----

| (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, 2009   |   |

|  ̈ | 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 |   | x No |   |
| 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 |   | x No |   |
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
|                                                                                                                                                                                                                                                                                                                                                          | x Yes |   |  ̈ No |   |

| Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                       |  ̈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 |   | x No |   |

| 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.  $111,191,777. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Portions of the definitive proxy statement relating to the 2010 Annual Meeting of Stockholders, which will be filed with the Commission not later than April 30, 2010, are incorporated by reference in Part III of this Form 10-K. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Page   |
|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Part I   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| Item 1.  | Business                                                                                                                        | 5      |   |
|     | General                                                                                                                                             | 5      |   |
|     | Company Profile                                                                                                                                     | 6      |   |
|     | Investment in Desta Drilling                                                                                                                        | 8      |   |
|     | Exploration and Development Activities                                                                                                              | 8      |   |
|     | Marketing Arrangements                                                                                                                              | 10     |   |
|     | Natural Gas Services                                                                                                                                | 11     |   |
|     | Competition and Markets                                                                                                                             | 11     |   |
|     | Regulation                                                                                                                                          | 11     |   |
|     | Environmental Matters                                                                                                                               | 13     |   |
|     | Title to Properties                                                                                                                                 | 15     |   |
|     | Operational Hazards and Insurance                                                                                                                   | 15     |   |
|     | Operating Segments                                                                                                                                  | 16     |   |
|     | Executive Officers                                                                                                                                  | 16     |   |
|     | Employees                                                                                                                                           | 16     |   |
|     | Website Address                                                                                                                                     | 16     |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| Item 1A. | Risk Factors                                                                                                                                        | 17     |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| Item 1B. | Unresolved Staff Comments                                                                                                                           | 26     |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| Item 2.  | Properties                                                                                                                      | 26     |   |
|     | Reserves                                                                                                                                            | 26     |   |
|     | Exploration and Development Activities                                                                                                              | 30     |   |
|     | Productive Well Summary                                                                                                                             | 31     |   |
|     | Volumes, Prices and Production Costs                                                                                                                | 31     |   |
|     | Development, Exploration and Acquisition Expenditures                                                                                               | 32     |   |
|     | Acreage                                                                                                                                             | 32     |   |
|     | Desta Drilling                                                                                                                                      | 32     |   |
|     | Offices                                                                                                                                             | 32     |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| Item 3.  | Legal Proceedings                                                                                                               | 32     |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| Item 4.  | (Removed and Reserved)                                                                                                          | 32     |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| Part II  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| Item 5.  | Market for the Registrant’s Common Equity, Related Stockholder Matters and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|     | Issuer Repurchases of Equity Securities                                                                                                             | 33     |   |
|     | Price Range of Common Stock                                                                                                                                   | 33     |   |
|     | Dividend Policy                                                                                                                                               | 33     |   |
|     | Securities Authorized for Issuance under Equity Compensation Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 33     |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| Item 6.  | Selected Financial Data                                                                                                         | 34     |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| Item 7.  | Management’s Discussion and Analysis of Financial Condition and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
|     | Results of Operations                                                                                                                               | 35     |   |
|     | Overview                                                                                                                                                      | 35     |   |
|     | Key Factors to Consider                                                                                                                                       | 35     |   |
|     | Proved Oil and Gas Reserves                                                                                                                                   | 36     |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Page   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| Item 7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Management’s Discussion and Analysis of Financial Condition and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Results of Operations (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Supplemental Information                                                                                                                                                                   | 38     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Operating Results                                                                                                                                                                          | 40     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Liquidity and Capital Resources                                                                                                                                                            | 44     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Known Trends and Uncertainties                                                                                                                                                             | 48     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Application of Critical Accounting Policies and Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 48     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Adopted Accounting Pronouncements                                                                                                                                                          | 51     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Recent Accounting Pronouncements                                                                                                                                                           | 52     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| Item 7A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Quantitative and Qualitative Disclosure About Market Risks                                                                                                   | 53     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Oil and Gas Prices                                                                                                                                                                         | 53     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Interest Rates                                                                                                                                                                             | 54     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| Item 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Financial Statements and Supplementary Data                                                                                                                  | 54     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| Item 9.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Changes in and Disagreements with Accountants on Accounting and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Financial Disclosure                                                                                                                                                             | 54     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| Item 9A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Controls and Procedures                                                                                                                                      | 54     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Disclosure Controls and Procedures                                                                                                                                                         | 54     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Internal Control Over Financial Reporting                                                                                                                                                  | 55     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Changes in Internal Control Over Financial Reporting                                                                                                                                       | 55     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Management’s Report on Internal Control Over Financial Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 55     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 56     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| Item 9B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Other Information                                                                                                                                            | 57     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| Part III                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| Items 10-14.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Information Incorporated by Reference                                                                                                                        | 57     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| Part IV                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| Item 15.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibits and Financial Statement Schedules                                                                                                                   | 58     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Financial Statements and Schedules                                                                                                                                                         | 58     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Exhibits                                                                                                                                                                                   | 58     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| Glossary of Terms                                                                                                                       | 63                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
| Signatures                                                                                                                              | 66                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |

----

| ·   | estimates of our oil and gas reserves; |
|--------------------|----------------------------------------|

| ·   | estimates of our future oil and gas production, including estimates of any increases or decreases in production; |
|--------------------|------------------------------------------------------------------------------------------------------------------|

| ·   | planned capital expenditures and the availability of capital resources to fund those expenditures; |
|--------------------|----------------------------------------------------------------------------------------------------|

| ·   | our outlook on oil and gas prices; |
|--------------------|------------------------------------|

| ·   | our outlook on domestic and worldwide economic conditions; |
|--------------------|------------------------------------------------------------|

| ·   | our access to capital and our anticipated liquidity; |
|--------------------|------------------------------------------------------|

| ·   | our future business strategy and other plans and objectives for future operations; |
|--------------------|------------------------------------------------------------------------------------|

| ·   | the impact of political and regulatory developments; |
|--------------------|------------------------------------------------------|

| ·   | our assessment of counterparty risks and the ability of our counterparties to perform their future obligations; |
|--------------------|-----------------------------------------------------------------------------------------------------------------|

| ·   | estimates of the impact of new accounting pronouncements on earnings in future periods; and |
|--------------------|---------------------------------------------------------------------------------------------|

| ·   | our future financial condition or results of operations and our future revenues and expenses. |
|--------------------|-----------------------------------------------------------------------------------------------|

| ·   | the possibility of unsuccessful exploration and development drilling activities; |
|--------------------|----------------------------------------------------------------------------------|

| ·   | our ability to replace and sustain production; |
|--------------------|------------------------------------------------|

| ·   | commodity price volatility; |
|--------------------|-----------------------------|

| ·   | domestic and worldwide economic conditions; |
|--------------------|---------------------------------------------|

| ·   | the availability of capital on economic terms to fund our capital expenditures and acquisitions; |
|--------------------|--------------------------------------------------------------------------------------------------|

| ·   | our level of indebtedness; |
|--------------------|----------------------------|

| ·   | the impact of the current economic recession on our business operations, financial condition and ability to raise capital; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------|

| ·   | declines in the value of our oil and gas properties resulting in a decrease in our borrowing base under our credit facility and impairments; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | the ability of financial counterparties to perform or fulfill their obligations under existing agreements; |
|--------------------|------------------------------------------------------------------------------------------------------------|

| ·   | the uncertainty inherent in estimating proved oil and gas reserves and in projecting future rates of production and timing of development expenditures; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | drilling and other operating risks; |
|--------------------|-------------------------------------|

| ·   | hurricanes and other weather conditions; |
|--------------------|------------------------------------------|

| ·   | lack of availability of goods and services; |
|--------------------|---------------------------------------------|

| ·   | regulatory and environmental risks associated with drilling and production activities; |
|--------------------|----------------------------------------------------------------------------------------|

| ·   | the adverse effects of changes in applicable tax, environmental and other regulatory legislation; and |
|--------------------|-------------------------------------------------------------------------------------------------------|

| ·   | the other risks described in this Form 10-K. |
|--------------------|----------------------------------------------|

tem

General

----

Company 

| ·   | Entered into 2-year agreements with selected service providers to fix unit costs covering approximately 90% of the drilling and completion services provided by third parties; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Improved drilling efficiencies by acquiring the noncontrolling interest in Desta Drilling, giving us full control over the management and operation of drilling services (see “Investment in Desta Drilling” below); |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Purchased casing and tubing for more than 175 wells at discounts to current market prices; and |
|--------------------|------------------------------------------------------------------------------------------------|

| ·   | Entered into derivative contracts for most of our estimated proved developed oil production for 2010 and 2011 at average prices of $76.50 and $84.38 per barrel, respectively. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

Investment 

Exploration 

----

----

Marketing 

----

Natural 

Competition 

Regulation

----

----

Environmental 

----

----

Title 

Operational 

----

Operating 

Executive 

Employees

Website 

----

Item 

| ·   | changes in the supply of and demand for oil and natural gas; |
|--------------------|--------------------------------------------------------------|

| ·   | market uncertainty; |
|--------------------|---------------------|

| ·   | the level of consumer product demands; |
|--------------------|----------------------------------------|

| ·   | hurricanes and other weather conditions; |
|--------------------|------------------------------------------|

| ·   | domestic governmental regulations and taxes; |
|--------------------|----------------------------------------------|

| ·   | the price and availability of alternative fuels; |
|--------------------|--------------------------------------------------|

| ·   | political and economic conditions in oil producing countries; |
|--------------------|---------------------------------------------------------------|

| ·   | the foreign supply of oil and natural gas; |
|--------------------|--------------------------------------------|

| ·   | the price of oil and gas imports; and |
|--------------------|---------------------------------------|

| ·   | overall domestic and foreign economic conditions. |
|--------------------|---------------------------------------------------|

----

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

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

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

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

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

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

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

----

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

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

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

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

----

----

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

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

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

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

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

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

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

----

----

----

----

----

Item 

Item 

Reserves

| ·   | amends the definition of proved reserves to require the use of average commodity prices based upon the prior 12-month period rather than year-end prices; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | expands the type of technologies available to establish reserve estimates and categories; |
|--------------------|-------------------------------------------------------------------------------------------|

| ·   | modifies certain definitions used in estimating proved reserves; |
|--------------------|------------------------------------------------------------------|

| ·   | permits disclosure of probable and possible reserves; |
|--------------------|-------------------------------------------------------|

| ·   | requires disclosure of internal controls over reserve estimations and the qualifications of technical persons primarily responsible for the preparation or audit of reserve estimates; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | permits disclosure of reserves based on different price and cost criteria, such as futures prices or management forecasts; and |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------|

| ·   | requires disclosure of material changes in proved undeveloped reserves, including a discussion of investments and progress made to convert proved undeveloped reserves to proved developed reserves. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                               |   | Proved Reserves(a) |   |
|--------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|
|                                                                                                               |   |               |   |   | Natural |   |   | Total Oil |   |
|                                                                                                               |   | Oil(b)             |   |   | Gas |   |   | Equivalents(c) |   |
| Reserve Category                                                                                                   |   | (MBbls)            |   |   | (MMcf) |   |   | (MBOE) |   |
|                                                                                                               |   |               |   |   |   |   |   |   |   |
| Developed                                                                                                          |   |               | 16,779 |   |   |   | 70,840 |   |   |   | 28,586 |   |
| Undeveloped                                                                                                        |   |               | 4,174  |   |   |   | 5,263 |   |   |   | 5,051 |   |
| Total Proved                                                                                                       |   |               | 20,953 |   |   |   | 76,103 |   |   |   | 33,637 |   |
|                     |   |               |   |   |   |   |   |   |   |   |   |   |

| (a)   |     None of our oil and gas reserves are derived from non-traditional sources. |
|-----------------|----------------------------------------------------------------------------------------------------|

| (b)   |     Oil reserves include crude oil, condensate and natural gas liquids. |
|-----------------|---------------------------------------------------------------------------------------------|

| (c)   |     Natural gas reserves have been converted to oil equivalents at the rate of six Mcf of gas to one barrel of oil. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                                   |   |            |   |   |    |   |   |           |   |   |       |   |           |     |   |   | Percent  |   |
|--------------------------------------------------------------------------------------------------------|--------|-----------------|--------|--------|---------|--------|--------|----------------|--------|--------|------------|--------|----------------|----------|--------|--------|----------|--------|
|                                                                                                   |   | Proved Reserves |   |   |    |   |   | PV-10          |   |   | of PV-10   |   |
|                                                                                                   |   |            |   |   | Natural |   |   | Total Oil      |   |   | Percent of |   |           | Value of |   |   | Value of |   |
|                                                                                                   |   | Oil (a)         |   |   | Gas     |   |   | Equivalents(b) |   |   | Total Oil  |   |           | Proved   |   |   | Proved   |   |
|                                                                                                   |   | (MBbls)         |   |   | (MMcf)  |   |   | (MBOE)         |   |   | Equivalent |   |           | Reserves |   |   | Reserves |   |
|                                                                                                   |   |            |   |   |    |   |   |           |   |   |       |   | (In thousands) |     |   |   |
|                                                                                                   |   |            |   |   |    |   |   |           |   |   |       |   |           |     |   |   |     |   |
| Permian Basin                                                                                          |   |            | 13,325 |   |    |   | 39,874 |           |   |   | 19,971     |   |           |     | 59.4   | %      |     | $      | 259,180 |   |   |   | 56.3 | % |
| Austin Chalk (Trend)                                                                                   |   |            | 6,887  |   |    |   | 5,131  |           |   |   | 7,742      |   |           |     | 23.0   | %      |     |   | 131,408 |   |   |   | 28.5 | % |
| North Louisiana                                                                                        |   |            | 291    |   |    |   | 17,205 |           |   |   | 3,159      |   |           |     | 9.4    | %      |     |   | 37,140 |   |   |   | 8.1 | % |
| South Louisiana                                                                                        |   |            | 243    |   |    |   | 5,968  |           |   |   | 1,238      |   |           |     | 3.7    | %      |     |   | 21,801 |   |   |   | 4.7 | % |
| Cotton Valley Reef Complex                                                                             |   |            | -      |   |    |   | 5,981  |           |   |   | 997        |   |           |     | 3.0    | %      |     |   | 5,444 |   |   |   | 1.2 | % |
| Other                                                                                                  |   |            | 207    |   |    |   | 1,944  |           |   |   | 530        |   |           |     | 1.5    | %      |     |   | 5,417 |   |   |   | 1.2 | % |
| Total                                                                                                  |   |            | 20,953 |   |    |   | 76,103 |           |   |   | 33,637     |   |           |     | 100.0  | %      |     | $      | 460,390 |   |   |   | 100.0 | % |
|                   |   |            |   |   |    |   |   |           |   |   |       |   |           |     |   |   |     |   |   |   |   |   |   |   |

| (a)   |     Oil reserves include crude oil, condensate and natural gas liquids. |
|-----------------|---------------------------------------------------------------------------------------------|

| (b)   |     Natural gas reserves have been converted to oil equivalents at the rate of six Mcf to one barrel of oil. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | Proved   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | Reserves |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | (MBOE)   |   |
| As of December 31, 2008                                                                                                 |   |     | 38,098 |   |
| Extensions and discoveries                                                                                                                  |   |     | 3,655  |   |
| Revisions                                                                                                                                   |   |     | (2,353 | ) |
| Production                                                                                                                                  |   |     | (5,763 | ) |
| As of December 31, 2009                                                                                                 |   |     | 33,637 |   |

----

|                                                                                                                                                                                                                                                                  |   | Proved Reserves |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|
|                                                                                                                                                                                                                                                                  |   |            |   |   | Natural |   |   | Total Oil |   |   |   |   |
|                                                                                                                                                                                                                                                                  |   | Oil(a)          |   |   | Gas |   |   | Equivalents (b) |   |   |   |   |
| Pricing Cases                                                                                                                                                                                                                                                         |   | (MBbls)         |   |   | (MMcf) |   |   | (MBOE) |   |   | PV-10 Value |   |
|                                                                                                                                                                                                                                                                  |   |            |   |   |   |   |   |   |   |   | (In thousands) |   |
| SEC Case                                                      |   |            | 20,953 |   |   |   | 76,103 |   |   |   | 33,637 |   |   | $ | 460,386 |   |
| Year-end Pricing Case                                         |   |            | 23,117 |   |   |   | 84,389 |   |   |   | 37,182 |   |   | $ | 741,427 |   |
| Futures Pricing Case                                          |   |            | 22,040 |   |   |   | 82,019 |   |   |   | 35,710 |   |   | $ | 832,292 |   |
|                                                                                                                                                                                  |   |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| (a)   |     Oil reserves include crude oil, condensate and natural gas liquids. |
|-----------------|---------------------------------------------------------------------------------------------|

| (b)   |     Natural gas has been converted to oil equivalents at the rate of six Mcf to one barrel of oil. |
|-----------------|------------------------------------------------------------------------------------------------------------------------|

----

----

Exploration 

|                                                                                                                                                                                                                  |   | Year Ended December 31,                               |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|
|                                                                                                                                                                                                                  |   | 2009                                                  |   |   | 2008 |   |   | 2007 |   |
|                                                                                                                                                                                                                  |   | Gross                                                 |   |   | Net |   |   | Gross |   |   | Net |   |   | Gross |   |   | Net |   |
|                                                                                                                                                                                                                  |   | (Excludes wells in progress at the end of any period) |   |
| Development Wells:                                                                                                                                                                                                    |   |                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil                                    |   |                                                  | 58     |   |   |   | 49.5 |   |   |   | 70 |   |   |   | 51.5 |   |   |   | 34 |   |   |   | 14.9 |   |
| Gas                                    |   |                                                  | 11     |   |   |   | 5.4 |   |   |   | 41 |   |   |   | 14.7 |   |   |   | 34 |   |   |   | 13.2 |   |
| Dry                                    |   |                                                  | 1      |   |   |   | 1.0 |   |   |   | 1 |   |   |   | 1.0 |   |   |   | - |   |   |   | - |   |
| Total                                                 |   |                                                  | 70     |   |   |   | 55.9 |   |   |   | 112 |   |   |   | 67.2 |   |   |   | 68 |   |   |   | 28.1 |   |
| Exploratory Wells:                                                                                                                                                                                                    |   |                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil                                    |   |                                                  | 1      |   |   |   | .2 |   |   |   | 1 |   |   |   | .5 |   |   |   | - |   |   |   | - |   |
| Gas                                    |   |                                                  | 1      |   |   |   | .1 |   |   |   | 3 |   |   |   | 1.7 |   |   |   | 12 |   |   |   | 8.0 |   |
| Dry                                    |   |                                                  | 6      |   |   |   | 4.4 |   |   |   | 4 |   |   |   | 3.0 |   |   |   | 7 |   |   |   | 5.8 |   |
| Total                                                 |   |                                                  | 8      |   |   |   | 4.7 |   |   |   | 8 |   |   |   | 5.2 |   |   |   | 19 |   |   |   | 13.8 |   |
| Total Wells:                                                                                                                                                                                                          |   |                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil                                    |   |                                                  | 59     |   |   |   | 49.7 |   |   |   | 71 |   |   |   | 52.0 |   |   |   | 34 |   |   |   | 14.9 |   |
| Gas                                    |   |                                                  | 12     |   |   |   | 5.5 |   |   |   | 44 |   |   |   | 16.4 |   |   |   | 46 |   |   |   | 21.2 |   |
| Dry                                    |   |                                                  | 7      |   |   |   | 5.4 |   |   |   | 5 |   |   |   | 4.0 |   |   |   | 7 |   |   |   | 5.8 |   |
| Total                                                 |   |                                                  | 78     |   |   |   | 60.6 |   |   |   | 120 |   |   |   | 72.4 |   |   |   | 87 |   |   |   | 41.9 |   |

----

Productive 

|                                                                                                                                                                                                                                                                 |   | Oil    |   |   | Gas    |   |   | Total  |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                 |   | Gross  |   |   | Net    |   |   | Gross  |   |   | Net |   |   | Gross |   |   | Net |   |
| Permian Basin                                                |   |   | 5,516  |   |   |   | 518.9  |   |   |   | 736 |   |   |   | 96.1 |   |   |   | 6,252 |   |   |   | 615.0 |   |
| Austin Chalk (Trend)                                         |   |   | 313    |   |   |   | 243.7  |   |   |   | 17 |   |   |   | 9.3 |   |   |   | 330 |   |   |   | 253.0 |   |
| North Louisiana                                              |   |   | -      |   |   |   | -      |   |   |   | 51 |   |   |   | 16.7 |   |   |   | 51 |   |   |   | 16.7 |   |
| South Louisiana                                              |   |   | 7      |   |   |   | 3.8    |   |   |   | 49 |   |   |   | 23.7 |   |   |   | 56 |   |   |   | 27.5 |   |
| Cotton Valley Reef Complex                                                                                                                                                                                                                                           |   |   | -      |   |   |   | -      |   |   |   | 14 |   |   |   | 11.6 |   |   |   | 14 |   |   |   | 11.6 |   |
| Other                                                        |   |   | 6      |   |   |   | 5.2    |   |   |   | 41 |   |   |   | 12.2 |   |   |   | 47 |   |   |   | 17.4 |   |
|     Total                                                                                                                                                                                                                                        |   |   | 5,842  |   |   |   | 771.6  |   |   |   | 908 |   |   |   | 169.6 |   |   |   | 6,750 |   |   |   | 941.2 |   |

Volumes

|                                                                                                                                                                                                                                                                                                                                                                                                            |   | Year Ended December 31, |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                            |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
| Oil and Gas Production Data:                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |   |   |   |   |   |   |   |
| Oil (MBbls)                                                                               |   |                    | 2,865  |   |   |   | 2,952 |   |   |   | 2,318 |   |
| Gas (MMcf)                                                                                |   |                    | 15,949 |   |   |   | 18,553 |   |   |   | 20,649 |   |
| Natural gas liquids (MBbls)                                                               |   |                    | 240    |   |   |   | 182 |   |   |   | 222 |   |
| Total (MBOE)                                                                                        |   |                    | 5,763  |   |   |   | 6,226 |   |   |   | 5,982 |   |
| Average Realized Prices (a):                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |   |   |   |   |   |   |   |   |   |   |
| Oil ($/Bbl)                                                                               |   | $                       | 57.37  |   |   | $ | 97.35 |   |   | $ | 70.36 |   |
| Gas ($/Mcf)                                                                               |   | $                       | 4.35   |   |   | $ | 9.02 |   |   | $ | 7.01 |   |
| Natural gas liquids ($/Bbl)                                                               |   | $                       | 30.83  |   |   | $ | 54.45 |   |   | $ | 43.74 |   |
| Average Production Costs:                                                                                                                                                                                                                                                                                                                                                                                       |   |                    |   |   |   |   |   |   |   |   |   |   |
| Production ($/MBOE) (b)                                                                   |   | $                       | 9.82   |   |   | $ | 9.83 |   |   | $ | 8.53 |   |
|                                                                                                                                                                                                                                                                                              |   |                    |   |   |   |   |   |   |   |   |   |   |

|   | (a) | Excludes any realized gains or losses on settled derivatives since none were designated as cash flow hedges during the periods presented. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | Excludes property taxes and severance taxes. |
|--------|-----|----------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                            |   | Year Ended December 31, |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                            |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
| Giddings Field Oil and Gas Production Data:                                                                                                                                                                                                                                                                                                                                                                     |   |                    |   |   |   |   |   |   |   |
| Oil (MBbls)                                                                               |   |                    | 963    |   |   |   | 1,189 |   |   |   | 589 |   |
| Gas (MMcf)                                                                                |   |                    | 773    |   |   |   | 709 |   |   |   | 621 |   |
| Natural gas liquids (MBbls)                                                               |   |                    | 94     |   |   |   | 83 |   |   |   | 87 |   |
| Total (MBOE)                                                                                        |   |                    | 1,186  |   |   |   | 1,390 |   |   |   | 780 |   |

----

Development

|                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Year Ended December 31, |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 2009                    |    |   | 2008 |   |   | 2007 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   | (In thousands)          |    |
| Property Acquisitions:                                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |    |   |   |   |   |   |   |
| Proved                                                                                              |   | $                       | -       |   |   | $ | - |   |   | $ | - |   |
| Unproved                                                                                            |   |                    | 12,558  |   |   |   | 36,397 |   |   |   | 15,746 |   |
| Developmental Costs                                                                  |   |                    | 86,672  |   |   |   | 260,073 |   |   |   | 45,611 |   |
| Exploratory Costs                                                                    |   |                    | 32,758  |   |   |   | 51,237 |   |   |   | 169,879 |   |
| Total                                                                                               |   | $                       | 131,988 |   |   | $ | 347,707 |   |   | $ | 231,236 |   |

Acreage

|                                                                                                                                                                                    |   | Developed |    |   | Undeveloped |   |    | Total  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|---------|--------|-------------|--------|---------|--------|--------|
|                                                                                                                                                                                    |   | Gross     |    |   | Net         |   |    | Gross  |   |   | Net |   |   | Gross |   |   | Net |   |
| Permian Basin                               |   |      | 84,478  |   |        |   | 36,864  |   |   |   | 333,674 |   |   |   | 151,873 |   |   |   | 418,152 |   |   |   | 188,737 |   |
| East Texas (a)                              |   |      | 133,903 |   |        |   | 122,454 |   |   |   | 186,484 |   |   |   | 116,979 |   |   |   | 320,387 |   |   |   | 239,433 |   |
| North Louisiana                             |   |      | 5,405   |   |        |   | 4,613   |   |   |   | 160,326 |   |   |   | 149,729 |   |   |   | 165,731 |   |   |   | 154,342 |   |
| South Louisiana                             |   |      | 7,782   |   |        |   | 5,288   |   |   |   | 17,513 |   |   |   | 16,281 |   |   |   | 25,295 |   |   |   | 21,569 |   |
| Other (b)                                   |   |      | 10,902  |   |        |   | 3,458   |   |   |   | 356,536 |   |   |   | 183,303 |   |   |   | 367,438 |   |   |   | 186,761 |   |
| Total                                                 |   |      | 242,470 |   |        |   | 172,677 |   |   |   | 1,054,533 |   |   |   | 618,165 |   |   |   | 1,297,003 |   |   |   | 790,842 |   |
|                                                                                                         |   |      |    |   |        |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

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

|   | (b) | Net undeveloped acres are attributable to the following areas:  Utah – 53,376; Mississippi – 43,187; Alabama – 38,912; Colorado – 28,798; and other – 19,030. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Desta 

Offices

Item 

Item 

----

Item 

Price 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | High   |   |   | Low    |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Year Ended December 31, 2009:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |   |   |   |   |
| Fourth Quarter                                                                                     |   | $      | 37.51  |   |   | $      | 24.67 |   |
| Third Quarter                                                                                      |   |   | 31.84  |   |   |   | 15.66 |   |
| Second Quarter                                                                                     |   |   | 35.27  |   |   |   | 17.80 |   |
| First Quarter                                                                                      |   |   | 52.69  |   |   |   | 19.37 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |   |   |   |   |   |   |
| Year Ended December 31, 2008:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Fourth Quarter                                                                                     |   | $      | 68.89  |   |   | $      | 29.70 |   |
| Third Quarter                                                                                      |   |   | 120.00 |   |   |   | 61.89 |   |
| Second Quarter                                                                                     |   |   | 121.50 |   |   |   | 48.86 |   |
| First Quarter                                                                                      |   |   | 53.50  |   |   |   | 30.84 |   |

Dividend 

Securities 

----

Item 

|                                                |   | Year Ended December 31,          |     |
|-----------------------------------------------------|--------|----------------------------------|----------|
|                                                |   | 2009                             |     |   | 2008 |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
|                                                |   | (In thousands, except per share) |     |
| Statement of Operations Data:                       |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues:                                           |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil and gas sales                                   |   | $                                | 242,338  |   |   | $ | 463,964 |   |   | $ | 316,992 |   |   | $ | 245,967 |   |   | $ | 252,599 |   |
| Natural gas services                                |   |                             | 6,146    |   |   |   | 10,926 |   |   |   | 10,230 |   |   |   | 11,327 |   |   |   | 12,080 |   |
| Drilling rig services                               |   |                             | 6,681    |   |   |   | 46,124 |   |   |   | 52,649 |   |   |   | 6,937 |   |   |   | - |   |
| Gain on sales of assets                             |   |                             | 796      |   |   |   | 44,503 |   |   |   | 14,024 |   |   |   | 1,767 |   |   |   | 18,920 |   |
| Total revenues                                      |   |                             | 255,961  |   |   |   | 565,517 |   |   |   | 393,895 |   |   |   | 265,998 |   |   |   | 283,599 |   |
| Costs and expenses:                                 |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Production                                          |   |                             | 76,288   |   |   |   | 89,054 |   |   |   | 75,319 |   |   |   | 63,298 |   |   |   | 57,404 |   |
| Exploration:                                        |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Abandonment and impairments                         |   |                             | 78,798   |   |   |   | 80,112 |   |   |   | 68,870 |   |   |   | 65,173 |   |   |   | 39,957 |   |
| Seismic and other                                   |   |                             | 8,189    |   |   |   | 22,685 |   |   |   | 4,765 |   |   |   | 11,299 |   |   |   | 10,780 |   |
| Natural gas services                                |   |                             | 5,348    |   |   |   | 10,060 |   |   |   | 9,745 |   |   |   | 10,005 |   |   |   | 11,212 |   |
| Drilling rig services                               |   |                             | 10,848   |   |   |   | 37,789 |   |   |   | 32,964 |   |   |   | 4,538 |   |   |   | - |   |
| Depreciation, depletion and amortization            |   |                             | 129,658  |   |   |   | 120,542 |   |   |   | 84,476 |   |   |   | 66,163 |   |   |   | 47,509 |   |
| Impairment of property and equipment                |   |                             | 59,140   |   |   |   | 12,882 |   |   |   | 12,137 |   |   |   | 21,848 |   |   |   | 18,266 |   |
| Accretion of abandonment obligations                |   |                             | 3,120    |   |   |   | 2,355 |   |   |   | 2,508 |   |   |   | 1,653 |   |   |   | 1,158 |   |
| General and administrative                          |   |                             | 20,715   |   |   |   | 25,635 |   |   |   | 19,266 |   |   |   | 16,676 |   |   |   | 15,410 |   |
| Loss on sales of assets and impairment of inventory |   |                             | 5,282    |   |   |   | 2,122 |   |   |   | 9,815 |   |   |   | 99 |   |   |   | 209 |   |
| Other                                               |   |                             | -        |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,353 |   |
| Total costs and expenses                            |   |                             | 397,386  |   |   |   | 403,236 |   |   |   | 319,865 |   |   |   | 260,752 |   |   |   | 203,258 |   |
| Operating income (loss)                             |   |                             | (141,425 | ) |   |   | 162,281 |   |   |   | 74,030 |   |   |   | 5,246 |   |   |   | 80,341 |   |
| Other income (expense):                             |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                    |   |                             | (23,758  | ) |   |   | (24,994 | ) |   |   | (32,118 | ) |   |   | (20,895 | ) |   |   | (14,498 | ) |
| Gain (loss) on derivatives                          |   |                             | (17,416  | ) |   |   | 74,743 |   |   |   | (31,968 | ) |   |   | 37,340 |   |   |   | (70,059 | ) |
| Other income (expense)                              |   |                             | 2,543    |   |   |   | 6,539 |   |   |   | 5,355 |   |   |   | (1,339 | ) |   |   | 4,022 |   |
| Total other income (expense)                        |   |                             | (38,631  | ) |   |   | 56,288 |   |   |   | (58,731 | ) |   |   | 15,106 |   |   |   | (80,535 | ) |
| Income (loss) before income taxes                   |   |                             | (180,056 | ) |   |   | 218,569 |   |   |   | 15,299 |   |   |   | 20,352 |   |   |   | (194 | ) |
| Income tax (expense) benefit                        |   |                             | 64,096   |   |   |   | (77,327 | ) |   |   | (5,497 | ) |   |   | (1,979 | ) |   |   | 451 |   |
| NET INCOME (LOSS)                                   |   |                             | (115,960 | ) |   |   | 141,242 |   |   |   | 9,802 |   |   |   | 18,373 |   |   |   | 257 |   |
| Less income attributable to noncontrolling          |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| interest, net of tax                                |   |                             | (1,455   | ) |   |   | (708 | ) |   |   | (3,812 | ) |   |   | (574 | ) |   |   | - |   |
| NET INCOME (LOSS) attributable to                   |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Clayton Williams Energy, Inc.                       |   | $                                | (117,415 | ) |   | $ | 140,534 |   |   | $ | 5,990 |   |   | $ | 17,799 |   |   | $ | 257 |   |
| Net income (loss) per common share attributable     |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to Clayton Williams Energy, Inc. stockholders:      |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                               |   | $                                | (9.67    | ) |   | $ | 11.78 |   |   | $ | .53 |   |   | $ | 1.64 |   |   | $ | .02 |   |
| Diluted                                             |   | $                                | (9.67    | ) |   | $ | 11.67 |   |   | $ | .52 |   |   | $ | 1.58 |   |   | $ | .02 |   |
| Weighted average common shares outstanding:         |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                               |   |                             | 12,138   |   |   |   | 11,932 |   |   |   | 11,337 |   |   |   | 10,885 |   |   |   | 10,804 |   |
| Diluted                                             |   |                             | 12,138   |   |   |   | 12,039 |   |   |   | 11,494 |   |   |   | 11,244 |   |   |   | 11,241 |   |
| Other Data:                                         |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities           |   | $                                | 104,711  |   |   | $ | 381,980 |   |   | $ | 234,866 |   |   | $ | 145,990 |   |   | $ | 163,475 |   |
|                                                |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                |   | December 31,                     |     |
|                                                |   |                             | 2009     |   |   |   | 2008 |   |   |   | 2007 |   |   |   | 2006 |   |   |   | 2005 |   |
|                                                |   | (In thousands)                   |     |
| Balance Sheet Data:                                 |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Working capital (deficit)                           |   | $                                | 19,324   |   |   | $ | 2,607 |   |   | $ | (76,388 | ) |   | $ | (23,068 | ) |   | $ | (35,812 | ) |
| Total assets                                        |   |                             | 784,604  |   |   |   | 943,409 |   |   |   | 861,096 |   |   |   | 795,433 |   |   |   | 587,335 |   |
| Long-term debt                                      |   |                             | 395,000  |   |   |   | 347,225 |   |   |   | 430,175 |   |   |   | 413,876 |   |   |   | 235,700 |   |
| Total equity                                        |   |                             | 212,275  |   |   |   | 320,276 |   |   |   | 160,806 |   |   |   | 144,980 |   |   |   | 120,291 |   |

----

Item 

Overview

| ·   | Entered into 2-year agreements with selected service providers to fix unit costs covering approximately 90% of the drilling and completion services provided by third parties; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Improved drilling efficiencies by acquiring the noncontrolling interest in Desta Drilling, giving us full control over the management and operation of drilling services; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Purchased casing and tubing for more than 175 wells at discounts to current market prices; and |
|--------------------|------------------------------------------------------------------------------------------------|

| ·   | Entered into derivative contracts for most of our estimated proved developed oil production for 2010 and 2011 at average prices of $76.50 and $84.38 per barrel, respectively. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Key 

| ·   | Our oil and gas sales decreased $221.6 million, or 48%, from 2008, comprised of $195.4 million in price variances and $26.2 million in volume variances. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | During 2009, we increased borrowings under our revolving credit facility by $75.9 million from $94.1 million at December 31, 2008 to $170 million at December 31, 2009.  In August 2009, we repaid in full all amounts outstanding under the secured term loan of Desta Drilling with borrowings of approximately $27.2 million under the revolving credit facility (see Liquidity and Capital Resources). |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | We spent $138.3 million on exploration and development activities during fiscal 2009, of which approximately 40% was on exploratory prospects.  We currently plan to spend approximately $274.4 million on exploration and development for fiscal 2010, with approximately 97% applied to developmental activities. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Exploration costs were $87 million for 2009, of which approximately $42.7 million related to unsuccessful exploratory well costs, $36.1 million related to impairment of unproved acreage and the remaining $8.2 million was spent on seismic related activities.  Most of the abandonment and impairment costs in 2009 related to prospects in East Texas Bossier area, South Louisiana and Utah. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | We recorded a non-cash charge during 2009 of $59.1 million for impairments of property and equipment which included $32.1 million for impairments of certain drilling rigs held for sale and $27 million for impairments of proved oil and gas properties to reduce the carrying values to their estimated fair value based on applicable accounting standards. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | At December 31, 2009, our capitalized unproved oil and gas properties totaled $47.2 million, of which approximately $19.7 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 $17.4 million net loss on derivatives in fiscal 2009, consisting of a $15.9 million realized loss on settled contracts and a $1.5 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 estimated proved oil and gas reserves at December 31, 2009 were 33,637 MBOE compared to 38,098 MBOE at December 31, 2008.  In 2009, we added 3,655 MBOE through extensions and discoveries, had downward net revisions of 2,353 MBOE (see Item 2 – Properties – Reserves). |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Proved 

| ·   | amends the definition of proved reserves to require the use of average commodity prices based upon the prior 12-month period rather than year-end prices; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | expands the type of technologies available to establish reserve estimates and categories; |
|--------------------|-------------------------------------------------------------------------------------------|

| ·   | modifies certain definitions used in estimating proved reserves; |
|--------------------|------------------------------------------------------------------|

| ·   | permits disclosure of probable and possible reserves; |
|--------------------|-------------------------------------------------------|

| ·   | requires disclosure of internal controls over reserve estimations and the qualifications of technical persons primarily responsible for the preparation or audit of reserve estimates; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | permits disclosure of reserves based on different price and cost criteria, such as futures prices or management forecasts; and |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------|

| ·   | requires disclosure of material changes in proved undeveloped reserves, including a discussion of investments and progress made to convert proved undeveloped reserves to proved developed reserves. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | Proved   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | Reserves |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | (MBOE)   |   |
| As of December 31, 2008                                                                                                 |   |     | 38,098 |   |
| Extensions and discoveries                                                                                                                  |   |     | 3,655  |   |
| Revisions                                                                                                                                   |   |     | (2,353 | ) |
| Production                                                                                                                                  |   |     | (5,763 | ) |
| As of December 31, 2009                                                                                                 |   |     | 33,637 |   |

----

Supplemental 

|                                                                                                                                                                                                                                                                                                                                          |   | As of or for the Year Ended December 31, |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                          |   | 2009                                     |    |   | 2008 |   |   | 2007 |   |
| Oil and Gas Production Data:                                                                                                                                                                                                                                                                                                                  |   |                                     |    |   |   |   |   |   |   |
| Oil (MBbls)                                                                    |   |                                     | 2,865   |   |   |   | 2,952 |   |   |   | 2,318 |   |
| Gas (MMcf)                                                                     |   |                                     | 15,949  |   |   |   | 18,553 |   |   |   | 20,649 |   |
| Natural gas liquids (MBbls)                                                    |   |                                     | 240     |   |   |   | 182 |   |   |   | 222 |   |
| Total (MBOE)                                                                   |   |                                     | 5,763   |   |   |   | 6,226 |   |   |   | 5,982 |   |
| Average Realized Prices(a):                                                                                                                                                                                                                                                                                                                   |   |                                     |    |   |   |   |   |   |   |   |   |   |
| Oil ($/Bbl)                                                                    |   | $                                        | 57.37   |   |   | $ | 97.35 |   |   | $ | 70.36 |   |
| Gas ($/Mcf)                                                                    |   | $                                        | 4.35    |   |   | $ | 9.02 |   |   | $ | 7.01 |   |
| Natural gas liquids ($/Bbl)                                                    |   | $                                        | 30.83   |   |   | $ | 54.45 |   |   | $ | 43.74 |   |
| Gain (Loss) on Settled Derivative                                                                                                                                                                                                                                                                                                             |   |                                     |    |   |   |   |   |   |   |   |   |   |
| Contracts(a):                                                                                                                                                                                                                                                                                                                                 |   |                                     |    |   |   |   |   |   |   |   |   |   |
| Oil:      Net realized gain (loss)                                                       |   | $                                        | (25,713 | ) |   | $ | 15,560 |   |   | $ | (20,086 | ) |
| Per unit produced ($/Bbl)                                                                                              |   | $                                        | (8.97   | ) |   | $ | 5.27 |   |   | $ | (8.67 | ) |
| Gas:    Net realized gain                                                                          |   | $                                        | 9,777   |   |   | $ | 11,764 |   |   | $ | 12,229 |   |
| Per unit produced ($/Mcf)                                                                                              |   | $                                        | .61     |   |   | $ | .63 |   |   | $ | .59 |   |
|                                                                                                                                                                                                                                                                                                                                          |   |                                     |    |   |   |   |   |   |   |   |   |   |
| Average Daily Production:                                                                                                                                                                                                                                                                                                                     |   |                                     |    |   |   |   |   |   |   |   |   |   |
| Oil (Bbls):                                                                                                                                                                                                                                                                                                                                   |   |                                     |    |   |   |   |   |   |   |   |   |   |
| Permian Basin                                                                                           |   |                                     | 4,142   |   |   |   | 3,821 |   |   |   | 3,212 |   |
| Austin Chalk (Trend)                                                                                    |   |                                     | 2,734   |   |   |   | 3,384 |   |   |   | 1,737 |   |
| North Louisiana                                                                                         |   |                                     | 238     |   |   |   | 415 |   |   |   | 182 |   |
| South Louisiana                                                                                         |   |                                     | 649     |   |   |   | 378 |   |   |   | 1,139 |   |
| Other                                                                                                   |   |                                     | 86      |   |   |   | 90 |   |   |   | 81 |   |
| Total                                                                                                                            |   |                                     | 7,849   |   |   |   | 8,088 |   |   |   | 6,351 |   |
| Gas (Mcf):                                                                                                                                                                                                                                                                                                                                    |   |                                     |    |   |   |   |   |   |   |   |   |   |
| Permian Basin                                                                                           |   |                                     | 14,739  |   |   |   | 14,326 |   |   |   | 14,649 |   |
| Austin Chalk (Trend)                                                                                    |   |                                     | 2,485   |   |   |   | 2,367 |   |   |   | 2,220 |   |
| North Louisiana                                                                                         |   |                                     | 11,325  |   |   |   | 17,500 |   |   |   | 8,096 |   |
| South Louisiana                                                                                         |   |                                     | 9,851   |   |   |   | 10,402 |   |   |   | 24,025 |   |
| Cotton Valley Reef Complex                                                                                                                                                                                                                                                                                                                    |   |                                     | 3,960   |   |   |   | 5,745 |   |   |   | 7,133 |   |
| Other                                                                                                   |   |                                     | 1,336   |   |   |   | 490 |   |   |   | 450 |   |
| Total                                                                                                                            |   |                                     | 43,696  |   |   |   | 50,830 |   |   |   | 56,573 |   |
| Natural Gas Liquids (Bbls):                                                                                                                                                                                                                                                                                                                   |   |                                     |    |   |   |   |   |   |   |   |   |   |
| Permian Basin                                                                                           |   |                                     | 241     |   |   |   | 183 |   |   |   | 198 |   |
| Austin Chalk (Trend)                                                                                    |   |                                     | 288     |   |   |   | 250 |   |   |   | 259 |   |
| North Louisiana                                                                                         |   |                                     | 22      |   |   |   | 7 |   |   |   | 1 |   |
| South Louisiana                                                                                         |   |                                     | 98      |   |   |   | 49 |   |   |   | 141 |   |
| Other                                                                                                   |   |                                     | 9       |   |   |   | 10 |   |   |   | 9 |   |
| Total                                                                                                                            |   |                                     | 658     |   |   |   | 499 |   |   |   | 608 |   |
| Total Proved Reserves:                                                                                                                                                                                                                                                                                                                        |   |                                     |    |   |   |   |   |   |   |   |   |   |
| Oil and natural gas liquids (MBbls)                                                                                                                                                                                                                                                                                                           |   |                                     | 20,953  |   |   |   | 20,776 |   |   |   | 27,946 |   |
| Gas (MMcf)                                                                     |   |                                     | 76,103  |   |   |   | 103,929 |   |   |   | 123,156 |   |
| Total (MBOE)                                                                   |   |                                     | 33,637  |   |   |   | 38,098 |   |   |   | 48,472 |   |
| Standardized measure of discounted                                                                                                                                                                                                                                                                                                            |   |                                     |    |   |   |   |   |   |   |   |   |   |
| future net cash flows                                                                         |   | $                                        | 364,273 |   |   | $ | 405,166 |   |   | $ | 925,969 |   |

----

|                                                                                                                                                                                                                                                                                                                                                    |   | As of or for the Year Ended December 31, |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                    |   | 2009                                     |   |   | 2008 |   |   | 2007 |   |
| Total Proved Reserves by Area:                                                                                                                                                                                                                                                                                                                          |   |                                     |   |   |   |   |   |   |   |
| Oil and Natural Gas Liquids (MBbls):                                                                                                                                                                                                                                                                                                                    |   |                                     |   |   |   |   |   |   |   |
| Permian Basin                                                                            |   |                                     | 13,325 |   |   |   | 13,491 |   |   |   | 17,318 |   |
| Austin Chalk (Trend)                                                                     |   |                                     | 6,887  |   |   |   | 6,280 |   |   |   | 7,530 |   |
| North Louisiana                                                                          |   |                                     | 291    |   |   |   | 285 |   |   |   | 319 |   |
| South Louisiana                                                                          |   |                                     | 243    |   |   |   | 524 |   |   |   | 1,117 |   |
| Other                                                                                    |   |                                     | 207    |   |   |   | 196 |   |   |   | 1,662 |   |
| Total                                                                                                        |   |                                     | 20,953 |   |   |   | 20,776 |   |   |   | 27,946 |   |
|                                                                                                                                                                                                                                                                                                                                                    |   |                                     |   |   |   |   |   |   |   |   |   |   |
| Gas (MMcf):                                                                                                                                                                                                                                                                                                                                             |   |                                     |   |   |   |   |   |   |   |   |   |   |
| Permian Basin                                                                            |   |                                     | 39,874 |   |   |   | 54,914 |   |   |   | 65,248 |   |
| Austin Chalk (Trend)                                                                     |   |                                     | 5,131  |   |   |   | 4,471 |   |   |   | 5,387 |   |
| North Louisiana                                                                          |   |                                     | 17,205 |   |   |   | 19,750 |   |   |   | 14,046 |   |
| South Louisiana                                                                          |   |                                     | 5,968  |   |   |   | 13,966 |   |   |   | 27,196 |   |
| Cotton Valley Reef Complex                                                               |   |                                     | 5,981  |   |   |   | 9,281 |   |   |   | 9,157 |   |
| East Texas Bossier                                                                       |   |                                     | 98     |   |   |   | 519 |   |   |   | - |   |
| Other                                                                                    |   |                                     | 1,846  |   |   |   | 1,028 |   |   |   | 2,122 |   |
| Total                                                                                                        |   |                                     | 76,103 |   |   |   | 103,929 |   |   |   | 123,156 |   |
|                                                                                                                                                                                                                                                                                                                                                    |   |                                     |   |   |   |   |   |   |   |   |   |   |
| Total Oil Equivalent (MBOE):                                                                                                                                                                                                                                                                                                                            |   |                                     |   |   |   |   |   |   |   |   |   |   |
| Permian Basin                                                                            |   |                                     | 19,971 |   |   |   | 22,643 |   |   |   | 28,193 |   |
| Austin Chalk (Trend)                                                                     |   |                                     | 7,742  |   |   |   | 7,025 |   |   |   | 8,428 |   |
| North Louisiana                                                                          |   |                                     | 3,159  |   |   |   | 3,577 |   |   |   | 2,660 |   |
| South Louisiana                                                                          |   |                                     | 1,238  |   |   |   | 2,852 |   |   |   | 5,650 |   |
| Cotton Valley Reef Complex                                                               |   |                                     | 997    |   |   |   | 1,547 |   |   |   | 1,526 |   |
| East Texas Bossier                                                                       |   |                                     | 16     |   |   |   | 87 |   |   |   | - |   |
| Other                                                                                    |   |                                     | 514    |   |   |   | 367 |   |   |   | 2,015 |   |
| Total                                                                                                        |   |                                     | 33,637 |   |   |   | 38,098 |   |   |   | 48,472 |   |
| Exploration Costs (in thousands):                                                                                                                                                                                                                                                                                                                       |   |                                     |   |   |   |   |   |   |   |   |   |   |
| Abandonment and impairment costs:                                                                                                                                                                                                                                                                                                                       |   |                                     |   |   |   |   |   |   |   |   |   |   |
| North Louisiana                                                                          |   | $                                        | 9,716  |   |   | $ | 25,414 |   |   | $ | 30,356 |   |
| South Louisiana                                                                          |   |                                     | 22,502 |   |   |   | 3,187 |   |   |   | 28,805 |   |
| Permian Basin                                                                            |   |                                     | 3,484  |   |   |   | 717 |   |   |   | 1,322 |   |
| East Texas Bossier                                                                       |   |                                     | 30,200 |   |   |   | 40,544 |   |   |   | 2,640 |   |
| Utah                                                                                     |   |                                     | 11,111 |   |   |   | 6,331 |   |   |   | 4,062 |   |
| Mississippi                                                                              |   |                                     | 515    |   |   |   | 1,270 |   |   |   | 1,148 |   |
| Other                                                                                    |   |                                     | 1,270  |   |   |   | 2,649 |   |   |   | 537 |   |
| Total                                                                                                        |   |                                     | 78,798 |   |   |   | 80,112 |   |   |   | 68,870 |   |
| Seismic and other                                                                        |   |                                     | 8,189  |   |   |   | 22,685 |   |   |   | 4,765 |   |
| Total exploration costs                                                                                      |   | $                                        | 86,987 |   |   | $ | 102,797 |   |   | $ | 73,635 |   |
|                                                                                                                                                                                                                                                                                                                                                    |   |                                     |   |   |   |   |   |   |   |   |   |   |
| Oil and Gas Costs ($/BOE Produced):                                                                                                                                                                                                                                                                                                                     |   |                                     |   |   |   |   |   |   |   |   |   |   |
| Production(c)                                                             |   | $                                        | 13.24  |   |   | $ | 14.30 |   |   | $ | 12.59 |   |
| DD&A                                                                  |   | $                                        | 21.94  |   |   | $ | 17.83 |   |   | $ | 12.70 |   |
|                                                                                                                                                                                                                                                                                                                                                    |   |                                     |   |   |   |   |   |   |   |   |   |   |
| Net Wells Drilled(b):                                                                                                                                                                                                                                                                                                                                   |   |                                     |   |   |   |   |   |   |   |   |   |   |
| Exploratory wells                                                         |   |                                     | 4.7    |   |   |   | 5.2 |   |   |   | 13.8 |   |
| Developmental wells                                                       |   |                                     | 55.9   |   |   |   | 67.2 |   |   |   | 28.1 |   |
|                                                                                                                                                                                                                                                                    |   |                                     |   |   |   |   |   |   |   |   |   |   |
| (a)    No derivatives were designated as cash flow hedges in the table above. All gains or losses on settled derivatives were included in gain (loss) on derivatives.                                                                                                                                                          |   |
| (b)    Excludes wells being drilled or completed at the end of each period.                                                                                                                                                                                                                                                         |   |
| (c)    Includes property and severance taxes.                                                                                                                                                                                                                                                                                       |   |

----

Operating 

----

----

----

----

Liquidity 

|                                                                                                                                                                                                                                                                             |   | Actual            |    |   | Planned           |   |    |       |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|--------|-------------------|--------|---------|------------|--------|
|                                                                                                                                                                                                                                                                             |   | Expenditures      |    |   | Expenditures      |   |    | 2010       |   |
|                                                                                                                                                                                                                                                                             |   | Year Ended        |    |   | Year Ended        |   |    | Percentage |   |
|                                                                                                                                                                                                                                                                             |   | December 31, 2009 |    |   | December 31, 2010 |   |    | of Total   |   |
|                                                                                                                                                                                                                                                                             |   | (In thousands)    |    |   |              |   |
| Permian Basin                                                  |   | $                 | 63,700  |   |              | $      | 210,500 |       |   |   | 77 | % |
| Austin Chalk (Trend)                                           |   |              | 13,800  |   |              |   | 49,800  |       |   |   | 18 | % |
| South Louisiana                                                |   |              | 28,800  |   |              |   | 8,800   |       |   |   | 3 | % |
| California                                                     |   |              | 3,900   |   |              |   | 2,500   |       |   |   | 1 | % |
| Other(a)                                                       |   |              | 28,100  |   |              |   | 2,800   |       |   |   | 1 | % |
|                                                                                                                                                                                                                                                                             |   | $                 | 138,300 |   |              | $      | 274,400 |       |   |   | 100 | % |
|                                                                                                                                                                                   |   |              |    |   |              |   |    |       |   |   |   |   |
|     (a)    Includes expenditures in 2009 in the following areas (In thousands): East Texas Bossier - $17,000; North Louisiana – $5,300; Utah – $2,400; and Other - $3,400.                                         |   |

----

----

|                                                                                                                                                                     |   | December 31,   |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|---------|
|                                                                                                                                                                     |   | 2009           |    |   | 2008 |   |
|                                                                                                                                                                     |   | (In thousands) |    |
| Working capital per GAAP                                                                                                                                                 |   | $              | 19,324  |   |   | $ | 2,607 |   |
| Add funds available under the revolving credit facility                                                                                                                  |   |           | 79,196  |   |   |   | 155,096 |   |
| Exclude fair value of derivatives classified as current assets or current liabilities                                                                                    |   |           | 5,907   |   |   |   | - |   |
| Exclude current assets and current liabilities of Desta Drilling (a)                                                                                                     |   |           | -       |   |   |   | 13,205 |   |
| Working capital per loan covenant                                                                                                                                        |   | $              | 104,427 |   |   | $ | 170,908 |   |
|                                                                                          |   |           |    |   |   |   |   |   |
| (a)    In August 2009, we repaid all of the secured term loan of Desta Drilling with borrowings under our secured bank credit facility due May 2012. |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Payments Due by Period |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Total                  |    |   | 2010 |   |   | 2011to2012 |   |   | 2013to2014 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                   |    |   |   |   |   | (In thousands) |   |   |   |   |
| Contractual obligations:                                                                                                                                                                                                                                                                                                                                                                                                  |   |                   |    |   |   |   |   |   |   |   |   |   |
| 73⁄4% Senior Notes (a)                                                                      |   | $                      | 225,000 |   |   | $ | - |   |   | $ | - |   |   | $ | 225,000 |   |
| Secured bank credit facility(a)                                                                |   |                   | 170,000 |   |   |   | - |   |   |   | 170,000 |   |   |   | - |   |
| Lease obligations                                                                              |   |                   | 3,530   |   |   |   | 1,771 |   |   |   | 1,735 |   |   |   | 24 |   |
| Other                                                                                          |   |                   | 170     |   |   |   | 85 |   |   |   | 85 |   |   |   | - |   |
| Total contractual obligations                                                                       |   | $                      | 398,700 |   |   | $ | 1,856 |   |   | $ | 171,820 |   |   | $ | 225,024 |   |
|                                                                                                                                                                                                                                                                                                                                      |   |                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

|   | (a) | In addition to the principal payments presented, we expect to make annual interest payments of $17.4 million on the Senior Notes and approximately $4.7 million on the secured bank credit facility (based on the balances and interest rates at December 31, 2009). |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Known 

Application 

----

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

| 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:                                                                                           |   |            |   |   |          |   |   |          |   |   |   |   |   |   |   |
| 2009                                                                                                         |   |            | 21.0   |   |          |   | 76.1   |          |   | $ | 54.81 |   |   | $ | 3.71 |   |   | $ | 364.3 |   |
| 2008                                                                                                         |   |            | 20.8   |   |          |   | 103.9  |          |   | $ | 42.03 |   |   | $ | 5.90 |   |   | $ | 405.2 |   |
| 2007                                                                                                         |   |            | 27.9   |   |          |   | 123.2  |          |   | $ | 91.30 |   |   | $ | 7.37 |   |   | $ | 926.0 |   |
|                    |   |            |   |   |          |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |

| ·   | 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 critical services; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | 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 |
|--------------------|-----------------------------------------------------------------------------------------------|

----

Adopted 

----

Recent 

----

Item 

and 

----

|                                                                                                                                                                                                 |   | Oil    |      |   | Gas    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|--------|
|                                                                                                                                                                                                 |   | Bbls   |      |   | Price  |   |   | MMBtu (a) |   |   | Price |   |
| Production Period:                                                                                                                                                                                   |   |   |      |   |   |   |   |   |   |   |   |   |
| 1st Quarter 2010                               |   |   | 628,000   |   |   | $      | 76.70 |   |   |   | 2,280,000 |   |   | $ | 6.80 |   |
| 2nd Quarter 2010                               |   |   | 574,000   |   |   | $      | 76.60 |   |   |   | 1,830,000 |   |   | $ | 6.80 |   |
| 3rd Quarter 2010                               |   |   | 522,000   |   |   | $      | 76.40 |   |   |   | 1,750,000 |   |   | $ | 6.80 |   |
| 4th Quarter 2010                               |   |   | 480,000   |   |   | $      | 76.24 |   |   |   | 1,680,000 |   |   | $ | 6.80 |   |
| 2011                                           |   |   | 1,656,000 |   |   | $      | 84.38 |   |   |   | 6,420,000 |   |   | $ | 7.07 |   |
|                                                                                                                                                                                                 |   |   | 3,860,000 |   |   |   |   |   |   |   | 13,960,000 |   |   |   |   |   |
|                                                                                                            |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (a)    One MMBtu equals one Mcf at a Btu factor of 1,000.                                                                                                                        |   |

Interest 

Item 

Item 

Item 

Disclosure 

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

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

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

----

Internal 

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

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

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

Changes 

Management’s 

----

Report 

----

Item 

Item 

Item 

Item 

Item 

Item 

----

Item 

Financial 

Exhibits

|   | Exhibit |   |                                                                                                                                                                                                                                                                                        |
|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Number  |   | Description of Exhibit                                                                                                                                                                                                                                                                      |
|   |    |   |                                                                                                                                                                                                                                                                                        |
|   |    |   |                                                                                                                                                                                                                                                                                        |
|   | **2.1   |   | Agreement and Plan of Merger among Clayton Williams Energy, Inc. and Southwest Royalties, Inc. dated May 3, 2004, filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 3, 2004††                                            |
|   |    |   |                                                                                                                                                                                                                                                                                        |
|   | **3.1   |   | Second Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Company’s Form S-2 Registration Statement, Commission File No. 333-13441                                                                                                                     |
|   |    |   |                                                                                                                                                                                                                                                                                        |
|   |    |   |                                                                                                                                                                                                                                                                                        |
|   | **3.2   |   | Certificate of Amendment of Second Restated Certificate of Incorporation of Clayton Williams Energy, Inc., filed as Exhibit 3.1 to the Company’s Form 10-Q for the period ended September 30, 2000††                                                                      |
|   |    |   |                                                                                                                                                                                                                                                                                        |
|   | **3.3   |   | Corporate Bylaws of Clayton Williams Energy, Inc., as amended, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 13, 2008††                                                                                        |
|   |    |   |                                                                                                                                                                                                                                                                                        |
|   | **4.1   |   | Stock Purchase Agreement dated May 19, 2004 by and among Clayton Williams Energy, Inc. and various institutional investors, filed as Exhibit 4 to the Company’s Current Report on Form 8-K filed with the Commission on June 2, 2004††                                    |
|   |    |   |                                                                                                                                                                                                                                                                                        |
|   | **4.2   |   | Indenture, dated July 20, 2005, among Clayton Williams Energy, Inc., the Subsidiary Guarantors and Wells Fargo Bank, National Association, as Trustee, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 22, 2005†† |
|   |    |   |                                                                                                                                                                                                                                                                                        |
|   | **10.1  |   | Amended and Restated Credit Agreement dated as of May 21, 2004 among Clayton Williams Energy, Inc., et al, and Bank One, NA, et al, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed with the Commission on June 23, 2004††                      |
|   |    |   |                                                                                                                                                                                                                                                                                        |
|   | **10.2  |   | First Amendment to Amended and Restated Credit Agreement dated July 18, 2005, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 20, 2005††                                                                              |
|   |    |   |                                                                                                                                                                                                                                                                                        |
|   | **10.3  |   | Second Amendment to Amended and Restated Credit Agreement dated December 30, 2005, filed as Exhibit 10.3 to the Company’s Form 10-K for the period ended December 31, 2005††                                                                                    |
|   |    |   |                                                                                                                                                                                                                                                                                        |
|   | **10.4  |   | Third Amendment to Amended and Restated Credit Agreement dated June 30, 2006, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 14, 2006††                                                                         |
|   |    |   |                                                                                                                                                                                                                                                                                        |
|   | **10.5  |   | Fourth Amendment to Amended and Restated Credit Agreement dated July 28, 2006                                                                                                                                                                                                               |
|   |    |   |                                                                                                                                                                                                                                                                                        |

----

|   | **10.6         |   | Fifth Amendment to Amended and Restated Credit Agreement dated June 13, 2008, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 18, 2008††                                                                                                                                                               |
|--------|----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.7         |   | Sixth Amendment to Amended and Restated Credit Agreement dated April 14, 2009, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 17, 2009††                                                                                                                                                             |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.8         |   | Seventh Amendment to Amended and Restated Credit Agreement dated May 26, 2009, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 26, 2009††                                                                                                                                                               |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.9†  |   | Outside Directors Stock Option Plan, filed as Exhibit 10.1 to the Company’s Form S-8 Registration Statement, Commission File No. 33-68316                                                                                                                                                                                                                              |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.10† |   | 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††                                                                                                                                                                                                         |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.11† |   | 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††                                                                                                                                                                                                   |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.12† |   | Bonus Incentive Plan, filed as Exhibit 10.1 to the Company’s Form S-8 Registration Statement, Commission File No. 33-68320                                                                                                                                                                                                                                             |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.13† |   | 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††                                                                                                                                                                                                                         |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.14† |   | 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††                                                                                                                         |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.15† |   | Executive Incentive Stock Compensation Plan, filed as Exhibit 10.1 to the Company’s Form S-8 Registration Statement, Commission File No. 33-92834                                                                                                                                                                                                                      |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.16† |   | 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††                                                                                                                                                                                       |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.17        |   | 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                                                                                                                                  |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.18        |   | 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††                                                                                            |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.19        |   | 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                                                                                                                                                                                     |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.20        |   | 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†† |
|   |           |   |                                                                                                                                                                                                                                                                                                                                                                         |
|   | **10.21        |   | Amendment to Second Amended and Restated Service Agreement effective January 1, 2008 among Clayton Williams Energy, Inc. and its subsidiaries, Clayton Williams, Jr., Clayton Williams Ranch Holdings, Inc., ClayDesta L.P., The Williams Children’s Partnership, Ltd. and CWPLCO, Inc.††                                                                  |

----

|   | **10.22† |   | 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††                             |
|--------|----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.23† |   | 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††                      |
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.24† |   | 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††                                 |
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.25† |   | 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††                    |
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.26† |   | 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††       |
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.27† |   | 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††           |
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.28† |   | 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††                   |
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.29† |   | 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††                                |
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.30† |   | 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††                         |
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.31† |   | 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††                                                 |
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.32† |   | 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††                          |
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.33† |   | 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††                            |
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.34† |   | 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†† |
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.35† |   | 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††               |
|   |           |   |                                                                                                                                                                                                                                      |
|   | **10.36† |   | 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††                      |
|   |           |   |                                                                                                                                                                                                                                      |

----

|   | **10.37† |   | 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††                |
|--------|----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.38† |   | 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††  |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.39† |   | 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††                           |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.40† |   | 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††                                        |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.41† |   | 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††                                  |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.42† |   | 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††     |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.43† |   | 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††                                       |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.44† |   | 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†† |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.45† |   | Participation Agreement relating to East Texas Bossier – Margarita dated December 17, 2007, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on December 20, 2007††        |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.46† |   | Amaker Tippett Reward Plan dated June 19, 2008, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 25, 2008††                                                              |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.47† |   | Austin Chalk Reward Plan dated June 19, 2008, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on June 25, 2008††                                                                |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.48† |   | Barstow Area Reward Plan dated June 19, 2008, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on June 25, 2008††                                                                |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.49† |   | Participation Agreement relating to CWEI Andrews Area dated June 19, 2008, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 25, 2008††                                   |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.50† |   | Participation Agreement relating to CWEI Crockett County Area dated June 19, 2008, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on June 25, 2008††                           |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.51† |   | Participation Agreement relating to CWEI North Louisiana Bossier III dated June 19, 2008, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on June 25, 2008††                    |
|   |           |   |                                                                                                                                                                                                                                          |
|   | **10.52† |   | Participation Agreement relating to CWEI North Louisiana Hosston/Cotton Valley III dated June 19, 2008, filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Commission on June 25, 2008††      |

----

|   | **10.53†                                                                                                                                                  |   | Participation Agreement relating to CWEI South Louisiana VI dated June 19, 2008, filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Commission on June 25, 2008††                 |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **10.54†                                                                                                                                                  |   | Participation Agreement relating to CWEI Utah dated June 19, 2008, filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the Commission on June 25, 2008††                               |
|   |                                                                                                                                                            |   |                                                                                                                                                                                                                              |
|   | **10.55†                                                                                                                                                  |   | Participation Agreement relating to CWEI Sacramento Basin I dated August 12, 2008, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 14, 2008††             |
|   |                                                                                                                                                            |   |                                                                                                                                                                                                                              |
|   | **10.56†                                                                                                                                                  |   | Form of Director Indemnification Agreement                                                                                                                                                                                        |
|   |                                                                                                                                                            |   |                                                                                                                                                                                                                              |
|   | **10.57†                                                                                                                                                  |   | Participation Agreement relating to CWEI East Texas Bossier - Sunny dated November 19, 2008, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on November 20, 2008†† |
|   |                                                                                                                                                            |   |                                                                                                                                                                                                                              |
|   | **10.58†                                                                                                                                                  |   | Fuhrman-Mascho Reward Plan dated December 1, 2009, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 2, 2009††                                            |
|   |                                                                                                                                                            |   |                                                                                                                                                                                                                              |
|   | *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                                                                                         |
|   |                                                                                                                                                            |   |                                                                                                                                                                                                                              |
|   | *99.1                                                                                                                                                           |   |     Report of Williamson Petroleum Consultants, Inc. independent consulting engineers                                                                                                                         |
|   |                                                                                                                                                            |   |                                                                                                                                                                                                                              |
|   | *99.2                                                                                                                                                           |   |     Report of Ryder Scott Company, L.P. independent consulting engineers                                                                                                                                      |
|   |                                                                                                                                                            |   |                                                                                                                                                                                                                              |
|   | *       Filed herewith                                                                                                       |
|   | **     Incorporated by reference to the filing indicated                                                                               |
|   | ***    Furnished herewith                                                                                                                   |
|   | †        Identifies an Exhibit that consists of or includes a management contract or compensatory plan or arrangement. |
|   | ††      Filed under the Company’s Commission File No. 001-10924.                                                     |
|   |                                                                                                                                                            |

----

GLOSSARY 

----

----

----

SIGNATURES

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

| Signature                                                                          |   | Title                                 |   | Date           |
|------------------------------------------------------------------------------------|--------|---------------------------------------|--------|----------------|
|                                                                               |   |                                  |   |           |
| /s/ CLAYTON W. WILLIAMS *                                                          |   | Chairman of the Board,                |   | March 12, 2010 |
| Clayton W. Williams                                                                |   | President and Chief Executive         |   |           |
|                                                                               |   | Officer and Director                  |   |           |
|                                                                               |   |                                  |   |           |
| /s/ L. PAUL LATHAM                                                                 |   | Executive Vice President,             |   | March 12, 2010 |
| L. Paul Latham                                                                     |   | Chief Operating Officer and           |   |           |
|                                                                               |   | Director                              |   |           |
|                                                                               |   |                                  |   |           |
| /s/ MEL G. RIGGS                                                                   |   | Senior Vice President -               |   | March 12, 2010 |
| Mel G. Riggs                                                                       |   | Finance, Secretary, Treasurer,        |   |           |
|                                                                               |   | Chief Financial Officer and Director  |   |           |
|                                                                               |   |                                  |   |           |
| /s/ MICHAEL L. POLLARD                                                             |   | Vice President – Accounting and |   | March 12, 2010 |
| Michael L. Pollard                                                                 |   | Principal Accounting Officer          |   |           |
|                                                                               |   |                                  |   |           |
| /s/ TED GRAY, JR.*                                                                 |   | Director                              |   | March 12, 2010 |
| Ted Gray, Jr.                                                                      |   |                                  |   |           |
|                                                                               |   |                                  |   |           |
| /s/ DAVIS L. FORD *                                                                |   | Director                              |   | March 12, 2010 |
| Davis L. Ford                                                                      |   |                                  |   |           |
|                                                                               |   |                                  |   |           |
| /s/ ROBERT L. PARKER *                                                             |   | Director                              |   | March 12, 2010 |
| Robert L. Parker                                                                   |   |                                  |   |           |
|                                                                               |   |                                  |   |           |
| /s/ JORDAN R. SMITH *                                                              |   | Director                              |   | March 12, 2010 |
| 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 Comprehensive Income (Loss)                                                                                                                       |   | F-6    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| Consolidated Statements of Equity                                                                                                                                            |   | F-7    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| Consolidated Statements of Cash Flows                                                                                                                                        |   | F-8    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| Notes to Consolidated Financial Statements                                                                                                                                   |   | F-9    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| Financial Statement ScheduleSchedule II—Valuation and Qualifying Accounts                                                                                                                  |   | S-1    |

----

REPORT 

----

CLAYTON 

| ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | December 31, |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | 2009 |   |   | 2008 |   |
| CURRENT ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                                              |   | $ | 14,013 |   |   | $ | 41,199 |   |
| Accounts receivable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |   |   |
| Oil and gas sales                                                                                                                                               |   |   | 28,721 |   |   |   | 26,009 |   |
| Joint interest and other, net                                                                                                                                   |   |   | 6,669 |   |   |   | 14,349 |   |
| Affiliates                                                                                                                                                      |   |   | 624 |   |   |   | 227 |   |
| Inventory                                                                                                                              |   |   | 43,068 |   |   |   | 20,052 |   |
| Deferred income taxes                                                                                                                  |   |   | 1,362 |   |   |   | 3,637 |   |
| Assets held for sale                                                                                                                   |   |   | 7,411 |   |   |   | - |   |
| Prepaids and other                                                                                                                     |   |   | 1,729 |   |   |   | 20,011 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | 103,597 |   |   |   | 125,484 |   |
| PROPERTY AND EQUIPMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Oil and gas properties, successful efforts method                                                                                      |   |   | 1,579,664 |   |   |   | 1,526,473 |   |
| Natural gas gathering and processing systems                                                                                           |   |   | 17,816 |   |   |   | 17,816 |   |
| Contract drilling equipment                                                                                                            |   |   | 41,533 |   |   |   | 91,151 |   |
| Other                                                                                                                                  |   |   | 16,550 |   |   |   | 14,954 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | 1,655,563 |   |   |   | 1,650,394 |   |
| Less accumulated depreciation, depletion and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   | (985,517 | ) |   |   | (840,366 | ) |
| Property and equipment, net                                                                                                                                     |   |   | 670,046 |   |   |   | 810,028 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |   |   |
| OTHER ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |
| Debt issue costs, net                                                                                                                  |   |   | 4,874 |   |   |   | 6,225 |   |
| Fair value of derivatives                                                                                                              |   |   | 4,427 |   |   |   | - |   |
| Other                                                                                                                                  |   |   | 1,660 |   |   |   | 1,672 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | 10,961 |   |   |   | 7,897 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | $ | 784,604 |   |   | $ | 943,409 |   |

----

| LIABILITIES AND EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | December 31, |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | 2009 |   |   | 2008 |   |
| CURRENT LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |   |   |
| Accounts payable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |
| Trade                                                                                                                                              |   | $ | 47,211 |   |   | $ | 67,189 |   |
| Oil and gas sales                                                                                                                                  |   |   | 18,063 |   |   |   | 24,702 |   |
| Affiliates                                                                                                                                         |   |   | 1,097 |   |   |   | 1,627 |   |
| Current maturities of long-term debt                                                                                      |   |   | - |   |   |   | 18,750 |   |
| Fair value of derivatives                                                                                                 |   |   | 5,907 |   |   |   | - |   |
| Accrued liabilities and other                                                                                             |   |   | 11,995 |   |   |   | 10,609 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   | 84,273 |   |   |   | 122,877 |   |
| NON-CURRENT LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |   |   |
| Long-term debt                                                                                                            |   |   | 395,000 |   |   |   | 347,225 |   |
| Deferred income taxes                                                                                                     |   |   | 54,065 |   |   |   | 120,414 |   |
| Other                                                                                                                     |   |   | 38,991 |   |   |   | 32,617 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   | 488,056 |   |   |   | 500,256 |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |
| EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |   |   |   |   |   |   |
| Preferred stock, par value $.10 per share, authorized – 3,000,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |   |   |
|  shares; none issued                                                                                                 |   |   | - |   |   |   | - |   |
| Common stock, par value $.10 per share, authorized – 30,000,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |   |
|  shares; issued and outstanding – 12,145,536 shares in 2009                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |   |   |   |   |   |   |
|  and 12,115,898 shares in 2008                                                                                       |   |   | 1,215 |   |   |   | 1,212 |   |
| Additional paid-in capital                                                                                                |   |   | 152,051 |   |   |   | 137,046 |   |
| Retained earnings                                                                                                         |   |   | 59,009 |   |   |   | 176,424 |   |
| Total Clayton Williams Energy, Inc. stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   | 212,275 |   |   |   | 314,682 |   |
| Noncontrolling interest, net of tax                                                                                       |   |   | - |   |   |   | 5,594 |   |
| Total equity                                                                                                                                       |   |   | 212,275 |   |   |   | 320,276 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | $ | 784,604 |   |   | $ | 943,409 |   |

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | Year Ended December 31, |     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 2009                    |     |   | 2008 |   |   | 2007 |   |
| REVENUES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                    |     |   |   |   |   |   |   |
| Oil and gas sales                                                                                                                     |   | $                       | 242,338  |   |   | $ | 463,964 |   |   | $ | 316,992 |   |
| Natural gas services                                                                                                                  |   |                    | 6,146    |   |   |   | 10,926 |   |   |   | 10,230 |   |
| Drilling rig services                                                                                                                 |   |                    | 6,681    |   |   |   | 46,124 |   |   |   | 52,649 |   |
| Gain on sales of assets                                                                                                               |   |                    | 796      |   |   |   | 44,503 |   |   |   | 14,024 |   |
| Total revenues                                                                                                                                                      |   |                    | 255,961  |   |   |   | 565,517 |   |   |   | 393,895 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    |     |   |   |   |   |   |   |   |   |   |
| COSTS AND EXPENSES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                    |     |   |   |   |   |   |   |   |   |   |
| Production                                                                                                                            |   |                    | 76,288   |   |   |   | 89,054 |   |   |   | 75,319 |   |
| Exploration:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                    |     |   |   |   |   |   |   |   |   |   |
| Abandonments and impairments                                                                                                                                        |   |                    | 78,798   |   |   |   | 80,112 |   |   |   | 68,870 |   |
| Seismic and other                                                                                                                                                   |   |                    | 8,189    |   |   |   | 22,685 |   |   |   | 4,765 |   |
| Natural gas services                                                                                                                  |   |                    | 5,348    |   |   |   | 10,060 |   |   |   | 9,745 |   |
| Drilling rig services                                                                                                                 |   |                    | 10,848   |   |   |   | 37,789 |   |   |   | 32,964 |   |
| Depreciation, depletion and amortization                                                                                              |   |                    | 129,658  |   |   |   | 120,542 |   |   |   | 84,476 |   |
| Impairment of property and equipment                                                                                                  |   |                    | 59,140   |   |   |   | 12,882 |   |   |   | 12,137 |   |
| Accretion of abandonment obligations                                                                                                  |   |                    | 3,120    |   |   |   | 2,355 |   |   |   | 2,508 |   |
| General and administrative                                                                                                            |   |                    | 20,715   |   |   |   | 25,635 |   |   |   | 19,266 |   |
| Loss on sales of assets and impairment of inventory                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                    | 5,282    |   |   |   | 2,122 |   |   |   | 9,815 |   |
| Total costs and expenses                                                                                                                                            |   |                    | 397,386  |   |   |   | 403,236 |   |   |   | 319,865 |   |
| Operating income (loss)                                                                                                                                             |   |                    | (141,425 | ) |   |   | 162,281 |   |   |   | 74,030 |   |
| OTHER INCOME (EXPENSE)                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                    |     |   |   |   |   |   |   |   |   |   |
| Interest expense                                                                                                                      |   |                    | (23,758  | ) |   |   | (24,994 | ) |   |   | (32,118 | ) |
| Gain (loss) on derivatives                                                                                                            |   |                    | (17,416  | ) |   |   | 74,743 |   |   |   | (31,968 | ) |
| Other                                                                                                                                 |   |                    | 2,543    |   |   |   | 6,539 |   |   |   | 5,355 |   |
| Total other income (expense)                                                                                                                                        |   |                    | (38,631  | ) |   |   | 56,288 |   |   |   | (58,731 | ) |
| Income (loss) before income taxes                                                                            |   |                    | (180,056 | ) |   |   | 218,569 |   |   |   | 15,299 |   |
| Income tax (expense) benefit                                                                                 |   |                    | 64,096   |   |   |   | (77,327 | ) |   |   | (5,497 | ) |
| NET INCOME (LOSS)                                                                                            |   |                    | (115,960 | ) |   |   | 141,242 |   |   |   | 9,802 |   |
| Less income attributable to                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                    |     |   |   |   |   |   |   |   |   |   |
| noncontrolling interest, net of tax                                                                                                                                 |   |                    | (1,455   | ) |   |   | (708 | ) |   |   | (3,812 | ) |
| NET INCOME (LOSS) attributable to Clayton                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                    |     |   |   |   |   |   |   |   |   |   |
| Williams Energy, Inc.                                                                                                                 |   | $                       | (117,415 | ) |   | $ | 140,534 |   |   | $ | 5,990 |   |
| Net income (loss) per common share attributable to                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                    |     |   |   |   |   |   |   |   |   |   |
| Clayton Williams Energy, Inc. stockholders:                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                    |     |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                 |   | $                       | (9.67    | ) |   | $ | 11.78 |   |   | $ | .53 |   |
| Diluted                                                                                                                               |   | $                       | (9.67    | ) |   | $ | 11.67 |   |   | $ | .52 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    |     |   |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding:                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                    |     |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                 |   |                    | 12,138   |   |   |   | 11,932 |   |   |   | 11,337 |   |
| Diluted                                                                                                                               |   |                    | 12,138   |   |   |   | 12,039 |   |   |   | 11,494 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    |     |   |   |   |   |   |   |   |   |   |

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Year Ended December 31, |     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 2009                    |     |   | 2008 |   |   | 2007 |   |
| Net income (loss)                                                                        |   | $                       | (117,415 | ) |   | $ | 140,534 |   |   | $ | 5,990 |   |
| Unrealized gain on marketable securities, net of tax                                                                                                                                                                                                                                                                                                                                                                                                   |   |                    |     |   |   |   |   |   |   |   |   |   |
| of $2,015 in 2008 and $1,464 in 2007                                                                    |   |                    | -        |   |   |   | 3,742 |   |   |   | 2,718 |   |
| Total comprehensive income (loss)                                                                                      |   | $                       | (117,415 | ) |   | $ | 144,276 |   |   | $ | 8,708 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                    |     |   |   |   |   |   |   |   |   |   |

----

CLAYTON 

|                                        |   | Clayton Williams Energy, Inc. Stockholders’ Equity |   |   |       |   |
|---------------------------------------------|--------|----------------------------------------------------------|--------|--------|------------|--------|
|                                        |   |                                                     |   |   |       |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |
|                                        |   |                                                     |   |   |       |   |   |   |   |   |   |   |   | Other |   |   |   |   |
|                                        |   | Common Stock                                             |   |   | Additional |   |   |   |   |   | Compre- |   |   | Non- |   |
|                                        |   | No. of                                                   |   |   | Par        |   |   | Paid-In |   |   | Retained |   |   | hensive |   |   | Controlling |   |
|                                        |   | Shares                                                   |   |   | Value      |   |   | Capital |   |   | Earnings |   |   | Income |   |   | Interest |   |
| BALANCE,                                    |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2006                           |   |                                                     | 11,152 |   |       | $      | 1,115 |   |   | $ | 113,965 |   |   | $ | 29,900 |   |   | $ | - |   |   | $ | 1,074 |   |
| Net income                                  |   |                                                     | -      |   |       |   | - |   |   |   | - |   |   |   | 5,990 |   |   |   | - |   |   |   | 3,812 |   |
| Unrealized gain on                          |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   marketable securities,          |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   net of tax of $1,464            |   |                                                     | -      |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | 2,718 |   |   |   | - |   |
| 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 |   |   |   | 4,886 |   |
| Net income                                  |   |                                                     | -      |   |       |   | - |   |   |   | - |   |   |   | 140,534 |   |   |   | - |   |   |   | 708 |   |
| Unrealized gain on                          |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   marketable securities,          |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   net of tax of $2,015            |   |                                                     | -      |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | 3,742 |   |   |   | - |   |
| Reclassification adjustment for             |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   securities gains included       |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   in income, net of tax of $3,479 |   |                                                     | -      |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | (6,460 | ) |   |   | - |   |
| Issuance of stock through                   |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   compensation plans, including   |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   income tax benefits             |   |                                                     | 762    |   |       |   | 77 |   |   |   | 15,983 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| BALANCE,                                    |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2008                           |   |                                                     | 12,116 |   |       |   | 1,212 |   |   |   | 137,046 |   |   |   | 176,424 |   |   |   | - |   |   |   | 5,594 |   |
| Net income (loss)                           |   |                                                     | -      |   |       |   | - |   |   |   | - |   |   |   | (117,415 | ) |   |   | - |   |   |   | 1,455 |   |
| Issuance of stock through                   |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   compensation plans, including   |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   income tax benefits             |   |                                                     | 30     |   |       |   | 3 |   |   |   | 173 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Acquisition of noncontrolling               |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   interest                        |   |                                                     | -      |   |       |   | - |   |   |   | 14,832 |   |   |   | - |   |   |   | - |   |   |   | (7,049 | ) |
| BALANCE,                                    |   |                                                     |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2009                           |   |                                                     | 12,146 |   |       | $      | 1,215 |   |   | $ | 152,051 |   |   | $ | 59,009 |   |   | $ | - |   |   | $ | - |   |

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | Year Ended December 31, |     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2009                    |     |   | 2008 |   |   | 2007 |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                    |     |   |   |   |   |   |   |
| Net income (loss)                                                                                                                     |   | $                       | (115,960 | ) |   | $ | 141,242 |   |   | $ | 9,802 |   |
| Adjustments to reconcile net income (loss) to cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                    |     |   |   |   |   |   |   |   |   |   |
|    provided by operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                    |     |   |   |   |   |   |   |   |   |   |
| Depreciation, depletion and amortization                                                                                                                            |   |                    | 129,658  |   |   |   | 120,542 |   |   |   | 84,476 |   |
| Impairment of property and equipment                                                                                                                                |   |                    | 59,140   |   |   |   | 12,882 |   |   |   | 12,137 |   |
| Exploration costs                                                                                                                                                   |   |                    | 78,798   |   |   |   | 80,112 |   |   |   | 68,870 |   |
| (Gain) loss on sales of assets and impairment of inventory, net                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                    | 4,486    |   |   |   | (42,381 | ) |   |   | (4,209 | ) |
| Deferred income tax expense (benefit)                                                                                                                               |   |                    | (64,220  | ) |   |   | 77,315 |   |   |   | 3,768 |   |
| Non-cash employee compensation                                                                                                                                      |   |                    | 1,434    |   |   |   | 5,834 |   |   |   | 1,865 |   |
| Unrealized (gain) loss on derivatives                                                                                                                               |   |                    | 1,480    |   |   |   | (49,738 | ) |   |   | 24,249 |   |
| Settlements on derivatives with financing elements                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                    | -        |   |   |   | 43,486 |   |   |   | 28,468 |   |
| Amortization of debt issue costs                                                                                                                                    |   |                    | 1,458    |   |   |   | 1,354 |   |   |   | 1,281 |   |
| Accretion of abandonment obligations                                                                                                                                |   |                    | 3,120    |   |   |   | 2,355 |   |   |   | 2,508 |   |
| Excess tax benefit on exercise of stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                    | -        |   |   |   | - |   |   |   | (963 | ) |
| Changes in operating working capital:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                    |     |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                                                                                                                                 |   |                    | 4,571    |   |   |   | 13,087 |   |   |   | (10,028 | ) |
| Accounts payable                                                                                                                                                    |   |                    | (19,590  | ) |   |   | (4,946 | ) |   |   | 10,992 |   |
| Other                                                                                                                                                               |   |                    | 20,336   |   |   |   | (19,164 | ) |   |   | 1,650 |   |
| Net cash provided by operating activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                    | 104,711  |   |   |   | 381,980 |   |   |   | 234,866 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                    |     |   |   |   |   |   |   |   |   |   |
| Additions to property and equipment                                                                                                   |   |                    | (142,623 | ) |   |   | (351,789 | ) |   |   | (262,755 | ) |
| Proceeds from sales of assets                                                                                                         |   |                    | 729      |   |   |   | 117,226 |   |   |   | 22,773 |   |
| Change in equipment inventory                                                                                                         |   |                    | (26,675  | ) |   |   | (8,247 | ) |   |   | 18,166 |   |
| Other                                                                                                                                 |   |                    | (29      | ) |   |   | 3,935 |   |   |   | (14,443 | ) |
| Net cash used in investing activities                                                                                                                                                             |   |                    | (168,598 | ) |   |   | (238,875 | ) |   |   | (236,259 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                    |     |   |   |   |   |   |   |   |   |   |
| Proceeds from long-term debt                                                                                                          |   |                    | 75,900   |   |   |   | 7,500 |   |   |   | 34,527 |   |
| Repayments of long-term debt                                                                                                          |   |                    | (39,375  | ) |   |   | (94,200 | ) |   |   | (13,125 | ) |
| Proceeds from exercise of stock options                                                                                               |   |                    | 176      |   |   |   | 15,936 |   |   |   | 6,000 |   |
| Settlements on derivatives with financing elements                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                    | -        |   |   |   | (43,486 | ) |   |   | (28,468 | ) |
| Excess tax benefit on exercise of stock options                                                                                       |   |                    | -        |   |   |   | - |   |   |   | 963 |   |
| Net cash provided by (used in) financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                    | 36,701   |   |   |   | (114,250 | ) |   |   | (103 | ) |
| NET INCREASE (DECREASE) IN CASH AND                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                    |     |   |   |   |   |   |   |   |   |   |
|   CASH EQUIVALENTS                                                                                 |   |                    | (27,186  | ) |   |   | 28,855 |   |   |   | (1,496 | ) |
| CASH AND CASH EQUIVALENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |     |   |   |   |   |   |   |   |   |   |
| Beginning of period                                                                                                                   |   |                    | 41,199   |   |   |   | 12,344 |   |   |   | 13,840 |   |
| End of period                                                                                                                         |   | $                       | 14,013   |   |   | $ | 41,199 |   |   | $ | 12,344 |   |
| SUPPLEMENTAL DISCLOSURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                    |     |   |   |   |   |   |   |   |   |   |
| Cash paid for interest, net of amounts capitalized                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | $                       | 23,349   |   |   | $ | 24,027 |   |   | $ | 35,213 |   |
| Cash paid for income taxes                                                                                                            |   | $                       | -        |   |   | $ | 16,652 |   |   | $ | 348 |   |

----

CLAYTON 

| ·   | Provisions for depreciation, depletion and amortization are based on estimates of proved reserves; |
|--------------------|----------------------------------------------------------------------------------------------------|

| ·   | Impairments of long-lived assets are based on estimates of future net cash flows and, when applicable, the estimated fair values of impaired assets; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Exploration expenses related to impairments of unproved acreage are based on estimates of fair values of the underlying leases; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------|

| ·   | Impairments of inventory are based on estimates of fair values of tubular goods and other well equipment held in inventory; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------|

| ·   | Exploration expenses related to well abandonment costs are based on the judgments regarding the productive status of in-progress exploratory wells; and |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Abandonment obligations are based on estimates regarding the timing and cost of future asset abandonments. |
|--------------------|------------------------------------------------------------------------------------------------------------|

----

CLAYTON 

----

CLAYTON 

----

CLAYTON 

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

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

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

----

CLAYTON 

----

CLAYTON 

|                                                                                                   |   | December 31,   |    |   | December 31, |   |
|--------------------------------------------------------------------------------------------------------|--------|----------------|---------|--------|--------------|--------|
|                                                                                                   |   | 2009           |    |   | 2008         |   |
|                                                                                                   |   | (In thousands) |    |
| 73⁄4% Senior Notes due 2013                                                                         |   | $              | 225,000 |   |         | $      | 225,000 |   |
| Secured bank credit facility, due May 2012                                                             |   |           | 170,000 |   |         |   | 94,100 |   |
| Secured term loan of Desta Drilling, due June 2011(a)                                                  |   |           | -       |   |         |   | 39,375 |   |
| Subordinated notes of Desta Drilling(b)                                                           |   |           | -       |   |         |   | 7,500 |   |
|                                                                                                   |   |           | 395,000 |   |         |   | 365,975 |   |
| Less current maturities(c)                                                                        |   |           | -       |   |         |   | (18,750 | ) |
|                                                                                                   |   | $              | 395,000 |   |         | $      | 347,225 |   |
|                   |   |           |    |   |         |   |   |   |

| (a)   |     In August 2009, we repaid all of the secured term loan of Desta Drilling with borrowings under our secured bank credit facility due May 2012. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (b)   |     Note payable to Lariat Services, Inc. by Desta Drilling that was converted to equity in April 2009 (see Note 10). |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------|

| (c)   |     Amount relates to the current portion of the secured term loan of Desta Drilling. |
|-----------------|-----------------------------------------------------------------------------------------------------------|

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 2009           |   |   | 2008   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | (In thousands) |   |
| Abandonment obligations                                                                                    |   | $              | 38,412 |   |   | $      | 31,737 |   |
| Other taxes payable                                                                                        |   |           | -      |   |   |   | 144 |   |
| Other                                                                                                      |   |           | 579    |   |   |   | 736 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $              | 38,991 |   |   | $      | 32,617 |   |

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 2009           |   |   | 2008   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | (In thousands) |   |
| Beginning of year                                                                                    |   | $              | 31,737 |   |   | $      | 30,994 |   |
| Additional abandonment obligations from new properties                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |           | 1,654  |   |   |   | 1,780 |   |
| Sales or abandonments of properties                                                                                      |   |           | (293   | )      |   |   | (1,991 | ) |
| Accretion expense                                                                                                        |   |           | 3,120  |   |   |   | 2,355 |   |
| Revisions of previous estimates                                                                                          |   |           | 2,194  |   |   |   | (1,401 | ) |
| End of year                                                                                          |   | $              | 38,412 |   |   | $      | 31,737 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 2009           |    |   | 2008   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|---------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | (In thousands) |    |
| Deferred tax assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |           |    |   |   |   |
| Net operating loss carryforwards                                                                                                           |   | $              | 24,275  |   |   | $      | 9,033 |   |
| Fair value of derivatives                                                                                                                  |   |           | 518     |   |   |   | - |   |
| Statutory depletion carryforwards                                                                                                          |   |           | 6,589   |   |   |   | 6,096 |   |
| Alternative minimum tax credit carryforwards                                                                                               |   |           | 437     |   |   |   | 437 |   |
| Abandonment obligations and other                                                                                                          |   |           | 10,952  |   |   |   | 11,315 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |           | 42,771  |   |   |   | 26,881 |   |
| Deferred tax liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |           |    |   |   |   |   |   |
| Property and equipment                                                                                                                     |   |           | (95,474 | )      |   |   | (108,903 | ) |
| Tax deferred derivative settlements                                                                                                        |   |           | -       |   |   |   | (34,755 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |           | (95,474 | )      |   |   | (143,658 | ) |
| Net deferred tax liabilities                                                                                      |   | $              | (52,703 | )      |   | $      | (116,777 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |           |    |   |   |   |   |   |
| Components of net deferred tax liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |           |    |   |   |   |   |   |
| Current assets                                                                                                                             |   | $              | 1,362   |   |   | $      | 3,637 |   |
| Non-current liabilities                                                                                                                    |   |           | (54,065 | )      |   |   | (120,414 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | $              | (52,703 | )      |   | $      | (116,777 | ) |

|                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 2009           |    |   | 2008   |   |   | 2007   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|---------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                   |   | (In thousands) |    |
|                                                                                                                                                                                                                                                                                                                                                                                                                   |   |           |    |   |   |   |   |   |   |
| Income tax expense (benefit) at statutory rate of 35%                                                                                                                                                                                                                                                                                                                                                                  |   | $              | (63,020 | )      |   | $      | 76,500 |   |   | $ | 5,355 |   |
| Tax depletion in excess of basis                                                                 |   |           | (388    | )      |   |   | (700   | )      |   |   | (700 | ) |
| Revision of previous tax estimates                                                               |   |           | (130    | )      |   |   | 55     |   |   |   | 16 |   |
| State income taxes, net of federal tax effect                                                                                                                                                                                                                                                                                                                                                                          |   |           | (655    | )      |   |   | 1,375  |   |   |   | 738 |   |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                  |   |           | 97      |   |   |   | 97     |   |   |   | 88 |   |
| Income tax expense (benefit)                                                                                                        |   | $              | (64,096 | )      |   | $      | 77,327 |   |   | $ | 5,497 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                   |   |           |    |   |   |   |   |   |   |   |   |   |
| Current                                                                                          |   | $              | 124     |   |   | $      | 12     |   |   | $ | 1,729 |   |
| Deferred                                                                                         |   |           | (64,220 | )      |   |   | 77,315 |   |   |   | 3,768 |   |
| Income tax expense (benefit)                                                                                                        |   | $              | (64,096 | )      |   | $      | 77,327 |   |   | $ | 5,497 |   |

----

CLAYTON 

| Balance at December 31, 2007                                                                                    |   | $      | 358  |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|------|--------|
| Reductions for tax positions of prior years                                                                                    |   |   | (214 | )      |
| Balance at December 31, 2008                                                                                    |   |   | 144  |   |
| Reductions for tax positions of prior years                                                                                    |   |   | (144 | )      |
| Balance at December 31, 2009                                                                                    |   | $      | -    |   |

|                                                                                                                                                                                                 |   | Oil    |      |   | Gas    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|--------|
|                                                                                                                                                                                                 |   | Bbls   |      |   | Price  |   |   | MMBtu (a) |   |   | Price |   |
| Production Period:                                                                                                                                                                                   |   |   |      |   |   |   |   |   |   |   |   |   |
| 1st Quarter 2010                               |   |   | 628,000   |   |   | $      | 76.70 |   |   |   | 2,280,000 |   |   | $ | 6.80 |   |
| 2nd Quarter 2010                               |   |   | 574,000   |   |   | $      | 76.60 |   |   |   | 1,830,000 |   |   | $ | 6.80 |   |
| 3rd Quarter 2010                               |   |   | 522,000   |   |   | $      | 76.40 |   |   |   | 1,750,000 |   |   | $ | 6.80 |   |
| 4th Quarter 2010                               |   |   | 480,000   |   |   | $      | 76.24 |   |   |   | 1,680,000 |   |   | $ | 6.80 |   |
| 2011                                           |   |   | 1,656,000 |   |   | $      | 84.38 |   |   |   | 6,420,000 |   |   | $ | 7.07 |   |
|                                                                                                                                                                                                 |   |   | 3,860,000 |   |   |   |   |   |   |   | 13,960,000 |   |   |   |   |   |
|                                                                                                                                |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (a)    One MMBtu equals one Mcf at a Btu factor of 1,000.                                                                                                                        |   |

----

CLAYTON 

|                          | Fair Value of Derivative Instruments as of December 31, 2009 |   |
|-------------------------------|--------------------------------------------------------------|--------|
|                          | Asset Derivatives                                            |   | Liability Derivatives |   |
|                          | Balance Sheet                                                |   |   |   | Balance Sheet |   |   |   |
|                          | Location                                                     |   | Fair Value |   | Location |   | Fair Value |   |
|                          |                                                         |   | (In thousands) |   |   |   | (In thousands) |   |
| Derivatives not designated as |                                                         |   |   |   |   |   |   |
| hedging instruments:          |                                                         |   |   |   |   |   |   |   |
|                          |                                                         |   |   |   |   |   |   |   |
| Commodity derivatives         | Fair value of derivatives:                                   |   |   |   | Fair value of derivatives: |   |   |   |
|                          | Current                                                      |   | $ | - |   | Current |   | $ | 5,907 |   |
|                          | Non-current                                                  |   |   | 4,427 |   | Non-current |   |   | - |   |
| Total                         |                                                         |   | $ | 4,427 |   |   |   | $ | 5,907 |   |

|                                                 |   | December 31, 2009 |    |
|------------------------------------------------------|--------|-------------------|---------|
|                                                 |   | Assets            |    |   | Liabilities |   |
|                                                 |   | (In thousands)    |    |
| Fair value of derivatives – gross presentation |   | $                 | 20,105  |   |   | $ | 21,585 |   |
| Effects of netting arrangements                      |   |              | (15,678 | ) |   |   | (15,678 | ) |
| Fair value of derivatives – net presentation   |   | $                 | 4,427   |   |   | $ | 5,907 |   |

|                          |   | Amount of Gain or (Loss) Recognized in Earnings |
|-------------------------------|--------|-------------------------------------------------|
|                          |   |                                            |   | Year Ended |
|                          |   | Location of Gain or (Loss)                      |   | December 31, |
|                          |   | Recognized in Earnings                          |   | 2009 |   | 2008 |
|                          |   |                                            |   | (In thousands) |
| Derivatives not designated as |   |                                            |   |   |   |   |
| hedging instruments:          |   |                                            |   |   |   |   |
|                          |   |                                            |   |   |   |   |
| Commodity derivatives         |   | Other income (expense) -                        |   |   |   |   |
|                          |   | Gain (loss) on derivatives                      |   | $                   (17,416) |   | $                      74,743 |
| Total                         |   |                                            |   | $                   (17,416) |   | $                      74,743 |

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                    |   | Significant Other |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                    |   | Observable Inputs |   |
| Description                                                                                                                                                                                                                                                                                                                                                                                                             |   | (Level 2)         |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                    |   | (In thousands)    |   |
| Assets:                                                                                                                                                                                                                                                                                                                                                                                                                 |   |              |   |
| Fair value of commodity derivatives                                                               |   | $                 | 4,427  |   |
| Total assets                                                                            |   | $                 | 4,427  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                    |   |              |   |   |
| Liabilities:                                                                                                                                                                                                                                                                                                                                                                                                            |   |              |   |   |
| Fair value of commodity derivatives                                                               |   | $                 | 5,907  |   |
| Total liabilities                                                                       |   | $                 | 5,907  |   |

|                                                                                              |   |   |    |   |     |   |   | Weighted    |   |   |      |   |
|---------------------------------------------------------------------------------------------------|--------|--------|---------|--------|----------|--------|--------|-------------|--------|--------|-----------|--------|
|                                                                                              |   |   |    |   | Weighted |   |   | Average     |   |   |      |   |
|                                                                                              |   |   |    |   | Average  |   |   | Remaining   |   |   | Aggregate |   |
|                                                                                              |   |   |    |   | Exercise |   |   | Contractual |   |   | Intrinsic |   |
|                                                                                              |   | Shares |    |   | Price    |   |   | Term        |   |   | Value(a)  |   |
| Outstanding at January 1, 2009                                                                    |   |   | 53,638  |   |     | $      | 15.20  |        |   |   |      |   |   |   |
| Exercised (b)                                                                                |   |   | (29,638 | )      |     | $      | 5.93   |        |   |   |      |   |   |   |
| Outstanding at December 31, 2009                                                                  |   |   | 24,000  |   |     | $      | 26.66  |        |   |   | 4.5       |   |   | $ | 224,850 |   |
|                                                                                              |   |   |    |   |     |   |   |        |   |   |      |   |   |   |   |   |
| Vested at December 31, 2009                                                                       |   |   | 24,000  |   |     | $      | 26.66  |        |   |   | 4.5       |   |   | $ | 224,850 |   |
| Exercisable at December 31, 2009                                                                  |   |   | 24,000  |   |     | $      | 26.66  |        |   |   | 4.5       |   |   | $ | 224,850 |   |
|                        |   |   |    |   |     |   |   |        |   |   |      |   |   |   |   |   |
| (a)     Based on closing price at December 31, 2009 of $35.03 per share. |   |
| (b)     Cash received for options exercised totaled $175,635.            |   |

----

CLAYTON 

|                      |            |   | Outstanding and Exercisable Options |   |
|---------------------------|-----------------|--------|-------------------------------------|--------|
|                      |            |   |                                |   |   |   |   |   | Weighted |   |
|                      |            |   |                                |   |   | Weighted |   |   | Average |   |
|                      |            |   |                                |   |   | Average |   |   | Remaining |   |
|                      |            |   |                                |   |   | Exercise |   |   | Life in |   |
|                      |            |   | Shares                              |   |   | Price |   |   | Years |   |
| Range of exercise prices: |            |   |                                |   |   |   |   |   |   |   |
|                      | $10.00 - $19.74 |   |                                |   | 6,000 |   |   | $ | 12.62 |   |   |   | 2.5 |   |
|                      | $22.90 - $41.74 |   |                                |   | 18,000 |   |   | $ | 31.34 |   |   |   | 5.2 |   |
|                      |            |   |                                |   | 24,000 |   |   | $ | 26.66 |   |   |   | 4.5 |   |

|                                                                |   | 2009                             |   |   | 2008   |   |   | 2007   |   |
|---------------------------------------------------------------------|--------|----------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                |   | (In thousands, except per share) |   |
| Weighted average grant date fair value of options granted per share |   | $                                | -      |   |   | $      | 23.06  |   |   | $ | 27.56 |   |
| Intrinsic value of options exercised                                |   | $                                | 586    |   |   | $      | 20,480 |   |   | $ | 261 |   |
|                                                                |   |                             |   |   |   |   |   |   |   |   |   |   |
| Stock-based employee compensation expense                           |   | $                                | -      |   |   | $      | 92     |   |   | $ | 110 |   |
| Tax benefit                                                         |   |                             | -      |   |   |   | (32    | )      |   |   | (38 | ) |
| Net stock-based employee compensation expense                       |   | $                                | -      |   |   | $      | 60     |   |   | $ | 72 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 2009   |   |   | 2008   |   |   | 2007   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Risk-free interest rate                                                                                |   |   | -      |   |   |   | 4      | %      |   |   | 4.7 | % |
| Stock price volatility                                                                                      |   |   | -      |   |   |   | 63     | %      |   |   | 64 | % |
| Expected life in years                                                                                      |   |   | -      |   |   |   | 10     |   |   |   | 10 |   |
| Dividend yield                                                                                              |   |   | -      |   |   |   | -      |   |   |   | - |   |

----

CLAYTON 

----

CLAYTON 

|                                                                                                   |   | 2009           |   |   | 2008   |   |   | 2007   |   |
|--------------------------------------------------------------------------------------------------------|--------|----------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                   |   | (In thousands) |   |
| Amounts received from the Williams Entities:                                                           |   |           |   |   |   |   |   |   |   |
| Service Agreement:                                                                                     |   |           |   |   |   |   |   |   |   |
| Services                                                                                               |   | $              | 519    |   |   | $      | 581    |   |   | $ | 299 |   |
| Insurance premiums and benefits                                                                        |   |           | 826    |   |   |   | 868    |   |   |   | 707 |   |
| Reimbursed expenses                                                                                    |   |           | 300    |   |   |   | 467    |   |   |   | 676 |   |
|                                                                                                   |   | $              | 1,645  |   |   | $      | 1,916  |   |   | $ | 1,682 |   |
| Amounts paid to the Williams Entities:                                                                 |   |           |   |   |   |   |   |   |   |   |   |   |
| Rent(a)                                                                                           |   | $              | 895    |   |   | $      | 807    |   |   | $ | 663 |   |
| Service Agreement:                                                                                     |   |           |   |   |   |   |   |   |   |   |   |   |
| Business entertainment(b)                                                                         |   |           | 116    |   |   |   | 91     |   |   |   | 113 |   |
| Tax services(c)                                                                                   |   |           | -      |   |   |   | -      |   |   |   | 150 |   |
| Reimbursed expenses                                                                                    |   |           | 128    |   |   |   | 197    |   |   |   | 122 |   |
|                                                                                                   |   | $              | 1,139  |   |   | $      | 1,095  |   |   | $ | 1,048 |   |
|                   |   |           |   |   |   |   |   |   |   |   |   |   |

|   | (a) | Rent amounts were paid to a Partnership within the Williams Entities.  The Company owns 31.9% of the Partnership and affiliates of the Company own 23.3%. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | Consists of hunting and fishing rights pertaining to land owned by affiliates of Mr. Williams. |
|--------|-----|-----------------------------------------------------------------------------------------------------|

|   | (c) | Prior to 2008, the Williams Entities provided tax preparation services and tax planning services for us. |
|--------|-----|----------------------------------------------------------------------------------------------------------|

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                    |   | 2009           |   |   | 2008   |   |   | 2007   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                    |   | (In thousands) |   |
| Gain on sales of assets                                                 |   | $              | 796    |   |   | $      | 44,503 |   |   | $ | 14,024 |   |
|                                                                                                                                                                                                                                                                                                                    |   |           |   |   |   |   |   |   |   |   |   |   |
| Loss on sales of assets and impairment                                                                                                                                                                                                                                                                                  |   |           |   |   |   |   |   |   |   |   |   |   |
| of inventory:                                                                                                                                                                                                                                                                                                           |   |           |   |   |   |   |   |   |   |   |   |   |
| Loss on sales of assets                                                                     |   |           | (348   | )      |   |   | (2,122 | )      |   |   | (837 | ) |
| Impairment of inventory                                                                     |   |           | (4,934 | )      |   |   | -      |   |   |   | (8,978 | ) |
|                                                                                                                                                                                                                                                                                                                    |   |           | (5,282 | )      |   |   | (2,122 | )      |   |   | (9,815 | ) |
|                                                                                                                                                                                                                                                                                                                    |   |           |   |   |   |   |   |   |   |   |   |   |
| Net gain (loss)                                                    |   | $              | (4,486 | )      |   | $      | 42,381 |   |   | $ | 4,209 |   |

|                                                                                                                                                                                                                                                                                                       |   | Leases         |   |   |      |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|--------|-----------|--------|
|                                                                                                                                                                                                                                                                                                       |   | Capital(a)     |   |   | Operating |   |   | Total |   |
|                                                                                                                                                                                                                                                                                                       |   | (In thousands) |   |
| 2010                                                       |   | $              | 629    |   |      | $      | 1,142 |   |   | $ | 1,771 |   |
| 2011                                                       |   |           | 402    |   |      |   | 944 |   |   |   | 1,346 |   |
| 2012                                                       |   |           | 193    |   |      |   | 196 |   |   |   | 389 |   |
| Thereafter                                                 |   |           | -      |   |      |   | 24 |   |   |   | 24 |   |
| Total minimum lease payments                                                                                                                                                                                                                                                                               |   | $              | 1,224  |   |      | $      | 2,306 |   |   | $ | 3,530 |   |
|                                                                                                                                                                                                                            |   |           |   |   |      |   |   |   |   |   |   |   |

----

CLAYTON 

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                    |   | First                            |    |   | Second  |   |    | Third   |   |   | Fourth  |   |   |   |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|--------|---------|--------|---------|---------|--------|--------|---------|--------|--------|--------|---------|
|                                                                                                                                                                                                                                                                                                                                                                    |   | Quarter                          |    |   | Quarter |   |    | Quarter |   |   | Quarter |   |   | Year   |    |
|                                                                                                                                                                                                                                                                                                                                                                    |   | (In thousands, except per share) |    |
| Year ended December 31, 2009:                                                                                                                                                                                                                                                                                                                                           |   |                             |    |   |    |   |    |    |   |   |    |   |   |   |    |
| Total revenues                                                                  |   | $                                | 57,782  |   |    | $      | 60,503  |    |   | $      | 62,426  |   |   | $      | 75,250  |   |   | $ | 255,961 |   |
| Operating loss                                                                  |   | $                                | (31,620 | )      |    | $      | (33,462 | )       |   | $      | (19,571 | )      |   | $      | (56,772 | ) |   | $ | (141,425 | ) |
| Net loss(a)                                                                     |   | $                                | (22,315 | )      |    | $      | (38,608 | )       |   | $      | (13,600 | )      |   | $      | (42,892 | ) |   | $ | (117,415 | ) |
| Net loss per common share(b):                                                                                                                                                                                                                                                                                                                                           |   |                             |    |   |    |   |    |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Basic                                                                                     |   | $                                | (1.84   | )      |    | $      | (3.18   | )       |   | $      | (1.12   | )      |   | $      | (3.53   | ) |   | $ | (9.67 | ) |
| Diluted                                                                                   |   | $                                | (1.84   | )      |    | $      | (3.18   | )       |   | $      | (1.12   | )      |   | $      | (3.53   | ) |   | $ | (9.67 | ) |
| Weighted average common shares outstanding:                                                                                                                                                                                                                                                                                                                             |   |                             |    |   |    |   |    |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Basic                                                                                     |   |                             | 12,122  |   |    |   | 12,142  |    |   |   | 12,144  |   |   |   | 12,144  |   |   |   | 12,138 |   |
| Diluted                                                                                   |   |                             | 12,122  |   |    |   | 12,142  |    |   |   | 12,144  |   |   |   | 12,144  |   |   |   | 12,138 |   |
|                                                                                                                                                                                                                                                                                                                                                                    |   |                             |    |   |    |   |    |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Year ended December 31, 2008:                                                                                                                                                                                                                                                                                                                                           |   |                             |    |   |    |   |    |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Total revenues                                                                  |   | $                                | 136,858 |   |    | $      | 191,268 |    |   | $      | 146,985 |   |   | $      | 90,406  |   |   | $ | 565,517 |   |
| Operating income (loss)                                                         |   | $                                | 64,415  |   |    | $      | 119,001 |    |   | $      | 18,126  |   |   | $      | (39,261 | ) |   | $ | 162,281 |   |
| Net income (loss)(a)                                                            |   | $                                | 7,179   |   |    | $      | (21,171 | )       |   | $      | 94,629  |   |   | $      | 59,897  |   |   | $ | 140,534 |   |
| Net income (loss) per common share(b):                                                                                                                                                                                                                                                                                                                                  |   |                             |    |   |    |   |    |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Basic                                                                                     |   | $                                | .63     |   |    | $      | (1.75   | )       |   | $      | 7.81    |   |   | $      | 4.94    |   |   | $ | 11.78 |   |
| Diluted                                                                                   |   | $                                | .62     |   |    | $      | (1.75   | )       |   | $      | 7.79    |   |   | $      | 4.93    |   |   | $ | 11.67 |   |
| Weighted average common shares outstanding:                                                                                                                                                                                                                                                                                                                             |   |                             |    |   |    |   |    |    |   |   |    |   |   |   |    |   |   |   |   |   |
| Basic                                                                                     |   |                             | 11,387  |   |    |   | 12,111  |    |   |   | 12,114  |   |   |   | 12,114  |   |   |   | 11,932 |   |
| Diluted                                                                                   |   |                             | 11,643  |   |    |   | 12,111  |    |   |   | 12,141  |   |   |   | 12,148  |   |   |   | 12,039 |   |
|                                                                                                                                                                                                                                                                                    |   |                             |    |   |    |   |    |    |   |   |    |   |   |   |    |   |   |   |   |   |

| (a) | The Company recorded a $32.1 million charge for impairment of property and equipment in the second quarter of 2009 and a $27 million charge in the fourth quarter of 2009.  The Company recorded a $10 million charge for impairment of property and equipment in the third quarter of 2008 and a $2.9 million charge in the fourth quarter of 2008. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                                                                                                                                                                                                                                                                                                                                                                                  |   | 2009           |    |   | 2008   |   |    | 2007   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|---------|--------|--------|--------|---------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                  |   | (In thousands) |    |
| Property acquisitions:                                                                                                                                                                                                                                                                                                                                                                |   |           |    |   |   |   |    |   |   |
| Proved                                                                                                                 |   | $              | -       |   |   | $      | -       |   |   | $ | - |   |
| Unproved                                                                                                               |   |           | 12,558  |   |   |   | 36,397  |   |   |   | 15,746 |   |
| Developmental costs                                                            |   |           | 86,672  |   |   |   | 260,073 |   |   |   | 45,611 |   |
| Exploratory costs                                                              |   |           | 32,758  |   |   |   | 51,237  |   |   |   | 169,879 |   |
| Total                                                                                                                  |   | $              | 131,988 |   |   | $      | 347,707 |   |   | $ | 231,236 |   |
|                                                                                                                                                                                                                                                                                                                                                                                  |   |           |    |   |   |   |    |   |   |   |   |   |

----

CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 2009           |      |   | 2008   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|-----------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | (In thousands) |      |
| Proved properties                                                                                       |   | $              | 1,532,508 |   |   | $      | 1,435,718 |   |
| Unproved properties                                                                                     |   |           | 47,156    |   |   |   | 90,755 |   |
| Total capitalized costs                                                                                 |   |           | 1,579,664 |   |   |   | 1,526,473 |   |
| Accumulated depreciation, depletion and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |           | (945,047  | )      |   |   | (791,507 | ) |
| Net capitalized costs                                                                                                                           |   | $              | 634,617   |   |   | $      | 734,966 |   |

|                                         |   |           |     |   | Contract |   |    | Intercompany |   |   | Consolidated |   |
|----------------------------------------------|--------|----------------|----------|--------|----------|--------|---------|--------------|--------|--------|--------------|--------|
| For the Year Ended December 31, 2009         |   | Oil and Gas    |     |   | Drilling |   |    | Eliminations |   |   | Total        |   |
|                                         |   | (In thousands) |     |
| Revenues                                     |   | $              | 249,280  |   |     | $      | 27,000  |         |   | $      | (20,319      | )      |   | $ | 255,961 |   |
| Depreciation, depletion and amortization (a) |   |           | 154,328  |   |     |   | 38,027  |         |   |   | (3,557       | )      |   |   | 188,798 |   |
| Other operating expenses (b)                 |   |           | 214,282  |   |     |   | 11,054  |         |   |   | (16,748      | )      |   |   | 208,588 |   |
| Interest expense                             |   |           | 22,267   |   |     |   | 1,491   |         |   |   | -            |   |   |   | 23,758 |   |
| Other expense                                |   |           | 14,873   |   |     |   | -       |         |   |   | -            |   |   |   | 14,873 |   |
| Loss before income taxes                     |   |           | (156,470 | )      |     |   | (23,572 | )            |   |   | (14          | )      |   |   | (180,056 | ) |
| Income tax benefit                           |   |           | (55,864  | )      |     |   | (8,232  | )            |   |   | -            |   |   |   | (64,096 | ) |
| Net loss                                     |   |           | (100,606 | )      |     |   | (15,340 | )            |   |   | (14          | )      |   |   | (115,960 | ) |
| Less (income) loss attributable to           |   |           |     |   |     |   |    |         |   |   |         |   |   |   |   |   |
| noncontrolling interest, net of tax          |   |           | 783      |   |     |   | (2,238  | )            |   |   | -            |   |   |   | (1,455 | ) |
| Net loss attributable to Clayton             |   |           |     |   |     |   |    |         |   |   |         |   |   |   |   |   |
| Williams Energy, Inc.                        |   | $              | (99,823  | )      |     | $      | (17,578 | )            |   | $      | (14          | )      |   | $ | (117,415 | ) |
| Total assets                                 |   | $              | 773,631  |   |     | $      | 42,623  |         |   | $      | (31,650      | )      |   | $ | 784,604 |   |
| Additions to property and equipment          |   | $              | 133,860  |   |     | $      | 4,696   |         |   | $      | -            |   |   | $ | 138,556 |   |
|                                         |   |           |     |   |     |   |    |         |   |   |         |   |   |   |   |   |
|                                         |   |           |     |   |     |   |    |         |   |   |         |   |   |   |   |   |

----

CLAYTON 

|                                         |   |           |    |   | Contract |   |   | Intercompany |   |   | Consolidated |   |
|----------------------------------------------|--------|----------------|---------|--------|----------|--------|--------|--------------|--------|--------|--------------|--------|
| For the Year Ended December 31, 2008         |   | Oil and Gas    |    |   | Drilling |   |   | Eliminations |   |   | Total        |   |
|                                         |   | (In thousands) |    |
| Revenues                                     |   | $              | 514,686 |   |     | $      | 64,153 |         |   | $      | (13,322      | )      |   | $ | 565,517 |   |
| Depreciation, depletion and amortization (a) |   |           | 124,874 |   |     |   | 10,651 |         |   |   | (2,101       | )      |   |   | 133,424 |   |
| Other operating expenses (b)                 |   |           | 232,047 |   |     |   | 47,493 |         |   |   | (9,728       | )      |   |   | 269,812 |   |
| Interest expense                             |   |           | 21,134  |   |     |   | 3,860  |         |   |   | -            |   |   |   | 24,994 |   |
| Other income                                 |   |           | (81,282 | )      |     |   | -      |         |   |   | -            |   |   |   | (81,282 | ) |
| Income (loss) before income taxes            |   |           | 217,913 |   |     |   | 2,149  |         |   |   | (1,493       | )      |   |   | 218,569 |   |
| Income tax expense                           |   |           | 76,546  |   |     |   | 781    |         |   |   | -            |   |   |   | 77,327 |   |
| Net income (loss)                            |   |           | 141,367 |   |     |   | 1,368  |         |   |   | (1,493       | )      |   |   | 141,242 |   |
| Less (income) loss attributable to           |   |           |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| noncontrolling interest, net of tax          |   |           | 381     |   |     |   | (1,089 | )            |   |   | -            |   |   |   | (708 | ) |
| Net income (loss) attributable to Clayton    |   |           |    |   |     |   |   |         |   |   |         |   |   |   |   |   |
| Williams Energy, Inc.                        |   | $              | 141,748 |   |     | $      | 279    |         |   | $      | (1,493       | )      |   | $ | 140,534 |   |
| Total assets                                 |   | $              | 864,260 |   |     | $      | 85,006 |         |   | $      | (5,857       | )      |   | $ | 943,409 |   |
| Additions to property and equipment          |   | $              | 350,184 |   |     | $      | 1,195  |         |   | $      | (1,493       | )      |   | $ | 349,886 |   |
|                                         |   |           |    |   |     |   |   |         |   |   |         |   |   |   |   |   |

|                                                               |   |           |    |   | Contract |   |    | Intercompany |   |   | Consolidated |   |
|--------------------------------------------------------------------|--------|----------------|---------|--------|----------|--------|---------|--------------|--------|--------|--------------|--------|
| For the Year Ended December 31, 2007                               |   | Oil and Gas    |    |   | Drilling |   |    | Eliminations |   |   | Total        |   |
|                                                               |   | (In thousands) |    |
| Revenues                                                           |   | $              | 341,246 |   |     | $      | 64,551  |         |   | $      | (11,902      | )      |   | $ | 393,895 |   |
| Depreciation, depletion and amortization (a)                       |   |           | 82,240  |   |     |   | 16,060  |         |   |   | (1,687       | )      |   |   | 96,613 |   |
| Other operating expenses (b)                                       |   |           | 192,334 |   |     |   | 39,138  |         |   |   | (8,220       | )      |   |   | 223,252 |   |
| Interest expense                                                   |   |           | 27,818  |   |     |   | 4,300   |         |   |   | -            |   |   |   | 32,118 |   |
| Other expense                                                      |   |           | 26,613  |   |     |   | -       |         |   |   | -            |   |   |   | 26,613 |   |
| Income (loss) before income taxes                                  |   |           | 12,241  |   |     |   | 5,053   |         |   |   | (1,995       | )      |   |   | 15,299 |   |
| Income tax expense                                                 |   |           | 3,305   |   |     |   | 2,192   |         |   |   | -            |   |   |   | 5,497 |   |
| Net income (loss)                                                  |   |           | 8,936   |   |     |   | 2,861   |         |   |   | (1,995       | )      |   |   | 9,802 |   |
| Less (income) loss attributable to                                 |   |           |    |   |     |   |    |         |   |   |         |   |   |   |   |   |
| noncontrolling interest, net of tax                                |   |           | 2,053   |   |     |   | (5,865  | )            |   |   | -            |   |   |   | (3,812 | ) |
| Net income (loss) attributable to Clayton                          |   |           |    |   |     |   |    |         |   |   |         |   |   |   |   |   |
| Williams Energy, Inc.                                              |   | $              | 10,989  |   |     | $      | (3,004  | )            |   | $      | (1,995       | )      |   | $ | 5,990 |   |
| Total assets                                                       |   | $              | 753,480 |   |     | $      | 114,849 |         |   | $      | (7,233       | )      |   | $ | 861,096 |   |
| Additions to property and equipment                                |   | $              | 235,679 |   |     | $      | 23,538  |         |   | $      | (1,995       | )      |   | $ | 257,222 |   |
|             |   |           |    |   |     |   |    |         |   |   |         |   |   |   |   |   |

| (a)   |     Includes impairment of property and equipment. |
|-----------------|------------------------------------------------------------------------|

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

----

CLAYTON 

| (Dollars in thousands)                                                                                                                                                                                                          |   |   |    |   |         |   |    | Non-       |   |   |         |   |   |         |     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|---------|------------|--------|--------|--------------|--------|--------|--------------|----------|
|                                                                                                                                                                                                                            |   |   |    |   | Guarantor    |   |    | Guarantor  |   |   | Adjustments/ |   |   |         |     |
|                                                                                                                                                                                                                            |   | Issuer |    |   | Subsidiaries |   |    | Subsidiary |   |   | Eliminations |   |   | Consolidated |     |
|                                                                                                                                                                                                                            |   |   |    |   |         |   |    |       |   |   |         |   |   |         |     |
| Current assets                                        |   | $      | 205,950 |   |         | $      | 146,443 |       |   | $      | 920          |   |   | $            | (249,716 | ) |   | $ | 103,597 |   |
| Property and equipment, net                                                                                                                                                                                                     |   |   | 326,149 |   |         |   | 337,566 |       |   |   | 6,331        |   |   |         | -        |   |   |   | 670,046 |   |
| Investments in subsidiaries                                                                                                                                                                                                     |   |   | 112,018 |   |         |   | -       |       |   |   | -            |   |   |         | (112,018 | ) |   |   | - |   |
| Other assets                                          |   |   | 10,348  |   |         |   | 613     |       |   |   | -            |   |   |         | -        |   |   |   | 10,961 |   |
| Total assets                                                         |   | $      | 654,465 |   |         | $      | 484,622 |       |   | $      | 7,251        |   |   | $            | (361,734 | ) |   | $ | 784,604 |   |
|                                                                                                                                                                                                                            |   |   |    |   |         |   |    |       |   |   |         |   |   |         |     |   |   |   |   |   |
| Current liabilities                                   |   | $      | 153,505 |   |         | $      | 180,357 |       |   | $      | 127          |   |   | $            | (249,716 | ) |   | $ | 84,273 |   |
| Non-current liabilities:                                                                                                                                                                                                        |   |   |    |   |         |   |    |       |   |   |         |   |   |         |     |   |   |   |   |   |
| Long-term debt                                                       |   |   | 395,000 |   |         |   | -       |       |   |   | -            |   |   |         | -        |   |   |   | 395,000 |   |
| Other                                                                |   |   | 31,039  |   |         |   | 61,883  |       |   |   | 136          |   |   |         | (2       | ) |   |   | 93,056 |   |
|                                                                                                                                                                                                                            |   |   | 426,039 |   |         |   | 61,883  |       |   |   | 136          |   |   |         | (2       | ) |   |   | 488,056 |   |
|                                                                                                                                                                                                                            |   |   |    |   |         |   |    |       |   |   |         |   |   |         |     |   |   |   |   |   |
| Equity                                                |   |   | 74,921  |   |         |   | 242,382 |       |   |   | 6,988        |   |   |         | (112,016 | ) |   |   | 212,275 |   |
|                                                                                                                                                                                                                            |   |   |    |   |         |   |    |       |   |   |         |   |   |         |     |   |   |   |   |   |
| Total liabilities and equity                                                                                                                                                                                                    |   | $      | 654,465 |   |         | $      | 484,622 |       |   | $      | 7,251        |   |   | $            | (361,734 | ) |   | $ | 784,604 |   |

| (Dollars in thousands)                                                                                                                                                                                                          |   |   |    |   |         |   |    | Non-       |   |   |         |   |   |         |     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|---------|------------|--------|--------|--------------|--------|--------|--------------|----------|
|                                                                                                                                                                                                                            |   |   |    |   | Guarantor    |   |    | Guarantor  |   |   | Adjustments/ |   |   |         |     |
|                                                                                                                                                                                                                            |   | Issuer |    |   | Subsidiaries |   |    | Subsidiary |   |   | Eliminations |   |   | Consolidated |     |
|                                                                                                                                                                                                                            |   |   |    |   |         |   |    |       |   |   |         |   |   |         |     |
| Current assets                                        |   | $      | 178,349 |   |         | $      | 188,538 |       |   | $      | 847          |   |   | $            | (242,250 | ) |   | $ | 125,484 |   |
| Property and equipment, net                                                                                                                                                                                                     |   |   | 388,189 |   |         |   | 415,220 |       |   |   | 6,619        |   |   |         | -        |   |   |   | 810,028 |   |
| Investments in subsidiaries                                                                                                                                                                                                     |   |   | 72,082  |   |         |   | -       |       |   |   | -            |   |   |         | (72,082  | ) |   |   | - |   |
| Other assets                                          |   |   | 19,629  |   |         |   | 583     |       |   |   | -            |   |   |         | (12,315  | ) |   |   | 7,897 |   |
| Total assets                                                         |   | $      | 658,249 |   |         | $      | 604,341 |       |   | $      | 7,466        |   |   | $            | (326,647 | ) |   | $ | 943,409 |   |
|                                                                                                                                                                                                                            |   |   |    |   |         |   |    |       |   |   |         |   |   |         |     |   |   |   |   |   |
| Current liabilities                                   |   | $      | 83,288  |   |         | $      | 281,734 |       |   | $      | 105          |   |   | $            | (242,250 | ) |   | $ | 122,877 |   |
| Non-current liabilities:                                                                                                                                                                                                        |   |   |    |   |         |   |    |       |   |   |         |   |   |         |     |   |   |   |   |   |
| Long-term debt                                                       |   |   | 319,100 |   |         |   | 40,225  |       |   |   | -            |   |   |         | (12,100  | ) |   |   | 347,225 |   |
| Other                                                                |   |   | 95,619  |   |         |   | 57,302  |       |   |   | 113          |   |   |         | (3       | ) |   |   | 153,031 |   |
|                                                                                                                                                                                                                            |   |   | 414,719 |   |         |   | 97,527  |       |   |   | 113          |   |   |         | (12,103  | ) |   |   | 500,256 |   |
|                                                                                                                                                                                                                            |   |   |    |   |         |   |    |       |   |   |         |   |   |         |     |   |   |   |   |   |
| Equity                                                |   |   | 160,242 |   |         |   | 225,080 |       |   |   | 7,248        |   |   |         | (72,294  | ) |   |   | 320,276 |   |
|                                                                                                                                                                                                                            |   |   |    |   |         |   |    |       |   |   |         |   |   |         |     |   |   |   |   |   |
| Total liabilities and equity                                                                                                                                                                                                    |   | $      | 658,249 |   |         | $      | 604,341 |       |   | $      | 7,466        |   |   | $            | (326,647 | ) |   | $ | 943,409 |   |

----

CLAYTON 

| (Dollars in thousands)                                                                                                                                                                                                             |   |   |     |   |         |   |    | Non-       |   |   |         |   |   |         |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------------|--------|---------|------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                                                                                                                                                               |   |   |     |   | Guarantor    |   |    | Guarantor  |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                               |   | Issuer |     |   | Subsidiaries |   |    | Subsidiary |   |   | Eliminations |   |   | Consolidated |   |
|                                                                                                                                                                                                                               |   |   |     |   |         |   |    |       |   |   |         |   |   |         |   |
| Total revenue                                            |   | $      | 148,347  |   |         | $      | 108,098 |       |   | $      | 617          |   |   | $            | (1,101 | ) |   | $ | 255,961 |   |
| Costs and expenses                                       |   |   | 254,655  |   |         |   | 142,807 |       |   |   | 1,025        |   |   |         | (1,101 | ) |   |   | 397,386 |   |
| Operating income (loss)                                                                                                                                                                                                            |   |   | (106,308 | )      |         |   | (34,709 | )          |   |   | (408         | )      |   |         | -      |   |   |   | (141,425 | ) |
| Other income (expense)                                                                                                                                                                                                             |   |   | (42,820  | )      |         |   | 4,043   |       |   |   | 146          |   |   |         | -      |   |   |   | (38,631 | ) |
| Income tax (expense) benefit                                                                                                                                                                                                       |   |   | 64,096   |   |         |   | -       |       |   |   | -            |   |   |         | -      |   |   |   | 64,096 |   |
| Noncontrolling interest,                                                                                                                                                                                                           |   |   |     |   |         |   |    |       |   |   |         |   |   |         |   |   |   |   |   |   |
|   net of tax                                   |   |   | (1,455   | )      |         |   | -       |       |   |   | -            |   |   |         | -      |   |   |   | (1,455 | ) |
| Net income (loss)                                                       |   | $      | (86,487  | )      |         | $      | (30,666 | )          |   | $      | (262         | )      |   | $            | -      |   |   | $ | (117,415 | ) |

| (Dollars in thousands)                                                                                                                                                                                                             |   |   |    |   |         |   |    | Non-       |   |   |         |   |   |         |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|---------|------------|--------|--------|--------------|--------|--------|--------------|---------|
|                                                                                                                                                                                                                               |   |   |    |   | Guarantor    |   |    | Guarantor  |   |   | Adjustments/ |   |   |         |    |
|                                                                                                                                                                                                                               |   | Issuer |    |   | Subsidiaries |   |    | Subsidiary |   |   | Eliminations |   |   | Consolidated |    |
|                                                                                                                                                                                                                               |   |   |    |   |         |   |    |       |   |   |         |   |   |         |    |
| Total revenue                                            |   | $      | 346,570 |   |         | $      | 237,307 |       |   | $      | 1,033        |   |   | $            | (19,393 | ) |   | $ | 565,517 |   |
| Costs and expenses                                       |   |   | 254,093 |   |         |   | 166,310 |       |   |   | 733          |   |   |         | (17,900 | ) |   |   | 403,236 |   |
| Operating income (loss)                                                                                                                                                                                                            |   |   | 92,477  |   |         |   | 70,997  |       |   |   | 300          |   |   |         | (1,493  | ) |   |   | 162,281 |   |
| Other income (expense)                                                                                                                                                                                                             |   |   | 65,414  |   |         |   | (9,362  | )          |   |   | 236          |   |   |         | -       |   |   |   | 56,288 |   |
| Income tax (expense) benefit                                                                                                                                                                                                       |   |   | (77,327 | )      |         |   | -       |       |   |   | -            |   |   |         | -       |   |   |   | (77,327 | ) |
| Noncontrolling interest,                                                                                                                                                                                                           |   |   |    |   |         |   |    |       |   |   |         |   |   |         |    |   |   |   |   |   |
|   net of tax                                   |   |   | (708    | )      |         |   | -       |       |   |   | -            |   |   |         | -       |   |   |   | (708 | ) |
| Net income (loss)                                                       |   | $      | 79,856  |   |         | $      | 61,635  |       |   | $      | 536          |   |   | $            | (1,493  | ) |   | $ | 140,534 |   |

| (Dollars in thousands)                                                                                                                                                                                                             |   |   |    |   |         |   |    | Non-       |   |   |         |   |   |         |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------------|--------|---------|------------|--------|--------|--------------|--------|--------|--------------|---------|
|                                                                                                                                                                                                                               |   |   |    |   | Guarantor    |   |    | Guarantor  |   |   | Adjustments/ |   |   |         |    |
|                                                                                                                                                                                                                               |   | Issuer |    |   | Subsidiaries |   |    | Subsidiary |   |   | Eliminations |   |   | Consolidated |    |
|                                                                                                                                                                                                                               |   |   |    |   |         |   |    |       |   |   |         |   |   |         |    |
| Total revenue                                            |   | $      | 224,743 |   |         | $      | 181,759 |       |   | $      | 690          |   |   | $            | (13,297 | ) |   | $ | 393,895 |   |
| Costs and expenses                                       |   |   | 198,535 |   |         |   | 132,046 |       |   |   | 587          |   |   |         | (11,303 | ) |   |   | 319,865 |   |
| Operating income (loss)                                                                                                                                                                                                            |   |   | 26,208  |   |         |   | 49,713  |       |   |   | 103          |   |   |         | (1,994  | ) |   |   | 74,030 |   |
| Other income (expense)                                                                                                                                                                                                             |   |   | (46,373 | )      |         |   | (12,513 | )          |   |   | 155          |   |   |         | -       |   |   |   | (58,731 | ) |
| Income tax (expense) benefit                                                                                                                                                                                                       |   |   | (5,497  | )      |         |   | -       |       |   |   | -            |   |   |         | -       |   |   |   | (5,497 | ) |
| Noncontrolling interest,                                                                                                                                                                                                           |   |   |    |   |         |   |    |       |   |   |         |   |   |         |    |   |   |   |   |   |
|   net of tax                                   |   |   | (3,812  | )      |         |   | -       |       |   |   | -            |   |   |         | -       |   |   |   | (3,812 | ) |
| Net income (loss)                                                       |   | $      | (29,474 | )      |         | $      | 37,200  |       |   | $      | 258          |   |   | $            | (1,994  | ) |   | $ | 5,990 |   |

----

CLAYTON 

| (Dollars in thousands)                                                                                                                                                                                                           |   |   |     |   |         |   |     | Non-       |   |   |         |   |   |         |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------------|--------|----------|------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                                                                                                                                                             |   |   |     |   | Guarantor    |   |     | Guarantor  |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                             |   | Issuer |     |   | Subsidiaries |   |     | Subsidiary |   |   | Eliminations |   |   | Consolidated |   |
|                                                                                                                                                                                                                             |   |   |     |   |         |   |     |       |   |   |         |   |   |         |   |
| Operating activities                                   |   | $      | (28,867  | )      |         | $      | 129,934  |       |   | $      | 113          |   |   | $            | 3,531  |   |   | $ | 104,711 |   |
| Investing activities                                   |   |   | (186,872 | )      |         |   | 21,872   |       |   |   | (67          | )      |   |         | (3,531 | ) |   |   | (168,598 | ) |
| Financing activities                                   |   |   | 192,197  |   |         |   | (155,516 | )          |   |   | 20           |   |   |         | -      |   |   |   | 36,701 |   |
| Net increase (decrease) in                                                                                                                                                                                                       |   |   |     |   |         |   |     |       |   |   |         |   |   |         |   |   |   |   |   |   |
| cash and cash equivalents                                                                                                                                                                                                        |   |   | (23,542  | )      |         |   | (3,710   | )          |   |   | 66           |   |   |         | -      |   |   |   | (27,186 | ) |
| Cash at the beginning of                                                                                                                                                                                                         |   |   |     |   |         |   |     |       |   |   |         |   |   |         |   |   |   |   |   |   |
| the period                                                  |   |   | 35,381   |   |         |   | 5,054    |       |   |   | 764          |   |   |         | -      |   |   |   | 41,199 |   |
| Cash at end of the period                                                                                                                                                                                                        |   | $      | 11,839   |   |         | $      | 1,344    |       |   | $      | 830          |   |   | $            | -      |   |   | $ | 14,013 |   |

| (Dollars in thousands)                                                                                                                                                                                                           |   |   |     |   |         |   |     | Non-       |   |   |         |   |   |         |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------------|--------|----------|------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                                                                                                                                                             |   |   |     |   | Guarantor    |   |     | Guarantor  |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                             |   | Issuer |     |   | Subsidiaries |   |     | Subsidiary |   |   | Eliminations |   |   | Consolidated |   |
|                                                                                                                                                                                                                             |   |   |     |   |         |   |     |       |   |   |         |   |   |         |   |
| Operating activities                                   |   | $      | 319,182  |   |         | $      | 59,737   |       |   | $      | 960          |   |   | $            | 2,101  |   |   | $ | 381,980 |   |
| Investing activities                                   |   |   | (126,079 | )      |         |   | (110,366 | )          |   |   | (329         | )      |   |         | (2,101 | ) |   |   | (238,875 | ) |
| Financing activities                                   |   |   | (163,047 | )      |         |   | 48,797   |       |   |   | -            |   |   |         | -      |   |   |   | (114,250 | ) |
| Net increase (decrease) in                                                                                                                                                                                                       |   |   |     |   |         |   |     |       |   |   |         |   |   |         |   |   |   |   |   |   |
| cash and cash equivalents                                                                                                                                                                                                        |   |   | 30,056   |   |         |   | (1,832   | )          |   |   | 631          |   |   |         | -      |   |   |   | 28,855 |   |
| Cash at the beginning of                                                                                                                                                                                                         |   |   |     |   |         |   |     |       |   |   |         |   |   |         |   |   |   |   |   |   |
| the period                                                  |   |   | 5,325    |   |         |   | 6,886    |       |   |   | 133          |   |   |         | -      |   |   |   | 12,344 |   |
| Cash at end of the period                                                                                                                                                                                                        |   | $      | 35,381   |   |         | $      | 5,054    |       |   | $      | 764          |   |   | $            | -      |   |   | $ | 41,199 |   |

| (Dollars in thousands)                                                                                                                                                                                                           |   |   |     |   |         |   |    | Non-       |   |   |         |   |   |         |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------------|--------|---------|------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                                                                                                                                                             |   |   |     |   | Guarantor    |   |    | Guarantor  |   |   | Adjustments/ |   |   |         |   |
|                                                                                                                                                                                                                             |   | Issuer |     |   | Subsidiaries |   |    | Subsidiary |   |   | Eliminations |   |   | Consolidated |   |
|                                                                                                                                                                                                                             |   |   |     |   |         |   |    |       |   |   |         |   |   |         |   |
| Operating activities                                   |   | $      | 149,216  |   |         | $      | 83,299  |       |   | $      | 664          |   |   | $            | 1,687  |   |   | $ | 234,866 |   |
| Investing activities                                   |   |   | (189,626 | )      |         |   | (44,842 | )          |   |   | (604         | )      |   |         | (1,187 | ) |   |   | (236,259 | ) |
| Financing activities                                   |   |   | 39,620   |   |         |   | (39,223 | )          |   |   | -            |   |   |         | (500   | ) |   |   | (103 | ) |
| Net increase (decrease) in                                                                                                                                                                                                       |   |   |     |   |         |   |    |       |   |   |         |   |   |         |   |   |   |   |   |   |
| cash and cash equivalents                                                                                                                                                                                                        |   |   | (790     | )      |         |   | (766    | )          |   |   | 60           |   |   |         | -      |   |   |   | (1,496 | ) |
| Cash at the beginning of                                                                                                                                                                                                         |   |   |     |   |         |   |    |       |   |   |         |   |   |         |   |   |   |   |   |   |
| the period                                                  |   |   | 6,116    |   |         |   | 7,651   |       |   |   | 73           |   |   |         | -      |   |   |   | 13,840 |   |
| Cash at end of the period                                                                                                                                                                                                        |   | $      | 5,326    |   |         | $      | 6,885   |       |   | $      | 133          |   |   | $            | -      |   |   | $ | 12,344 |   |

----

CLAYTON 

| ·   | amends the definition of proved reserves to require the use of average commodity prices based upon the prior 12-month period rather than year-end prices; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | expands the type of technologies available to establish reserve estimates and categories; |
|--------------------|-------------------------------------------------------------------------------------------|

| ·   | modifies certain definitions used in estimating proved reserves; |
|--------------------|------------------------------------------------------------------|

| ·   | permits disclosure of probable and possible reserves; |
|--------------------|-------------------------------------------------------|

| ·   | requires disclosure of internal controls over reserve estimations and the qualifications of technical persons primarily responsible for the preparation or audit of reserve estimates; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | permits disclosure of reserves based on different price and cost criteria, such as futures prices or management forecasts; and |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------|

| ·   | requires disclosure of material changes in proved undeveloped reserves, including a discussion of investments and progress made to convert proved undeveloped reserves to proved developed reserves. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | Oil    |   |   | Gas    |   |    | MBOE   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|---------|--------|--------|
| Proved reserves:                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |    |   |   |
| December 31, 2006                                                                       |   |   | 25,381 |   |   |   | 119,167 |   |   |   | 45,242 |   |
| Revisions                                                                                                             |   |   | 3,194  |   |   |   | 1,761   |   |   |   | 3,488 |   |
| Extensions and discoveries                                                                                            |   |   | 1,902  |   |   |   | 23,533  |   |   |   | 5,824 |   |
| Purchases of minerals-in-place                                                                                        |   |   | -      |   |   |   | (624    | )      |   |   | (104 | ) |
| Production                                                                                                            |   |   | (2,531 | )      |   |   | (20,681 | )      |   |   | (5,978 | ) |
| December 31, 2007                                                                       |   |   | 27,946 |   |   |   | 123,156 |   |   |   | 48,472 |   |
| Revisions                                                                                                             |   |   | (5,620 | )      |   |   | (15,938 | )      |   |   | (8,276 | ) |
| Extensions and discoveries                                                                                            |   |   | 2,057  |   |   |   | 23,824  |   |   |   | 6,028 |   |
| Purchases of minerals-in-place                                                                                        |   |   | (473   | )      |   |   | (8,560  | )      |   |   | (1,900 | ) |
| Production                                                                                                            |   |   | (3,134 | )      |   |   | (18,553 | )      |   |   | (6,226 | ) |
| December 31, 2008                                                                       |   |   | 20,776 |   |   |   | 103,929 |   |   |   | 38,098 |   |
| Revisions                                                                                                             |   |   | 297    |   |   |   | (15,898 | )      |   |   | (2,353 | ) |
| Extensions and discoveries                                                                                            |   |   | 2,985  |   |   |   | 4,021   |   |   |   | 3,655 |   |
| Production                                                                                                            |   |   | (3,105 | )      |   |   | (15,949 | )      |   |   | (5,763 | ) |
| December 31, 2009                                                                       |   |   | 20,953 |   |   |   | 76,103  |   |   |   | 33,637 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |    |   |   |   |   |   |
| Proved developed reserves:                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |    |   |   |   |   |   |
| December 31, 2007                                                                       |   |   | 20,627 |   |   |   | 98,434  |   |   |   | 37,033 |   |
| December 31, 2008                                                                       |   |   | 16,815 |   |   |   | 87,340  |   |   |   | 31,372 |   |
| December 31, 2009                                                                       |   |   | 16,779 |   |   |   | 70,840  |   |   |   | 28,586 |   |

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CLAYTON 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 2009           |      |   | 2008   |   |      | 2007   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|-----------|--------|--------|--------|-----------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | (In thousands) |      |
| Future cash inflows                                                                         |   | $              | 1,311,330 |   |   | $      | 1,374,684 |   |   | $ | 3,363,271 |   |
| Future costs:                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |           |      |   |   |   |      |   |   |   |   |   |
| Production                                                                                                                |   |           | (588,564  | )      |   |   | (569,053  | )      |   |   | (999,945 | ) |
| Development                                                                                                               |   |           | (86,918   | )      |   |   | (104,223  | )      |   |   | (174,264 | ) |
| Income taxes                                                                                                              |   |           | (119,343  | )      |   |   | (126,819  | )      |   |   | (653,808 | ) |
| Future net cash flows                                                                       |   |           | 516,505   |   |   |   | 574,588   |   |   |   | 1,535,254 |   |
| 10% discount factor                                                                         |   |           | (152,232  | )      |   |   | (169,423  | )      |   |   | (609,285 | ) |
| Standardized measure of discounted net cash flows                                                                                                                                                                                                                                                                                                                                                                                                         |   | $              | 364,273   |   |   | $      | 405,166   |   |   | $ | 925,969 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | 2009           |     |   | 2008   |   |     | 2007   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|----------|--------|--------|--------|----------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | (In thousands) |     |
| Standardized measure, beginning of period                                                                                                                                                                                                                                                                                                                                                                                                                       |   | $              | 405,166  |   |   | $      | 925,969  |   |   | $ | 514,800 |   |
| Net changes in sales prices, net of production costs                                                                                                                                                                                                                                                                                                                                                                                                            |   |           | 12,007   |   |   |   | (600,719 | )      |   |   | 483,032 |   |
| Revisions of quantity estimates                                                                             |   |           | (34,419  | )      |   |   | (101,889 | )      |   |   | 82,451 |   |
| Accretion of discount                                                                                       |   |           | 51,123   |   |   |   | 131,824  |   |   |   | 70,844 |   |
| Changes in future development costs, including                                                                                                                                                                                                                                                                                                                                                                                                                  |   |           |     |   |   |   |     |   |   |   |   |   |
|   development costs incurred that reduced future                                                                                                                                                                                                                                                                                                                                                                                                      |   |           |     |   |   |   |     |   |   |   |   |   |
|   development costs                                                                               |   |           | 33,217   |   |   |   | 69,466   |   |   |   | 2,665 |   |
| Changes in timing and other                                                                                 |   |           | (31,567  | )      |   |   | (9,385   | )      |   |   | 24,497 |   |
| Net change in income taxes                                                                                  |   |           | 15,457   |   |   |   | 299,193  |   |   |   | (203,369 | ) |
| Future abandonment cost, net of salvage                                                                     |   |           | (5,075   | )      |   |   | (548     | )      |   |   | (4,204 | ) |
| Extensions and discoveries                                                                                  |   |           | 89,546   |   |   |   | 155,006  |   |   |   | 197,219 |   |
| Sales, net of production costs                                                                              |   |           | (171,182 | )      |   |   | (373,988 | )      |   |   | (240,733 | ) |
| Sales of minerals-in-place                                                                                  |   |           | -        |   |   |   | (89,763  | )      |   |   | (1,233 | ) |
| Standardized measure, end of period.                                                                        |   | $              | 364,273  |   |   | $      | 405,166  |   |   | $ | 925,969 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Average Price |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Oil (a)       |   |   | Gas |   |
| As of December 31:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |          |   |   |   |   |
| 2009 (b)                                                                                 |   | $             | 54.81  |   |   | $ | 3.71 |   |
| 2008                                                                                     |   | $             | 42.03  |   |   | $ | 5.90 |   |
| 2007                                                                                     |   | $             | 91.30  |   |   | $ | 7.37 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                     |   |          |   |   |   |   |   |   |

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| 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, 2009:                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts - Joint interest and other                                                         |   | $ | 1,387 |   |   | $ | - |   |   | $ | (114 | ) |   | $ | 1,273 |   |
| Year Ended December 31, 2008:                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts - Joint interest and other                                                         |   | $ | 1,387 |   |   | $ | - |   |   | $ | - |   |   | $ | 1,387 |   |
| Year Ended December 31, 2007:                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts - Joint interest and other                                                         |   | $ | 1,044 |   |   | $ | 343 |   |   | $ | - |   |   | $ | 1,387 |   |
|                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (a)    Additions relate to provisions for doubtful accounts.                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (b)    Deductions relate to the write-off or recovery of the provisions for doubtful accounts. |   |   |   |   |   |   |   |   |   |

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