----

| (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, 2007   |   |

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

| 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.  $156,486,908. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| There      were 11,354,051 shares of Common Stock, $.10 par value, of the registrant      outstanding as of March 14,2008. |
|---------------------------------------------------------------------------------------------------------------------------------|

| Portions      of the definitive proxy statement relating to the 2008 Annual Meeting of      Stockholders, which will be filed with the Commission not later than April      30, 2008, are incorporated by reference in Part III of this Form      10-K. |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Page   |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Part I        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      1.  | Business                                                                                                                                                   | 3      |   |
|          | General                                                                                                                                                                        | 3      |   |
|          | Company      Profile                                                                                                                                                           | 3      |   |
|          | Investments                                                                                                                                                                    | 5      |   |
|          | Exploration and Development      Activities                                                                                                                                    | 6      |   |
|          | Marketing      Arrangements                                                                                                                                                    | 9      |   |
|          | Natural Gas      Services                                                                                                                                                      | 9      |   |
|          | Competition and      Markets                                                                                                                                                   | 9      |   |
|          | Regulation                                                                                                                                                                     | 9      |   |
|          | Environmental      Matters                                                                                                                                                     | 11     |   |
|          | Title to      Properties                                                                                                                                                       | 13     |   |
|          | Operational Hazards and      Insurance                                                                                                                                         | 13     |   |
|          | Executive      Officers                                                                                                                                                        | 14     |   |
|          | Employees                                                                                                                                                                      | 15     |   |
|          | Website      Address                                                                                                                                                           | 15     |   |
| Item      1A. | Risk      Factors                                                                                                                                                              | 15     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      1B. | Unresolved Staff      Comments                                                                                                                                                 | 21     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      2.  | Properties                                                                                                                                                 | 21     |   |
|          | Reserves                                                                                                                                                                       | 22     |   |
|          | Exploration and Development      Activities                                                                                                                                    | 23     |   |
|          | Productive Well      Summary                                                                                                                                                   | 24     |   |
|          | Volumes, Prices and Production      Costs                                                                                                                                      | 24     |   |
|          | Development, Exploration and      Acquisition      Expenditures                                                                                                                | 24     |   |
|          | Acreage                                                                                                                                                                        | 25     |   |
|          | Contract      Drilling                                                                                                                                                         | 25     |   |
|          | Offices                                                                                                                                                                        | 25     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      3.  | Legal      Proceedings                                                                                                                                     | 25     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      4.  | Submission of Matters to a Vote of Security      Holders                                                                                                   | 25     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Part II       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      5.  | Market for the Registrant’s Common Equity, Related      Stockholder Matters and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|          | Issuer Repurchases of Equity      Securities                                                                                                                                   | 26     |   |
|          | Price Range of Common      Stock                                                                                                                                                         | 26     |   |
|          | Dividend      Policy                                                                                                                                                                     | 26     |   |
|          | Securities Authorized for Issuance      under Equity Compensation Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 26     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      6.  | Selected Financial      Data                                                                                                                               | 27     |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item      7.  | Management’s Discussion and Analysis of Financial Condition      and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
|          | Results of      Operations                                                                                                                                                     | 28     |   |
|          | Overview                                                                                                                                                                                 | 28     |   |
|          | Key Factors to      Consider                                                                                                                                                             | 28     |   |
|          | Proved Oil and Gas      Reserves                                                                                                                                                         | 29     |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Page   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Item      7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Management’s Discussion and Analysis of Financial Condition      and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Results of Operations (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Supplemental      Information                                                                                                                                                    | 30     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Operating      Results                                                                                                                                                           | 32     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Liquidity and Capital      Resources                                                                                                                                             | 35     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Known Trends and      Uncertainties                                                                                                                                              | 39     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Application of Critical      Accounting Policies and Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 39     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Recent Accounting      Pronouncements                                                                                                                                            | 42     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Item      7A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Quantitative and Qualitative Disclosure About Market      Risks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 43     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Oil and Gas      Prices                                                                                                                                                          | 43     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Interest      Rates                                                                                                                                                              | 44     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Item      8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Financial Statements and Supplementary      Data                                                                                                   | 45     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Item      9.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Changes in and Disagreements with Accountants on Accounting      and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Financial      Disclosure                                                                                                                                              | 45     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Item      9A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Controls and      Procedures                                                                                                                       | 45     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Disclosure Controls and      Procedures                                                                                                                                          | 45     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Internal Control Over Financial      Reporting                                                                                                                                   | 45     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Changes in Internal Control Over      Financial      Reporting                                                                                                                   | 46     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Management’s Report on Internal      Control Over Financial Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 46     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Item      9B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Other      Information                                                                                                                             | 48     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Part III                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Items      10-14.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Information Incorporated by      Reference                                                                                                         | 48     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Part IV                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Item      15.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibits and Financial Statement      Schedules                                                                                                    | 48     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Financial Statements and      Schedules                                                                                                                                          | 48     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Exhibits                                                                                                                                                                         | 48     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| Glossary of      Terms                                                                                                                       | 54                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
| Signatures                                                                                                                                   | 57                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |

----

PART I

Item1

General

mpany

----

----

Invest

----

xplora

----

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

|                |   |                                 |   | Working  |   | Current   |
|---------------------|--------|--------------------------------------|--------|----------|--------|-----------|
| Spud      Date      |   | Well      Name (Prospect)            |   | Interest |   | Status    |
| October      2006   |   | P.      Benoit #1 (Sarepta)          |   | 91%      |   | Dry       |
| January      2007   |   | J.L.      Hood #1 (Terryville)       |   | 86%      |   | Producing |
| February      2007  |   | J.      Huey #1 (Terryville)         |   | 86%      |   | Producing |
| March      2007     |   | David      Barton #1 (Winnsboro)     |   | 100%     |   | Dry       |
| March      2007     |   | George      Staton #1 (Sarepta)      |   | 68%      |   | Producing |
| April      2007     |   | C.M.      Bice #1 (Terryville)       |   | 86%      |   | Producing |
| May      2007       |   | C.      Dugdale #1 (Choudrant)       |   | 99%      |   | Dry       |
| June      2007      |   | Stephenson      #1 (Terryville)      |   | 86%      |   | Producing |
| June      2007      |   | John      Warren #1 (Terryville)     |   | 86%      |   | Producing |
| July      2007      |   | Burks      #1 (Terryville)           |   | 86%      |   | Producing |
| July      2007      |   | Henry      #2 (Terryville)           |   | 86%      |   | Dry       |
| July      2007      |   | Allen      Estate #1 (Terryville)    |   | 100%     |   | Producing |
| August      2007    |   | McCrary      #1 (Terryville)         |   | 86%      |   | Producing |
| August      2007    |   | Henry      #1 (Terryville)           |   | 86%      |   | Producing |
| September      2007 |   | LA      Minerals #1 (Ruston)         |   | 66%      |   | Producing |
| October      2007   |   | Barnett      #1 (Terryville)         |   | 86%      |   | Producing |
| November      2007  |   | A.      Lewis Estate #2 (Terryville) |   | 86%      |   | Producing |
| January      2008   |   | Henry      #3 (Terryville)           |   | 86%      |   | Producing |
| February      2008  |   | J.G.      Mitchell #1 (Ruston)       |   | 74%      |   | Drilling  |

----

----

arketing

atural 

ompeti

egula

----

----

nvironment

----

----

Title to Properties

peratio

----

Executive Officers

----

Employ

Website Address

Item1A

----

----

----

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

----

----

Item1B

Item2

----

Reserves

|                                                   |   | Proved      Developed |    |   | Proved                      |   |   | Total       |   |
|--------------------------------------------------------|--------|-----------------------|---------|--------|-----------------------------|--------|--------|-------------|--------|
|                                                   |   | Producing             |    |   | Non-producing               |   |   | Undeveloped |   |   | Proved |   |
|                                                   |   |                  |    |   | (Dollars      in thousands) |   |   |        |   |
| Gas      (MMcf)                                        |   |                  | 87,403  |   |                        |   | 11,031 |        |   |   | 24,722 |   |   |   | 123,156 |   |
| Oil      and natural gas liquids (MBbls)               |   |                  | 18,299  |   |                        |   | 2,328  |        |   |   | 7,319 |   |   |   | 27,946 |   |
| Total      (MMcfe)                                     |   |                  | 197,197 |   |                        |   | 24,999 |        |   |   | 68,636 |   |   |   | 290,832 |   |
| Standardized      measure of discounted                |   |                  |    |   |                        |   |   |        |   |   |   |   |   |   |   |   |
|         future net cash flows                |   |                  |    |   |                        |   |   |        |   |   |   |   |   | $ | 925,969 |   |
| Present      value of proved reserves (a)              |   |                  |    |   |                        |   |   |        |   |   |   |   |   | $ | 1,331,110 |   |
|           |   |                  |    |   |                        |   |   |        |   |   |   |   |   |   |   |   |

|   | (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, 2007 were $381.4 million      and $23.7 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                                     |   |                 | 17,318 |   |   |   | 65,248  |           |   |   | 169,156         |   |                |          | 58.2   | %      |          | $      | 684,691 |   |   |   | 51.4 | % |
| North      Louisiana                                   |   |                 | 319    |   |   |   | 14,046  |           |   |   | 15,960          |   |                |          | 5.5    | %      |          |   | 72,240 |   |   |   | 5.5 | % |
| South      Louisiana                                   |   |                 | 1,117  |   |   |   | 27,196  |           |   |   | 33,898          |   |                |          | 11.7   | %      |          |   | 204,231 |   |   |   | 15.3 | % |
| Austin      Chalk (Trend)                              |   |                 | 7,530  |   |   |   | 5,387   |           |   |   | 50,567          |   |                |          | 17.4   | %      |          |   | 305,185 |   |   |   | 22.9 | % |
| Cotton      Valley Reef Complex                        |   |                 | -      |   |   |   | 9,157   |           |   |   | 9,157           |   |                |          | 3.1    | %      |          |   | 32,838 |   |   |   | 2.5 | % |
| Other                                                  |   |                 | 1,662  |   |   |   | 2,122   |           |   |   | 12,094          |   |                |          | 4.1    | %      |          |   | 31,925 |   |   |   | 2.4 | % |
| Total                                                  |   |                 | 27,946 |   |   |   | 123,156 |           |   |   | 290,832         |   |                |          | 100.0  | %      |          | $      | 1,331,110 |   |   |   | 100.0 | % |
|           |   |                 |   |   |   |   |    |           |   |   |            |   |                |          |   |   |          |   |   |   |   |   |   |   |

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

----

xploratio

|                                                                                                                                                                                                                  |   | Year      Ended December 31,                               |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|--------|
|                                                                                                                                                                                                                  |   | 2007                                                       |   |   | 2006 |   |   | 2005 |   |
|                                                                                                                                                                                                                  |   | Gross                                                      |   |   | Net |   |   | Gross |   |   | Net |   |   | Gross |   |   | Net |   |
|                                                                                                                                                                                                                  |   | (Excludes      wells in progress at the end of any period) |   |
| Development      Wells:                                                                                                                                                                                               |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil                                    |   |                                                       | 34     |   |   |   | 14.9 |   |   |   | 2 |   |   |   | 1.0 |   |   |   | 49 |   |   |   | 26.4 |   |
| Gas                                    |   |                                                       | 34     |   |   |   | 13.2 |   |   |   | 16 |   |   |   | 1.8 |   |   |   | 10 |   |   |   | 3.2 |   |
| Dry                                    |   |                                                       | -      |   |   |   | - |   |   |   | 1 |   |   |   | .8 |   |   |   | 1 |   |   |   | .2 |   |
| Total                                                 |   |                                                       | 68     |   |   |   | 28.1 |   |   |   | 19 |   |   |   | 3.6 |   |   |   | 60 |   |   |   | 29.8 |   |
| Exploratory      Wells:                                                                                                                                                                                               |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil                                    |   |                                                       | -      |   |   |   | - |   |   |   | 6 |   |   |   | 5.2 |   |   |   | 2 |   |   |   | 1.8 |   |
| Gas                                    |   |                                                       | 12     |   |   |   | 8.0 |   |   |   | 35 |   |   |   | 14.5 |   |   |   | 7 |   |   |   | 4.5 |   |
| Dry                                    |   |                                                       | 7      |   |   |   | 5.8 |   |   |   | 10 |   |   |   | 8.7 |   |   |   | 10 |   |   |   | 6.1 |   |
| Total                                                 |   |                                                       | 19     |   |   |   | 13.8 |   |   |   | 51 |   |   |   | 28.4 |   |   |   | 19 |   |   |   | 12.4 |   |
| Total      Wells:                                                                                                                                                                                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil                                    |   |                                                       | 34     |   |   |   | 14.9 |   |   |   | 8 |   |   |   | 6.2 |   |   |   | 51 |   |   |   | 28.2 |   |
| Gas                                    |   |                                                       | 46     |   |   |   | 21.2 |   |   |   | 51 |   |   |   | 16.3 |   |   |   | 17 |   |   |   | 7.7 |   |
| Dry                                    |   |                                                       | 7      |   |   |   | 5.8 |   |   |   | 11 |   |   |   | 9.5 |   |   |   | 11 |   |   |   | 6.3 |   |
| Total                                                 |   |                                                       | 87     |   |   |   | 41.9 |   |   |   | 70 |   |   |   | 32.0 |   |   |   | 79 |   |   |   | 42.2 |   |

----

roductive

|                                                                                                                                                                                                                                                                           |   | Oil    |   |   | Gas    |   |   | Total  |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                           |   | Gross  |   |   | Net    |   |   | Gross  |   |   | Net |   |   | Gross |   |   | Net |   |
| Permian      Basin                                                     |   |   | 5,509  |   |   |   | 516.2  |   |   |   | 733 |   |   |   | 96.5 |   |   |   | 6,242 |   |   |   | 612.7 |   |
| North      Louisiana                                                   |   |   | -      |   |   |   | -      |   |   |   | 51 |   |   |   | 17.9 |   |   |   | 51 |   |   |   | 17.9 |   |
| South      Louisiana                                                   |   |   | 7      |   |   |   | 4.2    |   |   |   | 32 |   |   |   | 25.4 |   |   |   | 39 |   |   |   | 29.6 |   |
| Austin      Chalk      (Trend)                                         |   |   | 293    |   |   |   | 224.8  |   |   |   | 17 |   |   |   | 9.3 |   |   |   | 310 |   |   |   | 234.1 |   |
| Cotton      Valley                                                     |   |   | -      |   |   |   | -      |   |   |   | 14 |   |   |   | 11.6 |   |   |   | 14 |   |   |   | 11.6 |   |
| Other                                                                  |   |   | 6      |   |   |   | 5.2    |   |   |   | 32 |   |   |   | 6.9 |   |   |   | 38 |   |   |   | 12.1 |   |
| Total                                                                                                                                                                                                                                                                          |   |   | 5,815  |   |   |   | 750.4  |   |   |   | 879 |   |   |   | 167.6 |   |   |   | 6,694 |   |   |   | 918.0 |   |

Volumes, 

|                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Year      Ended December 31, |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 2007                         |   |   | 2006 |   |   | 2005 |   |
| Oil      and Gas Production Data:                                                                                                                                                                                                                                                                                                                                                                                         |   |                         |   |   |   |   |   |   |   |
| Gas      (MMcf)                                                                                     |   |                         | 20,649 |   |   |   | 15,198 |   |   |   | 16,408 |   |
| Oil      (MBbls)                                                                                    |   |                         | 2,318  |   |   |   | 2,171 |   |   |   | 2,258 |   |
| Natural      gas liquids      (MBbls)                                                               |   |                         | 222    |   |   |   | 199 |   |   |   | 246 |   |
| Total      (MMcfe)                                                                                  |   |                         | 35,889 |   |   |   | 29,418 |   |   |   | 31,432 |   |
| Average      Realized Prices (a):                                                                                                                                                                                                                                                                                                                                                                                         |   |                         |   |   |   |   |   |   |   |   |   |   |
| Gas      ($/Mcf)                                                                                    |   | $                            | 7.01   |   |   | $ | 6.68 |   |   | $ | 7.49 |   |
| Oil      ($/Bbl)                                                                                    |   | $                            | 70.36  |   |   | $ | 62.92 |   |   | $ | 53.37 |   |
| Natural      gas liquids      ($/Bbl)                                                               |   | $                            | 43.74  |   |   | $ | 38.18 |   |   | $ | 33.57 |   |
| Average      Production Costs                                                                                                                                                                                                                                                                                                                                                                                             |   |                         |   |   |   |   |   |   |   |   |   |   |
| Production      ($/Mcfe)      (b)                                                                   |   | $                            | 2.10   |   |   | $ | 2.15 |   |   | $ | 1.83 |   |
|                                                                                                                                                                                                                                                                                                                                                                              |   |                         |   |   |   |   |   |   |   |   |   |   |

|   | (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, Exploration 

|                                                                                                                                                                                                                                                                                                                                                                                                                           |   | Year      Ended December 31, |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 2007                         |    |   | 2006 |   |   | 2005 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                         |    |   | (In      thousands) |   |   |   |   |
| Property      Acquisitions:                                                                                                                                                                                                                                                                                                                                                                                                    |   |                         |    |   |   |   |   |   |   |
| Proved                                                                                                   |   | $                            | -       |   |   | $ | 6,432 |   |   | $ | 5,567 |   |
| Unproved                                                                                                 |   |                         | 15,746  |   |   |   | 54,437 |   |   |   | 50,238 |   |
| Developmental      Costs                                                                  |   |                         | 45,611  |   |   |   | 35,698 |   |   |   | 42,292 |   |
| Exploratory      Costs                                                                    |   |                         | 169,879 |   |   |   | 157,509 |   |   |   | 86,304 |   |
| Total                                                                                                    |   | $                            | 231,236 |   |   | $ | 254,076 |   |   | $ | 184,401 |   |

----

Acreage

|                                                                                                                                                                                             |   | Developed |    |   | Undeveloped |   |    | Total  |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|---------|--------|-------------|--------|---------|--------|--------|
|                                                                                                                                                                                             |   | Gross     |    |   | Net         |   |    | Gross  |   |   | Net |   |   | Gross |   |   | Net |   |
| Permian      Basin                                   |   |      | 84,296  |   |        |   | 46,099  |   |   |   | 341,162 |   |   |   | 150,781 |   |   |   | 425,458 |   |   |   | 196,880 |   |
| East      Texas      (a)                             |   |      | 110,545 |   |        |   | 107,442 |   |   |   | 135,668 |   |   |   | 95,997 |   |   |   | 246,213 |   |   |   | 203,439 |   |
| North      Louisiana                                 |   |      | 4,710   |   |        |   | 4,197   |   |   |   | 197,713 |   |   |   | 185,500 |   |   |   | 202,423 |   |   |   | 189,697 |   |
| South      Louisiana                                 |   |      | 8,865   |   |        |   | 7,001   |   |   |   | 24,310 |   |   |   | 22,542 |   |   |   | 33,175 |   |   |   | 29,543 |   |
| Other      (b)                                       |   |      | 11,924  |   |        |   | 4,147   |   |   |   | 567,589 |   |   |   | 329,268 |   |   |   | 579,513 |   |   |   | 333,415 |   |
| Total                                                          |   |      | 220,340 |   |        |   | 168,886 |   |   |   | 1,266,442 |   |   |   | 784,088 |   |   |   | 1,486,782 |   |   |   | 952,974 |   |
|                                                                                                                                                     |   |      |    |   |        |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

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

|   | (b) | Net      undeveloped acres are attributable to the following      areas:  Montana – 110,202;      Mississippi – 80,070; Utah – 54,311;      Alabama – 38,802; Colorado – 28,979; and      other – 16,904. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Contract Drilling

Offices

Item3-

Item4

----

PART II

Item5

Price Range 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | High   |   |   | Low    |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| 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 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |   |   |
| Year      Ended December 31, 2006:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Fourth      Quarter                                                                                     |   | $      | 43.87  |   |   | $      | 27.64 |   |
| Third      Quarter                                                                                      |   |   | 37.91  |   |   |   | 27.11 |   |
| Second      Quarter                                                                                     |   |   | 43.50  |   |   |   | 33.97 |   |
| First      Quarter                                                                                      |   |   | 55.33  |   |   |   | 37.12 |   |

Dividend Policy

Securities

----

Item6

|                                                                                                                                                                                                                                                                                                                                                     |   | Year      Ended December 31,          |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                     |   | 2007                                  |    |   | 2006 |   |   | 2005 |   |   | 2004 |   |   | 2003 |   |
|                                                                                                                                                                                                                                                                                                                                                     |   | (In      thousands, except per share) |    |
| Statement      of Operations Data:                                                                                                                                                                                                                                                                                                                       |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues:                                                                                                                                                                                                                                                                                                                                                |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil and gas      sales                                                                                   |   | $                                     | 316,992 |   |   | $ | 245,967 |   |   | $ | 252,599 |   |   | $ | 193,127 |   |   | $ | 163,032 |   |
| Natural gas      services                                                                                |   |                                  | 10,230  |   |   |   | 11,327 |   |   |   | 12,080 |   |   |   | 9,083 |   |   |   | 8,758 |   |
| Drilling rig      services                                                                               |   |                                  | 52,649  |   |   |   | 6,937 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Gain on sales of property and      equipment                                                                                                                                                                                                                                                                                                             |   |                                  | 14,024  |   |   |   | 1,767 |   |   |   | 18,920 |   |   |   | 4,120 |   |   |   | 267 |   |
| Total      revenues                                                                                                |   |                                  | 393,895 |   |   |   | 265,998 |   |   |   | 283,599 |   |   |   | 206,330 |   |   |   | 172,057 |   |
| Costs and    expenses:                                                                                                                                                                                                                                                                                                                                   |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Production                                                                                               |   |                                  | 75,319  |   |   |   | 63,298 |   |   |   | 57,404 |   |   |   | 41,163 |   |   |   | 28,239 |   |
| Exploration:                                                                                                                                                                                                                                                                                                                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Abandonment and      impairments                                                                                   |   |                                  | 68,870  |   |   |   | 65,173 |   |   |   | 39,957 |   |   |   | 67,956 |   |   |   | 35,120 |   |
| Seismic and      other                                                                                             |   |                                  | 4,765   |   |   |   | 11,299 |   |   |   | 10,780 |   |   |   | 7,124 |   |   |   | 8,755 |   |
| Natural gas      services                                                                                |   |                                  | 9,745   |   |   |   | 10,005 |   |   |   | 11,212 |   |   |   | 8,538 |   |   |   | 8,279 |   |
| Drilling rig      services                                                                               |   |                                  | 32,964  |   |   |   | 4,538 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Depreciation, depletion and      amortization                                                                                                                                                                                                                                                                                                            |   |                                  | 84,476  |   |   |   | 66,163 |   |   |   | 47,509 |   |   |   | 44,040 |   |   |   | 40,284 |   |
| Impairment of property and      equipment                                                                                                                                                                                                                                                                                                                |   |                                  | 12,137  |   |   |   | 21,848 |   |   |   | 18,266 |   |   |   | - |   |   |   | 170 |   |
| Accretion of abandonment      obligations                                                                                                                                                                                                                                                                                                                |   |                                  | 2,508   |   |   |   | 1,653 |   |   |   | 1,158 |   |   |   | 1,044 |   |   |   | 651 |   |
| General and      administrative                                                                          |   |                                  | 19,266  |   |   |   | 16,676 |   |   |   | 15,410 |   |   |   | 11,689 |   |   |   | 10,934 |   |
| Loss on sales of property and      equipment                                                                                                                                                                                                                                                                                                             |   |                                  | 9,815   |   |   |   | 99 |   |   |   | 209 |   |   |   | 14,337 |   |   |   | 68 |   |
| Other                                                                                                    |   |                                  | -       |   |   |   | - |   |   |   | 1,353 |   |   |   | - |   |   |   | - |   |
| Total costs and      expenses                                                                                      |   |                                  | 319,865 |   |   |   | 260,752 |   |   |   | 203,258 |   |   |   | 195,891 |   |   |   | 132,500 |   |
| Operating      income                                                                                              |   |                                  | 74,030  |   |   |   | 5,246 |   |   |   | 80,341 |   |   |   | 10,439 |   |   |   | 39,557 |   |
| Other income      (expense):                                                                                                                                                                                                                                                                                                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest      expense                                                                                    |   |                                  | (32,118 | ) |   |   | (20,895 | ) |   |   | (14,498 | ) |   |   | (7,877 | ) |   |   | (3,138 | ) |
| Gain (loss) on      derivatives                                                                          |   |                                  | (31,968 | ) |   |   | 37,340 |   |   |   | (70,059 | ) |   |   | (25,329 | ) |   |   | (1,593 | ) |
| Other income      (expense)                                                                              |   |                                  | 5,355   |   |   |   | (1,339 | ) |   |   | 4,022 |   |   |   | 1,354 |   |   |   | (1,662 | ) |
| Total other income      (expense)                                                                                  |   |                                  | (58,731 | ) |   |   | 15,106 |   |   |   | (80,535 | ) |   |   | (31,852 | ) |   |   | (6,393 | ) |
| Income (loss) before income      taxes                                                    |   |                                  | 15,299  |   |   |   | 20,352 |   |   |   | (194 | ) |   |   | (21,413 | ) |   |   | 33,164 |   |
| Income tax (expense)      benefit                                                         |   |                                  | (5,497  | ) |   |   | (1,979 | ) |   |   | 451 |   |   |   | 7,385 |   |   |   | (10,515 | ) |
| Minority interest, net of      tax                                                        |   |                                  | (3,812  | ) |   |   | (574 | ) |   |   | - |   |   |   | - |   |   |   | - |   |
| Income (loss) from continuing      operations                                                                                                                                                                                                                                                                                                            |   |                                  | 5,990   |   |   |   | 17,799 |   |   |   | 257 |   |   |   | (14,028 | ) |   |   | 22,649 |   |
| Cumulative effect of accounting      change, net of tax                                                                                                                                                                                                                                                                                                  |   |                                  | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 207 |   |
| NET INCOME      (LOSS)                                                                    |   | $                                     | 5,990   |   |   | $ | 17,799 |   |   | $ | 257 |   |   | $ | (14,028 | ) |   | $ | 22,856 |   |
| Net income (loss) per common      share:                                                                                                                                                                                                                                                                                                                 |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic:                                                                                                                                                                                                                                                                                                                                                   |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from continuing      operations                                                                                                                                                                                                                                                                                                            |   | $                                     | .53     |   |   | $ | 1.64 |   |   | $ | .02 |   |   | $ | (1.37 | ) |   | $ | 2.43 |   |
| Net income      (loss)                                                                                   |   | $                                     | .53     |   |   | $ | 1.64 |   |   | $ | .02 |   |   | $ | (1.37 | ) |   | $ | 2.45 |   |
| Diluted:                                                                                                                                                                                                                                                                                                                                                 |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from continuing      operations                                                                                                                                                                                                                                                                                                            |   | $                                     | .52     |   |   | $ | 1.58 |   |   | $ | .02 |   |   | $ | (1.37 | ) |   | $ | 2.38 |   |
| Net income      (loss)                                                                                   |   | $                                     | .52     |   |   | $ | 1.58 |   |   | $ | .02 |   |   | $ | (1.37 | ) |   | $ | 2.40 |   |
| Weighted average common shares      outstanding:                                                                                                                                                                                                                                                                                                         |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                    |   |                                  | 11,337  |   |   |   | 10,885 |   |   |   | 10,804 |   |   |   | 10,213 |   |   |   | 9,329 |   |
| Diluted                                                                                                  |   |                                  | 11,494  |   |   |   | 11,244 |   |   |   | 11,241 |   |   |   | 10,213 |   |   |   | 9,509 |   |
| Other      Data:                                                                                                                                                                                                                                                                                                                                         |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating      activities                                                                                                                                                                                                                                                                                                           |   | $                                     | 234,866 |   |   | $ | 145,990 |   |   | $ | 163,475 |   |   | $ | 126,980 |   |   | $ | 119,750 |   |
|                                                                                                                                                                                                                                                                                                                                                     |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                     |   | December      31,                     |    |
|                                                                                                                                                                                                                                                                                                                                                     |   | 2007                                  |    |   | 2006 |   |   | 2005 |   |   | 2004 |   |   | 2003 |   |
|                                                                                                                                                                                                                                                                                                                                                     |   | (In      thousands)                   |    |
| Balance      Sheet Data:                                                                                                                                                                                                                                                                                                                                 |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Working capital      (deficit)                                                            |   | $                                     | (76,388 | ) |   | $ | (23,068 | ) |   | $ | (35,812 | ) |   | $ | (27,566 | ) |   | $ | (13,119 | ) |
| Total      assets                                                                         |   |                                  | 861,096 |   |   |   | 795,433 |   |   |   | 587,335 |   |   |   | 462,235 |   |   |   | 224,433 |   |
| Long-term      debt                                                                       |   |                                  | 430,175 |   |   |   | 413,876 |   |   |   | 235,700 |   |   |   | 177,519 |   |   |   | 53,295 |   |
| Stockholders’      equity                                                           |   |                                  | 160,806 |   |   |   | 144,980 |   |   |   | 120,291 |   |   |   | 117,596 |   |   |   | 100,781 |   |

----

Item 7

Overview

Key Factors 

| ·   | Our      oil and gas production for 2007 was 22% higher on an Mcfe basis than in      the comparable period in 2006 and 14% higher than  2005. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Exploration      costs related to abandonments and impairments were $68.9 million for 2007,      of which approximately $52.1 million related to unsuccessful well      costs and $16.8 million related to impairment of unproved      acreage.  Most of the abandonment and impairment costs in 2007      related to prospects in North and South  Louisiana. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | We      recorded a non-cash charge during 2007 of $12.1 million for impairments      pursuant to Statement of Financial Accounting Standards No. 144 “Accounting for Impairment or      Disposal of Long-Lived Assets” (“SFAS 144”), of which $7.1 million      related to the write-down of two 2,000 horsepower drilling rigs and      related components, and $1.1 million for well service equipment to their      estimated fair market value. The remaining $3.9 million impairment is      related to producing properties in the Permian  Basin. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | We      spent $230.7 million on exploration and development activities during      fiscal 2007, of which approximately 51% was on exploratory      prospects.  We currently plan to spend approximately      $256.5 million on exploration and development for fiscal 2008, with      approximately 19% applied to exploratory  activities. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | Our      expenditures on exploration and development activities for the year ended      2007 exceeded cash flow from operating activities, excluding cash flow      from our contract drilling segment, by approximately      $13.1 million.  We cannot predict our drilling success on      exploratory prospects, and our future results of operations and financial      condition would be adversely affected by unsuccessful exploratory drilling      results. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | During      2007, we increased borrowings under our revolving credit facility by      $25.8 million from $140 million at December 31, 2006 to      $165.8 million at December 31, 2007 to partially finance our      exploration and developmentactivities. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | At      December 31, 2007, our capitalized unproved oil and gas properties totaled      $115.9 million, of which approximately $75.4 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 $32 million net loss on derivatives during      2007.  We recorded a $7.7 million realized loss on settled      contracts and a $24.3 million loss for changes in mark-to-market      valuations.  Since we do not presently designate our derivatives      as cash flow hedges under applicable accounting standards, we recognize      the full effect of changing prices on mark-to-market valuations as a      current charge or credit to our results of  operations. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Our      proved oil and gas reserves at December 31, 2007 were 290.8 Bcfe      compared to 271.5 Bcfe at December 31, 2006.  We added      34.9 Bcfe through extensions and discoveries, had upward net      revisions of 20.9 Bcfe and had sales of minerals-in-place of .6      Bcfe. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Proved Oil 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | Bcfe   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Total      proved reserves, December 31,      2006                                                                                                 |   |   | 271.5  |   |
| Extensions      and      discoveries                                                                                                                                   |   |   | 34.9   |   |
| Sales      of      minerals-in-place                                                                                                                                   |   |   | (.6    | ) |
| Revisions                                                                                                                                                              |   |   | 20.9   |   |
| Production                                                                                                                                                             |   |   | (35.9  | ) |
| Total      proved reserves, December 31,      2007                                                                                                 |   |   | 290.8  |   |

----

Suppleme

|                                                                                                                                                                                                                                                                                                                                                |   | As      of or for the Year Ended December 31, |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                |   | 2007                                          |    |   | 2006 |   |   | 2005 |   |
| Oil      and Gas Production Data:                                                                                                                                                                                                                                                                                                                   |   |                                          |    |   |   |   |   |   |   |
| Gas      (MMcf)                                                                      |   |                                          | 20,649  |   |   |   | 15,198 |   |   |   | 16,408 |   |
| Oil      (MBbls)                                                                     |   |                                          | 2,318   |   |   |   | 2,171 |   |   |   | 2,258 |   |
| Natural gas liquids      (MBbls)                                                     |   |                                          | 222     |   |   |   | 199 |   |   |   | 246 |   |
| Total      (MMcfe)                                                                   |   |                                          | 35,889  |   |   |   | 29,418 |   |   |   | 31,432 |   |
| Average      Realized Prices (a):                                                                                                                                                                                                                                                                                                                   |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Gas      ($/Mcf)                                                                     |   | $                                             | 7.01    |   |   | $ | 6.68 |   |   | $ | 7.49 |   |
| Oil      ($/Bbl)                                                                     |   | $                                             | 70.36   |   |   | $ | 62.92 |   |   | $ | 53.37 |   |
| Natural gas liquids      ($/Bbl)                                                     |   | $                                             | 43.74   |   |   | $ | 38.18 |   |   | $ | 33.57 |   |
| Gain      (Losses) on Settled Derivative                                                                                                                                                                                                                                                                                                            |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Contracts      (a):                                                                                                                                                                                                                                                                                                                                 |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Gas:    Net      realized gain      (loss)                                                               |   | $                                             | 12,229  |   |   | $ | (679 | ) |   | $ | (7,301 | ) |
| Per unit produced      ($/Mcf)                                                                                               |   | $                                             | .59     |   |   | $ | (.04 | ) |   | $ | (.44 | ) |
| Oil:      Net      realized gain      (loss)                                                   |   | $                                             | (20,086 | ) |   | $ | (19,886 | ) |   | $ | (21,976 | ) |
| Per unit produced      ($/Bbl)                                                                                               |   | $                                             | (8.67   | ) |   | $ | (9.16 | ) |   | $ | (9.73 | ) |
|                                                                                                                                                                                                                                                                                                                                                |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Average      Daily Production:                                                                                                                                                                                                                                                                                                                      |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Gas (Mcf):                                                                                                                                                                                                                                                                                                                                          |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Permian      Basin                                                                                            |   |                                          | 14,649  |   |   |   | 14,260 |   |   |   | 15,893 |   |
| North      Louisiana                                                                                          |   |                                          | 8,096   |   |   |   | 988 |   |   |   | - |   |
| South      Louisiana                                                                                          |   |                                          | 24,025  |   |   |   | 13,638 |   |   |   | 10,865 |   |
| Austin Chalk      (Trend)                                                                                     |   |                                          | 2,220   |   |   |   | 2,504 |   |   |   | 2,435 |   |
| Cotton Valley Reef      Complex                                                                               |   |                                          | 7,133   |   |   |   | 9,735 |   |   |   | 15,155 |   |
| Other                                                                                                         |   |                                          | 450     |   |   |   | 513 |   |   |   | 605 |   |
| Total                                                                                                                                  |   |                                          | 56,573  |   |   |   | 41,638 |   |   |   | 44,953 |   |
| Oil (Bbls):                                                                                                                                                                                                                                                                                                                                         |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Permian      Basin                                                                                            |   |                                          | 3,212   |   |   |   | 3,172 |   |   |   | 3,245 |   |
| North      Louisiana                                                                                          |   |                                          | 182     |   |   |   | 12 |   |   |   | - |   |
| South      Louisiana                                                                                          |   |                                          | 1,139   |   |   |   | 943 |   |   |   | 994 |   |
| Austin Chalk      (Trend)                                                                                     |   |                                          | 1,737   |   |   |   | 1,770 |   |   |   | 1,892 |   |
| Other                                                                                                         |   |                                          | 81      |   |   |   | 51 |   |   |   | 55 |   |
| Total                                                                                                                                  |   |                                          | 6,351   |   |   |   | 5,948 |   |   |   | 6,186 |   |
| Natural Gas Liquids      (Bbls):                                                                                                                                                                                                                                                                                                                    |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Permian      Basin                                                                                            |   |                                          | 198     |   |   |   | 226 |   |   |   | 255 |   |
| North      Louisiana                                                                                          |   |                                          | 1       |   |   |   | - |   |   |   | - |   |
| South      Louisiana                                                                                          |   |                                          | 141     |   |   |   | 44 |   |   |   | - |   |
| Austin Chalk      (Trend)                                                                                     |   |                                          | 259     |   |   |   | 269 |   |   |   | 322 |   |
| Other                                                                                                         |   |                                          | 9       |   |   |   | 6 |   |   |   | 97 |   |
| Total                                                                                                                                  |   |                                          | 608     |   |   |   | 545 |   |   |   | 674 |   |
| Total      Proved Reserves:                                                                                                                                                                                                                                                                                                                         |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Gas      (MMcf)                                                                      |   |                                          | 123,156 |   |   |   | 119,167 |   |   |   | 126,758 |   |
| Oil and natural gas liquids      (MBbls)                                                                                                                                                                                                                                                                                                            |   |                                          | 27,946  |   |   |   | 25,381 |   |   |   | 27,835 |   |
| Total gas equivalent      (MMcfe)                                                    |   |                                          | 290,832 |   |   |   | 271,453 |   |   |   | 293,768 |   |
| Standardized measure of      discounted                                                                                                                                                                                                                                                                                                             |   |                                          |    |   |   |   |   |   |   |   |   |   |
| future net cash      flows                                                                          |   | $                                             | 925,969 |   |   | $ | 514,800 |   |   | $ | 753,712 |   |

----

|                                                                                                                                                                                                                                                                                                                                                         |   | As      of or for the Year Ended December 31, |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                         |   | 2007                                          |    |   | 2006 |   |   | 2005 |   |
| Total      Proved Reserves by Area:                                                                                                                                                                                                                                                                                                                          |   |                                          |    |   |   |   |   |   |   |
| Gas (MMcf):                                                                                                                                                                                                                                                                                                                                                  |   |                                          |    |   |   |   |   |   |   |
| Permian      Basin                                                                            |   |                                          | 65,248  |   |   |   | 64,620 |   |   |   | 79,466 |   |
| North      Louisiana                                                                          |   |                                          | 14,046  |   |   |   | 12 |   |   |   | - |   |
| South      Louisiana                                                                          |   |                                          | 27,196  |   |   |   | 34,250 |   |   |   | 20,883 |   |
| Austin Chalk      (Trend)                                                                     |   |                                          | 5,387   |   |   |   | 4,789 |   |   |   | 6,234 |   |
| Cotton Valley Reef      Complex                                                               |   |                                          | 9,157   |   |   |   | 11,562 |   |   |   | 15,396 |   |
| Other                                                                                         |   |                                          | 2,122   |   |   |   | 3,934 |   |   |   | 4,779 |   |
| Total                                                                                                             |   |                                          | 123,156 |   |   |   | 119,167 |   |   |   | 126,758 |   |
| Oil and Natural Gas Liquids      (MBbls):                                                                                                                                                                                                                                                                                                                    |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Permian      Basin                                                                            |   |                                          | 17,318  |   |   |   | 15,679 |   |   |   | 18,504 |   |
| North      Louisiana                                                                          |   |                                          | 319     |   |   |   | - |   |   |   | - |   |
| South      Louisiana                                                                          |   |                                          | 1,117   |   |   |   | 2,231 |   |   |   | 1,667 |   |
| Austin Chalk      (Trend)                                                                     |   |                                          | 7,530   |   |   |   | 6,469 |   |   |   | 7,467 |   |
| Other                                                                                         |   |                                          | 1,662   |   |   |   | 1,002 |   |   |   | 197 |   |
| Total                                                                                                             |   |                                          | 27,946  |   |   |   | 25,381 |   |   |   | 27,835 |   |
| Total Gas Equivalent      (MMcfe):                                                                                                                                                                                                                                                                                                                           |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Permian      Basin                                                                            |   |                                          | 169,156 |   |   |   | 158,694 |   |   |   | 190,490 |   |
| North      Louisiana                                                                          |   |                                          | 15,960  |   |   |   | 1,360 |   |   |   | 167 |   |
| South      Louisiana                                                                          |   |                                          | 33,898  |   |   |   | 46,288 |   |   |   | 30,718 |   |
| Austin Chalk      (Trend)                                                                     |   |                                          | 50,567  |   |   |   | 43,603 |   |   |   | 51,036 |   |
| Cotton Valley Reef      Complex                                                               |   |                                          | 9,157   |   |   |   | 11,562 |   |   |   | 15,396 |   |
| Other                                                                                         |   |                                          | 12,094  |   |   |   | 9,946 |   |   |   | 5,961 |   |
| Total                                                                                                             |   |                                          | 290,832 |   |   |   | 271,453 |   |   |   | 293,768 |   |
| Exploration      Costs (in thousands):                                                                                                                                                                                                                                                                                                                       |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Abandonment and impairment      costs:                                                                                                                                                                                                                                                                                                                       |   |                                          |    |   |   |   |   |   |   |   |   |   |
| South      Louisiana                                                                          |   | $                                             | 28,805  |   |   | $ | 33,695 |   |   | $ | 12,405 |   |
| North      Louisiana                                                                          |   |                                          | 30,356  |   |   |   | 9,235 |   |   |   | - |   |
| Montana                                                                                       |   |                                          | 9       |   |   |   | 6,462 |   |   |   | - |   |
| Permian      Basin                                                                            |   |                                          | 1,322   |   |   |   | 5,638 |   |   |   | 7,411 |   |
| Utah                                                                                          |   |                                          | 4,062   |   |   |   | - |   |   |   | - |   |
| Mississippi                                                                                   |   |                                          | 1,148   |   |   |   | 328 |   |   |   | 4,306 |   |
| Colorado                                                                                      |   |                                          | 24      |   |   |   | 9,675 |   |   |   | - |   |
| Other      (b)                                                                                |   |                                          | 3,144   |   |   |   | 140 |   |   |   | 15,835 |   |
| Total                                                                                                             |   |                                          | 68,870  |   |   |   | 65,173 |   |   |   | 39,957 |   |
| Seismic and      other                                                                        |   |                                          | 4,765   |   |   |   | 11,299 |   |   |   | 10,780 |   |
| Total exploration      costs                                                                                      |   | $                                             | 73,635  |   |   | $ | 76,472 |   |   | $ | 50,737 |   |
|                                                                                                                                                                                                                                                                                                                                                         |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Oil      and Gas Costs ($/Mcfe Produced):                                                                                                                                                                                                                                                                                                                    |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Production                                                                     |   | $                                             | 2.10    |   |   | $ | 2.15 |   |   | $ | 1.83 |   |
| DD&A                                                                       |   | $                                             | 2.12    |   |   | $ | 2.12 |   |   | $ | 1.42 |   |
| Net      Wells Drilled (c):                                                                                                                                                                                                                                                                                                                                  |   |                                          |    |   |   |   |   |   |   |   |   |   |
| Exploratory      wells                                                         |   |                                          | 13.8    |   |   |   | 28.4 |   |   |   | 12.4 |   |
| Developmental      wells                                                       |   |                                          | 28.1    |   |   |   | 3.6 |   |   |   | 29.8 |   |
|                                                                                                                                                                                                                                                                                                                 |   |                                          |    |   |   |   |   |   |   |   |   |   |
| (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 an      $8 million charge in South Texas for the Deer-Hamilton #1 in      2005.                                                                                                                                                                                                                                                 |   |
| (c)  Excludes wells      being drilled or completed at the end of each period.                                                                                                                                                                                                                                                                     |   |

----

Operating 

----

----

----

Liquidity 

----

|                                                                                                                                                                                                                                                                                                   |   | Actual                 |    |   | Planned                |   |    |          |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|--------|------------------------|--------|---------|---------------|--------|
|                                                                                                                                                                                                                                                                                                   |   | Expenditures           |    |   | Expenditures           |   |    | 2008          |   |
|                                                                                                                                                                                                                                                                                                   |   | Year      Ended        |    |   | Year      Ended        |   |    | Percentage    |   |
|                                                                                                                                                                                                                                                                                                   |   | December      31, 2007 |    |   | December      31, 2008 |   |    | of      Total |   |
|                                                                                                                                                                                                                                                                                                   |   | (In      thousands)    |    |   |                   |   |
| North      Louisiana                                                       |   | $                      | 74,300  |   |                   | $      | 47,900  |          |   |   | 19 | % |
| South      Louisiana                                                       |   |                   | 65,700  |   |                   |   | 13,400  |          |   |   | 5 | % |
| Permian      Basin                                                         |   |                   | 34,200  |   |                   |   | 110,300 |          |   |   | 43 | % |
| East      Texas      Bossier                                               |   |                   | 31,500  |   |                   |   | 17,200  |          |   |   | 7 | % |
| Austin      Chalk      (Trend)                                             |   |                   | 19,200  |   |                   |   | 59,300  |          |   |   | 23 | % |
| Utah/California                                                            |   |                   | 5,300   |   |                   |   | 8,300   |          |   |   | 3 | % |
| Other                                                                      |   |                   | 500     |   |                   |   | 100     |          |   |   | - | % |
|                                                                                                                                                                                                                                                                                                   |   | $                      | 230,700 |   |                   | $      | 256,500 |          |   |   | 100 | % |

----

|                                                                                            |   | December      31,   |    |
|-------------------------------------------------------------------------------------------------|--------|---------------------|---------|
|                                                                                            |   | 2007                |    |   | 2006 |   |
|                                                                                            |   | (In      thousands) |    |
| Working      capital (deficit) per GAAP                                                         |   | $                   | (76,388 | ) |   | $ | (23,068 | ) |
| Add      funds available under the revolving credit facility                                    |   |                | 108,396 |   |   |   | 40,196 |   |
| Exclude      fair value of derivatives classified as current assets or current      liabilities |   |                | 49,738  |   |   |   | 5,993 |   |
| Exclude      current assets and current liabilities of Larclay JV                               |   |                | 21,423  |   |   |   | 13,759 |   |
| Working      capital per loan covenant                                                          |   | $                   | 103,169 |   |   | $ | 36,880 |   |

----

|                                                                                                                                                                                                                                                                                                  |   |  Payments      Due by Period |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                                                                                                                                                                                                                  |   |  Total                       |    |   |  2008 |   |   | 2009to2010 |   |   | 2011to2012 |   |   | 2013      andThereafter |   |
|                                                                                                                                                                                                                                                                                                  |   |                              |    |   |   |   |   | (In      thousands) |   |   |   |   |   |   |   |
| Contractual      obligations:                                                                                                                                                                                                                                                                         |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| 73⁄4%      Senior Notes      (a)                                            |   | $                                 | 225,000 |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | 225,000 |   |
| Secured      bank credit facility (a)                                                                                                                                                                                                                                                                 |   |                              | 165,800 |   |   |   | - |   |   |   | 165,800 |   |   |   | - |   |   |   | - |   |
| Drilling      contracts with Larclay JV                                                                                                                                                                                                                                                               |   |                              | 78,146  |   |   |   | 37,997 |   |   |   | 40,149 |   |   |   | - |   |   |   | - |   |
| Larclay      JV      note                                                      |   |                              | 61,875  |   |   |   | 22,500 |   |   |   | 33,750 |   |   |   | 5,625 |   |   |   | - |   |
| Purchase      commitments (seismic)                                                                                                                                                                                                                                                                   |   |                              | 4,308   |   |   |   | 4,308 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Lease      obligations                                                         |   |                              | 5,157   |   |   |   | 1,642 |   |   |   | 2,523 |   |   |   | 992 |   |   |   | - |   |
| Total      contractual obligations                                                                                                                                                                                                                                                                    |   | $                                 | 540,286 |   |   | $ | 66,447 |   |   | $ | 242,222 |   |   | $ | 6,617 |   |   | $ | 225,000 |   |
|                                                                                                                                                                          |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|   | (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 $12.2 million on the secured bank credit facility      (based on the balances and interest rates at December 31,      2007). |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Known Trends 

Application of Critical 

| 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 ofin progress exploratory      wells |   | ·Impairment of      unprovedproperties |
|                               |   |                                                                      |   | ·Abandonment      costs                |
|                               |   |                                                                      |   | (dry hole  costs)                           |

----

| Impairment      of proved         |   | ·Reserve estimates and      related  |   | ·Oil and gas      properties          |
|-----------------------------------|--------|-------------------------------------------|--------|--------------------------------------------|
| properties                        |   | present value of future      net          |   | ·Accumulated      DD&A            |
|                              |   | revenues                                  |   | ·Impairment of proved      properties |
| 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:                                                                                                                                                                        |   |                 |   |   |               |   |   |               |   |   |   |   |   |   |   |
| 2007                                |   |                 | 27.9   |   |               |   | 123.2  |               |   | $ | 91.30 |   |   | $ | 7.37 |   |   | $ | 926.0 |   |
| 2006                                |   |                 | 25.4   |   |               |   | 119.2  |               |   | $ | 57.18 |   |   | $ | 5.24 |   |   | $ | 514.8 |   |
| 2005                                |   |                 | 27.8   |   |               |   | 126.8  |               |   | $ | 57.85 |   |   | $ | 10.65 |   |   | $ | 753.7 |   |
|                                                                                                                                    |   |                 |   |   |               |   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |

----

| ·   | 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 Accounting 

----

Item7A

Oil and 

----

|                    |   | Gas            |      |   | Oil    |   |
|-------------------------|--------|----------------|-----------|--------|--------|--------|
|                    |   | MMBtu      (a) |      |   | Floor  |   |   | Ceiling |   |   | Bbls |   |   | Floor |   |   | Ceiling |   |
| Production      Period: |   |           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 1st      Quarter 2008   |   |           | 434,000   |   |   | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 132,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |
| 2nd      Quarter 2008   |   |           | 426,000   |   |   | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 132,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |
| 3rd      Quarter 2008   |   |           | 419,000   |   |   | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 128,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |
|                    |   |           | 1,279,000 |   |   |   |   |   |   |   |   |   |   |   | 392,000 |   |   |   |   |   |   |   |   |   |

|                                                                                                                                                                   |   | Gas            |       |   | Oil    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|------------|--------|--------|--------|
|                                                                                                                                                                   |   | MMBtu      (a) |       |   | Price  |   |   | Bbls |   |   | Price |   |
| Production      Period:                                                                                                                                                |   |           |       |   |   |   |   |   |   |   |   |   |
| 1st      Quarter 2008                                                                                                                                                  |   |           | 1,800,000  |   |   | $      | 8.26 |   |   |   | 380,000 |   |   | $ | 91.85 |   |
| 2nd      Quarter 2008                                                                                                                                                  |   |           | 4,650,000  |   |   | $      | 9.20 |   |   |   | 330,000 |   |   | $ | 79.84 |   |
| 3rd      Quarter 2008                                                                                                                                                  |   |           | 4,200,000  |   |   | $      | 9.15 |   |   |   | 310,000 |   |   | $ | 78.96 |   |
| 4th      Quarter 2008                                                                                                                                                  |   |           | 4,200,000  |   |   | $      | 9.15 |   |   |   | 400,000 |   |   | $ | 82.21 |   |
| 2009                            |   |           | 3,600,000  |   |   | $      | 9.33 |   |   |   | 1,440,000 |   |   | $ | 85.30 |   |
|                                                                                                                                                                   |   |           | 18,450,000 |   |   |   |   |   |   |   | 2,860,000 |   |   |   |   |   |

Interest Rates

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | Principal |        |   | FixedLibor |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-------------|--------|------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | Balance   |        |   | Rates      |   |
| Period:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |      |        |   |       |   |
| January 1, 2008 to September      24,      2008                                                                                     |   | $         | 100,000,000 |   |       |   | 4.73 | % |
| January 1, 2008 to November 3,      2008                                                                                            |   | $         | 45,000,000  |   |       |   | 5.73 | % |

----

Item8

Item9

Item9A-

Disclosure Controls 

| ·   | 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 Control 

| ·   | 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 in Internal 

Management’s Report 

----

----

Item9B-

PART III

Item10

PART IV

Item15-

Financial Statements 

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        |   | 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††                               |
|               |          |   |                                                                                                                                                                                                                                                                                                            |
|               | **10.6† |   | 1993      Stock Compensation Plan, filed as Exhibit 10.1 to the Company’s Form S-8      Registration Statement, Commission File No. 033-68318                                                                                                                                                             |
|               |          |   |                                                                                                                                                                                                                                                                                                            |
|               | **10.7† |   | 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††                                                                                                                                      |
|               |          |   |                                                                                                                                                                                                                                                                                                            |
|               | **10.8† |   | 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                                                                                                                                 |
|               |          |   |                                                                                                                                                                                                                                                                                                            |
|               | **10.9† |   | 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                                                                                                                                     |
|               |          |   |                                                                                                                                                                                                                                                                                                            |
|               |          |   |                                                                                                                                                                                                                                                                                                            |

----

|   | **10.10† |   | 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                                                                                                                                                                                                                          |
|--------|----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.11† |   | 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††                                                                                                                                                                                                                     |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.12† |   | Outside      Directors Stock Option Plan, filed as Exhibit 10.1 to the Company’s Form      S-8 Registration Statement, Commission File No.33-68316                                                                                                                                                                                                                                              |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.13† |   | 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††                                                                                                                                                                                                                   |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.14† |   | 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††                                                                                                                                                                                                             |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.15† |   | Bonus      Incentive Plan, filed as Exhibit 10.1 to the Company’s Form S-8      Registration Statement, Commission File No. 33-68320                                                                                                                                                                                                                                                            |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.16† |   | 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††                                                                                                                                                                                                                                        |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.17† |   | 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††                                                                                                                              |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.18† |   | Executive      Incentive Stock Compensation Plan, filed as Exhibit 10.1 to the Company’s      Form S-8 Registration Statement, Commission File No.    33-92834                                                                                                                                                                                                                                  |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.19† |   | 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††                                                                                                                                                                                                 |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.20        |   | 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                                                                                                                                       |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.21        |   | 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††                                                                                                 |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.22        |   | 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                                                                                                                                                                                               |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.23        |   | 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†† |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | **10.24† |   | 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††                                                                                                                                                                          |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |

----

|   | **10.25† |   | 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††                                                                                                                                                    |
|--------|----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.26† |   | 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††                                                                                                                                                               |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.27† |   | 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††                                                                                                                                                  |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.28† |   | 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††                                                                                                                                     |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.29† |   | 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††                                                                                                                                         |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.30† |   | 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††                                                                                                                                                 |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.31† |   | 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††                                                                                                                                                              |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.32† |   | 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††                                                                                                                                                       |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.33† |   | 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††                                                                                                                                                                                      |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.34† |   | 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††                                                                                                                                                                               |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.35        |   | 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††                                                                                                                  |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.36        |   | 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††     |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |
|   | **10.37        |   | 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†† |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                   |

----

|   | **10.38        |   | 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††                                                                                                                     |
|--------|----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.39        |   | 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††                                                                                          |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.40        |   | 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††                                                                                            |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.41        |   | 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††                                                                                                                                                         |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.42        |   | 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††                                                                                                             |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.43        |   | 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†† |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.44† |   | 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††                                                                                                                                                                      |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.45† |   | 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††                                                                                                                                                                        |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.46† |   | 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††                                                                                                                                             |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.47† |   | 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††                                                                                                                                                           |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.48† |   | 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††                                                                                                                                                                  |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.49† |   | 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††                                                                                                                                                        |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.50† |   | 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††                                                                                                                                       |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | **10.51† |   | 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††                                                                                                                                                                   |

----

|   |                                                                                                                           |   |                                                                                                                                                                                                                                                          |
|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **10.52†                                                                                                                 |   | 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††                                         |
|   |                                                                                                                           |   |                                                                                                                                                                                                                                                          |
|   | **10.53†                                                                                                                 |   | 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††                                   |
|   |                                                                                                                           |   |                                                                                                                                                                                                                                                          |
|   | **10.54†                                                                                                                 |   | 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†† |
|   |                                                                                                                           |   |                                                                                                                                                                                                                                                          |
|   | **10.55†                                                                                                                 |   | 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††                                        |
|   |                                                                                                                           |   |                                                                                                                                                                                                                                                          |
|   | **10.56†                                                                                                                 |   | 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††  |
|   |                                                                                                                           |   |                                                                                                                                                                                                                                                          |
|   | **10.57†                                                                                                                 |   | 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††         |
|   |                                                                                                                           |   |                                                                                                                                                                                                                                                          |
|   |                                                                                                                           |   |                                                                                                                                                                                                                                                          |
|   | *21                                                                                                                            |   | Subsidiaries      of the Registrant                                                                                                                                                                                                                           |
|   |                                                                                                                           |   |                                                                                                                                                                                                                                                          |
|   | *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 OF 

----

----

----

SIGNATURE

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

| Signature                                                                                                                                                                                                                                       |   | Title                                      |   | Date                |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|---------------------|
|                                                                                                                                                                                                                                            |   |                                       |   |                |
| /s/      CLAYTON W. WILLIAMS *                                                                                                                                                                                                                  |   | Chairman      of the Board,                |   | March      14, 2008 |
| Clayton      W. Williams                                                                                                                                                                                                                        |   | President      and Chief Executive         |   |                |
|                                                                                                                                                                                                                                            |   | Officer      and Director                  |   |                |
|                                                                                                                                                                                                                                            |   |                                       |   |                |
| /s/      L. PAUL LATHAM                                                                                                                                                                                                                         |   | Executive      Vice President,             |   | March      14, 2008 |
| L.      Paul Latham                                                                                                                                                                                                                             |   | Chief      Operating Officer and           |   |                |
|                                                                                                                                                                                                                                            |   | Director                                   |   |                |
|                                                                                                                                                                                                                                            |   |                                       |   |                |
| /s/      MEL G. RIGGS                                                                                                                                                                                                                           |   | Senior      Vice President -               |   | March      14, 2008 |
| Mel      G. Riggs                                                                                                                                                                                                                               |   | Finance,      Secretary, Treasurer,        |   |                |
|                                                                                                                                                                                                                                            |   | Chief      Financial Officer and Director  |   |                |
|                                                                                                                                                                                                                                            |   |                                       |   |                |
| /s/      MICHAEL L. POLLARD                                                                                                                                                                                                                     |   | Vice      President – Accounting and |   | March      14, 2008 |
| Michael      L. Pollard                                                                                                                                                                                                                         |   | Principal      Accounting Officer          |   |                |
|                                                                                                                                                                                                                                            |   |                                       |   |                |
| /s/      STANLEY S. BEARD *                                                                                                                                                                                                                     |   | Director                                   |   | March      14, 2008 |
| Stanley      S. Beard                                                                                                                                                                                                                           |   |                                       |   |                |
|                                                                                                                                                                                                                                            |   |                                       |   |                |
| /s/      DAVIS L. FORD *                                                                                                                                                                                                                        |   | Director                                   |   | March      14, 2008 |
| Davis      L. Ford                                                                                                                                                                                                                              |   |                                       |   |                |
|                                                                                                                                                                                                                                            |   |                                       |   |                |
| /s/      ROBERT L. PARKER *                                                                                                                                                                                                                     |   | Director                                   |   | March      14, 2008 |
| Robert      L. Parker                                                                                                                                                                                                                           |   |                                       |   |                |
|                                                                                                                                                                                                                                            |   |                                       |   |                |
| /s/      JORDAN R. SMITH *                                                                                                                                                                                                                      |   | Director                                   |   | March      14, 2008 |
| 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 OF INDEPENDENT

----

CLAYTON WILLIAMS 

| ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | December      31, |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 2007 |   |   | 2006 |   |
| CURRENT      ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |   |
| Cash and cash      equivalents                                                                                                                   |   | $ | 12,344 |   |   | $ | 13,840 |   |
| Accounts      receivable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |
| Oil and gas      sales                                                                                                                                                    |   |   | 36,698 |   |   |   | 23,398 |   |
| Joint interest and other,      net                                                                                                                                        |   |   | 16,666 |   |   |   | 17,810 |   |
| Affiliates                                                                                                                                                                |   |   | 308 |   |   |   | 2,436 |   |
| Inventory                                                                                                                                        |   |   | 14,348 |   |   |   | 40,392 |   |
| Deferred income      taxes                                                                                                                       |   |   | 3,581 |   |   |   | 505 |   |
| Fair value of      derivatives                                                                                                                   |   |   | 7,191 |   |   |   | 23,729 |   |
| Assets held for      sale                                                                                                                        |   |   | 17,281 |   |   |   | - |   |
| Prepaids and      other                                                                                                                          |   |   | 3,962 |   |   |   | 3,888 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 112,379 |   |   |   | 125,998 |   |
| PROPERTY      AND EQUIPMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |   |
| Oil and gas properties,      successful efforts      method                                                                                      |   |   | 1,374,090 |   |   |   | 1,226,761 |   |
| Natural gas gathering and      processing      systems                                                                                           |   |   | 18,404 |   |   |   | 18,068 |   |
| Contract drilling      equipment                                                                                                                 |   |   | 89,956 |   |   |   | 66,418 |   |
| Other                                                                                                                                            |   |   | 14,505 |   |   |   | 15,848 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 1,496,955 |   |   |   | 1,327,095 |   |
| Less accumulated depreciation,      depletion and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | (765,877 | ) |   |   | (682,286 | ) |
| Property and equipment,      net                                                                                                                                          |   |   | 731,078 |   |   |   | 644,809 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |
| OTHER      ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| Debt issue costs,      net                                                                                                                       |   |   | 6,963 |   |   |   | 8,104 |   |
| Fair value of      derivatives                                                                                                                   |   |   | - |   |   |   | 1,785 |   |
| Other                                                                                                                                            |   |   | 10,676 |   |   |   | 14,737 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 17,639 |   |   |   | 24,626 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $ | 861,096 |   |   | $ | 795,433 |   |

----

| LIABILITIES      AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | December      31, |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2007 |   |   | 2006 |   |
| CURRENT      LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |   |   |   |   |
| Accounts    payable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |
| Trade                                                                                                                                                        |   | $ | 72,477 |   |   | $ | 75,815 |   |
| Oil and gas      sales                                                                                                                                       |   |   | 24,806 |   |   |   | 14,222 |   |
| Affiliates                                                                                                                                                   |   |   | 1,747 |   |   |   | 1,407 |   |
| Current maturities of      long-term      debt                                                                                      |   |   | 22,500 |   |   |   | 17,397 |   |
| Fair value of      derivatives                                                                                                      |   |   | 56,929 |   |   |   | 29,722 |   |
| Accrued liabilities and      other                                                                                                  |   |   | 10,308 |   |   |   | 10,503 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 188,767 |   |   |   | 149,066 |   |
| NON-CURRENT      LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |
| Long-term      debt                                                                                                                 |   |   | 430,175 |   |   |   | 413,876 |   |
| Deferred income      taxes                                                                                                          |   |   | 44,302 |   |   |   | 36,409 |   |
| Fair value of      derivatives                                                                                                      |   |   | - |   |   |   | 21,281 |   |
| Other                                                                                                                               |   |   | 37,046 |   |   |   | 29,821 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 511,523 |   |   |   | 501,387 |   |
| COMMITMENTS      AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |   |   |   |   |   |   |
| STOCKHOLDERS’      EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |   |
| Preferred stock, par value      $.10 per share, authorized – 3,000,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |
|  shares; none      issued                                                                                                      |   |   | - |   |   |   | - |   |
| Common stock, par value $.10      per share, authorized – 30,000,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |   |   |   |   |   |   |
|  shares; issued and      outstanding – 11,354,051 shares in 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |
|  and 11,152,051 shares in      2006                                                                                            |   |   | 1,135 |   |   |   | 1,115 |   |
| Additional paid-in      capital                                                                                                     |   |   | 121,063 |   |   |   | 113,965 |   |
| Retained      earnings                                                                                                              |   |   | 35,890 |   |   |   | 29,900 |   |
| Accumulated other      comprehensive income, net of tax                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   | 2,718 |   |   |   | - |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | 160,806 |   |   |   | 144,980 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $ | 861,096 |   |   | $ | 795,433 |   |

----

CLAYTON WILLIAMS 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Year      Ended December 31, |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 2007                         |    |   | 2006 |   |   | 2005 |   |
| REVENUES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                         |    |   |   |   |   |   |   |
| Oil and gas      sales                                                                                                                      |   | $                            | 316,992 |   |   | $ | 245,967 |   |   | $ | 252,599 |   |
| Natural gas      services                                                                                                                   |   |                         | 10,230  |   |   |   | 11,327 |   |   |   | 12,080 |   |
| Drilling rig      services                                                                                                                  |   |                         | 52,649  |   |   |   | 6,937 |   |   |   | - |   |
| Gain on sales of property and      equipment                                                                                                |   |                         | 14,024  |   |   |   | 1,767 |   |   |   | 18,920 |   |
| Total      revenues                                                                                                                                                       |   |                         | 393,895 |   |   |   | 265,998 |   |   |   | 283,599 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                         |    |   |   |   |   |   |   |   |   |   |
| COSTS      AND EXPENSES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                         |    |   |   |   |   |   |   |   |   |   |
| Production                                                                                                                                  |   |                         | 75,319  |   |   |   | 63,298 |   |   |   | 57,404 |   |
| Exploration:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                         |    |   |   |   |   |   |   |   |   |   |
| Abandonments and      impairments                                                                                                                                         |   |                         | 68,870  |   |   |   | 65,173 |   |   |   | 39,957 |   |
| Seismic and      other                                                                                                                                                    |   |                         | 4,765   |   |   |   | 11,299 |   |   |   | 10,780 |   |
| Natural gas      services                                                                                                                   |   |                         | 9,745   |   |   |   | 10,005 |   |   |   | 11,212 |   |
| Drilling rig      services                                                                                                                  |   |                         | 32,964  |   |   |   | 4,538 |   |   |   | - |   |
| Depreciation, depletion and      amortization                                                                                               |   |                         | 84,476  |   |   |   | 66,163 |   |   |   | 47,509 |   |
| Impairment of property and      equipment                                                                                                   |   |                         | 12,137  |   |   |   | 21,848 |   |   |   | 18,266 |   |
| Accretion of abandonment      obligations                                                                                                   |   |                         | 2,508   |   |   |   | 1,653 |   |   |   | 1,158 |   |
| General and      administrative                                                                                                             |   |                         | 19,266  |   |   |   | 16,676 |   |   |   | 15,410 |   |
| Loss on sales of property and      equipment                                                                                                |   |                         | 9,815   |   |   |   | 99 |   |   |   | 209 |   |
| Other                                                                                                                                       |   |                         | -       |   |   |   | - |   |   |   | 1,353 |   |
| Total costs and      expenses                                                                                                                                             |   |                         | 319,865 |   |   |   | 260,752 |   |   |   | 203,258 |   |
| Operating      income                                                                                                                                                     |   |                         | 74,030  |   |   |   | 5,246 |   |   |   | 80,341 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                         |    |   |   |   |   |   |   |   |   |   |
| OTHER      INCOME (EXPENSE)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                         |    |   |   |   |   |   |   |   |   |   |
| Interest      expense                                                                                                                       |   |                         | (32,118 | ) |   |   | (20,895 | ) |   |   | (14,498 | ) |
| Gain (loss) on      derivatives                                                                                                             |   |                         | (31,968 | ) |   |   | 37,340 |   |   |   | (70,059 | ) |
| Other                                                                                                                                       |   |                         | 5,355   |   |   |   | (1,339 | ) |   |   | 4,022 |   |
| Total other income      (expense)                                                                                                                                         |   |                         | (58,731 | ) |   |   | 15,106 |   |   |   | (80,535 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                         |    |   |   |   |   |   |   |   |   |   |
| Income      (loss) before income taxes and minority interest                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                         | 15,299  |   |   |   | 20,352 |   |   |   | (194 | ) |
| Income      tax (expense)      benefit                                                                             |   |                         | (5,497  | ) |   |   | (1,979 | ) |   |   | 451 |   |
| Minority      interest, net of      tax                                                                            |   |                         | (3,812  | ) |   |   | (574 | ) |   |   | - |   |
| NET      INCOME                                                                                                    |   | $                            | 5,990   |   |   | $ | 17,799 |   |   | $ | 257 |   |
| Net      income per common share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                         |    |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                       |   | $                            | .53     |   |   | $ | 1.64 |   |   | $ | .02 |   |
| Diluted                                                                                                                                     |   | $                            | .52     |   |   | $ | 1.58 |   |   | $ | .02 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                         |    |   |   |   |   |   |   |   |   |   |
| Weighted      average common shares outstanding:                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                         |    |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                       |   |                         | 11,337  |   |   |   | 10,885 |   |   |   | 10,804 |   |
| Diluted                                                                                                                                     |   |                         | 11,494  |   |   |   | 11,244 |   |   |   | 11,241 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                         |    |   |   |   |   |   |   |   |   |   |

----

CLAYTON WILLIAMS 

|                                                                                                                                                                                                                                                                         |   |              |   |   |       |   |   |    |   |   |     |   |   | 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,      2004                                          |   |              | 10,787 |   |       | $      | 1,078  |    |   | $      | 104,674  |   |   | $           | 11,844 |   |    | $      | - |   |   |   |   |
| Net income and      total                                                                                                                                                                                                                                                    |   |              |   |   |       |   |   |    |   |   |     |   |   |        |   |   |    |   |   |   |   |   |   |
|  comprehensive      income                                                |   |              | -      |   |       |   | -      |    |   |   | -        |   |   |        | 257    |   |    |   | - |   |   | $ | 257 |   |
| Issuance of stock      through                                                                                                                                                                                                                                               |   |              |   |   |       |   |   |    |   |   |     |   |   |        |   |   |    |   |   |   |   |   |   |   |
|   compensation plans,      including                                                                                                                                                                                                                               |   |              |   |   |       |   |   |    |   |   |     |   |   |        |   |   |    |   |   |   |   |   |   |   |
|   income tax      benefits                                           |   |              | 19     |   |       |   | 3      |    |   |   | 2,164    |   |   |        | -      |   |    |   | - |   |   |   |   |   |
| Restricted stock issued      as                                                                                                                                                                                                                                              |   |              |   |   |       |   |   |    |   |   |     |   |   |        |   |   |    |   |   |   |   |   |   |   |
|   compensation                                                       |   |              | 9      |   |       |   | 1      |    |   |   | 270      |   |   |        | -      |   |    |   | - |   |   |   |   |   |
| 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 |   |   |   |   |   |

----

CLAYTON WILLIAMS ENERGY

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | Year      Ended December 31, |     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 2007                         |     |   | 2006 |   |   | 2005 |   |
| CASH      FLOWS FROM OPERATING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                         |     |   |   |   |   |   |   |
| Net      income                                                                                                                            |   | $                            | 5,990    |   |   | $ | 17,799 |   |   | $ | 257 |   |
| Adjustments to reconcile net      income to cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                         |     |   |   |   |   |   |   |   |   |   |
|    provided by      operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                         |     |   |   |   |   |   |   |   |   |   |
| Depreciation, depletion and      amortization                                                                                                                            |   |                         | 84,476   |   |   |   | 66,163 |   |   |   | 47,509 |   |
| Impairment of property and      equipment                                                                                                                                |   |                         | 12,137   |   |   |   | 21,848 |   |   |   | 18,266 |   |
| Exploration      costs                                                                                                                                                   |   |                         | 68,870   |   |   |   | 65,173 |   |   |   | 39,957 |   |
| Gain on sales of property and      equipment,      net                                                                                                                   |   |                         | (4,209   | ) |   |   | (1,668 | ) |   |   | (18,711 | ) |
| Deferred income      taxes                                                                                                                                               |   |                         | 3,768    |   |   |   | 215 |   |   |   | (526 | ) |
| Non-cash employee      compensation                                                                                                                                      |   |                         | 1,865    |   |   |   | 2,279 |   |   |   | 2,998 |   |
| Unrealized (gain) loss on      derivatives                                                                                                                               |   |                         | 24,249   |   |   |   | (57,568 | ) |   |   | 40,406 |   |
| Settlements on derivatives with      financing elements                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                         | 28,468   |   |   |   | 29,407 |   |   |   | 27,731 |   |
| Amortization of debt issue      costs                                                                                                                                    |   |                         | 1,281    |   |   |   | 1,308 |   |   |   | 2,631 |   |
| Accretion of abandonment      obligations                                                                                                                                |   |                         | 2,508    |   |   |   | 1,653 |   |   |   | 1,158 |   |
| Excess tax benefit on exercise      of stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                         | (963     | ) |   |   | (1,807 | ) |   |   | - |   |
| Minority interest, net of      tax                                                                                                                                       |   |                         | 3,812    |   |   |   | 574 |   |   |   | - |   |
| Changes in operating working      capital:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                         |     |   |   |   |   |   |   |   |   |   |
| Accounts      receivable                                                                                                                                                 |   |                         | (10,028  | ) |   |   | (8,101 | ) |   |   | (4,764 | ) |
| Accounts      payable                                                                                                                                                    |   |                         | 10,992   |   |   |   | 3,543 |   |   |   | 1,707 |   |
| Other                                                                                                                                                                    |   |                         | 1,650    |   |   |   | 5,172 |   |   |   | 4,856 |   |
| Net cash provided by operating      activities                                                                                                                                                         |   |                         | 234,866  |   |   |   | 145,990 |   |   |   | 163,475 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                         |     |   |   |   |   |   |   |   |   |   |
| CASH      FLOWS FROM INVESTING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                         |     |   |   |   |   |   |   |   |   |   |
| Additions to property and      equipment                                                                                                   |   |                         | (233,453 | ) |   |   | (254,840 | ) |   |   | (172,987 | ) |
| Additions to equipment of      Larclay      JV.                                                                                            |   |                         | (29,302  | ) |   |   | (60,655 | ) |   |   | - |   |
| Proceeds from sales of property      and      equipment                                                                                    |   |                         | 22,773   |   |   |   | 4,451 |   |   |   | 23,252 |   |
| Change in equipment      inventory                                                                                                         |   |                         | 18,166   |   |   |   | (662 | ) |   |   | (36,519 | ) |
| Other                                                                                                                                      |   |                         | (14,443  | ) |   |   | 1,753 |   |   |   | (10,411 | ) |
| Net cash used in investing      activities                                                                                                                                                             |   |                         | (236,259 | ) |   |   | (309,953 | ) |   |   | (196,665 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                         |     |   |   |   |   |   |   |   |   |   |
| CASH      FLOWS FROM FINANCING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                         |     |   |   |   |   |   |   |   |   |   |
| Proceeds from long-term      debt                                                                                                          |   |                         | 25,800   |   |   |   | 129,300 |   |   |   | 235,700 |   |
| Proceeds from long-term debt of      Larclay      JV                                                                                       |   |                         | 8,727    |   |   |   | 66,254 |   |   |   | - |   |
| Repayments of long-term      debt                                                                                                          |   |                         | -        |   |   |   | - |   |   |   | (177,531 | ) |
| Repayments of long-term debt of      Larclay      JV                                                                                       |   |                         | (13,125  | ) |   |   | - |   |   |   | - |   |
| Proceeds from sale of common      stock                                                                                                    |   |                         | 6,000    |   |   |   | 3,914 |   |   |   | 292 |   |
| Settlements on derivatives with      financing elements                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                         | (28,468  | ) |   |   | (29,407 | ) |   |   | (27,731 | ) |
| Payment of debt issue      costs                                                                                                           |   |                         | -        |   |   |   | - |   |   |   | (7,964 | ) |
| Excess tax benefit on exercise      of stock      options                                                                                  |   |                         | 963      |   |   |   | 1,807 |   |   |   | - |   |
| Net cash provided by (used in)      financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                         | (103     | ) |   |   | 171,868 |   |   |   | 22,766 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                         |     |   |   |   |   |   |   |   |   |   |
| NET      INCREASE (DECREASE) IN CASH AND                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                         |     |   |   |   |   |   |   |   |   |   |
|   CASH      EQUIVALENTS                                                                                 |   |                         | (1,496   | ) |   |   | 7,905 |   |   |   | (10,424 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                         |     |   |   |   |   |   |   |   |   |   |
| CASH      AND CASH EQUIVALENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                         |     |   |   |   |   |   |   |   |   |   |
| Beginning of      period                                                                                                                   |   |                         | 13,840   |   |   |   | 5,935 |   |   |   | 16,359 |   |
| End of      period                                                                                                                         |   | $                            | 12,344   |   |   | $ | 13,840 |   |   | $ | 5,935 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                         |     |   |   |   |   |   |   |   |   |   |
| SUPPLEMENTAL      DISCLOSURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                         |     |   |   |   |   |   |   |   |   |   |
| Cash paid for interest, net of      amounts      capitalized                                                                               |   | $                            | 35,213   |   |   | $ | 19,653 |   |   | $ | 4,343 |   |
| Cash paid for income      taxes                                                                                                            |   | $                            | 348      |   |   | $ | 196 |   |   | $ | 365 |   |

----

CLAYTON WILLIAMS 

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

----

----

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | December      31,   |    |   | December      31, |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 2007                |    |   | 2006              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | (In      thousands) |    |
| 73⁄4% Senior Notes due      2013                                                                                        |   | $                   | 225,000 |   |              | $      | 225,000 |   |
| Secured bank credit facility,      due May      2009                                                                       |   |                | 165,800 |   |              |   | 140,000 |   |
| Secured term loan of Larclay      JV, due June 2011                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                | 61,875  |   |              |   | 66,273 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                | 452,675 |   |              |   | 431,273 |   |
| Less current maturities(a)                                                                                                 |   |                | (22,500 | )      |              |   | (17,397 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | $                   | 430,175 |   |              | $      | 413,876 |   |

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | 2007                |   |   | 2006   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | (In      thousands) |   |
| Abandonment      obligations                                                                                          |   | $                   | 30,994 |   |   | $      | 27,846 |   |
| Minority interest, net of      tax                                                                                    |   |                | 4,886  |   |   |   | 1,074 |   |
| Other taxes      payable                                                                                              |   |                | 358    |   |   |   | - |   |
| Other                                                                                                                 |   |                | 808    |   |   |   | 901 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | $                   | 37,046 |   |   | $      | 29,821 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 2007                |   |   | 2006   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | (In      thousands) |   |
| Beginning of      year                                                                                                                         |   | $                   | 27,846 |   |   | $      | 19,447 |   |
| Additional abandonment      obligations from new      wells                                                                                    |   |                | 936    |   |   |   | 1,074 |   |
| Sales of      properties                                                                                                                       |   |                | (1,726 | )      |   |   | (912 | ) |
| Accretion      expense                                                                                                                         |   |                | 2,508  |   |   |   | 1,653 |   |
| Abandonment obligations related      to      acquisitions                                                                                      |   |                | -      |   |   |   | 98 |   |
| Revisions of previous      estimates                                                                                                           |   |                | 1,430  |   |   |   | 6,486 |   |
| End of      year                                                                                                                                              |   | $                   | 30,994 |   |   | $      | 27,846 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | 2007                |    |   | 2006   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | (In      thousands) |    |
| Deferred tax      assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                |    |   |   |   |
| Fair value of      derivatives                                                                                                                  |   | $                   | 17,224  |   |   | $      | 8,757 |   |
| Alternative minimum tax credit      carryforwards                                                                                               |   |                | 437     |   |   |   | 418 |   |
| Statutory depletion      carryforwards                                                                                                          |   |                | 5,366   |   |   |   | 4,682 |   |
| Other                                                                                                                                           |   |                | 11,132  |   |   |   | 7,080 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                | 34,159  |   |   |   | 20,937 |   |
| Deferred tax      liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                |    |   |   |   |   |   |
| Property and      equipment                                                                                                                     |   |                | (74,880 | )      |   |   | (56,841 | ) |
| Net deferred tax      liabilities                                                                                      |   | $                   | (40,721 | )      |   | $      | (35,904 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                |    |   |   |   |   |   |
| Components of net deferred tax      assets (liabilities):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                |    |   |   |   |   |   |
| Current      assets                                                                                                                             |   | $                   | 3,581   |   |   | $      | 505 |   |
| Non-current      liabilities                                                                                                                    |   |                | (44,302 | )      |   |   | (36,409 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | $                   | (40,721 | )      |   | $      | (35,904 | ) |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 2007                |   |   | 2006   |   |   | 2005   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                        |   | (In      thousands) |   |
| Income tax expense (benefit)      at                                                                                                                                                                                                                                                                                                                                                                                        |   |                |   |   |   |   |   |   |   |
|   statutory rate of      35%                                                                |   | $                   | 5,355  |   |   | $      | 7,123  |   |   | $ | (68 | ) |
| Tax depletion in excess of      basis                                                                 |   |                | (700   | )      |   |   | (700   | )      |   |   | (613 | ) |
| Revision of previous tax      estimates                                                               |   |                | 16     |   |   |   | (152   | )      |   |   | 102 |   |
| State income taxes, net of      federal tax effect                                                                                                                                                                                                                                                                                                                                                                          |   |                | 738    |   |   |   | (4,429 | )      |   |   | (40 | ) |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                | 88     |   |   |   | 137    |   |   |   | 168 |   |
| Income tax expense      (benefit)                                                                                                        |   | $                   | 5,497  |   |   | $      | 1,979  |   |   | $ | (451 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                |   |   |   |   |   |   |   |   |   |   |
| Current                                                                                               |   | $                   | 1,729  |   |   | $      | 1,764  |   |   | $ | 75 |   |
| Deferred                                                                                              |   |                | 3,768  |   |   |   | 215    |   |   |   | (526 | ) |
| Income tax expense      (benefit)                                                                                                        |   | $                   | 5,497  |   |   | $      | 1,979  |   |   | $ | (451 | ) |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 2007                |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | (In      thousands) |   |
| 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    |   |

----

|                    |   | Gas            |      |   | Oil    |   |
|-------------------------|--------|----------------|-----------|--------|--------|--------|
|                    |   | MMBtu      (a) |      |   | Floor  |   |   | Ceiling |   |   | Bbls |   |   | Floor |   |   | Ceiling |   |
| Production      Period: |   |           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 1st      Quarter 2008   |   |           | 434,000   |   |   | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 132,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |
| 2nd      Quarter 2008   |   |           | 426,000   |   |   | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 132,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |
| 3rd      Quarter 2008   |   |           | 419,000   |   |   | $      | 4.00 |   |   | $ | 5.15 |   |   |   | 128,000 |   |   | $ | 23.00 |   |   | $ | 25.07 |   |
|                    |   |           | 1,279,000 |   |   |   |   |   |   |   |   |   |   |   | 392,000 |   |   |   |   |   |   |   |   |   |

|                                                                                                                                                             |   | Gas            |       |   | Oil    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|------------|--------|--------|--------|
|                                                                                                                                                             |   | MMBtu      (a) |       |   | Price  |   |   | Bbls |   |   | Price |   |
| Production      Period:                                                                                                                                          |   |           |       |   |   |   |   |   |   |   |   |   |
| 1st      Quarter 2008                                                                                                                                            |   |           | 1,800,000  |   |   | $      | 8.26 |   |   |   | 380,000 |   |   | $ | 91.85 |   |
| 2nd      Quarter 2008                                                                                                                                            |   |           | 4,650,000  |   |   | $      | 9.20 |   |   |   | 330,000 |   |   | $ | 79.84 |   |
| 3rd      Quarter 2008                                                                                                                                            |   |           | 4,200,000  |   |   | $      | 9.15 |   |   |   | 310,000 |   |   | $ | 78.96 |   |
| 4th      Quarter 2008                                                                                                                                            |   |           | 4,200,000  |   |   | $      | 9.15 |   |   |   | 400,000 |   |   | $ | 82.21 |   |
| 2009                           |   |           | 3,600,000  |   |   | $      | 9.33 |   |   |   | 1,440,000 |   |   | $ | 85.30 |   |
|                                                                                            |   |           | 18,450,000 |   |   |   |   |   |   |   | 2,860,000 |   |   |   |   |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |      |        |   | Fixed  |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-------------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | Principal |        |   | Libor  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | Balance   |        |   | Rates  |   |
| Period:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |      |        |   |   |   |
| January 1, 2008 to September      24,      2008                                                                                     |   | $         | 100,000,000 |   |   |   | 4.73 | % |
| January 1, 2008 to November 3,      2008                                                                                            |   | $         | 45,000,000  |   |   |   | 5.73 | % |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 2007                |    |   | 2006   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | (In      thousands) |    |
| Assets    (liabilities):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                |    |   |   |   |
| Commodity      derivatives                                                                                       |   | $                   | (48,696 | )      |   | $      | (25,289 | ) |
| Interest rate      derivatives                                                                                   |   |                | (1,044  | )      |   |   | (200 | ) |
| Net      liabilities                                                                                                                      |   | $                   | (49,740 | )      |   | $      | (25,489 | ) |

----

|                                                                                                                                      |   |   |      |   |     |   |   | Weighted    |   |   |           |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|----------|--------|--------|-------------|--------|--------|----------------|--------|
|                                                                                                                                      |   |   |      |   | Weighted |   |   | Average     |   |   |           |   |
|                                                                                                                                      |   |   |      |   | Average  |   |   | Remaining   |   |   | Aggregate      |   |
|                                                                                                                                      |   |   |      |   | Exercise |   |   | Contractual |   |   | Intrinsic      |   |
|                                                                                                                                      |   | Shares |      |   | Price    |   |   | Term        |   |   | Value      (a) |   |
| Outstanding      at January 1, 2006                                                                                                       |   |   | 1,338,551 |   |     | $      | 19.53  |        |   |   |           |   |   |   |
| Granted                                                                                                                                   |   |   | 4,000     |   |     | $      | 41.74  |        |   |   |           |   |   |   |
| Exercised (b)                                                                                                                             |   |   | (333,066  | )      |     | $      | 11.75  |        |   |   |           |   |   |   |
| Outstanding      at December 31, 2006                                                                                                     |   |   | 1,009,485 |   |     | $      | 22.27  |        |   |   | 6.5            |   |   | $ | 14,174,163 |   |
| Vested      at December 31, 2006                                                                                                          |   |   | 1,009,485 |   |     | $      | 22.27  |        |   |   | 6.5            |   |   | $ | 14,174,163 |   |
| Exercisable      at December 31, 2006                                                                                                     |   |   | 1,009,485 |   |     | $      | 22.27  |        |   |   | 6.5            |   |   | $ | 14,174,163 |   |
|                                                                                                                                      |   |   |      |   |     |   |   |        |   |   |           |   |   |   |   |   |
| Outstanding      at January 1, 2007                                                                                                       |   |   | 1,009,485 |   |     | $      | 22.77  |        |   |   |           |   |   |   |   |   |
| Granted                                                                                                                                   |   |   | 4,000     |   |     | $      | 36.31  |        |   |   |           |   |   |   |   |   |
| Exercised (b)                                                                                                                             |   |   | (202,000  | )      |     | $      | 29.70  |        |   |   |           |   |   |   |   |   |
| Outstanding      at December 31, 2007                                                                                                     |   |   | 811,485   |   |     | $      | 20.49  |        |   |   | 5.12           |   |   | $ | 8,660,396 |   |
| Vested      at December 31, 2007                                                                                                          |   |   | 811,485   |   |     | $      | 20.49  |        |   |   | 5.12           |   |   | $ | 8,660,396 |   |
| Exercisable      at December 31, 2007                                                                                                     |   |   | 811,485   |   |     | $      | 20.49  |        |   |   | 5.12           |   |   | $ | 8,660,396 |   |
|                                                                          |   |   |      |   |     |   |   |        |   |   |           |   |   |   |   |   |
| (a)   Based on closing price at      December 31, 2007 of $31.16 per share and $36.31 per share at December 31,      2006. |   |
| (b)   Cash      received for options exercised totaled $6 million in 2007 and $3.9      million in 2006.              |   |

|                                                                                                                                                                                                                                                                                                                                                     | Outstanding      and Exercisable Options |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                     |                                     |   |   |   | Weighted |
|                                                                                                                                                                                                                                                                                                                                                     |                                     |   | Weighted |   | Average |
|                                                                                                                                                                                                                                                                                                                                                     |                                     |   | Average |   | Remaining |
|                                                                                                                                                                                                                                                                                                                                                     |                                     |   | Exercise |   | Life      in |
|                                                                                                                                                                                                                                                                                                                                                     | Shares                                   |   | Price |   | Years |
| Range      of exercise prices:                                                                                                                                                                                                                                                                                                                           |                                     |   |   |   |   |
| $5.50                                                                      | 33,485                                   |   | $        5.50 |   | 1.3 |
| $10.00 -      $19.74                                                       | 460,000                                  |   | $        17.50 |   | 4.3 |
| $22.90 -      $41.74                                                       | 318,000                                  |   | $        26.38 |   | 6.5 |
|                                                                                                                                                                                                                                                                                                                                                     | 811,485                                  |   | $        20.49 |   | 5.1 |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 2007                                  |   |   | 2006   |   |   | 2005   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | (In      thousands, except per share) |   |
| Weighted      average grant date fair value of options granted per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | $                                     | 27.56  |   |   | $      | 31.91  |   |   | $ | 22.81 |   |
| Intrinsic      value of options      exercised                                                                                         |   | $                                     | 261    |   |   | $      | 9,725  |   |   | $ | 133 |   |
| Stock-based      employee compensation      expense                                                                                    |   | $                                     | 110    |   |   | $      | 128    |   |   | $ | 1,897 |   |
| Tax      benefit                                                                                                                       |   | $                                     | (39    | )      |   | $      | (45    | )      |   | $ | (664 | ) |
| Net      stock-based employee compensation      expense                                                                                |   | $                                     | 72     |   |   | $      | 83     |   |   | $ | 1,233 |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 2007                                               |   | 2006                                                                      |   | 2005                                                          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------|--------|---------------------------------------------------------------------------|--------|---------------------------------------------------------------|
| Risk-free      interest      rate                                                                                |  4.7%                                         |   |  4.4%                                                                |   |  3.9%                                                    |
| Stock      price      volatility                                                                                 | 64%                                                |   | 66%                                                                       |   | 67%                                                           |
| Expected      life in      years                                                                                 |              10 |   |                10            |   |              10            |
| Dividend      yield                                                                                              |       -              |   |                  - |   |                - |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 2005                   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | (In      thousands,    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | except      per share) |   |
| Net      income, as      reported                                                                                    |   | $                      | 257    |   |
| Add:  Stock-based      employee compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                   |   |   |
| expense included in net      income,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                   |   |   |
| net of      tax                                                                                                                                    |   |                   | 1,233  |   |
| Deduct:  Stock-based      employee compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                   |   |   |
| expense determined under fair      value based                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                   |   |   |
| method (SFAS 123R), net of      tax                                                                                                                |   |                   | (2,920 | ) |
| Net      loss, pro      forma                                                                                        |   | $                      | (1,430 | ) |
| Basic:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                   |   |   |
| Net income per common share, as      reported                                                                                       |   | $                      | .02    |   |
| Net loss per common share, pro      forma                                                                                           |   | $                      | (.13   | ) |
| Diluted:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                   |   |   |
| Net income per common share, as      reported                                                                                       |   | $                      | .02    |   |
| Net loss per common share, pro      forma                                                                                           |   | $                      | (.13   | ) |

----

|                                                                                                                                                                                                                                                                                                                                                                                              |   | 2007                |   |   | 2006   |   |   | 2005   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                              |   | (In      thousands) |   |
| Amounts      received from the Williams Entities:                                                                                                                                                                                                                                                                                                                                                 |   |                |   |   |   |   |   |   |   |
| Service    Agreement:                                                                                                                                                                                                                                                                                                                                                                             |   |                |   |   |   |   |   |   |   |
| Services                                                                                             |   | $                   | 299    |   |   | $      | 337    |   |   | $ | 224 |   |
| Insurance premiums and      benefits                                                                 |   |                | 707    |   |   |   | 580    |   |   |   | 667 |   |
| Reimbursed      expenses                                                                             |   |                | 676    |   |   |   | 407    |   |   |   | 356 |   |
|                                                                                                                                                                                                                                                                                                                                                                                              |   | $                   | 1,682  |   |   | $      | 1,324  |   |   | $ | 1,247 |   |
| Amounts      paid to the Williams Entities:                                                                                                                                                                                                                                                                                                                                                       |   |                |   |   |   |   |   |   |   |   |   |   |
| Rent      (a)                                                               |   | $                   | 663    |   |   | $      | 619    |   |   | $ | 582 |   |
| Service    Agreement:                                                                                                                                                                                                                                                                                                                                                                             |   |                |   |   |   |   |   |   |   |   |   |   |
| Business entertainment      (b)                                                                      |   |                | 113    |   |   |   | 113    |   |   |   | 113 |   |
| Other      services                                                                                  |   |                | 150    |   |   |   | 150    |   |   |   | 150 |   |
| Reimbursed      expenses                                                                             |   |                | 122    |   |   |   | 118    |   |   |   | 122 |   |
|                                                                                                                                                                                                                                                                                                                                                 |   | $                   | 1,048  |   |   | $      | 1,000  |   |   | $ | 967 |   |

----

----

|                                                                                                                                                                                                                                                                                                       |   | Leases              |   |   |      |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|-----------|--------|
|                                                                                                                                                                                                                                                                                                       |   | Capital      (a)    |   |   | Operating |   |   | Total |   |
|                                                                                                                                                                                                                                                                                                       |   | (In      thousands) |   |
| 2008                                                       |   | $                   | 545    |   |      | $      | 1,097 |   |   | $ | 1,642 |   |
| 2009                                                       |   |                | 322    |   |      |   | 1,058 |   |   |   | 1,380 |   |
| 2010                                                       |   |                | 119    |   |      |   | 1,024 |   |   |   | 1,143 |   |
| Thereafter                                                 |   |                | -      |   |      |   | 992 |   |   |   | 992 |   |
| Total minimum lease      payments                                                                                                                                                                                                                                                                          |   | $                   | 986    |   |      | $      | 4,171 |   |   | $ | 5,157 |   |
|                                                                                                                                                                                                                                                |   |                |   |   |      |   |   |   |   |   |   |   |

----

|                                                                                                                                                                                                                                                                                                                                                                         |   | First                                 |    |   | Second  |   |   | Third   |   |   | Fourth  |   |   |   |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|--------|---------|
|                                                                                                                                                                                                                                                                                                                                                                         |   | Quarter                               |    |   | Quarter |   |   | Quarter |   |   | Quarter |   |   | Year   |    |
|                                                                                                                                                                                                                                                                                                                                                                         |   | (In      thousands, except per share) |    |
| 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 |   |
| Year      ended December 31, 2006:                                                                                                                                                                                                                                                                                                                                           |   |                                  |    |   |    |   |   |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Total      revenues                                                                  |   | $                                     | 63,394  |   |    | $      | 70,341 |    |   | $      | 66,389  |   |   | $      | 65,874  |   |   | $ | 265,998 |   |
| Operating income      (loss)                                                         |   | $                                     | 10,487  |   |    | $      | 25,366 |    |   | $      | (11,476 | )      |   | $      | (19,131 | ) |   | $ | 5,246 |   |
| Net income (loss)      (a)                                                           |   | $                                     | 3,376   |   |    | $      | 17,966 |    |   | $      | 5,349   |   |   | $      | (8,892  | ) |   | $ | 17,799 |   |
| Net income (loss) per common share      (b):                                                                                                                                                                                                                                                                                                                                 |   |                                  |    |   |    |   |   |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Basic                                                                                          |   | $                                     | .31     |   |    | $      | 1.66   |    |   | $      | .49     |   |   | $      | (.81    | ) |   | $ | 1.64 |   |
| Diluted                                                                                        |   | $                                     | .30     |   |    | $      | 1.59   |    |   | $      | .48     |   |   | $      | (.81    | ) |   | $ | 1.58 |   |
| Weighted average common shares      outstanding:                                                                                                                                                                                                                                                                                                                             |   |                                  |    |   |    |   |   |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Basic                                                                                          |   |                                  | 10,841  |   |    |   | 10,850 |    |   |   | 10,850  |   |   |   | 11,000  |   |   |   | 10,885 |   |
| Diluted                                                                                        |   |                                  | 11,351  |   |    |   | 11,286 |    |   |   | 11,205  |   |   |   | 11,000  |   |   |   | 11,244 |   |
|                                                                                                                                                                                                                                                                                                                                 |   |                                  |    |   |    |   |   |    |   |   |    |   |   |   |    |   |   |   |   |   |

| (a) | The      Company recorded a $8.0 million charge for impairment of property and      equipment in the third quarter of 2007 and a $3.1 million charge in      the fourth quarter of 2007.  The Company recorded a      $12.9 million charge for impairment of proved properties in the third      quarter of 2006 and a $8.9 million charge in the fourth quarter of      2006. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                                                                                                                                                                                                                                                                                                                       |   | 2007                |    |   | 2006   |   |    | 2005   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------|--------|--------|---------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                       |   | (In      thousands) |    |
| Property      acquisitions:                                                                                                                                                                                                                                                                                                                                                                |   |                |    |   |   |   |    |   |   |
| Proved                                                                                                                      |   | $                   | -       |   |   | $      | 6,432   |   |   | $ | 5,567 |   |
| Unproved                                                                                                                    |   |                | 15,746  |   |   |   | 54,437  |   |   |   | 50,238 |   |
| Developmental      costs                                                            |   |                | 45,611  |   |   |   | 35,698  |   |   |   | 42,292 |   |
| Exploratory      costs                                                              |   |                | 169,879 |   |   |   | 157,509 |   |   |   | 86,304 |   |
| Total                                                                                                                       |   | $                   | 231,236 |   |   | $      | 254,076 |   |   | $ | 184,401 |   |
|                                                                                                                                                                                                                                                                                                                                                                                       |   |                |    |   |   |   |    |   |   |   |   |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2007                |      |   | 2006   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | (In      thousands) |      |
| Proved      properties                                                                                       |   | $                   | 1,258,166 |   |   | $      | 1,097,341 |   |
| Unproved      properties                                                                                     |   |                | 115,924   |   |   |   | 129,420 |   |
| Total capitalized      costs                                                                                 |   |                | 1,374,090 |   |   |   | 1,226,761 |   |
| Accumulated depreciation,      depletion and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                | (727,739  | )      |   |   | (654,316 | ) |
| Net capitalized      costs                                                                                                                           |   | $                   | 646,351   |   |   | $      | 572,445 |   |

----

|                                              |   |                |    |   | 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 |   |

|                                                   |   |                |    |   | Contract |   |   | Intercompany |   |   | Consolidated |   |
|--------------------------------------------------------|--------|---------------------|---------|--------|----------|--------|--------|--------------|--------|--------|--------------|--------|
| For      the Year Ended December 31, 2006              |   | Oil      and Gas    |    |   | Drilling |   |   | Eliminations |   |   | Total        |   |
|                                                   |   | (In      thousands) |    |
| Revenues                                               |   | $                   | 259,061 |   |     | $      | 11,180 |         |   | $      | (4,243       | )      |   | $ | 265,998 |   |
| Depreciation,      depletion and amortization (a)      |   |                | 86,887  |   |     |   | 1,646  |         |   |   | (522         | )      |   |   | 88,011 |   |
| Other      operating expenses (b)                      |   |                | 168,359 |   |     |   | 7,100  |         |   |   | (2,718       | )      |   |   | 172,741 |   |
| Interest      expense                                  |   |                | 20,227  |   |     |   | 668    |         |   |   | -            |   |   |   | 20,895 |   |
| Other      (income) expense                            |   |                | (36,001 | )      |     |   | -      |         |   |   | -            |   |   |   | (36,001 | ) |
| Income      before income taxes                        |   |                | 19,589  |   |     |   | 1,766  |         |   |   | (1,003       | )      |   |   | 20,352 |   |
| Income      tax expense                                |   |                | (1,361  | )      |     |   | (618   | )            |   |   | -            |   |   |   | (1,979 | ) |
| Minority      interest, net of tax                     |   |                | -       |   |     |   | (574   | )            |   |   | -            |   |   |   | (574 | ) |
| Net      income                                        |   | $                   | 18,228  |   |     | $      | 574    |         |   | $      | (1,003       | )      |   | $ | 17,799 |   |
|                                                   |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Total      assets                                      |   | $                   | 720,660 |   |     | $      | 76,946 |         |   | $      | (2,173       | )      |   | $ | 795,433 |   |
| Additions      to property and equipment               |   | $                   | 261,508 |   |     | $      | 66,418 |         |   | $      | (1,003       | )      |   | $ | 326,923 |   |
|           |   |                |    |   |     |   |   |         |   |   |         |   |   |   |   |   |

----

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

----

| (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 |   |

| (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 |   |
| Total      revenue                                             |   | $      | 179,443 |   |         | $      | 105,927 |      |   | $      | -            |   |   | $            | (1,771 | ) |   | $ | 283,599 |   |
| Costs      and      expenses                                   |   |   | 137,837 |   |         |   | 67,192  |      |   |   | -            |   |   |         | (1,771 | ) |   |   | 203,258 |   |
| Operating      income (loss)                                                                                                                                                                                                             |   |   | 41,606  |   |         |   | 38,735  |      |   |   | -            |   |   |         | -      |   |   |   | 80,341 |   |
| Other      income (expense)                                                                                                                                                                                                              |   |   | (18,077 | )      |         |   | (62,458 | )         |   |   | -            |   |   |         | -      |   |   |   | (80,535 | ) |
| Income      tax      benefit                                   |   |   | 451     |   |         |   | -       |      |   |   | -            |   |   |         | -      |   |   |   | 451 |   |
| Net      income      (loss)                                                        |   | $      | 23,980  |   |         | $      | (23,723 | )         |   | $      | -            |   |   | $            | -      |   |   | $ | 257 |   |

----

| (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 |   |

| (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 |   |

| (Dollars      in thousands)                                                                                                                                                                                                           |   |   |     |   |         |   |    | Non-      |   |   |         |   |   |         |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------------|--------|---------|-----------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                                                                                                                                                                  |   |   |     |   | Guarantor    |   |    | Guarantor |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                                  |   | Issuer |     |   | Subsidiaries |   |    | Entities  |   |   | Eliminations |   |   | Consolidated |   |
| Operating      activities                                   |   | $      | 141,878  |   |         | $      | 21,597  |      |   | $      | -            |   |   | $            | -      |   |   | $ | 163,475 |   |
| Investing      activities                                   |   |   | (154,102 | )      |         |   | (42,563 | )         |   |   | -            |   |   |         | -      |   |   |   | (196,665 | ) |
| Financing      activities                                   |   |   | 13,794   |   |         |   | 8,972   |      |   |   | -            |   |   |         | -      |   |   |   | 22,766 |   |
| Net      increase (decrease) in                                                                                                                                                                                                       |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| cash      and cash equivalents                                                                                                                                                                                                        |   |   | 1,570    |   |         |   | (11,994 | )         |   |   | -            |   |   |         | -      |   |   |   | (10,424 | ) |
| Cash      at the beginning of                                                                                                                                                                                                         |   |   |     |   |         |   |    |      |   |   |         |   |   |         |   |   |   |   |   |   |
| the      period                                                  |   |   | 2,732    |   |         |   | 13,627  |      |   |   | -            |   |   |         | -      |   |   |   | 16,359 |   |
| Cash      at end of the period                                                                                                                                                                                                        |   | $      | 4,302    |   |         | $      | 1,633   |      |   | $      | -            |   |   | $            | -      |   |   | $ | 5,935 |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | Oil    |   |   | Gas    |   |    | MMcfe  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|---------|--------|--------|
| Proved      reserves:                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |   |   |   |   |    |   |   |
| December      31,      2004                                                                       |   |   | 26,793 |   |   |   | 138,278 |   |   |   | 299,036 |   |
| Revisions                                                                                                                       |   |   | 2,193  |   |   |   | (5,333  | )      |   |   | 7,825 |   |
| Extensions and      discoveries                                                                                                 |   |   | 868    |   |   |   | 12,476  |   |   |   | 17,684 |   |
| Sales of      minerals-in-place                                                                                                 |   |   | (101   | )      |   |   | (2,922  | )      |   |   | (3,528 | ) |
| Purchases of      minerals-in-place                                                                                             |   |   | 586    |   |   |   | 667     |   |   |   | 4,183 |   |
| Production                                                                                                                      |   |   | (2,504 | )      |   |   | (16,408 | )      |   |   | (31,432 | ) |
| 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 |   |
| Sales of      minerals-in-place                                                                                                 |   |   | -      |   |   |   | (624    | )      |   |   | (624 | ) |
| Production                                                                                                                      |   |   | (2,531 | )      |   |   | (20,681 | )      |   |   | (35,867 | ) |
| December      31,      2007                                                                       |   |   | 27,946 |   |   |   | 123,156 |   |   |   | 290,832 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |    |   |   |   |   |   |
| Proved      developed reserves:                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |    |   |   |   |   |   |
| December      31,      2005                                                                       |   |   | 21,503 |   |   |   | 91,366  |   |   |   | 220,384 |   |
| December      31,      2006                                                                       |   |   | 18,872 |   |   |   | 90,217  |   |   |   | 203,450 |   |
| December      31,      2007                                                                       |   |   | 20,627 |   |   |   | 98,434  |   |   |   | 222,196 |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 2007                |      |   | 2006   |   |      | 2005   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|--------|--------|--------|-----------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | (In      thousands) |      |
| Future      cash      inflows                                                                         |   | $                   | 3,363,271 |   |   | $      | 1,991,628 |   |   | $ | 2,910,325 |   |
| Future      costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                |      |   |   |   |      |   |   |   |   |   |
| Production                                                                                                                          |   |                | (999,945  | )      |   |   | (685,021  | )      |   |   | (811,529 | ) |
| Development                                                                                                                         |   |                | (174,264  | )      |   |   | (160,264  | )      |   |   | (161,921 | ) |
| Income      taxes                                                                                                                   |   |                | (653,808  | )      |   |   | (293,870  | )      |   |   | (612,771 | ) |
| Future      net cash      flows                                                                       |   |                | 1,535,254 |   |   |   | 852,473   |   |   |   | 1,324,104 |   |
| 10%      discount      factor                                                                         |   |                | (609,285  | )      |   |   | (337,673  | )      |   |   | (570,392 | ) |
| Standardized      measure of discounted net cash flows                                                                                                                                                                                                                                                                                                                                                                                                              |   | $                   | 925,969   |   |   | $      | 514,800   |   |   | $ | 753,712 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 2007                |     |   | 2006   |   |     | 2005   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|----------|--------|--------|--------|----------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | (In      thousands) |     |
| Standardized      measure, beginning of      period                                                                     |   | $                   | 514,800  |   |   | $      | 753,712  |   |   | $ | 500,198 |   |
| Net      changes in sales prices, net of production costs                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                | 483,032  |   |   |   | (356,919 | )      |   |   | 458,744 |   |
| Revisions      of quantity      estimates                                                                               |   |                | 82,451   |   |   |   | (76,332  | )      |   |   | 35,741 |   |
| Accretion      of      discount                                                                                         |   |                | 70,844   |   |   |   | 111,789  |   |   |   | 58,095 |   |
| Changes      in future development costs, including                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                |     |   |   |   |     |   |   |   |   |   |
|   development      costs incurred that reduced future                                                                                                                                                                                                                                                                                                                                                                                                             |   |                |     |   |   |   |     |   |   |   |   |   |
|   development      costs                                                                                      |   |                | 2,665    |   |   |   | 11,665   |   |   |   | (21,368 | ) |
| Changes      in timing and      other                                                                                   |   |                | 24,497   |   |   |   | (37,086  | )      |   |   | (20,024 | ) |
| Net      change in income      taxes                                                                                    |   |                | (203,369 | )      |   |   | 174,488  |   |   |   | (154,401 | ) |
| Future      abandonment cost, net of      salvage                                                                       |   |                | (4,204   | )      |   |   | (7,880   | )      |   |   | (4,657 | ) |
| Extensions      and      discoveries                                                                                    |   |                | 197,219  |   |   |   | 113,110  |   |   |   | 100,302 |   |
| Sales,      net of production      costs                                                                                |   |                | (240,733 | )      |   |   | (181,280 | )      |   |   | (195,195 | ) |
| Sales      of      minerals-in-place                                                                                    |   |                | (1,233   | )      |   |   | -        |   |   |   | (13,781 | ) |
| Purchases      of      minerals-in-place                                                                                |   |                | -        |   |   |   | 9,533    |   |   |   | 10,058 |   |
| Standardized      measure, end of      period.                                                                          |   | $                   | 925,969  |   |   | $      | 514,800  |   |   | $ | 753,712 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | Average      Price |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | Oil      (a)       |   |   | Gas |   |
| As of December    31:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |               |   |   |   |   |
| 2007                                                                                 |   | $                  | 91.30  |   |   | $ | 7.37 |   |
| 2006                                                                                 |   | $                  | 57.18  |   |   | $ | 5.24 |   |
| 2005                                                                                 |   | $                  | 57.85  |   |   | $ | 10.65 |   |
|                                                                                                                                                                                                                                                                                                                                                                                        |   |               |   |   |   |   |   |   |

----

CLAYTON 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, 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 |   |
| Year      Ended December 31, 2005:                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful      accounts - Joint interest and other                                                  |   | $ | 1,013 |   |   | $ | 89 |   |   | $ | (15 | ) |   | $ | 1,087 |   |
|                                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (a)  Additions relate to      provisions for doubtful accounts.                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (b)  Deductions relate      to the write-off or recovery of the provisions for doubtful      accounts. |   |   |   |   |   |   |   |   |   |