----

| (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, 2008   |   |

|  ̈ | TRANSITION      REPORT PURSUANT TO SECTION 13 OR 15(d)                                                                                                                                                                            |   |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | OF      THE SECURITIES EXCHANGE ACT OF 1934                                                                                                                                                                                       |   |
|   | For      the transition period from                      to                 |   |
|   | Commission      File Number 001-10924                                                                                                                                                                                             |   |

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

| Title      of each class         |   | Name      of each exchange on which registered |
|----------------------------------|--------|------------------------------------------------|
| Common Stock - $.10 Par    Value |   | The NASDAQ Stock Market  LLC                   |

| Indicate      by check mark if the registrant is a well-known seasoned issuer, as      defined in Rule 405 of the Securities Act                                                                                                                                                                                                                                                  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                   |  ̈    Yes |   | xNo |   |
| Indicate      by check mark if the registrant is not required to file reports pursuant      to Section 13 or Section 15(d) of the Act.                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                   |  ̈    Yes |   | xNo |   |
| Indicate      by check mark whether the registrant (1) has filed all reports required to      be filed by Section 13 or 15(d) of the Securities Exchange Act of      1934 during the preceding 12 months (or for such shorter period that the      registrant was required to file such reports), and (2) has been subject to      such filing requirements for the past 90 days. |
|                                                                                                                                                                                                                                                                                                                                                                                   | x    Yes |   |  ̈No |   |

| Indicate      by check mark if disclosure of delinquent filers 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 |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

| State      the aggregate market value of the voting and non-voting common equity held      by non-affiliates, computed by reference to the price at which common      equity was last sold, as of the last business day of the registrant’s most      recently completed second fiscal      quarter.  $647,925,345. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| There      were 12,134,089 shares of Common Stock, $.10 par value, of the registrant      outstanding as of March 10,2009. |
|---------------------------------------------------------------------------------------------------------------------------------|

| Portions      of the definitive proxy statement relating to the 2009 Annual Meeting of      Stockholders, which will be filed with the Commission not later than April      30, 2009, are incorporated by reference in Part III of this Form      10-K. |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Page   |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Part      I   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      1.  | Business                                                                                                                                                   | 4      |   |
|          | General                                                                                                                                                                        | 4      |   |
|          | Company      Profile                                                                                                                                                           | 5      |   |
|          | Investment in Larclay      JV                                                                                                                                                  | 7      |   |
|          | Exploration and Development      Activities                                                                                                                                    | 8      |   |
|          | Marketing      Arrangements                                                                                                                                                    | 10     |   |
|          | Natural Gas      Services                                                                                                                                                      | 10     |   |
|          | Competition and      Markets                                                                                                                                                   | 10     |   |
|          | Regulation                                                                                                                                                                     | 11     |   |
|          | Environmental      Matters                                                                                                                                                     | 12     |   |
|          | Title to      Properties                                                                                                                                                       | 14     |   |
|          | Operational Hazards and      Insurance                                                                                                                                         | 15     |   |
|          | Executive      Officers                                                                                                                                                        | 15     |   |
|          | Employees                                                                                                                                                                      | 15     |   |
|          | Website      Address                                                                                                                                                           | 16     |   |
| Item      1A. | Risk      Factors                                                                                                                                                              | 16     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      1B. | Unresolved Staff      Comments                                                                                                                                                 | 24     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      2.  | Properties                                                                                                                                                 | 24     |   |
|          | Reserves                                                                                                                                                                       | 25     |   |
|          | Exploration and Development      Activities                                                                                                                                    | 26     |   |
|          | Productive Well      Summary                                                                                                                                                   | 27     |   |
|          | Volumes, Prices and Production      Costs                                                                                                                                      | 27     |   |
|          | Development, Exploration and Acquisition      Expenditures                                                                                                                     | 27     |   |
|          | Acreage                                                                                                                                                                        | 28     |   |
|          | Contract      Drilling                                                                                                                                                         | 28     |   |
|          | Offices                                                                                                                                                                        | 28     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      3.  | Legal      Proceedings                                                                                                                                     | 28     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      4.  | Submission of Matters to a Vote of Security      Holders                                                                                                   | 28     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Part      II  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      5.  | Market for the Registrant’s Common Equity, Related      Stockholder Matters and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|          | Issuer Repurchases of Equity      Securities                                                                                                                                   | 29     |   |
|          | Price Range of Common      Stock                                                                                                                                                         | 29     |   |
|          | Dividend      Policy                                                                                                                                                                     | 29     |   |
|          | Securities Authorized for Issuance under Equity      Compensation Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 29     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      6.  | Selected Financial      Data                                                                                                                               | 30     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      7.  | Management’s Discussion and Analysis of Financial Condition      and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
|          | Results of      Operations                                                                                                                                                     | 31     |   |
|          | Overview                                                                                                                                                                                 | 31     |   |
|          | Key Factors to      Consider                                                                                                                                                             | 31     |   |
|          | Proved Oil and Gas      Reserves                                                                                                                                                         | 32     |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Page   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   Item      7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Management’s Discussion and Analysis of Financial Condition      and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Results of Operations (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Supplemental      Information                                                                                                                                                    | 33     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Operating      Results                                                                                                                                                           | 35     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Liquidity and Capital      Resources                                                                                                                                             | 39     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Known Trends and      Uncertainties                                                                                                                                              | 43     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Application of Critical Accounting Policies and      Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 44     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Recent Accounting      Pronouncements                                                                                                                                            | 47     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   Item      7A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Quantitative and Qualitative Disclosure About Market      Risks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 48     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Oil and Gas      Prices                                                                                                                                                          | 48     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Interest      Rates                                                                                                                                                              | 49     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   Item      8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Financial Statements and Supplementary      Data                                                                                                   | 49     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   Item      9.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Changes in and Disagreements with Accountants on Accounting      and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   Financial      Disclosure                                                                                                                                  | 49     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   Item      9A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Controls and      Procedures                                                                                                                       | 49     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Disclosure Controls and      Procedures                                                                                                                                          | 49     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Internal Control Over Financial      Reporting                                                                                                                                   | 50     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Changes in Internal Control Over Financial      Reporting                                                                                                                        | 50     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Management’s Report on Internal Control Over      Financial Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 50     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   Item      9B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Other      Information                                                                                                                             | 52     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Part      III                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   Items 10-14.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Information Incorporated by      Reference                                                                                                         | 53     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Part      IV                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   Item      15.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Exhibits and Financial Statement      Schedules                                                                                                    | 54     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Financial Statements and      Schedules                                                                                                                                          | 54     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Exhibits                                                                                                                                                                         | 54     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Glossary of      Terms                                                                                                                       | 61                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
| Signatures                                                                                                                                   | 64                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |

----

|   | • |   | estimates      of our oil and gas reserves;                                                                                |
|--------|---------|--------|----------------------------------------------------------------------------------------------------------------------------|
|   |    |   |                                                                                                                       |
|   | • |   | estimates      of our future oil and gas production, including estimates of any increases      or decreases in production; |
|   |    |   |                                                                                                                       |
|   | • |   | planned      capital expenditures and the availability of capital resources to fund      those expenditures;               |
|   |    |   |                                                                                                                       |
|   | • |   | our      outlook on oil and gas prices;                                                                                    |
|   |    |   |                                                                                                                       |
|   | • |   | our      outlook on domestic and worldwide economic conditions;                                                            |
|   |    |   |                                                                                                                       |
|   | • |   | our      access to capital and our anticipated liquidity;                                                                  |
|   |    |   |                                                                                                                       |
|   | • |   | our      future business strategy and other plans and objectives for future      operations;                               |
|   |    |   |                                                                                                                       |
|   | • |   | the      impact of political and regulatory developments;                                                                  |
|   |    |   |                                                                                                                       |
|   | • |   | our      assessment of counterparty risks and the ability of our counterparties to      perform their future obligations;  |
|   |    |   |                                                                                                                       |
|   | • |   | estimates      of the impact of new accounting pronouncements on earnings in future      periods; and                      |
|   |    |   |                                                                                                                       |
|   | • |   | our      future financial condition or results of operations and our future      revenues and expenses.                    |
|   |    |   |                                                                                                                       |
|   |

|   | • |   | the      possibility of unsuccessful exploration and development drilling      activities;                                                              |
|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |   |                                                                                                                                                    |
|   | • |   | our      ability to replace and sustain production;                                                                                                     |
|   |    |   |                                                                                                                                                    |
|   | • |   | commodity      price volatility;                                                                                                                        |
|   |    |   |                                                                                                                                                    |
|   | • |   | domestic      and worldwide economic conditions;                                                                                                        |
|   |    |   |                                                                                                                                                    |
|   | • |   | the      availability of capital on economic terms to fund our capital expenditures      and acquisitions;                                              |
|   |    |   |                                                                                                                                                    |
|   | • |   | our      level of indebtedness;                                                                                                                         |
|   |    |   |                                                                                                                                                    |
|   | • |   | the      impact of the current economic recession on our business operations,      financial condition and ability to raise capital;                    |
|   |    |   |                                                                                                                                                    |
|   | • |   | declines      in the value of our oil and gas properties resulting in a decrease in our      borrowing base under our credit facility and  impairments; |

----

|   | • |   | the      ability of financial counterparties to perform or fulfill their      obligations under existing agreements;                                                   |
|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |   |                                                                                                                                                                   |
|   | • |   | the      uncertainty inherent in estimating proved oil and gas reserves and in      projecting future rates of production and timing of development      expenditures; |
|   |    |   |                                                                                                                                                                   |
|   | • |   | drilling      and other operating risks;                                                                                                                               |
|   |    |   |                                                                                                                                                                   |
|   | • |   | hurricanes      and other weather conditions;                                                                                                                          |
|   |    |   |                                                                                                                                                                   |
|   | • |   | lack      of availability of goods and services;                                                                                                                       |
|   |    |   |                                                                                                                                                                   |
|   | • |   | regulatory      and environmental risks associated with drilling and production      activities;                                                                       |
|   |    |   |                                                                                                                                                                   |
|   | • |   | the      adverse effects of changes in applicable tax, environmental and other      regulatory legislation; and                                                        |
|   |    |   |                                                                                                                                                                   |
|   | • |   | the      other risks described in this Form 10-K.                                                                                                                      |
|   |    |   |                                                                                                                                                                   |

Item1

Genera

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Company Profile

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Investme

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Explor

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Marketing 

Natural

Competition 

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Regulation

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Environmental 

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Title 

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Operational 

Executive 

Employees

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Website 

Item

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| ·   | require      us to use a significant portion of our cash flow to pay principal and      interest on the debt, which will reduce the amount available to fund      working capital, capital expenditures, and other general corporate      purposes; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | adversely      affect the credit ratings assigned by third party rating agencies, which      have in the past and may in the future, downgrade their ratings of our      debt and other obligations due to changes in our debt level or our      financial condition; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | limit      our access to the capital markets; |
|--------------------|-----------------------------------------------|

| ·   | increase      our borrowing costs, and impact the terms, conditions, and restrictions      contained in our debt agreements, including the addition of more      restrictive covenants; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | limit      our flexibility in planning for and reacting to changes in our business as      covenants and restrictions contained in our existing and possible future      debt arrangements may require that we meet certain financial tests and      place restrictions on the incurrence of additional      indebtedness; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | place      us at a disadvantage compared to similar companies in our industry that      have less debt; and |
|--------------------|-------------------------------------------------------------------------------------------------------------|

| ·   | make      us more vulnerable to economic downturns and adverse developments in our      business. |
|--------------------|---------------------------------------------------------------------------------------------------|

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| ·   | we      may be limited in receiving the full benefit of increases in oil and gas      prices as a result of thesetransactions; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------|

| ·   | a      counterparty may not perform its obligation under the applicable      derivative instrument or seek bankruptcy  protection; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------|

| ·   | there      may be a change in the expected differential between the underlying      commodity price in the derivative instrument and the actual price      received; and |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the      steps we take to monitor our derivative financial instruments may not      detect and prevent violations of our risk management policies and      procedures, particularly if deception or other intentional misconduct is      involved. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | unexpected      drilling conditions; |
|--------------------|--------------------------------------|

| ·   | title      problems; |
|--------------------|----------------------|

| ·   | pressure      or irregularities in formations; |
|--------------------|------------------------------------------------|

| ·   | equipment      failures or accidents; |
|--------------------|---------------------------------------|

| ·   | adverse      weather conditions; |
|--------------------|----------------------------------|

| ·   | compliance      with environmental and other governmental requirements, which may increase      our costs or restrict our activities;and |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | costs      of, or shortages or delays in the availability of, drilling rigs, tubular      materials and equipment andservices. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------|

----

----

Item

Item

----

Reserves

|                                                   |   | Proved      Developed |    |   | Proved                      |   |   | Total       |   |
|--------------------------------------------------------|--------|-----------------------|---------|--------|-----------------------------|--------|--------|-------------|--------|
|                                                   |   | Producing             |    |   | Non-producing               |   |   | Undeveloped |   |   | Proved |   |
|                                                   |   |                  |    |   | (Dollars      in thousands) |   |   |        |   |
| Gas      (MMcf)                                        |   |                  | 74,058  |   |                        |   | 13,282 |        |   |   | 16,589 |   |   |   | 103,929 |   |
| Oil      and natural gas liquids (MBbls)               |   |                  | 14,792  |   |                        |   | 2,023  |        |   |   | 3,961 |   |   |   | 20,776 |   |
| Total      (MMcfe)                                     |   |                  | 162,810 |   |                        |   | 25,420 |        |   |   | 40,355 |   |   |   | 228,585 |   |
| Standardized      measure of discounted                |   |                  |    |   |                        |   |   |        |   |   |   |   |   |   |   |   |
|    future      net cash flows           |   |                  |    |   |                        |   |   |        |   |   |   |   |   | $ | 405,166 |   |
| Present      value of proved reserves(a)               |   |                  |    |   |                        |   |   |        |   |   |   |   |   | $ | 511,661 |   |
|           |   |                  |    |   |                        |   |   |        |   |   |   |   |   |   |   |   |

|   | (a) | We      believe that the present value of proved reserves (a non-GAAP measure) is      a useful supplemental disclosure to the standardized measure of discounted      future net cash flows. While the standardized measure of discounted future      net cash flows is dependent on the unique tax situation of each company,      the present value of proved reserves is based on prices and discount      factors that are consistent for all companies and can be used within the      industry and by securities analysts to evaluate proved reserves on a more      comparable basis. Standardized measure of discounted future net cash flows      differs from the present value of proved reserves by the amount of      estimated future income taxes and net abandonment      costs.  Estimated future income taxes and future net abandonment      costs (discounted at 10%) as of December 31, 2008 were $82.2 million      and $24.3 million,respectively. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                   |   |                 |   |   |   |   |    |           |   |   |            |   |                |          |   |   | Percent       |   |
|--------------------------------------------------------|--------|----------------------|--------|--------|--------|--------|---------|----------------|--------|--------|-----------------|--------|---------------------|---------------|--------|--------|---------------|--------|
|                                                   |   | Proved      Reserves |   |   |   |   |    | Present        |   |   | of      Present |   |
|                                                   |   |                 |   |   |   |   |    | Total      Gas |   |   | Percent      of |   |                | Value      of |   |   | Value      of |   |
|                                                   |   | Oil      (a)         |   |   | Gas    |   |    | Equivalent     |   |   | Total      Gas  |   |                | Proved        |   |   | Proved        |   |
|                                                   |   | (MBbls)              |   |   | (MMcf) |   |    | (MMcfe)        |   |   | Equivalent      |   |                | Reserves      |   |   | Reserves      |   |
|                                                   |   |                 |   |   |   |   |    |           |   |   |            |   | (In      thousands) |          |   |   |
| Permian      Basin                                     |   |                 | 13,491 |   |   |   | 54,914  |           |   |   | 135,860         |   |                |          | 59.4   | %      |          | $      | 256,467 |   |   |   | 50.1 | % |
| North      Louisiana                                   |   |                 | 285    |   |   |   | 19,750  |           |   |   | 21,460          |   |                |          | 9.4    | %      |          |   | 64,377 |   |   |   | 12.6 | % |
| South      Louisiana                                   |   |                 | 524    |   |   |   | 13,966  |           |   |   | 17,110          |   |                |          | 7.5    | %      |          |   | 61,109 |   |   |   | 11.9 | % |
| Austin      Chalk (Trend)                              |   |                 | 6,280  |   |   |   | 4,471   |           |   |   | 42,151          |   |                |          | 18.4   | %      |          |   | 102,370 |   |   |   | 20.0 | % |
| Cotton      Valley Reef Complex                        |   |                 | -      |   |   |   | 9,281   |           |   |   | 9,281           |   |                |          | 4.1    | %      |          |   | 22,029 |   |   |   | 4.3 | % |
| East      Texas Bossier                                |   |                 | -      |   |   |   | 519     |           |   |   | 519             |   |                |          | .2     | %      |          |   | 1,297 |   |   |   | .3 | % |
| Other                                                  |   |                 | 196    |   |   |   | 1,028   |           |   |   | 2,204           |   |                |          | 1.0    | %      |          |   | 4,012 |   |   |   | .8 | % |
| Total                                                  |   |                 | 20,776 |   |   |   | 103,929 |           |   |   | 228,585         |   |                |          | 100.0  | %      |          | $      | 511,661 |   |   |   | 100.0 | % |
|           |   |                 |   |   |   |   |    |           |   |   |            |   |                |          |   |   |          |   |   |   |   |   |   |   |

|  (a) | Includes      natural gas liquids. |
|-----------|------------------------------------|

----

Exploration 

|                                                                                                                                                                                                                  |   | Year      Ended December 31,                               |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|--------|
|                                                                                                                                                                                                                  |   | 2008                                                       |   |   | 2007 |   |   | 2006 |   |
|                                                                                                                                                                                                                  |   | Gross                                                      |   |   | Net |   |   | Gross |   |   | Net |   |   | Gross |   |   | Net |   |
|                                                                                                                                                                                                                  |   | (Excludes      wells in progress at the end of any period) |   |
| Development      Wells:                                                                                                                                                                                               |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil                                    |   |                                                       | 70     |   |   |   | 51.5 |   |   |   | 34 |   |   |   | 14.9 |   |   |   | 2 |   |   |   | 1.0 |   |
| Gas                                    |   |                                                       | 41     |   |   |   | 14.7 |   |   |   | 34 |   |   |   | 13.2 |   |   |   | 16 |   |   |   | 1.8 |   |
| Dry                                    |   |                                                       | 1      |   |   |   | 1.0 |   |   |   | - |   |   |   | - |   |   |   | 1 |   |   |   | .8 |   |
| Total                                                 |   |                                                       | 112    |   |   |   | 67.2 |   |   |   | 68 |   |   |   | 28.1 |   |   |   | 19 |   |   |   | 3.6 |   |
| Exploratory      Wells:                                                                                                                                                                                               |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil                                    |   |                                                       | 1      |   |   |   | .5 |   |   |   | - |   |   |   | - |   |   |   | 6 |   |   |   | 5.2 |   |
| Gas                                    |   |                                                       | 3      |   |   |   | 1.7 |   |   |   | 12 |   |   |   | 8.0 |   |   |   | 35 |   |   |   | 14.5 |   |
| Dry                                    |   |                                                       | 4      |   |   |   | 3.0 |   |   |   | 7 |   |   |   | 5.8 |   |   |   | 10 |   |   |   | 8.7 |   |
| Total                                                 |   |                                                       | 8      |   |   |   | 5.2 |   |   |   | 19 |   |   |   | 13.8 |   |   |   | 51 |   |   |   | 28.4 |   |
| Total      Wells:                                                                                                                                                                                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil                                    |   |                                                       | 71     |   |   |   | 52.0 |   |   |   | 34 |   |   |   | 14.9 |   |   |   | 8 |   |   |   | 6.2 |   |
| Gas                                    |   |                                                       | 44     |   |   |   | 16.4 |   |   |   | 46 |   |   |   | 21.2 |   |   |   | 51 |   |   |   | 16.3 |   |
| Dry                                    |   |                                                       | 5      |   |   |   | 4.0 |   |   |   | 7 |   |   |   | 5.8 |   |   |   | 11 |   |   |   | 9.5 |   |
| Total                                                 |   |                                                       | 120    |   |   |   | 72.4 |   |   |   | 87 |   |   |   | 41.9 |   |   |   | 70 |   |   |   | 32.0 |   |

----

Productive 

|                                                                                                                                                                                                                                                                           |   | Oil    |   |   | Gas    |   |   | Total  |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                           |   | Gross  |   |   | Net    |   |   | Gross  |   |   | Net |   |   | Gross |   |   | Net |   |
| Permian      Basin                                                     |   |   | 5,481  |   |   |   | 482.8  |   |   |   | 736 |   |   |   | 96.2 |   |   |   | 6,217 |   |   |   | 579.0 |   |
| North      Louisiana                                                   |   |   | -      |   |   |   | -      |   |   |   | 52 |   |   |   | 18.0 |   |   |   | 52 |   |   |   | 18.0 |   |
| South      Louisiana                                                   |   |   | 6      |   |   |   | 3.6    |   |   |   | 48 |   |   |   | 23.5 |   |   |   | 54 |   |   |   | 27.1 |   |
| Austin      Chalk      (Trend)                                         |   |   | 310    |   |   |   | 240.8  |   |   |   | 17 |   |   |   | 9.3 |   |   |   | 327 |   |   |   | 250.1 |   |
| Cotton      Valley Reef Complex                                                                                                                                                                                                                                                |   |   | -      |   |   |   | -      |   |   |   | 14 |   |   |   | 11.6 |   |   |   | 14 |   |   |   | 11.6 |   |
| Other                                                                  |   |   | 6      |   |   |   | 5.3    |   |   |   | 34 |   |   |   | 8.7 |   |   |   | 40 |   |   |   | 14.0 |   |
| Total                                                                                                                                                                                                                                                                          |   |   | 5,803  |   |   |   | 732.5  |   |   |   | 901 |   |   |   | 167.3 |   |   |   | 6,704 |   |   |   | 899.8 |   |

Volumes

|                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Year      Ended December 31, |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 2008                         |   |   | 2007 |   |   | 2006 |   |
| Oil      and Gas Production Data:                                                                                                                                                                                                                                                                                                                                                                                         |   |                         |   |   |   |   |   |   |   |
| Gas      (MMcf)                                                                                     |   |                         | 18,553 |   |   |   | 20,649 |   |   |   | 15,198 |   |
| Oil      (MBbls)                                                                                    |   |                         | 2,952  |   |   |   | 2,318 |   |   |   | 2,171 |   |
| Natural      gas liquids      (MBbls)                                                               |   |                         | 182    |   |   |   | 222 |   |   |   | 199 |   |
|   Total      (MMcfe)                                                                      |   |                         | 37,357 |   |   |   | 35,889 |   |   |   | 29,418 |   |
| Average      Realized Prices (a):                                                                                                                                                                                                                                                                                                                                                                                         |   |                         |   |   |   |   |   |   |   |   |   |   |
| Gas      ($/Mcf)                                                                                    |   | $                            | 9.02   |   |   | $ | 7.01 |   |   | $ | 6.68 |   |
| Oil      ($/Bbl)                                                                                    |   | $                            | 97.35  |   |   | $ | 70.36 |   |   | $ | 62.92 |   |
| Natural      gas liquids      ($/Bbl)                                                               |   | $                            | 54.45  |   |   | $ | 43.74 |   |   | $ | 38.18 |   |
| Average      Production Costs:                                                                                                                                                                                                                                                                                                                                                                                            |   |                         |   |   |   |   |   |   |   |   |   |   |
| Production      ($/Mcfe)      (b)                                                                   |   | $                            | 2.38   |   |   | $ | 2.10 |   |   | $ | 2.15 |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |

|   | (a) | No      derivatives were designated as cash flow hedges in the table      above.  All gains or losses on settled derivatives were included      in gain/loss on derivatives. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | Includes      direct lifting costs (labor, repairs and maintenance, materials and      supplies), workover costs, administrative costs of production offices,      insurance and property and severancetaxes. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Development

|                                                                                                                                                                                                                                                                                                                                                                                                                           |   | Year      Ended December 31, |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 2008                         |    |   | 2007 |   |   | 2006 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                           |   |  (In      thousands)    |    |
| Property      Acquisitions:                                                                                                                                                                                                                                                                                                                                                                                                    |   |                         |    |   |   |   |   |   |   |
| Proved                                                                                                   |   | $                            | -       |   |   | $ | - |   |   | $ | 6,432 |   |
| Unproved                                                                                                 |   |                         | 36,397  |   |   |   | 15,746 |   |   |   | 54,437 |   |
| Developmental      Costs                                                                  |   |                         | 260,073 |   |   |   | 45,611 |   |   |   | 35,698 |   |
| Exploratory      Costs                                                                    |   |                         | 51,237  |   |   |   | 169,879 |   |   |   | 157,509 |   |
| Total                                                                                                    |   | $                            | 347,707 |   |   | $ | 231,236 |   |   | $ | 254,076 |   |

----

Acreage

|                                                                                                                                                                                             |   | Developed |    |   | Undeveloped |   |    | Total  |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|---------|--------|-------------|--------|---------|--------|--------|
|                                                                                                                                                                                             |   | Gross     |    |   | Net         |   |    | Gross  |   |   | Net |   |   | Gross |   |   | Net |   |
| Permian      Basin                                   |   |      | 86,278  |   |        |   | 47,699  |   |   |   | 351,167 |   |   |   | 159,653 |   |   |   | 437,445 |   |   |   | 207,352 |   |
| East      Texas      (a)                             |   |      | 118,806 |   |        |   | 115,048 |   |   |   | 147,689 |   |   |   | 107,623 |   |   |   | 266,495 |   |   |   | 222,671 |   |
| North      Louisiana                                 |   |      | 5,736   |   |        |   | 5,013   |   |   |   | 236,480 |   |   |   | 165,571 |   |   |   | 242,216 |   |   |   | 170,584 |   |
| South      Louisiana                                 |   |      | 8,662   |   |        |   | 5,882   |   |   |   | 23,034 |   |   |   | 20,168 |   |   |   | 31,696 |   |   |   | 26,050 |   |
| Other      (b)                                       |   |      | 10,938  |   |        |   | 3,507   |   |   |   | 392,850 |   |   |   | 208,687 |   |   |   | 403,788 |   |   |   | 212,194 |   |
| Total                                                          |   |      | 230,420 |   |        |   | 177,149 |   |   |   | 1,151,220 |   |   |   | 661,702 |   |   |   | 1,381,640 |   |   |   | 838,851 |   |
|                                                                                                                                                     |   |      |    |   |        |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|  (a) | Includes      our acreage in the Austin Chalk (Trend), Cotton Valley Reef Complex and      East Texas Bossier areas. |
|-----------|----------------------------------------------------------------------------------------------------------------------|

|  (b) | Net      undeveloped acres are attributable to the following      areas:  Mississippi – 70,093; Utah – 53,781;      Alabama – 38,912; Colorado – 28,979; and      other – 16,922. |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Contract 

Offices

Item

Item

----

| Item      5 - | Market for the      Registrant's Common Equity, Related Stockholder Matters and Issuer      Repurchases of EquitySecurities |
|---------------|-----------------------------------------------------------------------------------------------------------------------------|

Price 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | High   |   |   | Low    |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Year      Ended December 31, 2008:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |   |   |   |   |
| Fourth      Quarter                                                                                     |   | $      | 68.89  |   |   | $      | 29.70 |   |
| Third      Quarter                                                                                      |   |   | 120.00 |   |   |   | 61.89 |   |
| Second      Quarter                                                                                     |   |   | 121.50 |   |   |   | 48.86 |   |
| First      Quarter                                                                                      |   |   | 53.50  |   |   |   | 30.84 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |   |   |
| Year      Ended December 31, 2007:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Fourth      Quarter                                                                                     |   | $      | 35.39  |   |   | $      | 27.12 |   |
| Third      Quarter                                                                                      |   |   | 34.54  |   |   |   | 21.33 |   |
| Second      Quarter                                                                                     |   |   | 29.68  |   |   |   | 23.43 |   |
| First      Quarter                                                                                      |   |   | 36.25  |   |   |   | 26.44 |   |

Dividend 

Securities 

----

Item

|                                                                                                                                                                                                                                                                                                                                                     |   | Year      Ended December 31,          |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                     |   | 2008                                  |    |   | 2007 |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
|                                                                                                                                                                                                                                                                                                                                                     |   | (In      thousands, except per share) |    |
| Statement      of Operations Data:                                                                                                                                                                                                                                                                                                                       |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues:                                                                                                                                                                                                                                                                                                                                                |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil and gas      sales                                                                                   |   | $                                     | 463,964 |   |   | $ | 316,992 |   |   | $ | 245,967 |   |   | $ | 252,599 |   |   | $ | 193,127 |   |
| Natural gas      services                                                                                |   |                                  | 10,926  |   |   |   | 10,230 |   |   |   | 11,327 |   |   |   | 12,080 |   |   |   | 9,083 |   |
| Drilling rig      services                                                                               |   |                                  | 46,124  |   |   |   | 52,649 |   |   |   | 6,937 |   |   |   | - |   |   |   | - |   |
| Gain on sales of property and      equipment                                                                                                                                                                                                                                                                                                             |   |                                  | 44,503  |   |   |   | 14,024 |   |   |   | 1,767 |   |   |   | 18,920 |   |   |   | 4,120 |   |
| Total      revenues                                                                                                |   |                                  | 565,517 |   |   |   | 393,895 |   |   |   | 265,998 |   |   |   | 283,599 |   |   |   | 206,330 |   |
| Costs and    expenses:                                                                                                                                                                                                                                                                                                                                   |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Production                                                                                               |   |                                  | 89,054  |   |   |   | 75,319 |   |   |   | 63,298 |   |   |   | 57,404 |   |   |   | 41,163 |   |
| Exploration:                                                                                                                                                                                                                                                                                                                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Abandonment and      impairments                                                                                   |   |                                  | 80,112  |   |   |   | 68,870 |   |   |   | 65,173 |   |   |   | 39,957 |   |   |   | 67,956 |   |
| Seismic and      other                                                                                             |   |                                  | 22,685  |   |   |   | 4,765 |   |   |   | 11,299 |   |   |   | 10,780 |   |   |   | 7,124 |   |
| Natural gas      services                                                                                |   |                                  | 10,060  |   |   |   | 9,745 |   |   |   | 10,005 |   |   |   | 11,212 |   |   |   | 8,538 |   |
| Drilling rig      services                                                                               |   |                                  | 37,789  |   |   |   | 32,964 |   |   |   | 4,538 |   |   |   | - |   |   |   | - |   |
| Depreciation, depletion and      amortization                                                                                                                                                                                                                                                                                                            |   |                                  | 120,542 |   |   |   | 84,476 |   |   |   | 66,163 |   |   |   | 47,509 |   |   |   | 44,040 |   |
| Impairment of property and      equipment                                                                                                                                                                                                                                                                                                                |   |                                  | 12,882  |   |   |   | 12,137 |   |   |   | 21,848 |   |   |   | 18,266 |   |   |   | - |   |
| Accretion of abandonment      obligations                                                                                                                                                                                                                                                                                                                |   |                                  | 2,355   |   |   |   | 2,508 |   |   |   | 1,653 |   |   |   | 1,158 |   |   |   | 1,044 |   |
| General and      administrative                                                                          |   |                                  | 25,635  |   |   |   | 19,266 |   |   |   | 16,676 |   |   |   | 15,410 |   |   |   | 11,689 |   |
| Loss on sales of property and      equipment                                                                                                                                                                                                                                                                                                             |   |                                  | 2,122   |   |   |   | 9,815 |   |   |   | 99 |   |   |   | 209 |   |   |   | 14,337 |   |
| Other                                                                                                    |   |                                  | -       |   |   |   | - |   |   |   | - |   |   |   | 1,353 |   |   |   | - |   |
| Total costs and      expenses                                                                                      |   |                                  | 403,236 |   |   |   | 319,865 |   |   |   | 260,752 |   |   |   | 203,258 |   |   |   | 195,891 |   |
| Operating      income                                                                                              |   |                                  | 162,281 |   |   |   | 74,030 |   |   |   | 5,246 |   |   |   | 80,341 |   |   |   | 10,439 |   |
| Other income      (expense):                                                                                                                                                                                                                                                                                                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest      expense                                                                                    |   |                                  | (24,994 | ) |   |   | (32,118 | ) |   |   | (20,895 | ) |   |   | (14,498 | ) |   |   | (7,877 | ) |
| Gain (loss) on      derivatives                                                                          |   |                                  | 74,743  |   |   |   | (31,968 | ) |   |   | 37,340 |   |   |   | (70,059 | ) |   |   | (25,329 | ) |
| Other income      (expense)                                                                              |   |                                  | 6,539   |   |   |   | 5,355 |   |   |   | (1,339 | ) |   |   | 4,022 |   |   |   | 1,354 |   |
| Total other income      (expense)                                                                                  |   |                                  | 56,288  |   |   |   | (58,731 | ) |   |   | 15,106 |   |   |   | (80,535 | ) |   |   | (31,852 | ) |
| Income (loss) before income      taxes                                                    |   |                                  | 218,569 |   |   |   | 15,299 |   |   |   | 20,352 |   |   |   | (194 | ) |   |   | (21,413 | ) |
| Income tax (expense)      benefit                                                         |   |                                  | (77,327 | ) |   |   | (5,497 | ) |   |   | (1,979 | ) |   |   | 451 |   |   |   | 7,385 |   |
| Minority interest, net of      tax                                                        |   |                                  | (708    | ) |   |   | (3,812 | ) |   |   | (574 | ) |   |   | - |   |   |   | - |   |
| NET INCOME      (LOSS)                                                                    |   | $                                     | 140,534 |   |   | $ | 5,990 |   |   | $ | 17,799 |   |   | $ | 257 |   |   | $ | (14,028 | ) |
| Net income (loss) per common      share:                                                                                                                                                                                                                                                                                                                 |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                    |   | $                                     | 11.78   |   |   | $ | .53 |   |   | $ | 1.64 |   |   | $ | .02 |   |   | $ | (1.37 | ) |
| Diluted                                                                                                  |   | $                                     | 11.67   |   |   | $ | .52 |   |   | $ | 1.58 |   |   | $ | .02 |   |   | $ | (1.37 | ) |
| Weighted average common shares      outstanding:                                                                                                                                                                                                                                                                                                         |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                    |   |                                  | 11,932  |   |   |   | 11,337 |   |   |   | 10,885 |   |   |   | 10,804 |   |   |   | 10,213 |   |
| Diluted                                                                                                  |   |                                  | 12,039  |   |   |   | 11,494 |   |   |   | 11,244 |   |   |   | 11,241 |   |   |   | 10,213 |   |
| Other      Data:                                                                                                                                                                                                                                                                                                                                         |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating      activities                                                                                                                                                                                                                                                                                                           |   | $                                     | 381,980 |   |   | $ | 234,866 |   |   | $ | 145,990 |   |   | $ | 163,475 |   |   | $ | 126,980 |   |
|                                                                                                                                                                                                                                                                                                                                                     |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                     |   | December      31,                     |    |
|                                                                                                                                                                                                                                                                                                                                                     |   | 2008                                  |    |   | 2007 |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
|                                                                                                                                                                                                                                                                                                                                                     |   | (In      thousands)                   |    |
| Balance      Sheet Data:                                                                                                                                                                                                                                                                                                                                 |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Working capital      (deficit)                                                            |   | $                                     | 2,607   |   |   | $ | (76,388 | ) |   | $ | (23,068 | ) |   | $ | (35,812 | ) |   | $ | (27,566 | ) |
| Total      assets                                                                         |   |                                  | 943,409 |   |   |   | 861,096 |   |   |   | 795,433 |   |   |   | 587,335 |   |   |   | 462,235 |   |
| Long-term      debt                                                                       |   |                                  | 347,225 |   |   |   | 430,175 |   |   |   | 413,876 |   |   |   | 235,700 |   |   |   | 177,519 |   |
| Stockholders’      equity                                                           |   |                                  | 314,682 |   |   |   | 160,806 |   |   |   | 144,980 |   |   |   | 120,291 |   |   |   | 117,596 |   |

----

Item 

Overview

Key 

| ·   | Our      oil and gas sales increased $147 million, or 46%, from 2007, comprised of      $118.7 million in price variances and $28.3 million in volume      variances. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | During      2008, we decreased borrowings under our revolving credit facility by      $71.7 million from $165.8 million at December 31, 2007 to      $94.1 million at December 31, 2008 by utilizing cash proceeds from      the sales of assets and the early termination of derivative      contracts. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | We      spent $372.7 million on exploration and development activities during      fiscal 2008, of which approximately 28% was on exploratory      prospects.  We currently plan to spend approximately      $56 million on exploration and development for fiscal 2009, with      approximately 70% applied to exploratory  activities. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Exploration      costs were $102.8 million for 2008, of which approximately      $28.9 million related to unsuccessful exploratory well costs, $51.2      million related to impairment of unproved acreage and the remaining $22.7      million was spent on seismic related activities.  Most of the      abandonment and impairment costs in 2008 related to prospects in the East      Texas Bossier area and NorthLouisiana. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | We      recorded a non-cash charge during 2008 of $12.9 million for impairments      pursuant to Statement of Financial Accounting Standards No. 144 “Accounting for Impairment or      Disposal of Long-Lived Assets” (“SFAS 144”) including proved oil      and gas property impairments of $11.3 million for the Margarita #1 well to      reduce the carrying value to its estimated fair  value. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | At      December 31, 2008, our capitalized unproved oil and gas properties totaled      $90.8 million, of which approximately $52.5 million was attributable      to unproved acreage.  Unproved properties are subject to a      valuation impairment to the extent the carrying cost of a prospect exceeds      its estimated fair value.  Therefore, our results of operations      in future periods may be adversely affected by unproved property      impairments. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | We      recorded a $74.7 million net gain on derivatives in fiscal 2008,      consisting of a $25 million realized gain on settled contracts and a      $49.7 million gain for changes in mark-to-market valuations.  In      December 2008, the Company terminated substantially all of its      then-existing derivative contracts for cash proceeds of $99.3      million.  The terminated contracts covered 2.6 million barrels      of oil production and 15.2 million MMBtu of gas production for 2009 and      2010.  Since we do not presently designate our derivatives as      cash flow hedges under applicable accounting standards, we recognize the      full effect of changing prices on mark-to-market valuations as a current      charge or credit to our results ofoperations. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Our      estimated proved oil and gas reserves at December 31, 2008 were      228.6 Bcfe compared to 290.8 Bcfe at December 31, 2007.  We      added 36.2 Bcfe through extensions and discoveries, had downward net      revisions of 49.7 Bcfe and had sales of minerals-in-place of 11.3      Bcfe. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Proved 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | Bcfe   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Total      proved reserves, December 31,      2007                                                                                                 |   |   | 290.8  |   |
| Extensions      and      discoveries                                                                                                                                   |   |   | 36.2   |   |
| Sales      of      minerals-in-place                                                                                                                                   |   |   | (11.3  | ) |
| Revisions                                                                                                                                                              |   |   | (49.7  | ) |
| Production                                                                                                                                                             |   |   | (37.4  | ) |
| Total      proved reserves, December 31,      2008                                                                                                 |   |   | 228.6  |   |

----

Supplemental 

|                                                                                                                                                                                                                                                                                                                                                |   | As      of or for the Year Ended December 31, |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                |   | 2008                                          |    |   | 2007 |   |   | 2006 |   |
| Oil      and Gas Production Data:                                                                                                                                                                                                                                                                                                                   |   |                                          |    |   |   |   |   |   |   |
| Gas      (MMcf)                                                                      |   |                                          | 18,553  |   |   |   | 20,649 |   |   |   | 15,198 |   |
| Oil      (MBbls)                                                                     |   |                                          | 2,952   |   |   |   | 2,318 |   |   |   | 2,171 |   |
| Natural gas liquids      (MBbls)                                                     |   |                                          | 182     |   |   |   | 222 |   |   |   | 199 |   |
| Total      (MMcfe)                                                                   |   |                                          | 37,357  |   |   |   | 35,889 |   |   |   | 29,418 |   |
| Average      Realized Prices (a):                                                                                                                                                                                                                                                                                                                   |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Gas      ($/Mcf)                                                                     |   | $                                             | 9.02    |   |   | $ | 7.01 |   |   | $ | 6.68 |   |
| Oil      ($/Bbl)                                                                     |   | $                                             | 97.35   |   |   | $ | 70.36 |   |   | $ | 62.92 |   |
| Natural gas liquids      ($/Bbl)                                                     |   | $                                             | 54.45   |   |   | $ | 43.74 |   |   | $ | 38.18 |   |
| Gain      (Losses) on Settled Derivative                                                                                                                                                                                                                                                                                                            |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Contracts      (a):                                                                                                                                                                                                                                                                                                                                 |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Gas:    Net      realized gain      (loss)                                                               |   | $                                             | 11,764  |   |   | $ | 12,229 |   |   | $ | (679 | ) |
| Per unit produced      ($/Mcf)                                                                                               |   | $                                             | .63     |   |   | $ | .59 |   |   | $ | (.04 | ) |
| Oil:      Net      realized gain      (loss)                                                   |   | $                                             | 15,560  |   |   | $ | (20,086 | ) |   | $ | (19,886 | ) |
| Per unit produced      ($/Bbl)                                                                                               |   | $                                             | 5.27    |   |   | $ | (8.67 | ) |   | $ | (9.16 | ) |
|                                                                                                                                                                                                                                                                                                                                                |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Average      Daily Production:                                                                                                                                                                                                                                                                                                                      |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Gas (Mcf):                                                                                                                                                                                                                                                                                                                                          |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Permian      Basin                                                                                            |   |                                          | 14,326  |   |   |   | 14,649 |   |   |   | 14,260 |   |
| North      Louisiana                                                                                          |   |                                          | 17,500  |   |   |   | 8,096 |   |   |   | 988 |   |
| South      Louisiana                                                                                          |   |                                          | 10,402  |   |   |   | 24,025 |   |   |   | 13,638 |   |
| Austin Chalk      (Trend)                                                                                     |   |                                          | 2,367   |   |   |   | 2,220 |   |   |   | 2,504 |   |
| Cotton Valley Reef      Complex                                                                               |   |                                          | 5,745   |   |   |   | 7,133 |   |   |   | 9,735 |   |
| Other                                                                                                         |   |                                          | 490     |   |   |   | 450 |   |   |   | 513 |   |
| Total                                                                                                                                  |   |                                          | 50,830  |   |   |   | 56,573 |   |   |   | 41,638 |   |
| Oil (Bbls):                                                                                                                                                                                                                                                                                                                                         |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Permian      Basin                                                                                            |   |                                          | 3,821   |   |   |   | 3,212 |   |   |   | 3,172 |   |
| North      Louisiana                                                                                          |   |                                          | 415     |   |   |   | 182 |   |   |   | 12 |   |
| South      Louisiana                                                                                          |   |                                          | 378     |   |   |   | 1,139 |   |   |   | 943 |   |
| Austin Chalk      (Trend)                                                                                     |   |                                          | 3,384   |   |   |   | 1,737 |   |   |   | 1,770 |   |
| Other                                                                                                         |   |                                          | 90      |   |   |   | 81 |   |   |   | 51 |   |
| Total                                                                                                                                  |   |                                          | 8,088   |   |   |   | 6,351 |   |   |   | 5,948 |   |
| Natural Gas Liquids      (Bbls):                                                                                                                                                                                                                                                                                                                    |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Permian      Basin                                                                                            |   |                                          | 183     |   |   |   | 198 |   |   |   | 226 |   |
| North      Louisiana                                                                                          |   |                                          | 7       |   |   |   | 1 |   |   |   | - |   |
| South      Louisiana                                                                                          |   |                                          | 49      |   |   |   | 141 |   |   |   | 44 |   |
| Austin Chalk      (Trend)                                                                                     |   |                                          | 250     |   |   |   | 259 |   |   |   | 269 |   |
| Other                                                                                                         |   |                                          | 10      |   |   |   | 9 |   |   |   | 6 |   |
| Total                                                                                                                                  |   |                                          | 499     |   |   |   | 608 |   |   |   | 545 |   |
| Total      Proved Reserves:                                                                                                                                                                                                                                                                                                                         |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Gas      (MMcf)                                                                      |   |                                          | 103,929 |   |   |   | 123,156 |   |   |   | 119,167 |   |
| Oil and natural gas liquids      (MBbls)                                                                                                                                                                                                                                                                                                            |   |                                          | 20,776  |   |   |   | 27,946 |   |   |   | 25,381 |   |
| Total gas equivalent      (MMcfe)                                                    |   |                                          | 228,585 |   |   |   | 290,832 |   |   |   | 271,453 |   |
| Standardized measure of      discounted                                                                                                                                                                                                                                                                                                             |   |                                          |    |   |   |   |   |   |   |   |   |   |
| future net cash      flows                                                                          |   | $                                             | 405,166 |   |   | $ | 925,969 |   |   | $ | 514,800 |   |

----

|                                                                                                                                                                                                                                                                                                                                                         |   | As      of or for the Year Ended December 31, |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                         |   | 2008                                          |    |   | 2007 |   |   | 2006 |   |
| Total      Proved Reserves by Area:                                                                                                                                                                                                                                                                                                                          |   |                                          |    |   |   |   |   |   |   |
| Gas (MMcf):                                                                                                                                                                                                                                                                                                                                                  |   |                                          |    |   |   |   |   |   |   |
| Permian      Basin                                                                            |   |                                          | 54,914  |   |   |   | 65,248 |   |   |   | 64,620 |   |
| North      Louisiana                                                                          |   |                                          | 19,750  |   |   |   | 14,046 |   |   |   | 12 |   |
| South      Louisiana                                                                          |   |                                          | 13,966  |   |   |   | 27,196 |   |   |   | 34,250 |   |
| Austin Chalk      (Trend)                                                                     |   |                                          | 4,471   |   |   |   | 5,387 |   |   |   | 4,789 |   |
| Cotton Valley Reef      Complex                                                               |   |                                          | 9,281   |   |   |   | 9,157 |   |   |   | 11,562 |   |
| East Texas      Bossier                                                                       |   |                                          | 519     |   |   |   | - |   |   |   | - |   |
| Other                                                                                         |   |                                          | 1,028   |   |   |   | 2,122 |   |   |   | 3,934 |   |
| Total                                                                                                             |   |                                          | 103,929 |   |   |   | 123,156 |   |   |   | 119,167 |   |
| Oil and Natural Gas Liquids      (MBbls):                                                                                                                                                                                                                                                                                                                    |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Permian      Basin                                                                            |   |                                          | 13,491  |   |   |   | 17,318 |   |   |   | 15,679 |   |
| North      Louisiana                                                                          |   |                                          | 285     |   |   |   | 319 |   |   |   | - |   |
| South      Louisiana                                                                          |   |                                          | 524     |   |   |   | 1,117 |   |   |   | 2,231 |   |
| Austin Chalk      (Trend)                                                                     |   |                                          | 6,280   |   |   |   | 7,530 |   |   |   | 6,469 |   |
| Other                                                                                         |   |                                          | 196     |   |   |   | 1,662 |   |   |   | 1,002 |   |
| Total                                                                                                             |   |                                          | 20,776  |   |   |   | 27,946 |   |   |   | 25,381 |   |
| Total Gas Equivalent      (MMcfe):                                                                                                                                                                                                                                                                                                                           |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Permian      Basin                                                                            |   |                                          | 135,860 |   |   |   | 169,156 |   |   |   | 158,694 |   |
| North      Louisiana                                                                          |   |                                          | 21,460  |   |   |   | 15,960 |   |   |   | 1,360 |   |
| South      Louisiana                                                                          |   |                                          | 17,110  |   |   |   | 33,898 |   |   |   | 46,288 |   |
| Austin Chalk      (Trend)                                                                     |   |                                          | 42,151  |   |   |   | 50,567 |   |   |   | 43,603 |   |
| Cotton Valley Reef      Complex                                                               |   |                                          | 9,281   |   |   |   | 9,157 |   |   |   | 11,562 |   |
| East Texas      Bossier                                                                       |   |                                          | 519     |   |   |   | - |   |   |   | - |   |
| Other                                                                                         |   |                                          | 2,204   |   |   |   | 12,094 |   |   |   | 9,946 |   |
| Total                                                                                                             |   |                                          | 228,585 |   |   |   | 290,832 |   |   |   | 271,453 |   |
| Exploration      Costs (in thousands):                                                                                                                                                                                                                                                                                                                       |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Abandonment and impairment      costs:                                                                                                                                                                                                                                                                                                                       |   |                                          |    |   |   |   |   |   |   |   |   |   |
| North      Louisiana                                                                          |   | $                                             | 25,414  |   |   | $ | 30,356 |   |   | $ | 9,235 |   |
| South      Louisiana                                                                          |   |                                          | 3,187   |   |   |   | 28,805 |   |   |   | 33,695 |   |
| Permian      Basin                                                                            |   |                                          | 717     |   |   |   | 1,322 |   |   |   | 5,638 |   |
| East Texas      Bossier                                                                       |   |                                          | 40,544  |   |   |   | 2,640 |   |   |   | - |   |
| Utah                                                                                          |   |                                          | 6,331   |   |   |   | 4,062 |   |   |   | - |   |
| Montana                                                                                       |   |                                          | -       |   |   |   | 9 |   |   |   | 6,462 |   |
| Mississippi                                                                                   |   |                                          | 1,270   |   |   |   | 1,148 |   |   |   | 328 |   |
| Colorado                                                                                      |   |                                          | -       |   |   |   | 24 |   |   |   | 9,675 |   |
| Other                                                                                         |   |                                          | 2,649   |   |   |   | 504 |   |   |   | 140 |   |
| Total                                                                                                             |   |                                          | 80,112  |   |   |   | 68,870 |   |   |   | 65,173 |   |
| Seismic and      other                                                                        |   |                                          | 22,685  |   |   |   | 4,765 |   |   |   | 11,299 |   |
| Total exploration      costs                                                                                      |   | $                                             | 102,797 |   |   | $ | 73,635 |   |   | $ | 76,472 |   |
|                                                                                                                                                                                                                                                                                                                                                         |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Oil      and Gas Costs ($/Mcfe Produced):                                                                                                                                                                                                                                                                                                                    |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Production                                                                     |   | $                                             | 2.38    |   |   | $ | 2.10 |   |   | $ | 2.15 |   |
| DD&A                                                                       |   | $                                             | 2.97    |   |   | $ | 2.12 |   |   | $ | 2.12 |   |
| Net      Wells Drilled (b):                                                                                                                                                                                                                                                                                                                                  |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Exploratory      wells                                                         |   |                                          | 5.2     |   |   |   | 13.8 |   |   |   | 28.4 |   |
| Developmental      wells                                                       |   |                                          | 67.2    |   |   |   | 28.1 |   |   |   | 3.6 |   |
|                                                                                                                                                                                                                                                                                                                 |   |                                          |    |   |   |   |   |   |   |   |   |   |
| (a)  No derivatives were      designated as cash flow hedges in the table above. All gains or      losses on settled derivatives were included in gain/loss on      derivatives.                                                                                                                                                              |   |
| (b)  Excludes wells      being drilled or completed at the end of each period.                                                                                                                                                                                                                                                                     |   |

----

Operating 

----

----

----

----

Liquidity 

|                      |   | Actual                 |    |   | Planned                |   |   |          |   |
|---------------------------|--------|------------------------|---------|--------|------------------------|--------|--------|---------------|--------|
|                      |   | Expenditures           |    |   | Expenditures           |   |   | 2009          |   |
|                      |   | Year      Ended        |    |   | Year      Ended        |   |   | Percentage    |   |
|                      |   | December      31, 2008 |    |   | December      31, 2009 |   |   | of      Total |   |
|                      |   | (In      thousands)    |    |   |                   |   |
| South      Louisiana      |   | $                      | 39,700  |   |                   | $      | 17,700 |          |   |   | 32 | % |
| Permian      Basin        |   |                   | 152,700 |   |                   |   | 14,600 |          |   |   | 26 | % |
| East      Texas Bossier   |   |                   | 38,800  |   |                   |   | 11,800 |          |   |   | 21 | % |
| Utah/California           |   |                   | 5,400   |   |                   |   | 7,400  |          |   |   | 13 | % |
| Austin      Chalk (Trend) |   |                   | 52,600  |   |                   |   | 2,100  |          |   |   | 4 | % |
| North      Louisiana      |   |                   | 82,500  |   |                   |   | 1,900  |          |   |   | 3 | % |
| Other                     |   |                   | 1,000   |   |                   |   | 500    |          |   |   | 1 | % |
|                      |   | $                      | 372,700 |   |                   | $      | 56,000 |          |   |   | 100 | % |

----

----

|                                                                                            |   | December      31,   |    |
|-------------------------------------------------------------------------------------------------|--------|---------------------|---------|
|                                                                                            |   | 2008                |    |   | 2007 |   |
|                                                                                            |   | (In      thousands) |    |
| Working      capital (deficit) per GAAP                                                         |   | $                   | 2,607   |   |   | $ | (76,388 | ) |
| Add      funds available under the revolving credit facility                                    |   |                | 155,096 |   |   |   | 108,396 |   |
| Exclude      fair value of derivatives classified as current assets or current      liabilities |   |                | -       |   |   |   | 49,738 |   |
| Exclude      current assets and current liabilities of Larclay JV                               |   |                | 13,205  |   |   |   | 21,423 |   |
| Working      capital per loan covenant                                                          |   | $                   | 170,908 |   |   | $ | 103,169 |   |

----

----

|                                                                                                                                                                                                                                                                                             |   |  Payments      Due by Period |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                                                                                                                                                                                                             |   |  Total                       |    |   |  2009 |   |   | 2010to2011 |   |   | 2012to2013 |   |
|                                                                                                                                                                                                                                                                                             |   |                              |    |   |   |   |   | (In      thousands) |   |   |   |   |
| Contractual      obligations:                                                                                                                                                                                                                                                                    |   |                              |    |   |   |   |   |   |   |   |   |   |
| 73⁄4%      Senior Notes (a)                                            |   | $                                 | 225,000 |   |   | $ | - |   |   | $ | - |   |   | $ | 225,000 |   |
| Secured      bank credit facility(a)                                                                                                                                                                                                                                                             |   |                              | 94,100  |   |   |   | - |   |   |   | - |   |   |   | 94,100 |   |
| Drilling      contracts with Larclay JV                                                                                                                                                                                                                                                          |   |                              | 29,008  |   |   |   | 29,008 |   |   |   | - |   |   |   | - |   |
| Larclay      JV      note                                                 |   |                              | 39,375  |   |   |   | 18,750 |   |   |   | 20,625 |   |   |   | - |   |
| Subordinated      notes of Larclay JV(b)                                                                                                                                                                                                                                                         |   |                              | 7,500   |   |   |   | - |   |   |   | 7,500 |   |   |   | - |   |
| Lease      obligations                                                    |   |                              | 4,211   |   |   |   | 1,632 |   |   |   | 2,380 |   |   |   | 199 |   |
| Total contractual      obligations                                                                                                                                                                                                                                                               |   | $                                 | 399,194 |   |   | $ | 49,390 |   |   | $ | 30,505 |   |   | $ | 319,299 |   |
|                                                                                                                                                                                                                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

|   | (a) | In      addition to the principal payments presented, we expect to make annual      interest payments of $17.4 million on the Senior Notes and      approximately $4.5 million on the secured bank credit facility (based      on the balances and interest rates at December 31,    2008). |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | Note      payable to Lariat for advances to LarclayJV. |
|--------|-----|--------------------------------------------------------|

Known 

----

Application 

| Accounting      Policies           |   | Estimates      or Assumptions                                                                           |   | Accounts      Affected                                                          |
|------------------------------------|--------|---------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|
| Successful      efforts accounting |   | ·  Reserve      estimates                                                                |   | ·  Oil and gas      properties                                   |
| for oil and gas      properties    |   | ·  Valuation of      unproved                                                            |   | ·  Accumulated      DD&A                                     |
|                               |   |     properties                                                                      |   | ·  Provision for      DD&A                                   |
|                               |   | ·  Judgment regarding      status of   in progress      exploratory wells |   | ·  Impairment of      unproved    properties |
|                               |   |                                                                                                    |   | ·  Abandonment      costs                                        |
|                               |   |                                                                                                    |   |    (dry hole      costs)                                         |
| Impairment      of proved          |   | ·  Reserve estimates      and related                                                    |   | ·  Oil and gas      properties                                   |
| properties and      long-          |   |    present value of      future net                                                      |   | ·  Contract drilling      equipment                              |
| lived assets                       |   |    revenues (proved      properties)                                                     |   | ·  Accumulated      DD&A                                     |
|                               |   | ·  Estimates of future      undiscounted                                                 |   | ·  Impairment of proved      properties                          |
|                               |   |     cash      flows (long-lived assets)                                             |   |     and      long-lived assets                              |
|                               |   |                                                                                                    |   |                                                                            |
| Asset      retirement obligations  |   | ·  Estimates of the      present value                                                   |   | ·  Abandonment      obligations                                  |
|                               |   |     of      future abandonment costs                                                |   |     (non-current      liability)                            |
|                               |   |                                                                                                    |   | ·  Oil and gas      properties                                   |
|                               |   |                                                                                                    |   | ·  Accretion of      discount                                    |
|                               |   |                                                                                                    |   |     expense                                                 |

----

| Type      of Reserves               |   | Nature      of Available Data                      |   | Degree      of Accuracy |
|-------------------------------------|--------|----------------------------------------------------|--------|-------------------------|
| Proved      undeveloped             |   | Data      from offsetting wells, seismic data      |   | Least      accurate     |
| Proved      developed non-producing |   | Logs,      core samples, well tests, pressure data |   | More      accurate      |
| Proved      developed producing     |   | Production      history, pressure data over time   |   | Most      accurate      |

|                                                               |   |                 |   |   |               |   |   | Standardized       |   |
|--------------------------------------------------------------------|--------|----------------------|--------|--------|--------------------|--------|--------|--------------------|--------|
|                                                               |   |                 |   |   |               |   |   |               |   |   |   |   |   | Measure |   |
|                                                               |   | Proved      Reserves |   |   | Average      Price |   |   | of      Discounted |   |
|                                                               |   | Oil      (a)         |   |   | Gas                |   |   | Oil      (a)       |   |   | Gas |   |   | Future |   |
|                                                               |   | (MMBbls)             |   |   | (Bcf)              |   |   | ($/Bbl)            |   |   | ($/Mcf) |   |   | Net      Cash Flows |   |
|                                                               |   |                 |   |   |               |   |   |               |   |   |   |   |   | (In      millions) |   |
| As      of December 31:                                            |   |                 |   |   |               |   |   |               |   |   |   |   |   |   |   |
| 2008                                                               |   |                 | 20.8   |   |               |   | 103.9  |               |   | $ | 42.03 |   |   | $ | 5.90 |   |   | $ | 405.2 |   |
| 2007                                                               |   |                 | 27.9   |   |               |   | 123.2  |               |   | $ | 91.30 |   |   | $ | 7.37 |   |   | $ | 926.0 |   |
| 2006                                                               |   |                 | 25.4   |   |               |   | 119.2  |               |   | $ | 57.18 |   |   | $ | 5.24 |   |   | $ | 514.8 |   |
|             |   |                 |   |   |               |   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |

| ·   | The      location of the prospect in relation to known fields and reservoirs,      available markets and transportation systems for oil and gas production in      the vicinity, and other criticalservices; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The      nature and extent of geological and geophysical data on the      prospect; |
|--------------------|-------------------------------------------------------------------------------------|

| ·   | The      terms of the leases holding the acreage in the prospect, such as ownership      interests, expiration terms, delay rental obligations, depth limitations,      drilling and marketing restrictions, and similar  terms; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | The      prospect’s risk-adjusted potential for return on investment, giving effect      to such factors as potential reserves to be discovered, drilling and      completion costs, prevailing commodity prices, and other economic factors;      and |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The      results of drilling activity in close proximity to the prospect that could      either enhance or condemn the prospect’s chances of    success. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | DD&A      Rate = Unamortized Cost   ̧  Beginning      of Period Reserves |
|--------------------|------------------------------------------------------------------------------------------------------|

| ·   | Provision      for DD&A = DD&A Rate   ́  Current      Period Production |
|--------------------|---------------------------------------------------------------------------------------------------------|

----

Recent 

----

Item

Oil 

----

|                                                                                                                                                                   |   | Gas            |       |   | Oil    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|------------|--------|--------|--------|
|                                                                                                                                                                   |   | MMBtu      (a) |       |   | Price  |   |   | Bbls |   |   | Price |   |
| Production      Period:                                                                                                                                                |   |           |       |   |   |   |   |   |   |   |   |   |
| 1st      Quarter 2009                                                                                                                                                  |   |           | 1,180,000  |   |   | $      | 5.47 |   |   |   | 160,000 |   |   | $ | 46.39 |   |
| 2nd      Quarter 2009                                                                                                                                                  |   |           | 1,570,000  |   |   | $      | 5.47 |   |   |   | 470,000 |   |   | $ | 49.68 |   |
| 3rd      Quarter 2009                                                                                                                                                  |   |           | 1,450,000  |   |   | $      | 5.47 |   |   |   | 440,000 |   |   | $ | 48.13 |   |
| 4th      Quarter 2009                                                                                                                                                  |   |           | 1,850,000  |   |   | $      | 5.47 |   |   |   | 400,000 |   |   | $ | 46.15 |   |
| 2010                            |   |           | 7,540,000  |   |   | $      | 6.80 |   |   |   | 327,000 |   |   | $ | 53.30 |   |
| 2011                            |   |           | 6,420,000  |   |   | $      | 7.07 |   |   |   | - |   |   | $ | - |   |
|                                                                                                                                                                   |   |           | 20,010,000 |   |   |   |   |   |   |   | 1,797,000 |   |   |   |   |   |

Interest 

Item

Item

Item

Disclosure 

----

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

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

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

Internal 

| ·   | pertain      to the maintenance of records that, in reasonable detail, accurately and      fairly reflect the transactions and dispositions of our      assets; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | provide      reasonable assurance that transactions are recorded as necessary to permit      preparation of financial statements in accordance with generally accepted      accounting principles, and that our receipts and expenditures are being      made only in accordance with authorizations of management and our Board of      Directors; and |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | provide      reasonable assurance regarding prevention or timely detection of any      unauthorized acquisition, use or disposition of our assets that could have      a material effect on the financialstatements. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Changes 

Management’s 

----

----

Item

----

Item 

----

Item

Financial 

Exhibits

|   | Exhibit |   |                                                                                                                                                                                                                                                                                                            |
|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Number  |   | Description      of Exhibit                                                                                                                                                                                                                                                                                     |
|   |    |   |                                                                                                                                                                                                                                                                                                            |
|   |    |   |                                                                                                                                                                                                                                                                                                            |
|   | **2.1   |   | Agreement      and Plan of Merger among Clayton Williams Energy, Inc. and Southwest      Royalties, Inc. dated May 3, 2004, filed as Exhibit 2.1 to the Company’s      Current Report on Form 8-K filed with the Commission on June 3,      2004††                                            |
|   |    |   |                                                                                                                                                                                                                                                                                                            |
|   | **3.1   |   | Second      Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1      to the Company’s Form S-2 Registration Statement, Commission File No.      333-13441                                                                                                                          |
|   |    |   |                                                                                                                                                                                                                                                                                                            |
|   | **3.2   |   | Certificate      of Amendment of Second Restated Certificate of Incorporation of Clayton      Williams Energy, Inc., filed as Exhibit 3.1 to the Company’s Form 10-Q for      the period ended September 30, 2000††                                                                           |
|   |    |   |                                                                                                                                                                                                                                                                                                            |
|   | **3.3   |   | Corporate      Bylaws of Clayton Williams Energy, Inc., as amended, filed as Exhibit 3.1      to the Company’s Current Report on Form 8-K filed with the Commission on      March 13, 2008††                                                                                             |
|   |    |   |                                                                                                                                                                                                                                                                                                            |
|   | **4.1   |   | Stock      Purchase Agreement dated May 19, 2004 by and among Clayton Williams      Energy, Inc. and various institutional investors, filed as Exhibit 4 to      the Company’s Current Report on Form 8-K filed with the Commission on June      2, 2004††                                    |
|   |    |   |                                                                                                                                                                                                                                                                                                            |
|   | **4.2   |   | Indenture,      dated July 20, 2005, among Clayton Williams Energy, Inc., the Subsidiary      Guarantors and Wells Fargo Bank, National Association, as Trustee, filed      as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the      Commission on July 22, 2005†† |
|   |    |   |                                                                                                                                                                                                                                                                                                            |
|   | **10.1  |   | Amended      and Restated Credit Agreement dated as of May 21, 2004 among Clayton      Williams Energy, Inc., et al, and Bank One, NA, et al, filed as Exhibit      10.1 to the Company’s Current Report on Form 8-K/A filed with the      Commission on June 23, 2004††                      |
|   |    |   |                                                                                                                                                                                                                                                                                                            |

----

|   | **10.2               |   | First      Amendment to Amended and Restated Credit Agreement dated July 18, 2005,      filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed      with the Commission on July 20, 2005††                                                              |
|--------|----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.3               |   | Second      Amendment to Amended and Restated Credit Agreement dated December 30,      2005, filed as Exhibit 10.3 to the Company’s Form 10-K for the period      ended December 31, 2005††                                                                    |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.4               |   | Third      Amendment to Amended and Restated Credit Agreement dated June 30,      2006, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K      filed with the Commission on July 14, 2006††                                                         |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | *10.5                |   | Fourth      Amendment to Amended and Restated Credit Agreement dated July 28,      2006                                                                                                                                                                                                    |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.6               |   | Fifth      Amendment to Amended and Restated Credit Agreement dated June 13, 2008,      filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed      with the Commission on June 18, 2008††                                                              |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.7               |   | Senior      Term Credit Agreement dated as of May 21, 2004 among Clayton Williams      Energy, Inc., et al, and Bank One, NA, et al, filed as Exhibit 10.2 to the      Company’s Current Report on Form 8-K/A filed with the Commission on June      23, 2004††          |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.8†        |   | 1993      Stock Compensation Plan, filed as Exhibit 10.1 to the Company’s Form S-8      Registration Statement, Commission File No. 033-68318                                                                                                                                        |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.9†        |   | First      Amendment to 1993 Stock Compensation Plan, filed as Exhibit 10.11 to the      Company’s Form 10-K for the period ended December 31,    1995††                                                                                                                 |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.10†       |   | Second      Amendment to the 1993 Stock Compensation Plan, filed as Exhibit 10.2 to      the Company’s Form S-8 Registration Statement, Commission File No.      33-68318                                                                                                            |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.11†       |   | Third      Amendment to 1993 Stock Compensation Plan, filed as Exhibit 10.4 to the      Company’s Form S-8 Registration Statement, Commission File No.      333-47232                                                                                                                |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.12†       |   | Fourth      Amendment to 1993 Stock Compensation Plan, filed as Exhibit 10.5 to the      Company’s Form S-8 Registration Statement, Commission File No.      333-47232                                                                                                               |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.13†       |   | Fifth      Amendment to 1993 Stock Compensation Plan, filed as Exhibit 10.13 to the      Company’s Form 10-K for the period ended December 31,      2005††                                                                                                          |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.14†       |   | Outside      Directors Stock Option Plan, filed as Exhibit 10.1 to the Company’s Form      S-8 Registration Statement, Commission File No.33-68316                                                                                                                                   |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.15†       |   | First      Amendment to Outside Directors Stock Option Plan, filed as Exhibit 10.13      to the Company’s Form 10-K for the period ended December 31,      1995††                                                                                                        |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.16†       |   | Second      Amendment to Outside Directors Stock Option Plan, filed as Exhibit 10.13      to the Company’s Form 10-K for the period ended December 31,      2005††                                                                                                  |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.17†       |   | Bonus      Incentive Plan, filed as Exhibit 10.1 to the Company’s Form S-8      Registration Statement, Commission File No. 33-68320                                                                                                                                                 |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   | **10.18†       |   | First      Amendment to Bonus Incentive Plan, filed as Exhibit 10.9 to the Company’s      Form 10-K for the period ended December 31, 1997††                                                                                                                             |
|   |                 |   |                                                                                                                                                                                                                                                                                       |
|   |  **10.19† |   |    Scudder      Trust Company Prototype Defined Contribution Plan adopted by Clayton      Williams Energy, Inc. effective as of August 1, 2004, filed as Exhibit      10.12 to the Company’s Form 10-K for the period ended December 31,      2004†† |

----

|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **10.20† |   | Executive      Incentive Stock Compensation Plan, filed as Exhibit 10.1 to the Company’s      Form S-8 Registration Statement, Commission File No.    33-92834                                                                                                                                                                                                                                  |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.21† |   | First      Amendment to Executive Incentive Stock Compensation Plan, filed as      Exhibit 10.16 to the Company’s Form 10-K for the period ended      December 31, 1996††                                                                                                                                                                                                 |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.22        |   | Consolidation      Agreement dated May 13, 1993 among Clayton Williams Energy, Inc., Warrior      Gas Co. and the Williams Entities, filed as Exhibit 10.1 to the Company’s      Form S-1 Registration Statement, Commission File No.      033-43350                                                                                                                                       |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.23        |   | Amendment      to Consolidation Agreement dated August 7, 2000 among Clayton Williams      Energy, Inc., Warrior Gas Co., Clayton W. Williams, Jr. and the Williams      Companies, filed as Exhibit 10.1 to the Company’s Form 10-Q for the period      ended September 30, 2000††                                                                                                 |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.24        |   | Agreement      dated April 23, 1993 between the Company and Robert C. Lyon, filed as      Exhibit 10.42 to the Company’s Form S-1 Registration Statement,      Commission File No. 033-43350                                                                                                                                                                                               |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.25        |   | Second      Amended and Restated Service Agreement effective March 1, 2005 among      Clayton Williams Energy, Inc. and its subsidiaries, Clayton Williams Ranch      Holdings, Inc., ClayDesta L.P., Clayton Williams Partnership, Ltd. and      CWPLCO, Inc., filed as Exhibit 99.1 to the Company’s Current Report on      Form 8-K filed with the Commission on March 3, 2005†† |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | *10.26         |   | Amendment      to Second Amended and Restated Service Agreement effective January 1, 2008      among Clayton Williams Energy, Inc. and its subsidiaries, Clayton      Williams, Jr., Clayton Williams Ranch Holdings, Inc., ClayDesta L.P., The      Williams Children’s Partnership, Ltd. and CWPLCO,Inc.††                                                                        |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.27† |   | Agreement      of Limited Partnership of CWEI Longfellow Ranch I, L.P. dated      April 1, 2003, filed as Exhibit 10.32 to the Company’s Form 10-K for      the period ended December 31, 2003††                                                                                                                                                                          |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.28† |   | Agreement      of Limited Partnership of CWEI South Louisiana II, L.P. effective as of      January 1, 2004, filed as Exhibit 10.29 to the Company’s Form 10-K      for the period ended December 31, 2004††                                                                                                                                                                   |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.29† |   | Agreement      of Limited Partnership of Rocky Arroyo, L.P. effective as of      January 2, 2005, filed as Exhibit 10.31 to the Company’s Form 10-K      for the period ended December 31, 2004††                                                                                                                                                                              |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.30† |   | Agreement      of Limited Partnership of CWEI West Pyle/McGonagill, L.P. effective as of      January 2, 2005, filed as Exhibit 10.33 to the Company’s Form 10-K      for the period ended December 31, 2004††                                                                                                                                                                 |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.31† |   | Agreement      of Limited Partnership of CWEI South Louisiana III, L.P. effective as of      March 1, 2005, filed as Exhibit 10.1 to the Company’s Current Report on      Form 8-K filed with the Commission on April 14, 2005††                                                                                                                                                    |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.32† |   | Agreement      of Limited Partnership of CWEI North Louisiana, L.P. effective as of March      1, 2005, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K      filed with the Commission on April 14, 2005††                                                                                                                                                        |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |

----

|   | **10.33† |   | Agreement      of Limited Partnership of Floyd Prospect, L.P. effective as of March 1,      2005, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K      filed with the Commission on June 3, 2005††                                                                                                                                                 |
|--------|----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.34† |   | Amendment      to Agreement dated April 23, 1993 between the Company and      Robert C. Lyon, filed as Exhibit 10.35 to the Company’s Form      10-K for the period ended December 31, 2004††                                                                                                                                                              |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.35† |   | Second      Amendment to Agreement dated April 23, 1993 between the Company and      Robert C. Lyon, filed as Exhibit 10.36 to the Company’s Form      10-K for the period ended December 31, 2004††                                                                                                                                                       |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.36† |   | Form      of stock option agreement for 1993 Stock Compensation Plan, filed as      Exhibit 10.32 to the Company’s Form 10-K for the period ended      December 31, 2004††                                                                                                                                                                                      |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.37† |   | Form      of stock option agreement for Outside Directors Stock Option Plan, filed      as Exhibit 10.38 to the Company’s Form 10-K for the period ended      December 31, 2004††                                                                                                                                                                               |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.38        |   | Letter      agreement dated October 20, 2005 between Clayton Williams Energy, Inc. and      Lariat Services, Inc., filed as Exhibit 10.1 to the Company’s Current      Report on Form 8-K filed with the Commission on October 27,      2005††                                                                                                                  |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.39        |   | Limited      Liability Company Agreement, dated April 21, 2006, by and between Clayton      Williams Energy, Inc. and Lariat Services, Inc., with respect to the      formation of Larclay GP, LLC, a Texas limited liability company, filed as      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the      Commission on April 26, 2006††     |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.40        |   | Agreement      of Limited Partnership, dated April 21, 2006, by and among Larclay GP,      LLC, Clayton Williams Energy, Inc. and Lariat Services, Inc., with respect      to the formation of Larclay, L.P., a Texas limited partnership, filed as      Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the      Commission on April 26, 2006†† |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.41        |   | Drilling      Contract for Multiple Rigs, dated April 21, 2006, by and between Clayton      Williams Energy, Inc. and Larclay, L.P., filed as Exhibit 10.3 to the      Company’s Current Report on Form 8-K filed with the Commission on April      26, 2006††                                                                                                       |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.42        |   | Subordination      Agreement, dated April 21, 2006, by and among Clayton Williams Energy,      Inc., Lariat Services, Inc. and Merrill Lynch Capital, as agent, filed as      Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the      Commission on April 26, 2006††                                                                            |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.43        |   | Consent      and Agreement, dated April 21, 2006, by and among Clayton Williams Energy,      Inc., Lariat Services, Inc. and Merrill Lynch Capital, as agent, filed as      Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the      Commission on April 26, 2006††                                                                              |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.44        |   | Letter      of Credit, dated March 21, 2007, issued in favor of Merrill Lynch Capital,      as agent, filed as Exhibit 10.1 to the Company’s Current Report on Form      8-K filed with the Commission on March 27, 2007††                                                                                                                                           |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.45        |   | Form      of Unconditional Limited Guaranty, to be issued by Clayton Williams      Energy, Inc. in favor of Merrill Lynch Capital, as agent, filed as Exhibit      10.7 to the Company’s Current Report on Form 8-K filed with the Commission      on April 26, 2006††                                                                                               |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |

----

|   | **10.46        |   | Second      Amendment to Term Loan and Security Agreement and Amendment to Limited      Guaranty dated as of March 15, 2007 among Larclay, L.P., Clayton Williams      Energy, Inc., Merrill Lynch Capital, as agent, and the other signatories      thereto, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K      filed with the Commission on March 27, 2007†† |
|--------|----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.47† |   | Agreement      of Limited Partnership of Floyd Prospect II, L.P. dated May 15, 2006.,      filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed      with the Commission on May 17, 2006††                                                                                                                                                                      |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.48† |   | Participation      Agreement relating to South Louisiana IV dated August 2, 2006, filed as      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the      Commission on August 7, 2006††                                                                                                                                                                        |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.49† |   | Participation      Agreement relating to North Louisiana — Hosston/Cotton Valley dated August      2, 2006, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K      filed with the Commission on August 7, 2006††                                                                                                                                             |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.50† |   | Participation      Agreement relating to North Louisiana — Bossier dated August 2, 2006,      filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed      with the Commission on August 7, 2006††                                                                                                                                                           |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.51† |   | Participation      Agreement relating to Floyd Prospect III dated November 15, 2006, filed as      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the      Commission on November 17, 2006††                                                                                                                                                                  |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.52† |   | Participation      Agreement relating to North Louisiana - Bossier II dated November 15,      2006, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K      filed with the Commission on November 17, 2006††                                                                                                                                                        |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.53† |   | Participation      Agreement relating to North Louisiana - Hosston/Cotton Valley II dated      November 15, 2006, filed as Exhibit 10.3 to the Company’s Current Report      on Form 8-K filed with the Commission on November 17,    2006††                                                                                                                                       |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.54† |   | Participation      Agreement relating to South Louisiana V dated November 15, 2006, filed as      Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the      Commission on November 17, 2006††                                                                                                                                                                   |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.55† |   | Southwest      Royalties Reward Plan dated January 15, 2007, filed as Exhibit 10.1      to the Company’s Current Report on Form 8-K filed with Commission on      January 18, 2007††                                                                                                                                                                                |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.56† |   | Form      of Notice of Bonus Award Under the Southwest Royalties Reward Plan, filed      as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the      Commission on January 18, 2007††                                                                                                                                                                          |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.57† |   | Participation      Agreement relating to West Coast Energy Properties, L.P. dated      December 11, 2006, filed as Exhibit 10.1 to the Company’s Current      Report on Form 8-K filed with the Commission on December 14,      2006††                                                                                                                                        |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.58† |   | Participation      Agreement relating to RMS/Warnick dated April 10, 2007, filed as Exhibit      10.1 to the Company’s Current Report on Form 8-K filed with the Commission      on April 13, 2007††                                                                                                                                                                               |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.59† |   | Participation      Agreement relating to East Texas Bossier – Big Bill Simpson dated December      17, 2007, filed as Exhibit 10.1 to the Company’s Current Report on Form      8-K filed with the Commission on December 20, 2007††                                                                                                                                         |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |

----

|   | **10.60†        |   | Participation      Agreement relating to East Texas Bossier – Margarita dated December 17,      2007, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K      filed with the Commission on December 20, 2007††   |
|--------|-----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | **10.61†        |   | Amaker      Tippett Reward Plan dated June 19, 2008, filed as Exhibit 10.1 to the      Company’s Current Report on Form 8-K filed with the Commission on June 25,      2008††                                                         |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | **10.62†        |   | Austin      Chalk Reward Plan dated June 19, 2008, filed as Exhibit 10.2 to the      Company’s Current Report on Form 8-K filed with the Commission on June 25,      2008††                                                           |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | **10.63†        |   | Barstow      Area Reward Plan dated June 19, 2008, filed as Exhibit 10.2 to the      Company’s Current Report on Form 8-K filed with the Commission on June 25,      2008††                                                           |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | **10.64†        |   | Participation      Agreement relating to CWEI Andrews Area dated June 19, 2008, filed as      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the      Commission on June 25, 2008††                              |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | **10.65†        |   | Participation      Agreement relating to CWEI Crockett County Area dated June 19, 2008, filed      as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the      Commission on June 25, 2008††                      |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | **10.66†        |   | Participation      Agreement relating to CWEI North Louisiana Bossier III dated June 19,      2008, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K      filed with the Commission on June 25, 2008††               |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | **10.67†        |   | Participation      Agreement relating to CWEI North Louisiana Hosston/Cotton Valley III dated      June 19, 2008, filed as Exhibit 10.4 to the Company’s Current Report on      Form 8-K filed with the Commission on June 25, 2008†† |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | **10.68†        |   | Participation      Agreement relating to CWEI South Louisiana VI dated June 19, 2008, filed      as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the      Commission on June 25, 2008††                        |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | **10.69†        |   | Participation      Agreement relating to CWEI Utah dated June 19, 2008, filed as Exhibit 10.6      to the Company’s Current Report on Form 8-K filed with the Commission on      June 25, 2008††                                      |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | **10.70†        |   | Participation      Agreement relating to CWEI Sacramento Basin I dated August 12, 2008, filed      as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the      Commission on August 14, 2008††                    |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | *10.71†         |   | Form      of Director Indemnification Agreement                                                                                                                                                                                                         |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | **10.72†        |   | Participation      Agreement relating to CWEI East Texas Bossier - Sunny dated November 19,      2008, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K      filed with the Commission on November 20, 2008††        |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | **10.73†† |   | Beard      Consulting Agreement dated December 1, 2008, filed as Exhibit 10.1 to the      Company’s Current Report on Form 8-K filed with the Commission on      December 2, 2008††                                         |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   | *10.74††  |   | Assignment      and Assumption Agreement between Lariat Services, Inc. and Clayton      Williams Energy, Inc.                                                                                                                                           |
|   |                  |   |                                                                                                                                                                                                                                                    |
|   |                  |   |                                                                                                                                                                                                                                                    |

----

|   | **21                                                                                                                                                   |   | Subsidiaries      of the Registrant, filed as Exhibit 21 to the Company’s Form 10-Q for the      period ended June 30, 2008                                            |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                   |   |                                                                                                                                                                         |
|   | *23.1                                                                                                                                                  |   | Consent      of KPMG LLP                                                                                                                                                     |
|   |                                                                                                                                                   |   |                                                                                                                                                                         |
|   | *23.2                                                                                                                                                  |   | Consent      of Williamson Petroleum Consultants, Inc.                                                                                                                       |
|   |                                                                                                                                                   |   |                                                                                                                                                                         |
|   | *23.3                                                                                                                                                  |   | Consent      of Ryder Scott Company, L.P.                                                                                                                                    |
|   |                                                                                                                                                   |   |                                                                                                                                                                         |
|   | *24.1                                                                                                                                                  |   | Power      of Attorney                                                                                                                                                       |
|   |                                                                                                                                                   |   |                                                                                                                                                                         |
|   | *31.1                                                                                                                                                  |   | Certification      by the President and Chief Executive Officer of the Company pursuant to      Rule 13a – 14(a) of the Securities Exchange Act of      1934 |
|   |                                                                                                                                                   |   |                                                                                                                                                                         |
|   | *31.2                                                                                                                                                  |   | Certification      by the Chief Financial Officer of the Company pursuant to Rule      13a – 14(a) of the Securities Exchange Act of    1934                 |
|   |                                                                                                                                                   |   |                                                                                                                                                                         |
|   | ***32.1                                                                                                                                                |   | Certifications      by the Chief Executive Officer and Chief Financial Officer of the Company      pursuant to 18 U.S.C. § 1350                          |
|   |                                                                                                                                                   |   |                                                                                                                                                                         |
|   | *    Filed      herewith                                                                                                           |
|   | **    Incorporated by      reference to the filing indicated                                                                       |
|   | ***    Furnished      herewith                                                                                                     |
|   | †    Identifies an      Exhibit that consists of or includes a management contract or compensatory      plan or arrangement. |
|   | ††    Filed      under the Company’s Commission File No. 001-10924.                                              |
|   |                                                                                                                                                   |

----

GLOSSARY 

----

----

----

SIGNATURES

| CLAYTON      WILLIAMS ENERGY, INC. |
|------------------------------------|
| (Registrant)                       |
|                               |   |
| By:                                | /s/      CLAYTON W. WILLIAMS * |
|                               | Clayton      W. Williams |
|                               | Chairman      of the Board, President |
|                               | and      Chief ExecutiveOfficer |

| Signature                                                                               |   | Title                                      |   | Date                |
|-----------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|---------------------|
|                                                                                    |   |                                       |   |                |
| /s/      CLAYTON W. WILLIAMS *                                                          |   | Chairman      of the Board,                |   | March      13, 2009 |
| Clayton      W. Williams                                                                |   | President      and Chief Executive         |   |                |
|                                                                                    |   | Officer      and Director                  |   |                |
|                                                                                    |   |                                       |   |                |
| /s/      L. PAUL LATHAM                                                                 |   | Executive      Vice President,             |   | March      13, 2009 |
| L.      Paul Latham                                                                     |   | Chief      Operating Officer and           |   |                |
|                                                                                    |   | Director                                   |   |                |
|                                                                                    |   |                                       |   |                |
| /s/      MEL G. RIGGS                                                                   |   | Senior      Vice President -               |   | March      13, 2009 |
| Mel      G. Riggs                                                                       |   | Finance,      Secretary, Treasurer,        |   |                |
|                                                                                    |   | Chief      Financial Officer and Director  |   |                |
|                                                                                    |   |                                       |   |                |
| /s/      MICHAEL L. POLLARD                                                             |   | Vice      President – Accounting and |   | March      13, 2009 |
| Michael      L. Pollard                                                                 |   | Principal      Accounting Officer          |   |                |
|                                                                                    |   |                                       |   |                |
| /s/      TED GRAY, JR.*                                                                 |   | Director                                   |   | March      13, 2009 |
| Ted      Gray, Jr.                                                                      |   |                                       |   |                |
|                                                                                    |   |                                       |   |                |
| /s/      DAVIS L. FORD *                                                                |   | Director                                   |   | March      13, 2009 |
| Davis      L. Ford                                                                      |   |                                       |   |                |
|                                                                                    |   |                                       |   |                |
| /s/      ROBERT L. PARKER *                                                             |   | Director                                   |   | March      13, 2009 |
| Robert      L. Parker                                                                   |   |                                       |   |                |
|                                                                                    |   |                                       |   |                |
| /s/      JORDAN R. SMITH *                                                              |   | Director                                   |   | March      13, 2009 |
| Jordan      R. Smith                                                                    |   |                                       |   |                |
|                                                                                    |   |                                       |   |                |
| *        By:  /s/      L. PAUL LATHAM |   |                                       |   |                |
| L.      Paul Latham                                                                     |   |                                       |   |                |
| Attorney-in-Fact                                                                        |   |                                       |   |                |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | Page |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|
| Report of Independent Registered Public Accounting      Firm                                                                                                                      |   | F-2  |
| Consolidated Balance      Sheets                                                                                                                                                  |   | F-3  |
| Consolidated Statements of      Operations                                                                                                                                        |   | F-5  |
| Consolidated Statements of Stockholders'      Equity                                                                                                                              |   | F-6  |
| Consolidated Statements of Cash      Flows                                                                                                                                        |   | F-7  |
| Notes to Consolidated Financial      Statements                                                                                                                                   |   | F-8  |
| Financial Statement ScheduleSchedule II—Valuation and Qualifying      Accounts                                                                                                                  |   | S-1  |

----

REPORT 

----

WILLIAMS 

| ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | December      31, |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 2008 |   |   | 2007 |   |
| CURRENT      ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |   |
| Cash and cash      equivalents                                                                                                                   |   | $ | 41,199 |   |   | $ | 12,344 |   |
| Accounts      receivable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |
| Oil and gas      sales                                                                                                                                                    |   |   | 26,009 |   |   |   | 36,698 |   |
| Joint interest and other,      net                                                                                                                                        |   |   | 14,349 |   |   |   | 16,666 |   |
| Affiliates                                                                                                                                                                |   |   | 227 |   |   |   | 308 |   |
| Inventory                                                                                                                                        |   |   | 20,052 |   |   |   | 14,348 |   |
| Deferred income      taxes                                                                                                                       |   |   | 3,637 |   |   |   | 3,581 |   |
| Fair value of      derivatives                                                                                                                   |   |   | - |   |   |   | 7,191 |   |
| Assets held for      sale                                                                                                                        |   |   | - |   |   |   | 17,281 |   |
| Prepaids and      other                                                                                                                          |   |   | 20,011 |   |   |   | 3,962 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 125,484 |   |   |   | 112,379 |   |
| PROPERTY      AND EQUIPMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |
| Oil and gas properties,      successful efforts      method                                                                                      |   |   | 1,526,473 |   |   |   | 1,374,090 |   |
| Natural gas gathering and      processing      systems                                                                                           |   |   | 17,816 |   |   |   | 18,404 |   |
| Contract drilling      equipment                                                                                                                 |   |   | 91,151 |   |   |   | 89,956 |   |
| Other                                                                                                                                            |   |   | 14,954 |   |   |   | 14,505 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 1,650,394 |   |   |   | 1,496,955 |   |
| Less accumulated depreciation,      depletion and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | (840,366 | ) |   |   | (765,877 | ) |
| Property and equipment,      net                                                                                                                                          |   |   | 810,028 |   |   |   | 731,078 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |
| OTHER      ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| Debt issue costs,      net                                                                                                                       |   |   | 6,225 |   |   |   | 6,963 |   |
| Other                                                                                                                                            |   |   | 1,672 |   |   |   | 10,676 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 7,897 |   |   |   | 17,639 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $ | 943,409 |   |   | $ | 861,096 |   |

----

| LIABILITIES      AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | December      31, |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2008 |   |   | 2007 |   |
| CURRENT      LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |   |   |   |   |
| Accounts    payable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |
| Trade                                                                                                                                                        |   | $ | 67,189 |   |   | $ | 72,477 |   |
| Oil and gas      sales                                                                                                                                       |   |   | 24,702 |   |   |   | 24,806 |   |
| Affiliates                                                                                                                                                   |   |   | 1,627 |   |   |   | 1,747 |   |
| Current maturities of      long-term      debt                                                                                      |   |   | 18,750 |   |   |   | 22,500 |   |
| Fair value of      derivatives                                                                                                      |   |   | - |   |   |   | 56,929 |   |
| Accrued liabilities and      other                                                                                                  |   |   | 10,609 |   |   |   | 10,308 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 122,877 |   |   |   | 188,767 |   |
| NON-CURRENT      LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |
| Long-term      debt                                                                                                                 |   |   | 347,225 |   |   |   | 430,175 |   |
| Deferred income      taxes                                                                                                          |   |   | 120,414 |   |   |   | 44,302 |   |
| Other                                                                                                                               |   |   | 38,211 |   |   |   | 37,046 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 505,850 |   |   |   | 511,523 |   |
| COMMITMENTS      AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |   |   |   |   |   |   |
| STOCKHOLDERS’      EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |   |
| Preferred stock, par value      $.10 per share, authorized – 3,000,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |
|  shares; none      issued                                                                                                      |   |   | - |   |   |   | - |   |
| Common stock, par value $.10      per share, authorized – 30,000,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |   |   |   |   |   |   |
|  shares; issued and      outstanding – 12,115,898 shares in 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |
|  and 11,354,051 shares in      2007                                                                                            |   |   | 1,212 |   |   |   | 1,135 |   |
| Additional paid-in      capital                                                                                                     |   |   | 137,046 |   |   |   | 121,063 |   |
| Retained      earnings                                                                                                              |   |   | 176,424 |   |   |   | 35,890 |   |
| Accumulated other      comprehensive income, net of tax                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | - |   |   |   | 2,718 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 314,682 |   |   |   | 160,806 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $ | 943,409 |   |   | $ | 861,096 |   |

----

WILLIAMS 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Year      Ended December 31, |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 2008                         |    |   | 2007 |   |   | 2006 |   |
| REVENUES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                         |    |   |   |   |   |   |   |
| Oil and gas      sales                                                                                                                      |   | $                            | 463,964 |   |   | $ | 316,992 |   |   | $ | 245,967 |   |
| Natural gas      services                                                                                                                   |   |                         | 10,926  |   |   |   | 10,230 |   |   |   | 11,327 |   |
| Drilling rig      services                                                                                                                  |   |                         | 46,124  |   |   |   | 52,649 |   |   |   | 6,937 |   |
| Gain on sales of property and      equipment                                                                                                |   |                         | 44,503  |   |   |   | 14,024 |   |   |   | 1,767 |   |
| Total      revenues                                                                                                                                                       |   |                         | 565,517 |   |   |   | 393,895 |   |   |   | 265,998 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                         |    |   |   |   |   |   |   |   |   |   |
| COSTS      AND EXPENSES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                         |    |   |   |   |   |   |   |   |   |   |
| Production                                                                                                                                  |   |                         | 89,054  |   |   |   | 75,319 |   |   |   | 63,298 |   |
| Exploration:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                         |    |   |   |   |   |   |   |   |   |   |
| Abandonments and      impairments                                                                                                                                         |   |                         | 80,112  |   |   |   | 68,870 |   |   |   | 65,173 |   |
| Seismic and      other                                                                                                                                                    |   |                         | 22,685  |   |   |   | 4,765 |   |   |   | 11,299 |   |
| Natural gas      services                                                                                                                   |   |                         | 10,060  |   |   |   | 9,745 |   |   |   | 10,005 |   |
| Drilling rig      services                                                                                                                  |   |                         | 37,789  |   |   |   | 32,964 |   |   |   | 4,538 |   |
| Depreciation, depletion and      amortization                                                                                               |   |                         | 120,542 |   |   |   | 84,476 |   |   |   | 66,163 |   |
| Impairment of property and      equipment                                                                                                   |   |                         | 12,882  |   |   |   | 12,137 |   |   |   | 21,848 |   |
| Accretion of abandonment      obligations                                                                                                   |   |                         | 2,355   |   |   |   | 2,508 |   |   |   | 1,653 |   |
| General and      administrative                                                                                                             |   |                         | 25,635  |   |   |   | 19,266 |   |   |   | 16,676 |   |
| Loss on sales of property and      equipment                                                                                                |   |                         | 2,122   |   |   |   | 9,815 |   |   |   | 99 |   |
| Total costs and      expenses                                                                                                                                             |   |                         | 403,236 |   |   |   | 319,865 |   |   |   | 260,752 |   |
| Operating      income                                                                                                                                                     |   |                         | 162,281 |   |   |   | 74,030 |   |   |   | 5,246 |   |
| OTHER      INCOME (EXPENSE)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                         |    |   |   |   |   |   |   |   |   |   |
| Interest      expense                                                                                                                       |   |                         | (24,994 | ) |   |   | (32,118 | ) |   |   | (20,895 | ) |
| Gain (loss) on      derivatives                                                                                                             |   |                         | 74,743  |   |   |   | (31,968 | ) |   |   | 37,340 |   |
| Other                                                                                                                                       |   |                         | 6,539   |   |   |   | 5,355 |   |   |   | (1,339 | ) |
| Total other income      (expense)                                                                                                                                         |   |                         | 56,288  |   |   |   | (58,731 | ) |   |   | 15,106 |   |
| Income      before income taxes and minority interest                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                         | 218,569 |   |   |   | 15,299 |   |   |   | 20,352 |   |
| Income      tax      expense                                                                                       |   |                         | (77,327 | ) |   |   | (5,497 | ) |   |   | (1,979 | ) |
| Minority      interest, net of      tax                                                                            |   |                         | (708    | ) |   |   | (3,812 | ) |   |   | (574 | ) |
| NET      INCOME                                                                                                    |   | $                            | 140,534 |   |   | $ | 5,990 |   |   | $ | 17,799 |   |
| Net      income per common share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                         |    |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                       |   | $                            | 11.78   |   |   | $ | .53 |   |   | $ | 1.64 |   |
| Diluted                                                                                                                                     |   | $                            | 11.67   |   |   | $ | .52 |   |   | $ | 1.58 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                         |    |   |   |   |   |   |   |   |   |   |
| Weighted      average common shares outstanding:                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                         |    |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                       |   |                         | 11,932  |   |   |   | 11,337 |   |   |   | 10,885 |   |
| Diluted                                                                                                                                     |   |                         | 12,039  |   |   |   | 11,494 |   |   |   | 11,244 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                         |    |   |   |   |   |   |   |   |   |   |

----

CLAYTON 

|                                                                                                                                                                                                                                                             |   |              |   |   |       |   |   |    |   |   |     |   |   | Accumulated |    |   |    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|--------|------------|--------|--------|---------|--------|--------|----------|--------|--------|-------------|---------|--------|---------|--------|
|                                                                                                                                                                                                                                                             |   |              |   |   |       |   |   |    |   |   |     |   |   | Other       |    |   | Total   |   |
|                                                                                                                                                                                                                                                             |   | Common      Stock |   |   | Additional |   |   |    |   |   | Compre-  |   |   | Compre-     |    |
|                                                                                                                                                                                                                                                             |   | No.      of       |   |   | Par        |   |   | Paid-In |   |   | Retained |   |   | hensive     |    |   | hensive |   |
|                                                                                                                                                                                                                                                             |   | Shares            |   |   | Value      |   |   | Capital |   |   | Earnings |   |   | Income      |    |   | Income  |   |
| BALANCE,                                                                                                                                                                                                                                                         |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |
| December 31,      2005                                        |   |              | 10,815 |   |       | $      | 1,082  |    |   | $      | 107,108  |   |   | $           | 12,101  |   |    | $      | - |   |   |   |   |
| Net income and      total                                                                                                                                                                                                                                        |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |
|   comprehensive      income                                                                                                                                                                                                                            |   |              | -      |   |       |   | -      |    |   |   | -        |   |   |        | 17,799  |   |    |   | - |   |   | $ | 17,799 |   |
| Issuance of stock      through                                                                                                                                                                                                                                   |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   compensation      plans, including                                                                                                                                                                                                                   |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   income tax      benefits                                         |   |              | 337    |   |       |   | 33     |    |   |   | 6,857    |   |   |        | -       |   |    |   | - |   |   |   |   |   |
| BALANCE,                                                                                                                                                                                                                                                         |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
| December 31,      2006                                        |   |              | 11,152 |   |       |   | 1,115  |    |   |   | 113,965  |   |   |        | 29,900  |   |    |   | - |   |   |   |   |   |
| Net      income                                                              |   |              | -      |   |       |   | -      |    |   |   | -        |   |   |        | 5,990   |   |    |   | - |   |   | $ | 5,990 |   |
| Unrealized gain    on                                                                                                                                                                                                                                            |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   marketable      securities,                                                                                                                                                                                                                          |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   net of tax of      $1,464                                        |   |              | -      |   |       |   | -      |    |   |   | -        |   |   |        | -       |   |    |   | 2,718 |   |   |   | 2,718 |   |
| Total      comprehensive                                                                                                                                                                                                                                         |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   income                                                           |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   | $ | 8,708 |   |
| Issuance of stock      through                                                                                                                                                                                                                                   |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   compensation      plans, including                                                                                                                                                                                                                   |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   income tax      benefits                                         |   |              | 202    |   |       |   | 20     |    |   |   | 7,098    |   |   |        | -       |   |    |   | - |   |   |   |   |   |
| BALANCE,                                                                                                                                                                                                                                                         |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
| December 31,      2007                                        |   |              | 11,354 |   |       |   | 1,135  |    |   |   | 121,063  |   |   |        | 35,890  |   |    |   | 2,718 |   |   |   |   |   |
| Net      income                                                              |   |              | -      |   |       |   | -      |    |   |   | -        |   |   |        | 140,534 |   |    |   | - |   |   | $ | 140,534 |   |
| Unrealized gain    on                                                                                                                                                                                                                                            |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   marketable      securities,                                                                                                                                                                                                                          |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   net of tax of      $2,015                                        |   |              | -      |   |       |   | -      |    |   |   | -        |   |   |        | -       |   |    |   | 3,742 |   |   |   | 3,742 |   |
| Reclassification adjustment      for                                                                                                                                                                                                                             |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   securities gains      included                                                                                                                                                                                                                       |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   in income, net of      tax of $3,479                                                                                                                                                                                                                 |   |              | -      |   |       |   | -      |    |   |   | -        |   |   |        | -       |   |    |   | (6,460 | ) |   |   | - |   |
| Total      comprehensive                                                                                                                                                                                                                                         |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   income                                                           |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   | $ | 144,276 |   |
| Issuance of stock      through                                                                                                                                                                                                                                   |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   compensation      plans, including                                                                                                                                                                                                                   |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
|   income tax      benefits                                         |   |              | 762    |   |       |   | 77     |    |   |   | 15,983   |   |   |        | -       |   |    |   | - |   |   |   |   |   |
| BALANCE,                                                                                                                                                                                                                                                         |   |              |   |   |       |   |   |    |   |   |     |   |   |        |    |   |    |   |   |   |   |   |   |   |
| December 31,      2008                                        |   |              | 12,116 |   |       | $      | 1,212  |    |   | $      | 137,046  |   |   | $           | 176,424 |   |    | $      | - |   |   |   |   |   |

----

WILLIAMS 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | Year      Ended December 31, |     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 2008                         |     |   | 2007 |   |   | 2006 |   |
| CASH      FLOWS FROM OPERATING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                         |     |   |   |   |   |   |   |
| Net      income                                                                                                                            |   | $                            | 140,534  |   |   | $ | 5,990 |   |   | $ | 17,799 |   |
| Adjustments to reconcile net      income to cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                         |     |   |   |   |   |   |   |   |   |   |
|    provided by      operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                         |     |   |   |   |   |   |   |   |   |   |
| Depreciation, depletion and      amortization                                                                                                                            |   |                         | 120,542  |   |   |   | 84,476 |   |   |   | 66,163 |   |
| Impairment of property and      equipment                                                                                                                                |   |                         | 12,882   |   |   |   | 12,137 |   |   |   | 21,848 |   |
| Exploration      costs                                                                                                                                                   |   |                         | 80,112   |   |   |   | 68,870 |   |   |   | 65,173 |   |
| Gain on sales of property and      equipment,      net                                                                                                                   |   |                         | (42,381  | ) |   |   | (4,209 | ) |   |   | (1,668 | ) |
| Deferred income      taxes                                                                                                                                               |   |                         | 77,327   |   |   |   | 3,768 |   |   |   | 215 |   |
| Non-cash employee      compensation                                                                                                                                      |   |                         | 5,834    |   |   |   | 1,865 |   |   |   | 2,279 |   |
| Unrealized (gain) loss on      derivatives                                                                                                                               |   |                         | (49,738  | ) |   |   | 24,249 |   |   |   | (57,568 | ) |
| Settlements on derivatives with      financing elements                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                         | 43,486   |   |   |   | 28,468 |   |   |   | 29,407 |   |
| Amortization of debt issue      costs                                                                                                                                    |   |                         | 1,354    |   |   |   | 1,281 |   |   |   | 1,308 |   |
| Accretion of abandonment      obligations                                                                                                                                |   |                         | 2,355    |   |   |   | 2,508 |   |   |   | 1,653 |   |
| Excess tax benefit on exercise      of stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                         | -        |   |   |   | (963 | ) |   |   | (1,807 | ) |
| Minority interest, net of      tax                                                                                                                                       |   |                         | 708      |   |   |   | 3,812 |   |   |   | 574 |   |
| Changes in operating working      capital:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                         |     |   |   |   |   |   |   |   |   |   |
| Accounts      receivable                                                                                                                                                 |   |                         | 13,087   |   |   |   | (10,028 | ) |   |   | (8,101 | ) |
| Accounts      payable                                                                                                                                                    |   |                         | (4,946   | ) |   |   | 10,992 |   |   |   | 3,543 |   |
| Other                                                                                                                                                                    |   |                         | (19,176  | ) |   |   | 1,650 |   |   |   | 5,172 |   |
| Net cash provided by operating      activities                                                                                                                                                         |   |                         | 381,980  |   |   |   | 234,866 |   |   |   | 145,990 |   |
| CASH      FLOWS FROM INVESTING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                         |     |   |   |   |   |   |   |   |   |   |
| Additions to property and      equipment                                                                                                   |   |                         | (350,106 | ) |   |   | (233,453 | ) |   |   | (254,840 | ) |
| Additions to equipment of      Larclay      JV                                                                                             |   |                         | (1,683   | ) |   |   | (29,302 | ) |   |   | (60,655 | ) |
| Proceeds from sales of property      and      equipment                                                                                    |   |                         | 117,226  |   |   |   | 22,773 |   |   |   | 4,451 |   |
| Change in equipment      inventory                                                                                                         |   |                         | (8,247   | ) |   |   | 18,166 |   |   |   | (662 | ) |
| Other                                                                                                                                      |   |                         | 3,935    |   |   |   | (14,443 | ) |   |   | 1,753 |   |
| Net cash used in investing      activities                                                                                                                                                             |   |                         | (238,875 | ) |   |   | (236,259 | ) |   |   | (309,953 | ) |
| CASH      FLOWS FROM FINANCING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                         |     |   |   |   |   |   |   |   |   |   |
| Proceeds from long-term      debt                                                                                                          |   |                         | -        |   |   |   | 25,800 |   |   |   | 129,300 |   |
| Proceeds from long-term debt of      Larclay      JV                                                                                       |   |                         | 7,500    |   |   |   | 8,727 |   |   |   | 66,254 |   |
| Repayments of long-term      debt                                                                                                          |   |                         | (71,700  | ) |   |   | - |   |   |   | - |   |
| Repayments of long-term debt of      Larclay      JV                                                                                       |   |                         | (22,500  | ) |   |   | (13,125 | ) |   |   | - |   |
| Proceeds from sale of common      stock                                                                                                    |   |                         | 15,936   |   |   |   | 6,000 |   |   |   | 3,914 |   |
| Settlements on derivatives with      financing elements                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                         | (43,486  | ) |   |   | (28,468 | ) |   |   | (29,407 | ) |
| Excess tax benefit on exercise      of stock      options                                                                                  |   |                         | -        |   |   |   | 963 |   |   |   | 1,807 |   |
| Net cash provided by (used in)      financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                         | (114,250 | ) |   |   | (103 | ) |   |   | 171,868 |   |
| NET      INCREASE (DECREASE) IN CASH AND                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                         |     |   |   |   |   |   |   |   |   |   |
|   CASH      EQUIVALENTS                                                                                 |   |                         | 28,855   |   |   |   | (1,496 | ) |   |   | 7,905 |   |
| CASH      AND CASH EQUIVALENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                         |     |   |   |   |   |   |   |   |   |   |
| Beginning of      period                                                                                                                   |   |                         | 12,344   |   |   |   | 13,840 |   |   |   | 5,935 |   |
| End of      period                                                                                                                         |   | $                            | 41,199   |   |   | $ | 12,344 |   |   | $ | 13,840 |   |
| SUPPLEMENTAL      DISCLOSURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                         |     |   |   |   |   |   |   |   |   |   |
| Cash paid for interest, net of      amounts      capitalized                                                                               |   | $                            | 24,027   |   |   | $ | 35,213 |   |   | $ | 19,653 |   |
| Cash paid for income      taxes                                                                                                            |   | $                            | 16,652   |   |   | $ | 348 |   |   | $ | 196 |   |

----

CLAYTON 

| ·   | The      reliance on estimates of proved reserves to compute the provision for      depreciation, depletion and amortization, and to determine the amount of      any impairment of provedproperties; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The      valuation of unproved acreage and proved oil and gas properties to      determine the amount of any impairments of oil and gas      properties; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Judgment      regarding the productive status of in-progress exploratory wells to      determine the amount of any provision for abandonment;  and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Estimates      regarding abandonment obligations. |
|--------------------|---------------------------------------------------|

----

CLAYTON 

----

CLAYTON 

----

CLAYTON 

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | December      31,   |    |   | December      31, |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 2008                |    |   | 2007              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | (In      thousands) |    |
| 73⁄4% Senior Notes due      2013                                                                                        |   | $                   | 225,000 |   |              | $      | 225,000 |   |
| Secured bank credit facility,      due May      2012                                                                       |   |                | 94,100  |   |              |   | 165,800 |   |
| Secured term loan of Larclay      JV, due June 2011                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                | 39,375  |   |              |   | 61,875 |   |
| Subordinated notes of Larclay      JV(a)                                                                                   |   |                | 7,500   |   |              |   | - |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                | 365,975 |   |              |   | 452,675 |   |
| Less current maturities(b)                                                                                                 |   |                | (18,750 | )      |              |   | (22,500 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $                   | 347,225 |   |              | $      | 430,175 |   |

----

CLAYTON 

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | 2008                |   |   | 2007   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | (In      thousands) |   |
| Abandonment      obligations                                                                                          |   | $                   | 31,737 |   |   | $      | 30,994 |   |
| Minority interest, net of      tax                                                                                    |   |                | 5,594  |   |   |   | 4,886 |   |
| Other taxes      payable                                                                                              |   |                | 145    |   |   |   | 358 |   |
| Other                                                                                                                 |   |                | 735    |   |   |   | 808 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | $                   | 38,211 |   |   | $      | 37,046 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | 2008                |   |   | 2007   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | (In      thousands) |   |
| Beginning of      year                                                                                                                                                 |   | $                   | 30,994 |   |   | $      | 27,846 |   |
|     Additional      abandonment obligations from new      wells                                                                                    |   |                | 1,780  |   |   |   | 936 |   |
|     Sales of      properties                                                                                                                       |   |                | (1,991 | )      |   |   | (1,726 | ) |
|     Accretion      expense                                                                                                                         |   |                | 2,355  |   |   |   | 2,508 |   |
|     Revisions of      previous      estimates                                                                                                      |   |                | (1,401 | )      |   |   | 1,430 |   |
|      End of      year                                                                                                                                        |   | $                   | 31,737 |   |   | $      | 30,994 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | 2008                |     |   | 2007   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|----------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | (In      thousands) |     |
| Deferred tax      assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                |     |   |   |   |
| Net operating loss      carryforwards                                                                                                           |   | $                   | 9,033    |   |   | $      | - |   |
| Fair value of      derivatives                                                                                                                  |   |                | -        |   |   |   | 17,224 |   |
| Statutory depletion      carryforwards                                                                                                          |   |                | 6,096    |   |   |   | 5,366 |   |
| Alternative minimum tax credit      carryforwards                                                                                               |   |                | 437      |   |   |   | 437 |   |
| Other                                                                                                                                           |   |                | 301      |   |   |   | 11,132 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                | 15,867   |   |   |   | 34,159 |   |
| Deferred tax      liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                |     |   |   |   |   |   |
| Property and      equipment                                                                                                                     |   |                | (108,903 | )      |   |   | (74,880 | ) |
| Tax deferred derivative      settlements and      other                                                                                         |   |                | (23,741  | )      |   |   | - |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                | (132,644 | )      |   |   | (74,880 | ) |
| Net deferred tax      liabilities                                                                                      |   | $                   | (116,777 | )      |   | $      | (40,721 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                |     |   |   |   |   |   |
| Components of net deferred tax      assets (liabilities):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                |     |   |   |   |   |   |
| Current      assets                                                                                                                             |   | $                   | 3,637    |   |   | $      | 3,581 |   |
| Non-current      liabilities                                                                                                                    |   |                | (120,414 | )      |   |   | (44,302 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | $                   | (116,777 | )      |   | $      | (40,721 | ) |

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 2008                |   |   | 2007   |   |   | 2006   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                        |   | (In      thousands) |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                |   |   |   |   |   |   |   |
| Income tax expense at statutory      rate of 35%                                                                                                                                                                                                                                                                                                                                                                            |   | $                   | 76,500 |   |   | $      | 5,355  |   |   | $ | 7,123 |   |
| Tax depletion in excess of      basis                                                                 |   |                | (700   | )      |   |   | (700   | )      |   |   | (700 | ) |
| Revision of previous tax      estimates                                                               |   |                | 55     |   |   |   | 16     |   |   |   | (152 | ) |
| State income taxes, net of      federal tax effect                                                                                                                                                                                                                                                                                                                                                                          |   |                | 1,375  |   |   |   | 738    |   |   |   | (4,429 | ) |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                | 97     |   |   |   | 88     |   |   |   | 137 |   |
| Income tax      expense                                                                                                                  |   | $                   | 77,327 |   |   | $      | 5,497  |   |   | $ | 1,979 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                |   |   |   |   |   |   |   |   |   |   |
| Current                                                                                               |   | $                   | 12     |   |   | $      | 1,729  |   |   | $ | 1,764 |   |
| Deferred                                                                                              |   |                | 77,315 |   |   |   | 3,768  |   |   |   | 215 |   |
| Income tax      expense                                                                                                                  |   | $                   | 77,327 |   |   | $      | 5,497  |   |   | $ | 1,979 |   |

| Balance      at December 31,      2006                                                                                    |   | $      | -      |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Adoption of FIN 48 on January 1,      2007                                                                                               |   |   | 1,585  |   |
| Reductions for tax positions of      prior      years                                                                                    |   |   | (1,227 | )      |
| Balance      at December 31,      2007                                                                                    |   |   | 358    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |   |   |
| Reductions for tax positions of      prior      years                                                                                    |   |   | (214   | )      |
| Balance      at December 31,      2008                                                                                    |   | $      | 144    |   |

----

CLAYTON 

|                                                                                                                                                                   |   | Gas            |       |   | Oil    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|------------|--------|--------|--------|
|                                                                                                                                                                   |   | MMBtu      (a) |       |   | Price  |   |   | Bbls |   |   | Price |   |
| Production      Period:                                                                                                                                                |   |           |       |   |   |   |   |   |   |   |   |   |
| 1st      Quarter 2009                                                                                                                                                  |   |           | 1,180,000  |   |   | $      | 5.47 |   |   |   | 160,000 |   |   | $ | 46.39 |   |
| 2nd      Quarter 2009                                                                                                                                                  |   |           | 1,570,000  |   |   | $      | 5.47 |   |   |   | 470,000 |   |   | $ | 49.68 |   |
| 3rd      Quarter 2009                                                                                                                                                  |   |           | 1,450,000  |   |   | $      | 5.47 |   |   |   | 440,000 |   |   | $ | 48.13 |   |
| 4th      Quarter 2009                                                                                                                                                  |   |           | 1,850,000  |   |   | $      | 5.47 |   |   |   | 400,000 |   |   | $ | 46.15 |   |
| 2010                            |   |           | 7,540,000  |   |   | $      | 6.80 |   |   |   | 327,000 |   |   | $ | 53.30 |   |
| 2011                            |   |           | 6,420,000  |   |   | $      | 7.07 |   |   |   | - |   |   | $ | - |   |
|                                                                                                                                                                   |   |           | 20,010,000 |   |   |   |   |   |   |   | 1,797,000 |   |   |   |   |   |

----

CLAYTON 

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

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

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

----

CLAYTON 

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

----

CLAYTON 

|                                                                                                                                            |   |   |     |   |     |   |   | Weighted    |   |   |           |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|----------|--------|--------|-------------|--------|--------|----------------|--------|
|                                                                                                                                            |   |   |     |   | Weighted |   |   | Average     |   |   |           |   |
|                                                                                                                                            |   |   |     |   | Average  |   |   | Remaining   |   |   | Aggregate      |   |
|                                                                                                                                            |   |   |     |   | Exercise |   |   | Contractual |   |   | Intrinsic      |   |
|                                                                                                                                            |   | Shares |     |   | Price    |   |   | Term        |   |   | Value      (a) |   |
| Outstanding      at January 1, 2008                                                                                                             |   |   | 811,485  |   |     | $      | 20.49  |        |   |   |           |   |   |   |
| Granted                                                                                                                                         |   |   | 4,000    |   |     | $      | 31.16  |        |   |   |           |   |   |   |
| Exercised (b)                                                                                                                                   |   |   | (761,847 | )      |     | $      | 20.92  |        |   |   |           |   |   |   |
| Outstanding      at December 31, 2008                                                                                                           |   |   | 53,638   |   |     | $      | 15.20  |        |   |   | 2.68           |   |   | $ | 1,621,838 |   |
|                                                                                                                                            |   |   |     |   |     |   |   |        |   |   |           |   |   |   |   |   |
| Vested      at December 31, 2008                                                                                                                |   |   | 53,638   |   |     | $      | 15.20  |        |   |   | 2.68           |   |   | $ | 1,621,838 |   |
| Exercisable      at December 31, 2008                                                                                                           |   |   | 53,638   |   |     | $      | 15.20  |        |   |   | 2.68           |   |   | $ | 1,621,838 |   |
|                                                                                                         |   |   |     |   |     |   |   |        |   |   |           |   |   |   |   |   |
| (a)    Based      on closing price at December 31, 2008 of $45.44 per share and $31.16 per      share at December 31, 2007. |   |
| (b)    Cash      received for options exercised totaled $15.9 million in 2008 and $6      million in 2007.             |   |

|                                                                                                                                                                                                                                                                                                                                                     | Outstanding      and Exercisable Options |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                     |                                     |   |   |   | Weighted |
|                                                                                                                                                                                                                                                                                                                                                     |                                     |   | Weighted |   | Average |
|                                                                                                                                                                                                                                                                                                                                                     |                                     |   | Average |   | Remaining |
|                                                                                                                                                                                                                                                                                                                                                     |                                     |   | Exercise |   | Life      in |
|                                                                                                                                                                                                                                                                                                                                                     | Shares                                   |   | Price |   | Years |
| Range      of exercise prices:                                                                                                                                                                                                                                                                                                                           |                                     |   |   |   |   |
| $5.50                                                                      |     27,638           |   | $    5.50 |   |        .3 |
| $10.00 -      $19.74                                                       |     8,000            |   | $    12.42 |   | 2.9 |
| $22.90 -      $41.74                                                       |     18,000           |   | $    31.34 |   | 6.2 |
|                                                                                                                                                                                                                                                                                                                                                     |     53,638           |   | $    15.20 |   | 2.7 |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 2008                                  |   |   | 2007   |   |   | 2006   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | (In      thousands, except per share) |   |
| Weighted      average grant date fair value of options granted per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | $                                     | 23.06  |   |   | $      | 27.56  |   |   | $ | 31.91 |   |
| Intrinsic      value of options      exercised                                                                                         |   | $                                     | 20,480 |   |   | $      | 261    |   |   | $ | 9,725 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                  |   |   |   |   |   |   |   |   |   |   |
| Stock-based      employee compensation      expense                                                                                    |   | $                                     | 92     |   |   | $      | 110    |   |   | $ | 128 |   |
| Tax      benefit                                                                                                                       |   |                                  | (32    | )      |   |   | (38    | )      |   |   | (45 | ) |
| Net      stock-based employee compensation      expense                                                                                |   | $                                     | 60     |   |   | $      | 72     |   |   | $ | 83 |   |

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 2008                            |   | 2007                             |   | 2006                             |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------|--------|----------------------------------|--------|----------------------------------|
| Risk-free      interest      rate                                                                                |  4%                        |   |  4.7%                       |   |  4.4%                       |
| Stock      price      volatility                                                                                 | 63%                             |   | 64%                              |   | 66%                              |
| Expected      life in      years                                                                                 |     10      |   |      10 |   |           10 |
| Dividend      yield                                                                                              |      - |   |     -        |   | -                                |

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                              |   | 2008                |   |   | 2007   |   |   | 2006   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                              |   | (In      thousands) |   |
| Amounts      received from the Williams Entities:                                                                                                                                                                                                                                                                                                                                                 |   |                |   |   |   |   |   |   |   |
| Service    Agreement:                                                                                                                                                                                                                                                                                                                                                                             |   |                |   |   |   |   |   |   |   |
| Services                                                                                             |   | $                   | 581    |   |   | $      | 299    |   |   | $ | 337 |   |
| Insurance premiums and      benefits                                                                 |   |                | 868    |   |   |   | 707    |   |   |   | 580 |   |
| Reimbursed      expenses                                                                             |   |                | 467    |   |   |   | 676    |   |   |   | 407 |   |
|                                                                                                                                                                                                                                                                                                                                                                                              |   | $                   | 1,916  |   |   | $      | 1,682  |   |   | $ | 1,324 |   |
| Amounts      paid to the Williams Entities:                                                                                                                                                                                                                                                                                                                                                       |   |                |   |   |   |   |   |   |   |   |   |   |
| Rent      (a)                                                               |   | $                   | 807    |   |   | $      | 663    |   |   | $ | 619 |   |
| Service    Agreement:                                                                                                                                                                                                                                                                                                                                                                             |   |                |   |   |   |   |   |   |   |   |   |   |
| Business entertainment      (b)                                                                      |   |                | 91     |   |   |   | 113    |   |   |   | 113 |   |
| Tax      services                                                                                    |   |                | -      |   |   |   | 150    |   |   |   | 150 |   |
| Reimbursed      expenses                                                                             |   |                | 197    |   |   |   | 122    |   |   |   | 118 |   |
|                                                                                                                                                                                                                                                                                                                                                                                              |   | $                   | 1,095  |   |   | $      | 1,048  |   |   | $ | 1,000 |   |

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                       |   | Leases              |   |   |      |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|-----------|--------|
|                                                                                                                                                                                                                                                                                                       |   | Capital      (a)    |   |   | Operating |   |   | Total |   |
|                                                                                                                                                                                                                                                                                                       |   | (In      thousands) |   |
| 2009                                                       |   | $                   | 526    |   |      | $      | 1,106 |   |   | $ | 1,632 |   |
| 2010                                                       |   |                | 322    |   |      |   | 1,075 |   |   |   | 1,397 |   |
| 2011                                                       |   |                | 95     |   |      |   | 888 |   |   |   | 983 |   |
| Thereafter                                                 |   |                | -      |   |      |   | 199 |   |   |   | 199 |   |
| Total minimum lease      payments                                                                                                                                                                                                                                                                          |   | $                   | 943    |   |      | $      | 3,268 |   |   | $ | 4,211 |   |

----

CLAYTON 

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                         |   | First                                 |    |   | Second  |   |    | Third   |   |   | Fourth  |   |   |   |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|--------|---------|--------|---------|---------|--------|--------|---------|--------|--------|--------|---------|
|                                                                                                                                                                                                                                                                                                                                                                         |   | Quarter                               |    |   | Quarter |   |    | Quarter |   |   | Quarter |   |   | Year   |    |
|                                                                                                                                                                                                                                                                                                                                                                         |   | (In      thousands, except per share) |    |
| Year      ended December 31, 2008:                                                                                                                                                                                                                                                                                                                                           |   |                                  |    |   |    |   |    |    |   |   |    |   |   |   |    |
| Total      revenues                                                                  |   | $                                     | 136,858 |   |    | $      | 191,268 |    |   | $      | 146,985 |   |   | $      | 90,406  |   |   | $ | 565,517 |   |
| Operating income      (loss)                                                         |   | $                                     | 64,415  |   |    | $      | 119,001 |    |   | $      | 18,126  |   |   | $      | (39,261 | ) |   | $ | 162,281 |   |
| Net income (loss)      (a)                                                           |   | $                                     | 7,179   |   |    | $      | (21,171 | )       |   | $      | 94,629  |   |   | $      | 59,897  |   |   | $ | 140,534 |   |
| Net income (loss) per common share      (b):                                                                                                                                                                                                                                                                                                                                 |   |                                  |    |   |    |   |    |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Basic                                                                                          |   | $                                     | .63     |   |    | $      | (1.75   | )       |   | $      | 7.81    |   |   | $      | 4.94    |   |   | $ | 11.78 |   |
| Diluted                                                                                        |   | $                                     | .62     |   |    | $      | (1.75   | )       |   | $      | 7.79    |   |   | $      | 4.93    |   |   | $ | 11.67 |   |
| Weighted average common shares      outstanding:                                                                                                                                                                                                                                                                                                                             |   |                                  |    |   |    |   |    |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Basic                                                                                          |   |                                  | 11,387  |   |    |   | 12,111  |    |   |   | 12,114  |   |   |   | 12,114  |   |   |   | 11,932 |   |
| Diluted                                                                                        |   |                                  | 11,643  |   |    |   | 12,111  |    |   |   | 12,141  |   |   |   | 12,148  |   |   |   | 12,039 |   |
| Year      ended December 31, 2007:                                                                                                                                                                                                                                                                                                                                           |   |                                  |    |   |    |   |    |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Total      revenues                                                                  |   | $                                     | 72,501  |   |    | $      | 92,564  |    |   | $      | 101,839 |   |   | $      | 126,991 |   |   | $ | 393,895 |   |
| Operating      income                                                                |   | $                                     | 6,242   |   |    | $      | 13,698  |    |   | $      | 13,749  |   |   | $      | 40,341  |   |   | $ | 74,030 |   |
| Net income (loss)      (a)                                                           |   | $                                     | (12,310 | )      |    | $      | 8,810   |    |   | $      | 986     |   |   | $      | 8,504   |   |   | $ | 5,990 |   |
| Net income (loss) per common share      (b):                                                                                                                                                                                                                                                                                                                                 |   |                                  |    |   |    |   |    |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Basic                                                                                          |   | $                                     | (1.09   | )      |    | $      | .78     |    |   | $      | .09     |   |   | $      | .75     |   |   | $ | .53 |   |
| Diluted                                                                                        |   | $                                     | (1.09   | )      |    | $      | .77     |    |   | $      | .09     |   |   | $      | .74     |   |   | $ | .52 |   |
| Weighted average common shares      outstanding:                                                                                                                                                                                                                                                                                                                             |   |                                  |    |   |    |   |    |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Basic                                                                                          |   |                                  | 11,290  |   |    |   | 11,352  |    |   |   | 11,352  |   |   |   | 11,352  |   |   |   | 11,337 |   |
| Diluted                                                                                        |   |                                  | 11,290  |   |    |   | 11,507  |    |   |   | 11,521  |   |   |   | 11,529  |   |   |   | 11,494 |   |

| (a) | The      Company recorded a $10 million charge for impairment of property and      equipment in the third quarter of 2008 and a $2.9 million charge in      the fourth quarter of 2008.  The Company recorded an      $8 million charge for impairment of proved properties in the third      quarter of 2007 and a $3.1 million charge in the fourth quarter of      2007. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (b) | The      sum of the individual quarterly net income (loss) per share amounts may      not agree to the total for the year since each period’s computation is      based on the weighted average number of common shares outstanding during      each period. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                       |   | 2008                |    |   | 2007   |   |    | 2006   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------|--------|--------|---------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                       |   | (In      thousands) |    |
| Property      acquisitions:                                                                                                                                                                                                                                                                                                                                                                |   |                |    |   |   |   |    |   |   |
| Proved                                                                                                                      |   | $                   | -       |   |   | $      | -       |   |   | $ | 6,432 |   |
| Unproved                                                                                                                    |   |                | 36,397  |   |   |   | 15,746  |   |   |   | 54,437 |   |
| Developmental      costs                                                            |   |                | 260,073 |   |   |   | 45,611  |   |   |   | 35,698 |   |
| Exploratory      costs                                                              |   |                | 51,237  |   |   |   | 169,879 |   |   |   | 157,509 |   |
| Total                                                                                                                       |   | $                   | 347,707 |   |   | $      | 231,236 |   |   | $ | 254,076 |   |
|                                                                                                                                                                                                                                                                                                                                                                                       |   |                |    |   |   |   |    |   |   |   |   |   |

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2008                |      |   | 2007   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | (In      thousands) |      |
| Proved      properties                                                                                       |   | $                   | 1,435,718 |   |   | $      | 1,258,166 |   |
| Unproved      properties                                                                                     |   |                | 90,755    |   |   |   | 115,924 |   |
| Total capitalized      costs                                                                                 |   |                | 1,526,473 |   |   |   | 1,374,090 |   |
| Accumulated depreciation,      depletion and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                | (791,507  | )      |   |   | (727,739 | ) |
| Net capitalized      costs                                                                                                                           |   | $                   | 734,966   |   |   | $      | 646,351 |   |

|                                              |   |                |    |   | Contract |   |   | Intercompany |   |   | Consolidated |   |
|---------------------------------------------------|--------|---------------------|---------|--------|----------|--------|--------|--------------|--------|--------|--------------|--------|
| For      the Year Ended December 31, 2008         |   | Oil      and Gas    |    |   | Drilling |   |   | Eliminations |   |   | Total        |   |
|                                              |   | (In      thousands) |    |
| Revenues                                          |   | $                   | 514,686 |   |     | $      | 64,153 |         |   | $      | (13,322      | )      |   | $ | 565,517 |   |
| Depreciation,      depletion and amortization (a) |   |                | 124,874 |   |     |   | 10,651 |         |   |   | (2,101       | )      |   |   | 133,424 |   |
| Other      operating expenses (b)                 |   |                | 232,047 |   |     |   | 47,493 |         |   |   | (9,728       | )      |   |   | 269,812 |   |
| Interest      expense                             |   |                | 21,134  |   |     |   | 3,860  |         |   |   | -            |   |   |   | 24,994 |   |
| Other      (income) expense                       |   |                | (81,282 | )      |     |   | -      |         |   |   | -            |   |   |   | (81,282 | ) |
| Income      before income taxes                   |   |                | 217,913 |   |     |   | 2,149  |         |   |   | (1,493       | )      |   |   | 218,569 |   |
| Income      tax expense                           |   |                | 76,546  |   |     |   | 781    |         |   |   | -            |   |   |   | 77,327 |   |
| Minority      interest, net of tax                |   |                | 381     |   |     |   | (1,089 | )            |   |   | -            |   |   |   | (708 | ) |
| Net      income (loss)                            |   | $                   | 141,748 |   |     | $      | 279    |         |   | $      | (1,493       | )      |   | $ | 140,534 |   |
| Total      assets                                 |   | $                   | 864,260 |   |     | $      | 85,006 |         |   | $      | (5,857       | )      |   | $ | 943,409 |   |
| Additions      to property and equipment          |   | $                   | 350,184 |   |     | $      | 1,195  |         |   | $      | (1,493       | )      |   | $ | 349,886 |   |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
|                                              |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |

|                                                   |   |                |    |   | Contract |   |    | Intercompany |   |   | Consolidated |   |
|--------------------------------------------------------|--------|---------------------|---------|--------|----------|--------|---------|--------------|--------|--------|--------------|--------|
| For      the Year Ended December 31, 2007              |   | Oil      and Gas    |    |   | Drilling |   |    | Eliminations |   |   | Total        |   |
|                                                   |   | (In      thousands) |    |
| Revenues                                               |   | $                   | 341,246 |   |     | $      | 64,551  |         |   | $      | (11,902      | )      |   | $ | 393,895 |   |
| Depreciation,      depletion and amortization (a)      |   |                | 82,240  |   |     |   | 16,060  |         |   |   | (1,687       | )      |   |   | 96,613 |   |
| Other      operating expenses (b)                      |   |                | 192,334 |   |     |   | 39,138  |         |   |   | (8,220       | )      |   |   | 223,252 |   |
| Interest      expense                                  |   |                | 27,818  |   |     |   | 4,300   |         |   |   | -            |   |   |   | 32,118 |   |
| Other      (income) expense                            |   |                | 26,613  |   |     |   | -       |         |   |   | -            |   |   |   | 26,613 |   |
| Income      before income taxes                        |   |                | 12,241  |   |     |   | 5,053   |         |   |   | (1,995       | )      |   |   | 15,299 |   |
| Income      tax expense                                |   |                | 3,305   |   |     |   | 2,192   |         |   |   | -            |   |   |   | 5,497 |   |
| Minority      interest, net of tax                     |   |                | 2,053   |   |     |   | (5,865  | )            |   |   | -            |   |   |   | (3,812 | ) |
| Net      income (loss)                                 |   | $                   | 10,989  |   |     | $      | (3,004  | )            |   | $      | (1,995       | )      |   | $ | 5,990 |   |
| Total      assets                                      |   | $                   | 753,480 |   |     | $      | 114,849 |         |   | $      | (7,233       | )      |   | $ | 861,096 |   |
| Additions      to property and equipment               |   | $                   | 235,679 |   |     | $      | 23,538  |         |   | $      | (1,995       | )      |   | $ | 257,222 |   |
|           |   |                |    |   |     |   |    |         |   |   |         |   |   |   |   |   |

| (a)  |  Includes      impairment of property andequipment. |
|-----------|----------------------------------------------------------|

| (b)  |  Includes      the following expenses:  production, exploration, natural gas      services, accretion of abandonment obligations, general and administrative      and loss on sales of property andequipment. |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

CLAYTON 

| (Dollars      in thousands)                                                                                                                                                                                                                 |   |   |    |   |         |   |    | Non-      |   |   |         |   |   |         |     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|----------|
|                                                                                                                                                                                                                                        |   |   |    |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |     |
|                                                                                                                                                                                                                                        |   | Issuer |    |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |     |
|                                                                                                                                                                                                                                        |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |
| Current      assets                                               |   | $      | 178,349 |   |         | $      | 173,636 |      |   | $      | 15,749       |   |   | $            | (242,250 | ) |   | $ | 125,484 |   |
| Property      and equipment, net                                                                                                                                                                                                            |   |   | 388,189 |   |         |   | 345,327 |      |   |   | 76,512       |   |   |         | -        |   |   |   | 810,028 |   |
| Investments      in subsidiaries                                                                                                                                                                                                            |   |   | 72,082  |   |         |   | -       |      |   |   | -            |   |   |         | (72,082  | ) |   |   | - |   |
| Other      assets                                                 |   |   | 19,629  |   |         |   | 372     |      |   |   | 211          |   |   |         | (12,315  | ) |   |   | 7,897 |   |
| Total      assets                                                                     |   | $      | 658,249 |   |         | $      | 519,335 |      |   | $      | 92,472       |   |   | $            | (326,647 | ) |   | $ | 943,409 |   |
|                                                                                                                                                                                                                                        |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
| Current      liabilities                                          |   | $      | 83,288  |   |         | $      | 253,627 |      |   | $      | 28,212       |   |   | $            | (242,250 | ) |   | $ | 122,877 |   |
| Non-current      liabilities:                                                                                                                                                                                                               |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
| Long-term      debt                                                                   |   |   | 319,100 |   |         |   | -       |      |   |   | 40,225       |   |   |         | (12,100  | ) |   |   | 347,225 |   |
| Other                                                                                 |   |   | 101,213 |   |         |   | 57,301  |      |   |   | 114          |   |   |         | (3       | ) |   |   | 158,625 |   |
|                                                                                                                                                                                                                                        |   |   | 420,313 |   |         |   | 57,301  |      |   |   | 40,339       |   |   |         | (12,103  | ) |   |   | 505,850 |   |
|                                                                                                                                                                                                                                        |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
| Stockholders’      equity                                   |   |   | 154,648 |   |         |   | 208,407 |      |   |   | 23,921       |   |   |         | (72,294  | ) |   |   | 314,682 |   |
| Total      liabilities and                                                                                                                                                                                                                  |   |   |    |   |         |   |    |      |   |   |         |   |   |         |     |   |   |   |   |   |
|   stockholders’      equity                                                                                                                                                                                                 |   | $      | 658,249 |   |         | $      | 519,335 |      |   | $      | 92,472       |   |   | $            | (326,647 | ) |   | $ | 943,409 |   |

----

CLAYTON 

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

| (Dollars      in thousands)                                                                                                                                                                                                              |   |   |    |   |         |   |    | Non-      |   |   |         |   |   |         |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|---------|
|                                                                                                                                                                                                                                     |   |   |    |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |    |
|                                                                                                                                                                                                                                     |   | Issuer |    |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |    |
|                                                                                                                                                                                                                                     |   |   |    |   |         |   |    |      |   |   |         |   |   |         |    |
| Total      revenue                                             |   | $      | 346,570 |   |         | $      | 173,154 |      |   | $      | 65,186       |   |   | $            | (19,393 | ) |   | $ | 565,517 |   |
| Costs      and      expenses                                   |   |   | 254,093 |   |         |   | 108,166 |      |   |   | 58,877       |   |   |         | (17,900 | ) |   |   | 403,236 |   |
| Operating      income (loss)                                                                                                                                                                                                             |   |   | 92,477  |   |         |   | 64,988  |      |   |   | 6,309        |   |   |         | (1,493  | ) |   |   | 162,281 |   |
| Other      income (expense)                                                                                                                                                                                                              |   |   | 65,414  |   |         |   | (5,502  | )         |   |   | (3,624       | )      |   |         | -       |   |   |   | 56,288 |   |
| Income      tax      expense                                   |   |   | (77,327 | )      |         |   | -       |      |   |   | -            |   |   |         | -       |   |   |   | (77,327 | ) |
| Minority      interest, net of tax                                                                                                                                                                                                       |   |   | (708    | )      |         |   | -       |      |   |   | -            |   |   |         | -       |   |   |   | (708 | ) |
| Net      income      (loss)                                                        |   | $      | 79,856  |   |         | $      | 59,486  |      |   | $      | 2,685        |   |   | $            | (1,493  | ) |   | $ | 140,534 |   |

| (Dollars      in thousands)                                                                                                                                                                                                              |   |   |    |   |         |   |    | Non-      |   |   |         |   |   |         |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|---------|
|                                                                                                                                                                                                                                     |   |   |    |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |    |
|                                                                                                                                                                                                                                     |   | Issuer |    |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |    |
|                                                                                                                                                                                                                                     |   |   |    |   |         |   |    |      |   |   |         |   |   |         |    |
| Total      revenue                                             |   | $      | 224,743 |   |         | $      | 117,208 |      |   | $      | 65,241       |   |   | $            | (13,297 | ) |   | $ | 393,895 |   |
| Costs      and      expenses                                   |   |   | 198,535 |   |         |   | 83,947  |      |   |   | 48,686       |   |   |         | (11,303 | ) |   |   | 319,865 |   |
| Operating      income (loss)                                                                                                                                                                                                             |   |   | 26,208  |   |         |   | 33,261  |      |   |   | 16,555       |   |   |         | (1,994  | ) |   |   | 74,030 |   |
| Other      income (expense)                                                                                                                                                                                                              |   |   | (46,373 | )      |         |   | (8,213  | )         |   |   | (4,145       | )      |   |         | -       |   |   |   | (58,731 | ) |
| Income      tax      expense                                   |   |   | (5,497  | )      |         |   | -       |      |   |   | -            |   |   |         | -       |   |   |   | (5,497 | ) |
| Minority      interest, net of tax                                                                                                                                                                                                       |   |   | (3,812  | )      |         |   | -       |      |   |   | -            |   |   |         | -       |   |   |   | (3,812 | ) |
| Net      income      (loss)                                                        |   | $      | (29,474 | )      |         | $      | 25,048  |      |   | $      | 12,410       |   |   | $            | (1,994  | ) |   | $ | 5,990 |   |

----

CLAYTON 

| (Dollars      in thousands)                                                                                                                                                                                                              |   |   |    |   |         |   |    | Non-      |   |   |         |   |   |         |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                                                                                                                                                                     |   |   |    |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                                     |   | Issuer |    |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |   |
|                                                                                                                                                                                                                                     |   |   |    |   |         |   |    |      |   |   |         |   |   |         |   |
| Total      revenue                                             |   | $      | 154,159 |   |         | $      | 106,550 |      |   | $      | 11,397       |   |   | $            | (6,108 | ) |   | $ | 265,998 |   |
| Costs      and      expenses                                   |   |   | 176,951 |   |         |   | 79,456  |      |   |   | 9,450        |   |   |         | (5,105 | ) |   |   | 260,752 |   |
| Operating      income (loss)                                                                                                                                                                                                             |   |   | (22,792 | )      |         |   | 27,094  |      |   |   | 1,947        |   |   |         | (1,003 | ) |   |   | 5,246 |   |
| Other      income (expense)                                                                                                                                                                                                              |   |   | 4,453   |   |         |   | 11,281  |      |   |   | (628         | )      |   |         | -      |   |   |   | 15,106 |   |
| Income      tax      expense                                   |   |   | (1,979  | )      |         |   | -       |      |   |   | -            |   |   |         | -      |   |   |   | (1,979 | ) |
| Minority      interest, net of tax                                                                                                                                                                                                       |   |   | (574    | )      |         |   | -       |      |   |   | -            |   |   |         | -      |   |   |   | (574 | ) |
| Net      income      (loss)                                                        |   | $      | (20,892 | )      |         | $      | 38,375  |      |   | $      | 1,319        |   |   | $            | (1,003 | ) |   | $ | 17,799 |   |

| (Dollars      in thousands)                                                                                                                                                                                                           |   |   |     |   |         |   |     | Non-      |   |   |         |   |   |         |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------------|--------|----------|-----------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                                                                                                                                                                  |   |   |     |   | Guarantor    |   |     | Guarantor |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                                  |   | Issuer |     |   | Subsidiaries |   |     | Entities  |   |   | Eliminations |   |   | Consolidated |   |
|                                                                                                                                                                                                                                  |   |   |     |   |         |   |     |      |   |   |         |   |   |         |   |
| Operating      activities                                   |   | $      | 319,182  |   |         | $      | 53,388   |      |   | $      | 7,309        |   |   | $            | 2,101  |   |   | $ | 381,980 |   |
| Investing      activities                                   |   |   | (126,079 | )      |         |   | (109,172 | )         |   |   | (1,523       | )      |   |         | (2,101 | ) |   |   | (238,875 | ) |
| Financing      activities                                   |   |   | (163,047 | )      |         |   | 56,306   |      |   |   | (7,509       | )      |   |         | -      |   |   |   | (114,250 | ) |
| Net      increase (decrease) in                                                                                                                                                                                                       |   |   |     |   |         |   |     |      |   |   |         |   |   |         |   |   |   |   |   |   |
| cash      and cash equivalents                                                                                                                                                                                                        |   |   | 30,056   |   |         |   | 522      |      |   |   | (1,723       | )      |   |         | -      |   |   |   | 28,855 |   |
| Cash      at the beginning of                                                                                                                                                                                                         |   |   |     |   |         |   |     |      |   |   |         |   |   |         |   |   |   |   |   |   |
| the      period                                                  |   |   | 5,325    |   |         |   | 1,288    |      |   |   | 5,731        |   |   |         | -      |   |   |   | 12,344 |   |
| Cash      at end of the period                                                                                                                                                                                                        |   | $      | 35,381   |   |         | $      | 1,810    |      |   | $      | 4,008        |   |   | $            | -      |   |   | $ | 41,199 |   |

| (Dollars      in thousands)                                                                                                                                                                                                           |   |   |     |   |         |   |    | Non-      |   |   |         |   |   |         |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                                                                                                                                                                  |   |   |     |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                                  |   | Issuer |     |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |   |
|                                                                                                                                                                                                                                  |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |
| Operating      activities                                   |   | $      | 149,216  |   |         | $      | 60,738  |      |   | $      | 23,225       |   |   | $            | 1,687  |   |   | $ | 234,866 |   |
| Investing      activities                                   |   |   | (189,626 | )      |         |   | (21,303 | )         |   |   | (24,143      | )      |   |         | (1,187 | ) |   |   | (236,259 | ) |
| Financing      activities                                   |   |   | 39,620   |   |         |   | (39,445 | )         |   |   | 222          |   |   |         | (500   | ) |   |   | (103 | ) |
| Net      decrease in                                                                                                                                                                                                                  |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| cash      and cash equivalents                                                                                                                                                                                                        |   |   | (790     | )      |         |   | (10     | )         |   |   | (696         | )      |   |         | -      |   |   |   | (1,496 | ) |
| Cash      at the beginning of                                                                                                                                                                                                         |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| the      period                                                  |   |   | 6,116    |   |         |   | 1,298   |      |   |   | 6,426        |   |   |         | -      |   |   |   | 13,840 |   |
| Cash      at end of the period                                                                                                                                                                                                        |   | $      | 5,326    |   |         | $      | 1,288   |      |   | $      | 5,730        |   |   | $            | -      |   |   | $ | 12,344 |   |

----

CLAYTON 

| (Dollars      in thousands)                                                                                                                                                                                                           |   |   |     |   |         |   |    | Non-      |   |   |         |   |   |         |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                                                                                                                                                                  |   |   |     |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                                  |   | Issuer |     |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |   |
|                                                                                                                                                                                                                                  |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |
| Operating      activities                                   |   | $      | 50,130   |   |         | $      | 65,343  |      |   | $      | 30,229       |   |   | $            | 288    |   |   | $ | 145,990 |   |
| Investing      activities                                   |   |   | (215,405 | )      |         |   | (22,007 | )         |   |   | (72,753      | )      |   |         | 212    |   |   |   | (309,953 | ) |
| Financing      activities                                   |   |   | 167,089  |   |         |   | (43,671 | )         |   |   | 48,950       |   |   |         | (500   | ) |   |   | 171,868 |   |
| Net      increase (decrease) in                                                                                                                                                                                                       |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| cash      and cash equivalents                                                                                                                                                                                                        |   |   | 1,814    |   |         |   | (335    | )         |   |   | 6,426        |   |   |         | -      |   |   |   | 7,905 |   |
| Cash      at the beginning of                                                                                                                                                                                                         |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| the      period                                                  |   |   | 4,302    |   |         |   | 1,633   |      |   |   | -            |   |   |         | -      |   |   |   | 5,935 |   |
| Cash      at end of the period                                                                                                                                                                                                        |   | $      | 6,116    |   |         | $      | 1,298   |      |   | $      | 6,426        |   |   | $            | -      |   |   | $ | 13,840 |   |

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | Oil    |   |   | Gas    |   |    | MMcfe  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|---------|--------|--------|
| Proved      reserves:                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |   |   |   |   |    |   |   |
| December      31,      2005                                                                       |   |   | 27,835 |   |   |   | 126,758 |   |   |   | 293,768 |   |
| Revisions                                                                                                                       |   |   | (2,383 | )      |   |   | (14,402 | )      |   |   | (28,700 | ) |
| Extensions and      discoveries                                                                                                 |   |   | 1,367  |   |   |   | 21,204  |   |   |   | 29,406 |   |
| Purchases of      minerals-in-place                                                                                             |   |   | 932    |   |   |   | 805     |   |   |   | 6,397 |   |
| Production                                                                                                                      |   |   | (2,370 | )      |   |   | (15,198 | )      |   |   | (29,418 | ) |
| December      31,      2006                                                                       |   |   | 25,381 |   |   |   | 119,167 |   |   |   | 271,453 |   |
| Revisions                                                                                                                       |   |   | 3,194  |   |   |   | 1,761   |   |   |   | 20,925 |   |
| Extensions and      discoveries                                                                                                 |   |   | 1,902  |   |   |   | 23,533  |   |   |   | 34,945 |   |
| Purchases of      minerals-in-place                                                                                             |   |   | -      |   |   |   | (624    | )      |   |   | (624 | ) |
| Production                                                                                                                      |   |   | (2,531 | )      |   |   | (20,681 | )      |   |   | (35,867 | ) |
| December      31,      2007                                                                       |   |   | 27,946 |   |   |   | 123,156 |   |   |   | 290,832 |   |
| Revisions                                                                                                                       |   |   | (5,620 | )      |   |   | (15,938 | )      |   |   | (49,658 | ) |
| Extensions and      discoveries                                                                                                 |   |   | 2,057  |   |   |   | 23,824  |   |   |   | 36,166 |   |
| Sales of      minerals-in-place                                                                                                 |   |   | (473   | )      |   |   | (8,560  | )      |   |   | (11,398 | ) |
| Production                                                                                                                      |   |   | (3,134 | )      |   |   | (18,553 | )      |   |   | (37,357 | ) |
| December      31,      2008                                                                       |   |   | 20,776 |   |   |   | 103,929 |   |   |   | 228,585 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |    |   |   |   |   |   |
| Proved      developed reserves:                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |    |   |   |   |   |   |
| December      31,      2006                                                                       |   |   | 18,872 |   |   |   | 90,217  |   |   |   | 203,450 |   |
| December      31,      2007                                                                       |   |   | 20,627 |   |   |   | 98,434  |   |   |   | 222,196 |   |
| December      31,      2008                                                                       |   |   | 16,815 |   |   |   | 87,340  |   |   |   | 188,230 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 2008                |      |   | 2007   |   |      | 2006   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|--------|--------|--------|-----------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | (In      thousands) |      |
| Future      cash      inflows                                                                         |   | $                   | 1,374,684 |   |   | $      | 3,363,271 |   |   | $ | 1,991,628 |   |
| Future      costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                |      |   |   |   |      |   |   |   |   |   |
| Production                                                                                                                          |   |                | (569,053  | )      |   |   | (999,945  | )      |   |   | (685,021 | ) |
| Development                                                                                                                         |   |                | (104,223  | )      |   |   | (174,264  | )      |   |   | (160,264 | ) |
| Income      taxes                                                                                                                   |   |                | (126,819  | )      |   |   | (653,808  | )      |   |   | (293,870 | ) |
| Future      net cash      flows                                                                       |   |                | 574,588   |   |   |   | 1,535,254 |   |   |   | 852,473 |   |
| 10%      discount      factor                                                                         |   |                | (169,423  | )      |   |   | (609,285  | )      |   |   | (337,673 | ) |
| Standardized      measure of discounted net cash flows                                                                                                                                                                                                                                                                                                                                                                                                              |   | $                   | 405,166   |   |   | $      | 925,969   |   |   | $ | 514,800 |   |

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 2008                |     |   | 2007   |   |     | 2006   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|----------|--------|--------|--------|----------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | (In      thousands) |     |
| Standardized      measure, beginning of      period                                                                     |   | $                   | 925,969  |   |   | $      | 514,800  |   |   | $ | 753,712 |   |
| Net      changes in sales prices, net of production costs                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                | (600,719 | )      |   |   | 483,032  |   |   |   | (356,919 | ) |
| Revisions      of quantity      estimates                                                                               |   |                | (101,889 | )      |   |   | 82,451   |   |   |   | (76,332 | ) |
| Accretion      of      discount                                                                                         |   |                | 131,824  |   |   |   | 70,844   |   |   |   | 111,789 |   |
| Changes      in future development costs, including                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                |     |   |   |   |     |   |   |   |   |   |
|   development      costs incurred that reduced future                                                                                                                                                                                                                                                                                                                                                                                                             |   |                |     |   |   |   |     |   |   |   |   |   |
|   development      costs                                                                                      |   |                | 69,466   |   |   |   | 2,665    |   |   |   | 11,665 |   |
| Changes      in timing and      other                                                                                   |   |                | (9,385   | )      |   |   | 24,497   |   |   |   | (37,086 | ) |
| Net      change in income      taxes                                                                                    |   |                | 299,193  |   |   |   | (203,369 | )      |   |   | 174,488 |   |
| Future      abandonment cost, net of      salvage                                                                       |   |                | (548     | )      |   |   | (4,204   | )      |   |   | (7,880 | ) |
| Extensions      and      discoveries                                                                                    |   |                | 155,006  |   |   |   | 197,219  |   |   |   | 113,110 |   |
| Sales,      net of production      costs                                                                                |   |                | (373,988 | )      |   |   | (240,733 | )      |   |   | (181,280 | ) |
| Sales      of      minerals-in-place                                                                                    |   |                | (89,763  | )      |   |   | (1,233   | )      |   |   | - |   |
| Purchases      of      minerals-in-place                                                                                |   |                | -        |   |   |   | -        |   |   |   | 9,533 |   |
| Standardized      measure, end of      period.                                                                          |   | $                   | 405,166  |   |   | $      | 925,969  |   |   | $ | 514,800 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | Average      Price |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | Oil      (a)       |   |   | Gas |   |
| As of December    31:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |               |   |   |   |   |
| 2008                                                                                 |   | $                  | 42.03  |   |   | $ | 5.90 |   |
| 2007                                                                                 |   | $                  | 91.30  |   |   | $ | 7.37 |   |
| 2006                                                                                 |   | $                  | 57.18  |   |   | $ | 5.24 |   |

----

WILLIAMS 

| Schedule      II – Valuation and Qualifying Accounts                                                                   |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                         |   | Balance      at |   |   |   |   |   |   |   |   | Balance      at |   |
|                                                                                                                         |   | Beginning      of |   |   |   |   |   |   |   |   | End      of |   |
| Description                                                                                                                  |   | Period |   |   | Additions(a) |   |   | Deductions(b) |   |   | Period |   |
|                                                                                                                         |   |   |   |   | (In      thousands) |   |   |   |   |
| Year      Ended December 31, 2008:                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful      accounts - Joint interest and other                                                              |   | $ | 1,387 |   |   | $ | - |   |   | $ | - |   |   | $ | 1,387 |   |
| Year      Ended December 31, 2007:                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful      accounts - Joint interest and other                                                              |   | $ | 1,044 |   |   | $ | 343 |   |   | $ | - |   |   | $ | 1,387 |   |
| Year      Ended December 31, 2006:                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful      accounts - Joint interest and other                                                              |   | $ | 1,087 |   |   | $ | - |   |   | $ | (43 | ) |   | $ | 1,044 |   |
|                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (a)    Additions      relate to provisions for doubtful accounts.                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (b)    Deductions      relate to the write-off or recovery of the provisions for doubtful      accounts. |   |   |   |   |   |   |   |   |   |