -------   -------
Rental property, net                                 128,685   132,120
                                                     -------   -------
Rental property - construction in progress             3,984         -
                                                     -------   -------
Other property and equipment, net                      4,841     5,888
                                                     -------   -------
Other assets
    Equity   investment   in  subsidiary  and   partnerships              -
931
  Real estate investments                              3,644     4,019
  Deferred debt costs, net of accumulated
    amortization  of  $5,681  and  $3,136,  respectively             13,816
8,725
  Noncompete covenants, net of accumulated
   amortization of $563 and $269, respectively         1,041     1,335
  Other, net                                           1,385     1,730
                                                     -------   -------
  Total other assets                                  19,886    16,740
                                                     -------   -------
Total assets                                        $262,167  $257,550
                                                     =======   =======
                                                           (continued)








           The accompanying notes are an integral part of these
                    consolidated financial statements.

<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES

                 CONSOLIDATED BALANCE SHEETS - (continued)

                   (in thousands, except per share data)

                                                        December 31,
LIABILITIES, MINORITY INTEREST, REDEEMABLE        ------------------------
 COMMON STOCK AND STOCKHOLDERS' EQUITY                1999      1998
----------------------------------------------------------     -----  -----
Current liabilities
  Current maturities of long-term debt              $ 40,277  $ 12,716
  Accounts payable                                     6,011     7,116
  Accounts payable to related parties                    867       173
  Accrued expenses                                    10,670     9,737
                                                     -------   -------
     Total current liabilities                        57,825    29,742
                                                     -------   -------
Long-term debt                                       306,806   322,368
                                                     -------   -------
Other long-term liabilities                            1,220     1,797
                                                     -------   -------
Minority interest                                          8       206
                                                     -------   -------
Redeemable common stock of subsidiary                  1,228     2,979
                                                     -------   -------
Redeemable common stock                                8,290     8,290
                                                     -------   -------
Stockholders' equity
  Preferred stock - $1 par value; 5,000,000 shares
  authorized; none issued                                  -         -
  Common stock - $.10 par value; 5,000,000 shares
   authorized; 1,161,037 issued at December 31, 1999
   and 1998                                              116       116
  Additional paid-in capital                           2,196     2,196
  Accumulated deficit                               (110,784) (105,375)
   Note  receivable  from  an officer and  stockholder              (1,648)
(1,679)
  Less:  treasury stock - at cost; 214,215 shares at
   December 31, 1999 and 1998                        (3,090)   (3,090)
                                                     -------   -------
     Total stockholders' deficit                    (113,210) (107,832)
                                                     -------   -------
Total liabilities, minority interest, redeemable
  common stock and stockholders' equity             $262,167  $257,550
                                                     =======   =======















           The accompanying notes are an integral part of these
                    consolidated financial statements.

<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES

                   CONSOLIDATED STATEMENTS OF OPERATIONS

                   (in thousands, except per share data)

                                        For the years ended December 31,
                                       ----------------------------------
                                           1999       1998      1997
                                          -----      -----     -----
Operating revenues
  Oil and gas                           $ 31,425   $  32,467 $  38,500
  Well servicing, including related party
     revenues of $0, $0 and $8,
     respectively                              -           -     7,789
  Real estate                             31,301      25,650     9,338
  Other                                    1,206       1,392     1,227
                                        ---------  ---------  ---------
  Total operating revenues                63,932      59,509    56,854
                                        ---------  ---------  ---------
Operating expenses
  Oil and gas production                  10,833      18,395    18,500
  Well servicing                               -           -     5,600
  Real estate                             18,374      13,242     4,138
  General and administrative, net of
     related party management and
     administrative fees of $3,515, $3,789
     and $3,538, respectively              3,109       4,450     5,745
   Depreciation,  depletion  and amortization              9,987     19,240
15,034
   Impairment  of  oil  and gas  properties              -           64,000
-
  Other                                      798       1,235     1,342
                                        ---------  ---------  ---------
  Total operating expenses                43,101     120,562    50,359
                                        ---------  ---------  ---------
Operating income (loss)                   20,831    (61,053)     6,495
                                        ---------  ---------  ---------
Other income (expense)
  Interest and dividend income               954       1,478     1,002
  Interest expense                      (41,910)    (36,490)  (18,894)
  Other                                      952         370       145
                                        ---------  ---------  ---------
                                        (40,004)    (34,642)  (17,747)
                                        ---------  ---------  ---------
                                                           (continued)

<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF OPERATIONS - (continued)

                   (in thousands, except per share data)

                                        For the years ended December 31,
                                       ----------------------------------
                                           1999       1998      1997
                                          -----      -----     -----

Loss before income taxes, minority
  interest, equity loss and extraordinary
  item                                  (19,173)    (95,695)  (11,252)
  Income tax benefit                           -       2,348     2,641
                                        ---------  ---------  ---------
Loss before minority interest,
  equity loss and extraordinary item    (19,173)    (93,347)   (8,611)
  Minority interest in subsidiaries,
   net of tax                              1,820         913       430
  Equity loss in subsidiary and
   partnerships, net of tax                (931)     (3,620)     (203)
                                        ---------  ---------  ---------
Loss before extraordinary item          (18,284)    (96,054)   (8,384)
  Extraordinary gain (loss) from early
     extinguishment  of  debt,  net  of   tax                12,875       -
(3,109)
                                        ---------  ---------  ---------
Net Loss                                $(5,409)   $(96,054) $(11,493)
                                        =========  =========  =========
Loss per common share
  Loss per common share before
   extraordinary item                   $ (17.00)  $ (89.28) $  (7.78)
  Extraordinary gain (loss) from early
     extinguishment  of  debt,  net  of   tax                11.97        -
(2.88)
                                        ---------  ---------  ---------
Loss per common share                   $  (5.03)  $ (89.28) $ (10.66)
                                        =========  =========  =========
Weighted average shares outstanding     1,075,868  1,075,868  1,077,808
                                        =========  =========  =========





















           The accompanying notes are an integral part of these
                     consolidated financial statements

<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

           For the years ended December 31, 1999, 1998 and 1997

                     (in thousands, except share data)

                                                     Note
                    Common StockAdditional        ReceivableTreasury Stock
                   --------------Paid-InAccumulated  from   ---------------
                    Shares AmountCapital  DeficitStockholderShares  Amount
                   ------- -------------  ---------------------------------
-
Balance -
  January 1, 19971,160,537 $116   $2,196  $ 2,172  $(1,735)204,575 $(2,508)

Stock option exercised 500    -        -        -       -       -       -
Payments received on
  note receivable        -    -        -        -      28       -       -
Purchase  of treasury stock -      -       -        -             -   9,640
(582)
Net loss                 -    -        -  (11,493)      -       -       -
                 --------- ----    -----  -------  ------ -------  ------
Balance -
   December 31, 19971,161,037      116     2,196    (9,321)         (1,707)
214,215                    (3,090)

Payments received on
  note receivable        -    -        -        -      28       -       -
Net loss                 -    -        -  (96,054)      -       -       -
                 --------- ----    -----  -------  ------ -------  ------
Balance -
   December 31, 19981,161,037      116     2,196    (105,375)       (1,679)
214,215                    (3,090)

Payments received on
  note receivable        -    -        -        -      31       -       -
Net loss                 -    -        -  (5,409)       -       -       -
                 --------- ----    -----  -------  ------ -------  ------
Balance -
   December 31, 19991,161,037  $   116  $  2,196 $  (110,784)    $  (1,648)
214,215                  $ (3,090)
                 ========= ====    =====  =======  ====== =======  ======

























           The accompanying notes are an integral part of these
                    consolidated financial statements.

<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES

                   CONSOLIDATED STATEMENTS OF CASH FLOWS

                              (in thousands)

                                         For the years ended December 31,
                                        ----------------------------------
                                             1999      1998      1997
                                            -----     -----     -----
Cash flows from operating activities
  Net loss                               $ (5,409)  $(96,054)  $(11,493)
  Adjustments to reconcile net
   loss to net cash provided by (used in)
   operating activities:
   Depreciation,  depletion  and amortization               9,987    19,240
15,034
   Impairment  of  oil  and gas properties               -           64,000
-
  Noncash interest expense                   6,344      2,963    1,311
  Extraordinary (gain) loss from early
   extinguishment of debt                 (12,875)          -    1,411
  Gain (Loss) on sale of assets              (167)      (275)       84
  Equity in loss of subsidiary and
   partnerships                                187      3,620      203
  Impairment of equity investment              744          -        -
  Other noncash items                          329          3    (176)
  Amortization of lease commissions            525        184        -
  Bad debt expense                             438        501      241
  Deferred income taxes                          -    (2,348)  (2,606)
   Minority  interest  in loss of subsidiary              (1,820)     (913)
(430)
  Changes in operating assets and liabilities-
   Accounts receivable                     (1,704)      3,709  (6,029)
   Other current assets                         60      (226)    (594)
   Deferred lease costs                      (398)      (773)    (402)
     Accounts  payable  and  accrued  expenses             (512)        166
6,612
   Accrued interest payable                  (853)        227    2,898
   Income taxes payable                          -          -     (30)
  Change in restricted cash                (5,284)          -        -
                                           -------    -------  -------
Net cash provided by (used in) operating
  activities                              (10,408)    (5,976)    6,034
                                           -------    -------  -------
Cash flows from investing activities
   Proceeds  from  sale  of  oil and gas properties       5,575       5,706
1,538
  Purchase of oil and gas properties       (3,688)   (10,046)  (103,205)
  Purchase of other property and equipment
   and rental property                     (3,277)   (54,462)  (61,645)
  Purchase of other assets                   (733)      (712)  (3,121)
  Purchase of noncompete covenants               -    (1,604)        -
    Increase   in  construction  in  progress                (3,984)      -
-
  Proceeds from sale of other assets           515      1,317      219
  Proceeds from sale of other property,
   equipment and rental property             3,446         50      209
  Purchase of real estate investments            -      (333)     (91)
   Proceeds  from  sale  of  real  estate  investment       660         765
-
  Change in restricted cash                    331      3,014  (8,064)
  Other                                         31         22      258
                                           -------    -------  -------
Net cash used in investing activities      (1,124)   (56,283)  (173,902)
                                           -------    -------  -------
                                                           (continued)
<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)

                              (in thousands)

                                         For the years ended December 31,
                                        ----------------------------------
                                             1999      1998      1997
                                            -----     -----     -----
Cash flows from financing activities
  Proceeds from borrowings                 144,740     54,589  309,870
  Payments on debt                       (120,388)    (3,877)  (113,381)
   Decrease  in  other long-term liabilities                 (52)      (12)
(1,325)
   Cash  received  on subscriptions receivable                  -         -
2,807
  Purchase of treasury stock                     -          -    (582)
  Deferred debt costs                      (8,546)    (1,576)  (9,842)
  Issuance of redeemable common stock, net
  of issue costs                                 -          -       32
  Net proceeds from sale of subsidiaries
   common stock                                  -          -    1,007
  Prepayment penalty on early
   extinguishment of debt                    (887)          -    (341)
   Dividends  paid  to minority interest owners             (121)     (120)
(122)
   Purchase  of  minority interest in subsidiary                -     (309)
-
   Purchase  of  treasury stock by subsidiary                (32)         -
(1,174)
                                           -------    -------  -------
Net  cash  provided  by financing activities               14,714    48,695
186,949
                                           -------    -------  -------
Net increase (decrease) in unrestricted
  cash and cash equivalents                  3,182   (13,564)   19,081
  Unrestricted cash and cash equivalents -
  beginning of period                       13,801     27,365    8,284
                                           -------    -------  -------
Unrestricted cash and cash equivalents -
  end of period                          $  16,983  $  13,801  $27,365
                                           =======    =======  =======
Supplemental disclosures of cash flow
 information
  Interest paid                          $  36,419  $  31,695  $14,802




















           The accompanying notes are and integral part of these
                    consolidated financial statements.

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

1.   Organization and Summary of Significant Accounting Policies

Business

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

     Southwest  is  principally involved in the business  of  oil  and  gas
development  and production, as well as organizing and serving as  managing
general partner for various public and private limited partnerships engaged
in  oil  and  gas  acquisitions, exploration, development  and  production.
Southwest  is also the general partner of Southwest Partners  II  and  III,
which  own  common  stock  in Sierra.  Southwest  sells  its  oil  and  gas
production  to  a variety of purchasers, with the prices it receives  being
dependent  upon  the oil and gas commodity prices.  Red Oak is  principally
involved  in  real estate investment and development. Sierra is principally
involved in the business of oil and gas well services.

Principles of Consolidation

     The  consolidated financial statements include the accounts of SRH and
its  subsidiaries.  As  of December 31, 1999 and 1998,  the  Company  owned
approximately 81% of Red Oak, 39% of Sierra, 100% of Blue Heel, 99% of  MSS
and  100%  and  98%,  respectively, of TPI.  Blue Heel,  MSS  and  TPI  are
subsidiaries   of   Southwest.  Effective  July   1,   1997,   Sierra   was
deconsolidated and is accounted for using the equity method (see  Note  4).
Effective  November  1999, TPI was liquidated. The  consolidated  financial
statements  include  the  Company's  proportionate  share  of  the  assets,
liabilities,  income and expenses of oil and gas limited  partnerships  for
which it serves as managing general partner.  The Company accounts for  its
investments  in Southwest Partners II and III using the equity  method,  as
the  Company exercises significant influence over the operations  of  these
partnerships.    All  significant  intercompany  transactions   have   been
eliminated.

Estimates and Uncertainties

     Preparation  of the accompanying consolidated financial statements  in
conformity   with   generally  accepted  accounting   principles   requires
management  to  make  estimates and assumptions that  affect  the  reported
amounts of assets and liabilities and disclosures of contingent assets  and
liabilities  at  the  date  of the financial statements  and  the  reported
amounts  of  revenues  and  expenses during the reporting  period.   Actual
results could differ from those estimates.

Cash and Cash Equivalents

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

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

Restricted Cash

     Restricted cash represents amounts required to be reserved in separate
accounts by financial lenders.  The interest sinking fund is cash set aside
to pay interest on the 10.5% Senior Notes.

     Restricted  cash  accounts  have been established  for  the  following
purposes (in thousands):
                                                          1999     1998
                                                          ----     ----
     Cash bonds                                        $    35        -
     Certificate of Deposits                               112      105
     Tenant security deposits                              512      412
     Interest reserves                                       -      707
     Capital expenditures account                          552    1,229
     Tax and insurance reserve                           2,465    1,009
     Tenant bankruptcy reserve                               -      767
     Lockbox                                               439      217
     Customer service reserve                               10       10
     Escrow fund                                           627      594
     Interest sinking fund                               5,251        -
                                                        ------    -----
                                                       $10,003    5,050
                                                        ======    =====
Real Estate Revenue Recognition

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

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

Concentrations of Credit Risk

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

Commodity Hedging and Derivative Financial Instruments

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


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

     The derivative financial instruments that the Company accounts for  as
hedging  contracts must meet the following criteria:  the underlying  asset
must  expose the Company to price risk that is not offset in another  asset
or  liability,  the hedging contract must reduce that price risk,  and  the
instrument  must be designated as a hedge at the inception of the  contract
and  throughout the contract period.  In order to qualify as a hedge, there
must  be  clear  correlation between changes  in  the  fair  value  of  the
financial  instrument and the fair value of the underlying asset such  that
changes  in the market value of the financial instrument will be offset  by
the effect of price changes on the exposed items.

     Premiums  paid for commodity option contracts which qualify as  hedges
are  amortized  to  oil  and gas sales over the  term  of  the  agreements.
Unamortized  premiums  are  included in other assets  in  the  consolidated
balance  sheet.   Amounts receivable or payable under the commodity  option
contracts  are accrued as an increase or decrease in oil and gas sales  for
the applicable periods.

Oil and Gas Properties

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

     Net  capitalized  costs  of  oil  and gas  properties,  including  the
estimated future costs to develop proved reserves, are amortized using  the
units of revenue method, whereby the provision is computed on the basis  of
current  gross  revenues  from  production  in  relation  to  future  gross
revenues, based on current prices, from estimated production of proved  oil
and gas reserves.  Should the net capitalized costs net of related deferred
income  taxes  exceed the estimated present value of oil and  gas  reserves
discounted at 10% and adjusted for related income taxes, such excess  costs
would  be  charged to expense in the Consolidated Statements of Operations.
As  of December 31, 1999, no write down of the capitalized costs of oil and
gas  properties  was deemed necessary.  As of December 31,  1998,  the  net
capitalized  cost  exceeded the estimated present  value  of  oil  and  gas
reserves  resulting in a noncash charge of $64.0 million. Once incurred,  a
writedown of oil and gas properties is not reversible at a later date, even
if oil or natural gas prices increase.

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

Property and Equipment

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

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

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

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

Rental Property - Construction in Progress

     All costs associated with construction in progress are capitalized and
subject  to  depreciation  when each project  is  completed.   Interest  is
capitalized  for  construction in progress.  The  capitalized  interest  is
recorded as part of the asset to which it relates and is amortized over the
assets useful life.  In 1999 and 1998, no interest costs were capitalized.

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

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

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

Gas Balancing

     The  Company utilizes the sales method of accounting for over or under
deliveries of natural gas.  Under this method, the Company recognizes sales
revenue  on all natural gas sold. As of December 31, 1999, 1998  and  1997,
the  Company was underproduced by approximately 587 MMcf, 620 MMcf and  697
MMcf, respectively.

Income Taxes

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

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

Reclassifications

     Certain  reclassifications have been made to the 1998 and 1997 amounts
to conform to the 1999 presentation.


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

Derivative Instruments and Hedging Activities

     In  June  1998,  the  FASB  issued Statement of  Financial  Accounting
Standards  No.  133  "Accounting  for Derivative  Instruments  and  Hedging
Activities"  ("SFAS  133")  which  established  standards  for   derivative
instruments,  including certain derivative instruments  embedded  in  other
contracts,  and  for  hedging  activities.   It  requires  that  an  entity
recognize  all derivatives as either assets or liabilities in the statement
of  financial  position and measure those instruments at  fair  value.   It
establishes  conditions under which a derivative may  be  designated  as  a
hedge, and establishes standards for reporting changes in the fair value of
a  derivative.   SFAS  133,  as amended by SFAS  137,  is  required  to  be
implemented  for  all fiscal quarters of all fiscal years  beginning  after
June 15, 2000.  Early adoption is permitted.

Income (loss) per share

     Basic  net  income  (loss) per share is computed  by  dividing  income
available  to common stockholders by the weighted average number of  common
shares  outstanding for the period.  The computation of diluted net  income
(loss)  per  share  reflects the potential dilution  that  could  occur  if
securities  or  other  contracts to issue common stock  were  exercised  or
converted  into  common stock or resulted in the issuance of  common  stock
that  would then share in the earnings of the entity.  For 1999,  1998  and
1997,  the  computation  of diluted net loss per  share  was  antidilutive;
therefore, the amounts reported for basic and diluted net income (loss) per
share were the same.

Noncompete covenants

     Noncompete   covenants   are   carried  at   cost   less   accumulated
amortization.   The  covenants are being amortized over  their  contractual
lives, generally three to five years.


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

2.   Liquidity

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

     SRH  has  a  highly  leveraged capital structure with,  approximately,
$30.8  million  of  cash interest and $40.3 million  of  principal  due  at
December  31,  1999.  Subsequent to year end, SRH drew down  the  remaining
$15.0  million on the Revolving Loan Facility.  As a result, $32.1  million
of  cash  interest payments and $55.3 million of principal will be  due  in
2000 (See Note 18).  Due to severely depressed commodity prices experienced
throughout  1998  and  into  the first half of  1999,  and  lagging  rental
property   utilization,  SRH  is  experiencing  difficulty  in   generating
sufficient  cash  flow to meet its obligations and sustain its  operations.
Management is currently in the process of renegotiating the terms of  SRH's
various  obligations with its note holders and/or attempting  to  seek  new
lenders  or  equity  investors.  Additionally,  management  would  consider
disposing of certain assets in order to meet its obligations.

     There  can be no assurance that SRH's debt restructuring efforts  will
be  successful  or that the note holders will agree to a course  of  action
consistent with SRH's requirements in restructuring the obligations.   Even
if  such  agreement is reached, it may require approval of additional  note
holders,  or possibly, agreements of other creditors of SRH, none of  which
is  assured.   Furthermore, there can be no assurance  that  the  sales  of
assets can be successfully accomplished on terms acceptable to SRH.   Under
current circumstances, SRH's ability to continue as a going concern depends
upon  its  ability  to  (1)  successfully restructure  its  Revolving  Loan
Facility, the 10.5% Senior Notes and other obligations or obtain additional
financing  as  may  be  required, (2) maintain  compliance  with  all  debt
covenants, (3) generate sufficient cash flow to meet its obligations  on  a
timely  basis, and (4) achieve satisfactory levels of future earnings.   If
SRH  is  unsuccessful  in  its  efforts, it  may  be  unable  to  meet  its
obligations on the Revolving Loan Facility, the 10.5% Senior Notes, as well
as  other obligations, making it necessary to undertake such other  actions
as may be appropriate to preserve asset values.

3. Subsidiaries, Acquisitions and Dispositions

     During 1994, Red Oak sold 62,384 shares of redeemable common stock for
approximately  $1,560,000  million through a  private  placement  offering.
During  1995, Red Oak sold an additional 39,616 shares of redeemable common
stock  for  approximately  $990,000 and  34,611  shares  of  its  Series  A
cumulative  convertible preferred stock, for approximately $1,731,000.  The
redeemable  common  stock is redeemable at the stockholder's  option  at  a
price  equal  to the purchase price plus a 6% annual return computed  on  a
cumulative,  but not compounded basis. Redemptions are to be  paid  out  of
future  earnings of Red Oak.  If there are no future earnings,  redemptions
will  be  paid  out  of additional paid-in capital.  The redemption  rights
expired on 58,384 of the redeemable common shares on December 1, 1999.  The
remaining  shares' redemption rights will expire in March through  June  of
2000.

     On  September 26, 1996, Red Oak formed a subsidiary with an  unrelated
third  party.  On October 15, 1996, the subsidiary acquired three  shopping
centers  for a total purchase price of $12.5 million.  The transaction  was
funded  through a $2.3 million contribution from Red Oak and a $1.2 million
contribution  from  the  unrelated third party.   In  April  1997  Red  Oak
purchased  the  interest  of  the unrelated  third  party  and  merged  the
subsidiary into Red Oak.

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

     On  October 14, 1997, Southwest acquired various working interests  in
431 producing oil and gas wells, located in seven oil and gas fields in the
Permian  Basin of West Texas and southeastern New Mexico for $72.3 million.
Southwest  operates 133 of these wells.  Southwest funded this  acquisition
through  the issuance of 10.5% Senior Notes (see Note 7).  The  results  of
operations  of  the  properties acquired are included in  the  Consolidated
Statement of Operations beginning October 14, 1997.

     In  1997,  Red  Oak  acquired five shopping  centers  and  two  office
buildings in Texas, Oklahoma and Arizona for a total cost of $50.9 million.
The transactions were accounted for using the purchase method.  The results
of  operations of the properties acquired are included in the  Consolidated
Statements of Operations as of the close of each acquisition.

     In  June 1998, Red Oak acquired a retail shopping center in Texas  for
$13.5  million.  The acquisition was financed by the variable note  payable
due  July  2001 described in Note 7.  The operations of the retail shopping
center  from  the date of acquisition through December 31, 1998  have  been
included  in  the Consolidated Statement of Operations for the  year  ended
December 31, 1998.

     In  December 1998, Red Oak acquired a retail shopping center in  Texas
for  $21.0  million.  The acquisition was financed  by  the  variable  note
payable  due  December  2001 described in Note 7.  The  operations  of  the
retail  shopping center from the date of acquisition through  December  31,
1998 have been included in the Consolidated Statement of Operations for the
year ended December 31, 1998.

4.  Equity Investment in Subsidiary and Partnerships

     As  of  December 31, 1999, the investment in subsidiary  held  by  the
Company consists of a 28% direct ownership interest in Sierra as well as an
additional  11%  indirect  interest the Company  obtained  through  limited
partnerships, Southwest Partners II and Southwest Partners III,  for  which
Southwest  serves  as  the  managing general partner.   The  investment  is
accounted  for  using  the  equity method.  A  Financial  Institution  owns
preferred  stock in Sierra, which can be converted to common stock  at  the
Financial  Institutions  option.  If the Financial  Institution  elects  to
convert  its preferred stock to common stock, the Companys direct ownership
would  decrease  to 20% and its indirect ownership would  decrease  to  7%.
Effective  July 1, 1997, Southwest Partner III purchased additional  shares
of Sierra stock, decreasing Southwest's total direct and indirect ownership
percentage below 50%.  Therefore, with the change of Southwest's  ownership
percentage   from   a   majority  to  a  minority  interest,   Sierra   was
deconsolidated.   The deconsolidation of Sierra required an  adjustment  to
the  investment  account  to  reflect the change  in  accounting  from  the
consolidation method to the equity method.

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

     Pertinent  financial information for Sierra Well Service, Inc.  as  of
December  31, 1999 and 1998 and for the years ended December 31,  1999  and
1998  and  for  the six months ended December 31, 1997 is  as  follows  (in
thousands):

                                               December 31,  December 31,
                                                   1999          1998
                                                   ----          ----
  Balance Sheets
     Assets                                    $  53,327    $   46,861
                                                  ======        ======
     Liabilities                               $  58,263    $   59,891
     Stockholders' deficit                       (4,936)      (13,030)
                                                  ------        ------
     Total  liabilities  and stockholders'  deficit             $    53,327
$    46,861
                                                  ======        ======

                                 For the year  For the year  Six months
                                    ended         ended        ended
                                 December 31,  December 31, December 31,
                                     1999          1998         1997
                                     ----          ----         ----
  Statements of Operations
    Revenues                   $   37,331     $  45,319      $ 18,370
    Expenses                       50,732        50,944        19,163
     Impairment  of  long lived  assets                    -         22,671
-
                                   ------        ------        ------
      Net Income/(Loss)          (13,401)      (28,296)         (793)
                                   ======        ======        ======
  Company's share of net loss  $    (931)     $ (3,620)      $  (203)
                                   ======        ======        ======

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

5.  Property and Equipment

  Property and equipment, including rental property and other, consists  of
the following (in thousands):
                                                 Years Ended December 31,
                                                 ------------------------
                                                       1999      1998
                                                      -----     -----

     Land                                           $  2,352  $  2,287
     Building and improvements                         1,051     1,419
     Machinery and equipment                           2,896     3,048
     Furniture and fixtures                            1,536     2,367
     Equipment under capital lease                        56        93
     Rental property                                 137,535   137,059
                                                     -------    ------
                                                     145,426   146,273
     Less accumulated depreciation                    11,900     8,265
                                                     -------    ------
                                                    $133,526  $138,008
                                                     =======    ======
6.  Future Lease Receivables

     Red  Oak leases office and retail shopping centers under noncancelable
operating  leases that expire at various dates through 2035.  The following
is  a  summary  of  minimum future rentals expected to  be  received  under
noncancelable operating leases as of December 31, 1999 (in thousands):

     2000                                           $ 19,407
     2001                                             15,279
     2002                                             12,145
     2003                                              9,207
     2004                                              6,886
     Thereafter                                       24,262
                                                      ------
                                                    $ 87,186
                                                      ======

     The  preceding future minimum rentals do not include percentage  rents
or reimbursements.

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

7.  Long-term Debt

     Long-term debt consists of the following (in thousands):
                                                       December 31,
                                                   -------------------
                                                       1999      1998
                                                      -----     -----
     10.5% Senior Notes, interest payable semi-annually due
      October 15, 2004, net of discount of $1,487 and $2,116,
      respectively                                  $160,598  $197,884
     13.5% Notes payable, due April 2000.  Cash interest of
      10.5% payable monthly with additional interest payable
      based on excess cash flow or through the issuance of
       additional  notes.  Collateralized by  real  estate.               -
72,273
     Revolving Loan Facility with variable rate interest,
      due December 2000.  Collateralized by oil and
      gas properties.                                 35,000         -
     Variable Rate Notes Payables:
     Notes payable due July 2001, accrued interest due and
      payable monthly at 7.1%, per annum with additional
      1% payable in cash or additional notes.
       Net  of  discount  of $944 and $1,611, respectively           15,883
13,891
     Notes payable due December 2001, accrued interest due and
      payable monthly at 7.1%, per annum with additional
      1.5% payable in cash or additional notes.
       Net  of  discount  of $2,556 and $3,889, respectively         25,298
21,806
     Notes payable due July 2002, interest at 8.5% minimum
      per annum, accrued interest due and payable monthly.
      Net of discount of $4,229, respectively        101,835         -
     Other                                             8,469    29,230
                                                     -------   -------
                                                     347,083   335,084
     Less current maturities                          40,277    12,716
                                                     -------   -------
                                                    $306,806  $322,368
                                                     =======   =======
10.5% Senior Notes

     In  October 1997, the Company issued $200 million aggregate  principal
amount of 10.5% Senior Notes due October 15, 2004 (the "Notes").  The Notes
were sold at a discount and interest is payable April 15 and October 15  of
each  year,  commencing  April 15, 1998.  The Notes are  general  unsecured
senior obligations of the Company and rank equally in right of payment with
all other senior indebtedness of the Company and senior in right of payment
of  all  existing  future subordinated indebtedness  of  the  issuer.   Net
proceeds  from  the  issuance of the Notes were  used  primarily  to  repay
existing debt of approximately $84 million, purchase oil and gas properties
for  approximately $72 million, purchase additional stock in  Red  Oak  for
approximately  $10 million, invest $1.7 million in an affiliate,  with  the
remaining balance used for working capital.

     The  Indenture  imposes  certain limitations on  the  ability  of  the
Company  and  its  restricted subsidiaries to, among  other  things,  incur
additional indebtedness or issue disqualified capital stock, make  payments
in respect to capital stock, enter into transactions with affiliates, incur
liens, sell assets, change the nature of its business, merge or consolidate
with  any  other person and sell, lease, transfer or otherwise  dispose  of
substantially all of its properties or assets.  The indenture requires  the
issuer to repurchase notes under certain circumstances with the excess cash
of  certain  asset  sales.  The limitations are  subject  to  a  number  of
important  qualifications and exceptions.  The issuer must  report  to  the
Trustee on compliance with such limitations on a quarterly basis.

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

13.5% Note Payable

     In April 1997 MRO Properties Inc. ("MROP"), a 100% owned subsidiary of
Red  Oak entered into a $42 million credit facility maturing in April  2000
with an institutional lender (the "MROP Facility").  The MROP Facility  was
executed  in order to consolidate nine mortgage loans, originally  incurred
to  complete the acquisition of certain Red Oak properties and  to  finance
the  acquisition  of an additional real estate property.  Borrowings  under
the  facility bear interest at a rate of 13%, with 10% payable in cash  and
the  remaining  3%  payable  in  cash or additional  notes.   The  facility
contains  a  number  of  covenants that, among other things,  restrict  the
ability  of  MROP to incur additional indebtedness and dispose  of  assets.
The  facility  is secured by a first lien on substantially  all  of  MROP's
properties.  In September 1997, the Company negotiated an additional  $30.5
million in loan proceeds which was used to acquire a retail shopping center
and office building in Oklahoma City, Oklahoma and a retail shopping center
in  San  Antonio,  Texas.   The loan is collateralized  by  the  properties
purchased, and by properties contributed by Red Oak.  This note was  repaid
with  a  portion  of  the proceeds from the June 1999  Variable  Rate  Note
Payable.

Revolving Loan Facility

     In  December  1999, Southwest entered into a Revolving  Loan  Facility
with  Bank One Texas, N.A., which provided a borrowing base of $50  million
with  a maturity date of December 29, 2000.  Funds from the Revolving  Loan
Facility  may  be  used  for working capital and  other  general  corporate
purposes,  including the repurchase of a portion of Southwest's outstanding
10.5%  Senior Notes due 2004. Advances on the Revolving Loan Facility  bear
interest  at the option of Southwest, based on the prime rate of  Bank  One
Texas,  N.A.  (8.5% at December 31, 1999) plus one fourth  of  one  percent
(.25%),  when the borrowing base usage is equal to or greater than  80%  or
zero  percent  (0%) when the borrowing base usage is less than  80%  or,  a
Eurodollar  rate (substantially equal to the London InterBank Offered  Rate
("LIBOR"))  plus  1.25%  up  to  2.0% based on  the  borrowing  base  usage
percentage.  The Revolving Loan Facility is secured by no less than 85%  of
Southwest's  oil and gas properties.  As of December 31, 1999, the  company
has  drawn $35.0 million.  The remaining $15.0 million was drawn in January
2000(See Note 18).

     The Revolving Loan Facility imposes certain limitations on the ability
of Southwest to, among other things, incur additional indebtedness or issue
disqualified  capital  stock, make payments in respect  to  capital  stock,
enter  into transactions with affiliates, incur liens, sell assets,  change
the  nature of its business, merge or consolidate with any other person and
sell,  lease,  transfer or otherwise dispose of substantially  all  of  its
properties  or assets.  The Revolving Loan Facility required  Southwest  to
establish  a sinking fund account with an initial deposit of $3.5  million.
Southwest  is  to  transfer  monthly one-twelfth  of  the  annual  interest
payments  on the 10.5% Senior Notes beginning December 31, 1999  into  this
sinking  fund  account for the purpose of making interest payments  on  the
10.5% Senior Notes.

Variable Rate Notes Payable

     In  June 1998, MRO N Cross, Inc., a wholly owned subsidiary of Red Oak
negotiated two notes payable in the amount of $13.5 million, net  of  a  $2
million discount, and $2.5 million. The $13.5 million note was used for the
acquisition  of  rental property in the amount of $12.9  million  with  the
remaining  $600,000  to  be  used for capital improvements  to  the  rental
property  purchased.   The  $2.5  million  note  is  reserved  for  capital
improvements  to  the rental property purchased of which $1.3  million  has
been utilized as of December 31, 1999.  The notes are collateralized by the
property purchased.

     In  December 1998, MRO Commercial, Inc., a wholly owned subsidiary  of
Red Oak negotiated two notes payable in the amount of $21.7 million, net of
a  $4  million discount, and $9.7 million.  The $21.7 million note was used
for  the acquisition of a retail shopping center and the funding of various
escrow balances.  The $9.7 million note is for capital improvements to  the
rental  property purchased of which $1.9 million has been  utilized  as  of
December 31, 1999.  The notes are collateralized by the property purchased.

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

     In  June 1999, MRO Southwest, Inc., a wholly owned subsidiary  of  Red
Oak  negotiated two notes payable in the amount of $97.5 million  and  $8.0
million, net of discounts of $5.3 million. Borrowings for both notes accrue
interest  in arrears at a rate per annum equal to the greater  of  8.6%  or
LIBOR plus 360 basis points.  The interest rate includes a servicing fee of
 .10%.  Approximately $91.4 million of the $97.5 million note  was  used  to
retire existing debt on properties contributed to MRO Southwest by Red Oak,
$1.5  million was deposited into various restricted cash accounts  and  the
remaining  proceeds  were  used for general corporate  purposes.  The  $8.0
million  note  is  for  capital improvements to rental  property  and  $3.4
million  has  been  utilized  as  of December  31,  1999.   The  notes  are
collateralized by the properties owned by MRO Southwest.  The notes  impose
certain  restrictive covenants including restrictions on the incurrence  of
additional indebtedness, dissolution, termination or liquidation of all  or
substantially  all  of the assets, changes in the legal  structure  of  the
assets, making any loans or advances to any third party and commingling its
assets  with the assets of any of its affiliates or of any other person  or
entity.

Extinguishment of Debt

     In  1997, the Company repaid certain notes payable with proceeds  from
the  10.5%  Senior  Notes.  The remaining unamortized deferred  debt  costs
associated  with  these  notes  resulted  in  an  extraordinary  charge  of
$3,109,000, net of $1,241,000 of tax benefit, or $2.88 per share.

     In June 1999, MRO Southwest repaid certain notes payable with proceeds
from  the  aforementioned Variable Note Payable issued  in  June  of  1999.
Prepayment  penalties  and the remaining unamortized  deferred  debt  costs
associated  with  these  notes  resulted in  an  extraordinary  charge  of,
approximately, $1,598,000 or $(1.49) per share.  Since there is no recorded
income  tax  benefits  on  continuing operations there  is  no  income  tax
benefits recorded on the extraordinary loss.

     In  December  of  1999,  Southwest  purchased  approximately  19%,  or
approximately $37.9 million original face amount, of its 10.5% Senior Notes
with   the  proceeds  from  the  aforementioned  Revolving  Loan  facility.
Southwest paid approximately $22.0 million, including all fees, to purchase
the  10.5%  Senior Notes and wrote off approximately $349,000  of  deferred
loan  issue costs and approximately $980,000 of the original issue discount
to  recognize  a  $14.5 million extraordinary gain on the purchase  of  the
Notes.   Southwest has not recorded any income tax benefits  on  continuing
operations and therefore there is no income tax expense recognized  on  the
extraordinary  gain.   The extraordinary gain per  share  is  approximately
$13.48.   Southwest  purchased an additional  19%  or  approximately  $38.4
million  original face amount of its 10.5% Senior Notes in January of  2000
(See Note 18).

     Aggregate maturities of all long-term debt as of December 31, 1999 are
as follows (in thousands):

     2000                                           $ 40,277
     2001                                             41,412
     2002                                            101,926
     2003                                                391
     2004                                            160,680
     Thereafter                                        2,397
                                                     -------
                                                    $347,083
                                                     =======
<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

8.  Income Taxes

     Income  tax provision (benefit) and amounts separately allocated  were
as follows (in thousands):
                                                      December 31,
                                              ----------------------------
                                                 1999     1998     1997
                                                -----    -----    -----
     Loss before minority interest, equity loss
       and  extraordinary item                    $     -   $(2,348)      $
(2,641)
     Equity loss in subsidiary                        -       -    (106)
     Extraordinary  loss from early extinguishment              -         -
(1,241)
                                                 ------   ------   -----
                                                 $      -   $(2,348)      $
(3,988)
                                                 ======   ======   =====

     The  U.S. Federal tax provision (benefit) attributable to loss  before
income  taxes,  minority interest and extraordinary item  consists  of  the
following (in thousands):
                                                      December 31,
                                              ----------------------------
                                                 1999     1998     1997
                                                -----    -----    -----
     Current                                    $     -  $    -   $ (35)
     Benefit   of   net  operating  loss  carryforward             (11,307)
(14,165)                                        (7,340)
     Deferred                                          9,266       (20,237)
3,341
     Valuation allowance                          2,041   32,054   1,393
                                                 ------   ------   -----
                                                $     -  $(2,348) $(2,641)
                                                 ======   ======   =====

     Reconciliation's  between the amount determined by applying  the  U.S.
federal  statutory rate to loss before income taxes, minority interest  and
extraordinary  item with the income tax provision (benefit) is  as  follows
(in thousands):
                                                      December 31,
                                              ----------------------------
                                                 1999     1998     1997
                                                -----    -----    -----
     Computed "expected" tax expense using the
       U.S.  federal statutory rate               $(6,488) $(34,510)      $
(3,826)
     Reduction in available net operating loss
      carryforwards                               4,944       -        -
     Meals and entertainment                         16      16       16
     Change in valuation allowance                2,041   32,054   1,156
     Other                                        (513)      92       13
                                                 ------   ------   -----
     Provision (benefit) for income taxes       $     -  $(2,348) $(2,641)
                                                 ======   ======   =====

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

     The tax effects of temporary differences that give rise to significant
portions  of the deferred tax assets and deferred tax liabilities  were  as
follows (in thousands):
                                                       December 31,
                                                   -------------------
                                                       1999      1998
   Deferred tax assets:                              -----     -----
     Net operating loss carry forwards              $ 28,226    21,862
     Alternative minimum tax credit carryforwards        170       170
     Receivables                                         278       152
     Oil and gas properties, principally due to differences in
      the tax and book basis and depletion methods and the
       deduction  of  intangible drilling costs for tax  purposes     2,356
7,833
     Equity investment in subsidiary                   1,081     1,103
     Other long term assets                            2,192     1,817
     Other long term liabilities                         286       463
     Covenant not to complete                             64        57
     Other                                               243        29
                                                      ------   -------
     Total gross deferred tax assets                  34,896    33,486
                                                      ------   -------
     Less valuation allowance                       (34,727)  (32,686)
                                                      ------   -------
     Total gross deferred tax assets                     169       800
                                                      ------   -------
  Deferred tax liabilities:
     Other property and equipment                      (158)     (663)
     Real estate investments                               -      (21)
     Accounts payable and accrued expenses              (11)       (7)
     Other                                                 -     (109)
                                                      ------   -------
     Total gross deferred tax liabilities              (169)     (800)
                                                      ------   -------
     Net deferred tax asset (liability)             $      -  $      -
                                                      ======   =======

     A valuation allowance is provided when it is more likely than not that
some  portion  of the deferred tax assets will not be realized.   Based  on
expectations for the future, management has determined that taxable  income
of  Southwest  will  likely not be sufficient to  fully  utilize  available
carryforwards  prior to their ultimate expiration. As such,  Southwest  has
recorded  a valuation allowance of $27,598,000 to reflect the realizability
of  its  net  deferred  tax assets.  The amount of the valuation  allowance
could  be  reduced  if  estimates  of  future  taxable  income  during  the
carryforward period are increased.

     As   of   December   31,  1999,  Southwest  had  net  operating   loss
carryforwards  for  U.S.  federal  income  tax  purposes  of  approximately
$65,180,000,  which are available to offset future regular taxable  income,
if  any.   The  net operating loss carryforwards expire in various  periods
from  2012  through  2017.  Southwest has alternative  minimum  tax  credit
carryforwards totaling $170,000 to offset regular income tax, which have no
scheduled expiration date.
<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

     Red Oak files an independent return exclusive of Southwest and has net
operating  loss  carryforwards of $17,836,000 expiring in  various  periods
through  2017.  Based  on  expectations  for  the  future,  management  has
determined  that taxable income of Southwest will likely not be  sufficient
to   fully   utilize  available  carryforwards  prior  to  their   ultimate
expiration.   Approximately $7,129,000 of the valuation  allowance  relates
primarily   to   the  uncertainty  of  the  realizability  of   Red   Oak's
carryforwards, the amount of the valuation allowance could  be  reduced  if
estimates  of  future  taxable income during the  carryforward  period  are
increased.

9.  Profit Sharing Plan

     On  January  1,  1991, the Company adopted an employee profit  sharing
plan  that  is intended to provide participating employees with  additional
income  upon retirement.  Employees may contribute between 1%  and  15%  of
their  base salary up to a maximum of $10,000 for the years ended  December
31, 1999 and 1998 and $9,500 for the year ended December 31, 1997.  For the
years  ended December 31, 1999, 1998 and 1997, the Company matched  20%  of
the  employees' contributions.  For the year ended December 31,  2000,  the
Company  will  match 20% of the employees' contributions.   For  subsequent
years,  the  Company will make contributions to the plan on a discretionary
basis.

     Employee  contributions  are  fully vested  at  all  times.   Employer
contributions  are  fully vested upon retirement or  after  five  years  of
service.  For the years ended December 31, 1999, 1998 and 1997, the Company
contributed  approximately $72,000, $61,000 and $66,000,  respectively,  to
the plan.

10.  Redeemable Common Stock

     In August 1996, the Company issued 129,046 shares of redeemable common
stock through a private placement offering for $68 per share.  The stock is
redeemable  at  the stockholder's option at any time beginning  five  years
from  the  issuance of the stock (December 31, 2001) at  a  purchase  price
determined as follows:

     (i)   The Company shall review no less than five and no more than
     ten  publicly  traded oil and gas companies each  with  a  market
     capitalization  between  $50 million and  $150  million  ("Public
     Company").  The Company shall determine the ratio of each  Public
     Company's  market capitalization to EBITDA for  the  most  recent
     fiscal  year.  The Company shall then average such multiples  and
     take  this averaged multiple and apply it to the Company's EBITDA
     for  the  most  recent fiscal year, to estimate a value  for  the
     Company's common stock.

     (ii)  The  Company  will  determine the multiple  of  the  market
     capitalization  of each Public Company relating  to  the  present
     value  of  such  Public Company's oil and gas reserves.   Present
     value  will  be determined by discounting the expected  net  cash
     flow from the oil and gas reserves by 10%.  The Company will then
     take the average multiple based on this methodology and apply  it
     to  the  present  value  of the Company's oil  and  gas  reserves
     discounted by 10% to determine a value for the expected net  cash
     flow from the Company's common stock.

     The  Company  will  then take the average  of  (i)  and  (ii)  to
     determine   the  value  of  the  Company's  common  stock.    The
     redemption  right  terminates  on  the  effective  date  of   any
     registration  statement  filed with the Securities  and  Exchange
     Commission relative to the offer and sale of the Company's common
     stock to the public.

11.  Stockholders' Equity

     During 1994, the Company issued a 6% note to a stockholder.  The  note
requires  semi-monthly  payments of $5,500 and  is  collateralized  by  the
Company's common stock held by the stockholder.

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

12.  Commitments and Contingencies

     The  partnership  agreements relating to certain limited  partnerships
for  which  Southwest  serves  as  managing  general  partner  provide  for
Southwest  to  offer to repurchase such limited partner units.   Under  the
terms  of  three of the partnership agreements, Southwest is  obligated  to
repurchase  a  maximum  of  $100,000  annually  of  the  units  of  limited
partnerships'  interests originally outstanding.  Under the terms  of  nine
other partnership agreements, Southwest's obligation to repurchase units in
any  one  year is limited to 10% of the capital contributed by all  of  the
respective  limited  partners.   The  repurchase  price  is  based  on  the
discounted  future  revenues from oil and gas reserves  of  the  respective
partnership  and  the  value  of other partnership  assets.   Such  amounts
required  for repurchase in connection with the acceptance by a portion  of
the limited partners is approximately $2,447,000 at December 31, 1999.  The
total  amount  of  limited partner unit repurchases  for  the  years  ended
December  31,  1999  and  1998  was  approximately  $71,000  and  $287,000,
respectively.

     The   Company  is  subject  to  extensive  federal,  state  and  local
environmental  laws  and  regulations.  These laws,  which  are  constantly
changing, regulate the discharge of materials into the environment and  may
require the Company to remove or mitigate the environmental effects of  the
disposal  or release of petroleum or chemical substances at various  sites.
Environmental expenditures are expensed or capitalized depending  on  their
future economic benefit.  Expenditures that relate to an existing condition
caused  by  past operations and that have no future economic  benefits  are
expensed.  Liabilities for expenditures of a noncapital nature are expensed
when  environmental assessment and/or remediation is probable and the costs
can be reasonably estimated.

     Management  recognizes a financial exposure that  may  require  future
expenditures  presently  existing for oil  and  gas  properties  and  other
operations.   Other  long-term liabilities at December  31,  1999  includes
$663,000  for estimated future remedial actions and cleanup costs.   As  of
December 31, 1999, the Company has not been fined, cited or notified of any
environmental  violations which would have a material adverse  effect  upon
capital  expenditures, earnings or the competitive position in the oil  and
gas industry. However, management does recognize that by the very nature of
its business, significant costs could be incurred to bring the Company into
total  compliance.  The amount of such future expenditures is  not  readily
determinable  due  to several factors, including the unknown  magnitude  of
possible  contaminations, the unknown timing and extent of  the  corrective
actions which may be required, the determination of the Company's liability
in  proportion  to other responsible parties and the extent to  which  such
expenditures are recoverable from insurance or indemnifications from  prior
owners  of  the  Company's  properties.  It  is  reasonably  possible  this
estimate could change materially in the near term.

     In  the  normal  course  of its business, the Company  is  subject  to
pending or threatened legal actions; in the opinion of management, any such
matters   will  be  resolved  without  material  effect  on  the  Company's
operations, cash flow or financial position.

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

13.  Commodity Hedging and Derivative Financial Instruments

     The  Company, from time to time, uses option contracts to mitigate the
volatility of price changes on commodities the Company produces  and  sells
as  well  as to lock in prices to protect the economics related to  certain
capital projects.

     On  July 9, 1999, Southwest entered into a commodity swap agreement to
hedge  a  portion of its crude oil sales.  The agreement is for a  notional
amount  of 1,000 BBls of oil a day with a strike price of $20.22, based  on
West Texas Intermediate - NYMEX.  The contract is for the period August  1,
1999  through  October  31, 1999.  At the option of the  counter-party  the
contract has been extended to January 31, 2000.

     On  December  30,  1999,  Southwest  entered  into  a  basket  revenue
protection  agreement,  which provides the Company  with  an  oil  and  gas
revenue  floor.   The contract is for the period January  1,  2000  through
December  31,  2000.  The agreement is to be calculated on a calendar  year
quarter as disclosed in the following table based on NYMEX Natural Gas  and
NYMEX Crude Oil:

            Notional Volumes              Strike Prices
       -------------------------  -----------------------------
           Crude      Natural        Crude    Natural              Minimum
         Oil (bbl)  Gas (MMBtu)       Oil       Gas       Boe      Revenue
         ---------- -----------      -----    -------     ----     --------
Quarter 1 269,254      976,676     $  21.12  $   1.91  $  28.76  $7,552,096
Quarter 2 263,058      910,325     $  18.80  $   1.92  $  26.56  $6,714,359
Quarter 3 257,206      857,728     $  18.00  $   1.97  $  25.88  $6,319,432
Quarter 4 251,914      813,400     $  18.00  $   2.20  $  26.80  $6,323,932

     Payments  shall be made no later than five business days,  after  each
quarterly  floating price is determinable by NYMEX.  The cost of the  floor
was  approximately $638,000 and is amortized monthly as a reduction of  oil
and gas revenues.

14.  Related Party Transactions

     Southwest  is  the  managing general partner for  several  public  and
private oil and gas limited partnerships, with an officer of Southwest also
serving  as a general partner for certain of the limited partnerships.   As
is  usual  in the oil and gas industry, the operator is paid an amount  for
administrative  overhead  attributable to  operating  such  properties  and
management  fees attributable to serving as managing general  partner.   As
provided  for  in  the  partnership agreements, such amounts  paid  by  the
partnerships   to   Southwest  approximated  $3,515,000,   $3,789,000   and
$3,538,000  for  the  years  ended  December  31,  1999,  1998  and   1997,
respectively.   Included in these amounts, an affiliate of  Southwest  paid
management fees of approximately $136,000 and $147,000, for the years ended
December  31, 1999 and 1998, and approximately $54,000, for the six  months
ended  December 31, 1997.  In addition, Southwest and certain officers  and
employees may have an interest in some of the partnership properties.

     An  affiliate  of the company performs various oilfield  services  for
limited  partnerships  managed  by  Southwest.   Such  services  aggregated
$365,000, $115,000 and $155,000 for the years ended December 31, 1999, 1998
and  1997.   The  same  affiliate performed  services  for  Southwest  that
aggregated  approximately  $313,000  and  $131,000,  for  the  years  ended
December  31, 1999 and 1998 and approximately $47,000, for the  six  months
ended December 31, 1997.

15.  Disclosures About Fair Value of Financial Instruments

     The carrying amount of cash and cash equivalents, accounts receivable,
accounts  payable  and  accrued expenses, other current  assets  and  other
current  liabilities approximates fair value because of the short  maturity
of these instruments.

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

     The  fair value of the Company's 10.5% Senior Notes is estimated based
on the quoted market price for the notes.
                                            1999               1998
                                           -----              -----
                                      Carrying  Fair    Carrying   Fair
                                       Amount  Value     Amount   Value
                                      -------  ------   -------   ------
     10.5% Senior notes, net discount of
      $1,487 and 2,116, respectively  $160,598  $89,935 $197,884  $79,154

     The  fair  value of all other long-term debt approximates the carrying
amount  as  of  December 31, 1999 and 1998, based on  the  borrowing  rates
currently  estimated to be available to the Company for loans with  similar
terms.

     The  Company  purchased  the Basket Revenue  Protection  Agreement  on
December  31, 1999, and therefore deems the carrying value of  $638,000  to
equate to fair market value at December 31, 1999.

     The  carrying amount of investment in subsidiary at December 31,  1999
is  recorded  at  zero because the investor's proportionate  share  of  the
investee's  net loss exceeded the original investment.  The fair  value  of
SRH's  investment  in  Sierra is undeterminable at December  31,  1999,  as
Sierra  is  highly  leveraged  and  is  not  publicly  traded.   If  Sierra
subsequently  begins to report net income, Southwest will  resume  applying
the  equity method only after its share of net income equals the  share  of
net losses not recognized during the period the equity method is suspended.

16.  Lines of Business

     The  Company operates in three major segments: Oil and Gas  Activities
(oil  and gas acquisition, development, exploration and production, as well
as  organizing  and serving as managing general partner for various  public
and  private  limited partnerships engaged in oil and gas  development  and
production),  Oil  and  Gas  Well  Servicing  (provides  well   completion,
recompletion and production equipment, transportation services, tank supply
rental  services  and  other  support  and  well  maintenance  services  to
operating  oil and gas companies) and Real Estate Investment and Management
(owns  and  manages  retail shopping centers and office buildings).   Other
items include eliminations, manufacturing, computer service and the holding
Company.   Effective July 1, 1997, Sierra, the oil and gas  well  servicing
business, was deconsolidated, therefore only six months of income statement
information is displayed in the tables and no balance sheet information  is
displayed as of December 31, 1998 (see Note 4.)
                                                 1999     1998     1997
                                                -----    -----    -----
                                                     (in thousands)
     Operating Revenue
      Oil and gas                               $31,998 $ 32,599  $38,662
      Well service                                    -        -    7,833
      Real estate                                31,301   25,650    9,338
      Other and eliminations                        633    1,260    1,021
                                                 ------   ------   ------
                                                $63,932 $ 59,509  $56,854
                                                 ======   ======   ======
     Operating profit (loss)
      Oil and gas                               $14,146 $(68,633) $ 3,654
      Well service                                    -        -      184
      Real estate                                 6,812    7,605    3,074
      Other and eliminations                      (127)     (25)    (417)
                                                 ------   ------   ------
                                                $20,831 $(61,053) $ 6,495
                                                 ======   ======   ======
<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

                                                 1999     1998     1997
                                                -----    -----    -----
                                                     (in thousands)
     Interest Expense
      Oil and gas                               $22,381 $ 22,536  $12,329
      Well Service                                    -        -      184
      Real Estate                                19,664   13,969    6,320
      Other and eliminations                      (135)     (15)       61
                                                 ------  -------  -------
                                                $41,910 $ 36,490  $18,894
                                                 ======  =======  =======
     Depreciation, depletion and amortization
      Oil and gas                               $ 5,392 $ 16,118  $12,803
      Well Service                                    -        -      747
      Real Estate                                 4,485    2,935    1,313
      Other and eliminations                        110      187      171
                                                -------  -------  -------
                                                $ 9,987 $ 19,240  $15,034
                                                =======  =======  =======
     Identifiable assets
       Oil  and gas                               $115,520       $  111,876
$     205,054
      Well service                                    -        -        -
      Real estate                               150,269  148,340   98,890
      Other and eliminations                    (3,622)  (2,666)    1,499
                                                -------  -------  -------
                                                 $262,167       $   257,550
$     305,443
                                                =======  =======  =======
     Capital expenditures
      Oil and gas properties                    $ 3,688 $ 10,046  $103,205
      Oil and gas, other                            233      618    1,135
      Real estate                                 6,723   53,411   53,626
      Other                                         306      433      236
                                                -------  -------  -------
                                                $10,950 $ 64,508  $158,202
                                                =======  =======  =======
17.  Condensed Issuer Financial Data

     Summarized  consolidated financial information  for  Southwest  is  as
follows (in thousands):
                                                      December 31,
                                           ---------------------------------
                                                 1999      1998     1997
                                                -----     -----    -----
     Consolidated Balance Sheet Data:
      Current assets                            $28,276 $ 20,486  $35,545
      Net property and equipment                 73,477   81,373  156,302
      Other assets, net                          10,814    8,417   11,789
                                                -------  -------  -------
                                                 $112,567       $   110,276
$     203,636
                                                =======  =======  =======
      Current liabilities                       $46,597 $ 12,299  $14,614
      Long-term debt                            161,553  199,058  198,938
      Other liabilities                             841    1,361    1,412
      Deferred income taxes                           -        -    2,522
      Minority interest                               8        7      202
      Stockholders deficit                      (96,432)          (102,449)
(14,052)
                                                -------  -------  -------
                                                 $112,567       $   110,276
$     203,636
                                                =======  =======  =======
<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

                                                     December 31,
                                          ---------------------------------
                                                1999      1998      1997
                                               -----     -----     -----
     Consolidated Cash Flow Data:
       Net cash provided by (used in) operating
        activities                         $ (8,412)   $(5,309)  $ 4,920
       Net cash provided by (used in) investing
        activities                             3,022   (5,803)   (104,912)
       Net cash provided by (used in) financing
        activities                             8,543     (770)   116,680
                                             -------   -------   -------
       Net increase (decrease) in unrestricted
        cash and cash equivalents          $   3,153   $(11,882) $16,688
                                             =======   =======   =======

     Consolidated Statement of Operations Data (in thousands):
                               SRH  SouthwestSierraRed Oak ElimConsolidated
                               ---- ---------------------------------------
For the year ended December 31, 1999:
   Operating revenues           $   - $32,637 $    - $31,301     $  (6)   $
63,932
  Depreciation, depletion
   and amortization                -  5,502       - 4,485      -  9,987
  Operating income (loss)       (55) 14,074       - 6,812      - 20,831
   Interest  expense                 - 22,382        -  19,664        (136)
41,910
  Loss before taxes, minority interest,
     equity  loss  and  extraordinary  item           (39)  (7,623)       -
(11,419)                       (92)  (19,173)
   Net  income  (loss)             (39)  5,986       -  (13,017)      1,661
(5,409)

For the year ended December 31, 1998:
   Operating revenues           $   - $33,879 $    - $25,650     $  20    $
59,509
  Depreciation, depletion
   and amortization                - 16,305       - 2,935      - 19,240
  Impairment of properties         - 64,000       -     -      - 64,000
    Operating  income  (loss)        (44)  (68,614)        -      7,605   -
(61,053)
    Interest  expense                  -  22,544        -  13,969        23
36,490
  Loss before taxes, minority interest,
     equity  loss  and  extraordinary  item           (28)  (89,769)      -
(5,806)                        92    (95,695)
   Net  loss                     (2,645)       (88,425)     -       (5,858)
(874)                          (96,054)

For the year ending December 31, 1997:
   Operating revenues           $   - $39,727 $7,833 $9,338      $  (44)  $
56,854
  Depreciation, depletion
   and amortization                - 12,974     747 1,313      - 15,034
  Operating income                 -  3,237     184 3,074      -  6,495
  Interest expense                 - 12,372     184 6,320     18 18,894
  Income (loss) before taxes, minority
   interest, equity loss and
    extraordinary item          15,249        (8,097)       (5)     (3,125)
(15,274)                       (11,252)
   Net  income (loss)            15,046        (7,733)      (4)     (3,987)
(14,815)                       (11,493)

18.  Subsequent Events

     In January of 2000, Southwest drew down the remaining $15.0 million on
the  Revolving Loan Facility and applied the proceeds towards the  purchase
of an additional 19% or approximately $38.4 million original face amount of
its  10.5%  Senior  Notes.   Southwest paid  approximately  $23.0  million,
including  all fees, to purchase the 10.5% Senior Notes and  wrote  off  an
additional $349,000 of deferred loan issue costs and an additional $980,000
of  the  original issue discount to recognize an additional  $14.0  million
extraordinary  gain  on  the  purchase of the  notes.   Southwest  has  not
recorded any income tax benefits on the continuing operations and therefore
there is no income tax expense recognized on the extraordinary gain.

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

19.   Supplemental  Financial  Data  - Oil  and  Gas  Producing  Activities
(unaudited):

     The following information is presented in accordance with Statement of
Financial  Accounting  Standards No. 69,  "Disclosure  about  Oil  and  Gas
Producing Activities," (SFAS No. 69), except as noted.

Costs  incurred in connection with oil and gas producing activities are  as
follows (in thousands):

                                      Years ended December 31,
                                  --------------------------------
                                       1999      1998      1997
                                      -----     -----     -----
     Acquisition of properties       $    417  $  1,315  $ 80,797
     Exploration costs                     76       834     2,769
     Development costs                  3,195     7,897    19,639
                                       ------    ------   -------
       Total costs incurred          $  3,688  $ 10,046  $103,205
                                       ======    ======   =======

Results  of operations for oil and gas producing activities are as  follows
(in thousands):

                                      Years ended December 31,
                                  --------------------------------
                                       1999      1998      1997
                                      -----     -----     -----

     Revenues                        $ 31,425  $ 32,467  $ 38,500
                                       ------   -------    ------
     Production costs                  10,833    18,395    18,500
     Depletion                          4,901    15,601    12,419
     Impairment of oil and gas
      properties                            -    64,000         -
                                       ------   -------    ------
                                       15,691  (65,529)     7,581
     Income tax provision               5,335         -     2,578
                                      -------   -------    ------
     Results of operations from oil and
      gas producing activities
      (excluding corporate overhead)        $  10,356 $  (65,529)     $
5,003
                                      =======   =======    ======
<PAGE>
            SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Reserve Quantity Information

     The  estimates of the Company's proved oil and gas reserves, which are
located  in  the  United  States,  are based  on  evaluations  reviewed  by
independent  petroleum  engineers.  Reserves were estimated  in  accordance
with guidelines established by the U. S. Securities and Exchange Commission
and  the  Financial Accounting Standards Board, which require that  reserve
estimates be prepared under existing economic and operating conditions with
no   provision  for  price  and  cost  escalations  except  by  contractual
arrangements.  The reserve estimates at December 31, 1999 assume an average
oil  price  of  $23.90/Bbl  (reflecting adjustments  for  oil  quality  and
gathering  and transportation costs) and an average gas price of  $2.06/Mcf
(reflecting adjustments for BTU content, gathering and transportation costs
and gas processing and shrinkage).

     Oil  and  gas  reserve  quantity estimates  are  subject  to  numerous
uncertainties  inherent in the estimation of quantities of proved  reserves
and  the  projection  of  future  rates of production  and  the  timing  of
development expenditures.  The accuracy of such estimates is a function  of
the  quality  of  available data, engineering and geological interpretation
and  judgement.  Results of subsequent drilling, testing and production may
cause  either upward or downward revision of previous estimates.   Further,
the  volumes considered to be commercially recoverable fluctuate  with  the
changes in prices and operating costs.  The Company emphasizes that reserve
estimates  are  inherently imprecise and that estimates of new  discoveries
are   more  imprecise  than  those  of  currently  producing  oil  and  gas
properties.   Accordingly,  these estimates  are  expected  to  change,  as
additional information becomes available in the future.

                                      Oil and   Natural  Barrels of
                                     Condensate   Gas  Oil Equivalent
                                      (MBbls)    (MMcf)    (Mboe)
                                       ------    ------   -------
    Total Proved Reserves:
     Balance, January 1, 1997          18,806    76,776    31,602
       Extensions and discoveries         474     1,230       679
       Purchase of minerals-in-place   16,419     7,274    17,631
       Sales of minerals-in-place        (83)      (91)      (98)
         Revisions   of   previous  estimates           (4,642)    (14,825)
(7,113)
       Production                     (1,308)   (5,639)   (2,248)
                                       ------    ------    ------
     Balance, December 31, 1997        29,666    64,725    40,453
       Extensions and discoveries          27     1,526       282
       Purchase of minerals-in-place      288       895       437
       Sales of minerals-in-place     (1,024)   (6,132)   (2,046)
         Revisions   of   previous  estimates           (6,324)       2,815
(5,855)
       Production                     (1,689)   (5,556)   (2,615)
                                       ------    ------    ------
     Balance, December 31, 1998        20,944    58,273    30,656
       Purchase of minerals-in-place      261     1,329       483
       Sales of minerals-in-place     (1,704)   (2,751)   (2,163)
       Revisions of previous estimates            6,633    12,855     8,776
       Production                     (1,306)   (4,627)   (2,077)
                                       ------    ------    ------
     Balance, December 31, 1999        24,828    65,079    35,675
                                       ======    ======    ======
    Total proved developed reserves
       January 1, 1997                 10,302    58,961    20,129
       December 31, 1997               18,472    46,585    26,236
       December 31, 1998               12,006    37,481    18,253
       December 31, 1999               16,618    43,023    23,789

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

Standardized Measure of Discounted Future Net Cash Flows

     The  standardized  measure  of discounted future  net  cash  flows  is
computed by applying year-end prices of oil and gas (with consideration  of
price  changes only to the extent provided by contractual arrangements)  to
the  estimated  future  production of proved  oil  and  gas  reserves  less
estimated  future expenditures (based on year-end costs) to be incurred  in
developing and producing the proved reserves, discounted using  a  rate  of
10%  per  year  to reflect the estimated timing of the future  cash  flows.
Future  income  taxes  are calculated by comparing discounted  future  cash
flows   to  the  tax  basis  of  oil  and  gas  properties  plus  available
carryforwards  and  credits  and applying the  current  tax  rates  to  the
difference.

     Discounted future cash flow estimates like those shown below  are  not
intended  to  represent  estimates  of  the  fair  value  of  oil  and  gas
properties.   Estimates  of  fair  value  should  also  consider   probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development   and  production  costs  and  risks  associated  with   future
production.   Because of these and other considerations,  any  estimate  of
fair value is necessarily subjective and imprecise.

     During  most of 1996 and 1997, the Company benefited from  higher  oil
and  gas prices as compared to previous years.  However, during the  fourth
quarter  of 1997 and the year 1998, oil prices began a downward trend  that
has  continued throughout 1998 and the first half of 1999.  A  continuation
of the oil price environment experienced throughout 1998 and the first half
of 1999 will have an adverse affect on the Company's revenues and operating
cash flow, and may result in a downward adjustment to the Company's current
2000 capital budget.

                                                  December 31,
                                    ---------------------------------------
                                           1999       1998       1997
                                          -----      -----      -----
                                                (in thousands)
     Future cash inflows              $ 727,615   $315,709   $ 620,418
     Future production and development
      costs                           (284,354)   (181,627)  (303,406)
                                       --------   --------    --------
     Future net cash flows before
      income taxes                      443,261    134,082     317,012
     Future income tax expense        (103,067)          -    (59,764)
                                       --------   --------    --------
     Future net cash flows              340,194    134,082     257,248
     10% annual discount for estimated
      timing of cash flows            (164,634)   (62,182)   (117,427)
                                       --------   --------    --------
     Standardized measure of discounted
      future net cash flows           $ 175,560   $ 71,900   $ 139,821
                                       ========   ========    ========

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

     The  principal  sources  of  change in  the  standardized  measure  of
discounted future net cash flows are as follows:

                                                  December 31,
                                    ---------------------------------------
                                           1999       1998       1997
                                          -----      -----      -----
                                                (in thousands)
Sales of oil and gas produced,
  net of production costs             $(20,592)   $(14,072)  $(20,000)
Net change in sales prices net of production
  costs                                 116,644   (76,234)   (119,553)
Extensions and discoveries, net of future
  production and development costs            -      1,195       3,540
Revisions to estimated future development
  costs                                 (4,059)      3,103     (4,833)
Purchases of minerals-in-place            1,866      1,334      80,690
Revisions  of  previous  quantity estimates             60,317     (18,054)
(37,403)
Accretion of discount                     7,190     17,230      25,217
Net change in income taxes             (53,188)     32,483      46,887
Sales of minerals-in-place              (5,685)    (5,899)       (384)
Changes in production rates, timing
  and other                               1,167    (9,007)    (12,881)
                                        -------    -------     -------
                                        103,660   (67,921)    (38,720)
Discounted future net cash flows -
  Beginning of period                    71,900    139,821     178,541
                                        -------    -------     -------

  End of period                       $ 175,560   $ 71,900   $ 139,821
                                        =======    =======     =======

<PAGE>


                                SIGNATURES
                         SOUTHWEST ROYALTIES, INC.

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

                            SOUTHWEST ROYALTIES, INC.

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

                      Date: May 9, 2000

     Pursuant  to the requirements of the Securities Exchange Act of  1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

  SIGNATURE                TITLE                 DATE
  ---------                -----                 -----

  /s/ H. H. Wommack, III
  ------------------------ Chairman/President/   May 9, 2000
  H. H. Wommack, III       Chief Executive Officer

  /s/ J Steven Person
  -------------------------Vice President of
  J Steven Person          Marketing/Chief       May 9, 2000
                           Financial Officer

  /s/ H. Allen Corey
  -------------------------
  H. Allen Corey           Director/Secretary    May 9, 2000
<PAGE>



                                SIGNATURES
                    SOUTHWEST ROYALTIES HOLDINGS, INC.

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

                            SOUTHWEST ROYALTIES HOLDINGS, INC.

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

                      Date: May 9, 2000

     Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

  SIGNATURE                TITLE                 DATE
  ---------                -----                 -----

  /s/ H. H. Wommack, III
  ------------------------ Chairman/President/   May 9, 2000
  H. H. Wommack, III       Chief Executive Officer

  /s/ J Steven Person
  -------------------------Vice President of
  J Steven Person          Marketing/Chief       May 9, 2000
                           Financial Officer

  /s/ H. Allen Corey
  ------------------------
  H. Allen Corey           Director/Secretary    May 9, 2000

<PAGE>