**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

 

**FORM 10-Q**

 

| **x**                                                 | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|
| ** **                                            | ** **                                                                                                    | ** ** |
| **For the quarterly period ended September 30, 2007** |
| ** **                                            | ** **                                                                                                    | ** ** |
| **OR**                                                |
| ** **                                            | ** **                                                                                                    | ** ** |
| **o**                                                 | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**Forthe transition periodfrom              to**

 

**CommissionFile Number 0-9204**

 

**EXCO RESOURCES, INC.**(Exact name of registrant as specified in its charter)

 

| **Texas**                                               | ** ** | **74-1492779**                             |
|---------------------------------------------------------|------------|--------------------------------------------|
| (State  of incorporation)                               |       | (I.R.S.  Employer Identification No.) |
| ** **                                              | ** ** | ** **                                 |
| **12377 Merit Drive  Suite 1700, LB 82  Dallas, Texas** | ** ** | **75251**                                  |
| (Address  of principal executive offices)               |       | (Zip  Code)                                |

 

**(214) 368-2084**

(Registrant’s telephone number,including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

YES x   NO o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 

Large accelerated filer o                Acceleratedfiler o                Non-acceleratedfiler x

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES o   NO x

 

The number of shares of commonstock, par value $0.001 per share, outstanding as of November 1, 2007 was104,496,484.

 

 

----

 

**EXCORESOURCES, INC.**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                         | ** ** |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|
|         |                                                                                                                              |       |
| Item 1.      | Financial Statements (Unaudited)                                                                                                  |       |
|         | Condensed Consolidated Balance Sheets at  December 31, 2006 and September 30, 2007                                      |       |
|         | Condensed Consolidated Statements of  Operations for the Three and Nine Months Ended September 30, 2006 and  2007            |       |
|         | Condensed Consolidated Statements of Cash  Flows for the Nine Months Ended September 30, 2006 and 2007                       |       |
|         | Condensed Consolidated Statements of  Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2006  and 2007 |       |
|         | Notes to Condensed Consolidated Financial  Statements                                                                             |       |
| Item 2.      | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                       |       |
| Item 3.      | Quantitative and Qualitative Disclosures  About Market Risk                                                                       |       |
| Item 4.      | Controls and Procedures                                                                                                           |       |
|         |                                                                                                                              |       |
| **PART II.** | **OTHER INFORMATION**                                                                                                             | ** ** |
|         |                                                                                                                              |       |
| Item 1A.     | Risk Factors                                                                                                                      |       |
| Item 4.      | Submission of matters to a vote of security  holders                                                                              |       |
| Item 6.      | Exhibits                                                                                                                          |       |
|         | Signatures                                                                                                                        |       |
|         | Index to Exhibits                                                                                                                 |       |

 

----

 

**PARTI—FINANCIAL INFORMATION**

 

***Item 1. Financial Statements(Unaudited)***

 

**EXCO RESOURCES, INC.**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

** **
| ** **                                                       | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| **(in thousands)**                                          | ** ** | **2006**              | ** ** | **2007**               | ** ** |
| ** **                                                       | ** ** | ** **            | ** ** | **(Unaudited)**        | ** ** |
| Assets                                                           |       |                  |       |                   |       |
| Current assets:                                                  |       |                  |       |                   |       |
| Cash and cash equivalents                                        |       | $                     | 22,822     |                   | $          | 146,797 |   |
| Accounts receivable:                                             |       |                  |       |                   |       |
| Oil and natural gas                                              |       | 84,078                |       | 139,073                |       |
| Joint interest                                                   |       | 14,902                |       | 17,954                 |       |
| Interest and other                                               |       | 12,199                |       | 12,179                 |       |
| Oil and natural gas derivatives                                  |       | 91,614                |       | 80,471                 |       |
| Deferred income taxes                                            |       | —                |       | 37,996                 |       |
| Other                                                            |       | 11,095                |       | 11,816                 |       |
| Total current assets                                             |       | 236,710               |       | 446,286                |       |
| Oil and natural gas properties (full cost  accounting method):   |       |                  |       |                   |       |
| Unproved oil and natural gas properties                          |       | 297,919               |       | 327,862                |       |
| Proved developed and undeveloped oil and  natural gas properties |       | 2,492,863             |       | 4,612,481              |       |
| Accumulated depreciation, depletion and  amortization            |       | (142,591              | )          | (395,969               | )          |
| Oil and natural gas properties, net                              |       | 2,648,191             |       | 4,544,374              |       |
| Gas gathering assets                                             |       | 203,537               |       | 332,201                |       |
| Accumulated depreciation, depletion and  amortization            |       | (4,181                | )          | (12,743                | )          |
| Gas gathering assets, net                                        |       | 199,356               |       | 319,458                |       |
| Office and field equipment, net                                  |       | 14,805                |       | 17,422                 |       |
| Advance on pending acquisition                                   |       | 80,000                |       | —                 |       |
| Oil and natural gas derivatives                                  |       | 41,469                |       | 12,566                 |       |
| Deferred financing costs, net                                    |       | 15,929                |       | 20,748                 |       |
| Other assets                                                     |       | 520                   |       | 763                    |       |
| Goodwill                                                         |       | 470,077               |       | 470,077                |       |
| Total assets                                                     |       | $                     | 3,707,057  |                   | $          | 5,831,694 |   |

 

*See accompanying notes.*

 

3

----

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| **(in thousands, except per share and share data)**                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **2006**              | ** ** | **2007**               | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | ** **            | ** ** | **(Unaudited)**        | ** ** |
| Liabilities and shareholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                  |       |                   |       |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                  |       |                   |       |
| Accounts payable and accrued liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | $                     | 54,402     |                   | $          | 117,313 |   |
| Accrued interest payable                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 36,000                |       | 14,787                 |       |
| Revenues and royalties payable                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | 53,994                |       | 89,621                 |       |
| Income taxes payable                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 89                    |       | 87                     |       |
| Deferred income taxes payable                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 32,639                |       | —                 |       |
| Current portion of asset retirement  obligations                                                                                                                                                                                                                                                                                                                                                                                                                               |       | 1,579                 |       | 1,617                  |       |
| Current portion of long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 6,500                 |       | —                 |       |
| Oil and natural gas derivatives                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 5,721                 |       | 28,373                 |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 190,924               |       | 251,798                |       |
| Long-term debt, net of current portion                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 2,081,653             |       | 1,980,480              |       |
| Asset retirement obligations and other  long-term liabilities                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 57,570                |       | 85,700                 |       |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 166,136               |       | 301,569                |       |
| Oil and natural gas derivatives                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 30,924                |       | 75,267                 |       |
| Commitments and contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | —                |       | —                 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                  |       |                   |       |
| 7.0% Cumulative Convertible Perpetual Preferred  Stock, par value $0.001 per share, 39,008 shares outstanding at September 30,  2007, liquidation preference of $391,218 at September 30, 2007                                                                                                                                                                                                                                                                                 |       | —                |       | 388,542                |       |
| Hybrid Preferred Stock (7.0% dividend), par  value $0.001 per share, 160,992 shares outstanding at September 30, 2007,  liquidation preference of $1,614,616 at September 30, 2007                                                                                                                                                                                                                                                                                             |       | —                |       | 1,603,571              |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                  |       |                   |       |
| Shareholders’ equity:                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                  |       |                   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                  |       |                   |       |
| Preferred stock, par value $0.001 per  share; 10,000,000 shares authorized at September 30, 2007, of which 39,008  shares have been designated as 7.0% Cumulative Convertible Perpetual  Preferred Stock and 160,992 shares have been designated as Hybrid Preferred  Stock (7.0% dividend); no shares of preferred stock other than the 7.0% Cumulative  Convertible Perpetual and Hybrid Preferred Stock (presented above) are issued  and outstanding at September 30, 2007 |       | —                |       | —                 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                  |       |                   |       |
| Common stock, $.001 par value; Authorized  shares - 350,000,000; issued and outstanding shares - 104,162,241 at December  31, 2006 and 104,460,070 at September 30, 2007                                                                                                                                                                                                                                                                                                       |       | 104                   |       | 104                    |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 1,024,442             |       | 1,035,676              |       |
| Retained earnings                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 155,304               |       | 108,987                |       |
| Total shareholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 1,179,850             |       | 1,144,767              |       |
| Total liabilities and shareholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                |       | $                     | 3,707,057  |                   | $          | 5,831,694 |   |

 

*See accompanying notes.*

 

4

----

 

**EXCO RESOURCES, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
| ** **                                                                     | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(in thousands, except per share data)**             | ** ** | **2006**                         | ** ** | **2007**                        | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenues and other income:                                                     |       |                             |       |                            |       |   |   |   |   |
| Oil and natural gas                                                            |       | $                                | 84,890     |                            | $          | 218,925 |   | $ | 234,634 |   | $ | 589,809 |   |
| Gain on derivative financial instruments                                       |       | 99,761                           |       | 98,252                          |       | 175,768 |   | 80,130 |   |
| Other income                                                                   |       | 678                              |       | 9,052                           |       | 3,572 |   | 25,192 |   |
| Total revenues and other income                                                |       | 185,329                          |       | 326,229                         |       | 413,974 |   | 695,131 |   |
| Costs and expenses:                                                            |       |                             |       |                            |       |   |   |   |   |
| Oil and natural gas production                                                 |       | 15,683                           |       | 44,811                          |       | 41,942 |   | 122,356 |   |
| Depreciation, depletion and amortization                                       |       | 31,354                           |       | 109,325                         |       | 81,329 |   | 265,797 |   |
| Accretion of discount on asset retirement  obligations                         |       | 394                              |       | 1,324                           |       | 1,078 |   | 3,534 |   |
| General and administrative                                                     |       | 8,389                            |       | 17,010                          |       | 20,828 |   | 46,175 |   |
| Interest                                                                       |       | 13,280                           |       | 36,523                          |       | 41,285 |   | 146,775 |   |
| Total costs and expenses                                                       |       | 69,100                           |       | 208,993                         |       | 186,462 |   | 584,637 |   |
| Equity in net income of TXOK Acquisition,  Inc.                                |       | —                           |       | —                          |       | 1,593 |   | — |   |
| Income before income taxes                                                     |       | 116,229                          |       | 117,236                         |       | 229,105 |   | 110,494 |   |
| Income tax expense                                                             |       | 44,484                           |       | 60,774                          |       | 89,185 |   | 58,843 |   |
| Net income                                                                     |       | 71,745                           |       | 56,462                          |       | 139,920 |   | 51,651 |   |
| Preferred stock dividends                                                      |       | —                           |       | (45,733                         | )          | — |   | (97,968 | ) |
| Net income (loss) available to common  shareholders                            |       | $                                | 71,745     |                            | $          | 10,729 |   | $ | 139,920 |   | $ | (46,317 | ) |
| Net income (loss) per common share:                                            |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) available to common  shareholders per common share - basic   |       | $                                | 0.69       |                            | $          | 0.10 |   | $ | 1.46 |   | $ | (0.44 | ) |
| Net income (loss) available to common  shareholders per common share - diluted |       | $                                | 0.68       |                            | $          | 0.10 |   | $ | 1.43 |   | $ | (0.44 | ) |
| Weighted average shares:                                                       |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                          |       | 104,056                          |       | 104,415                         |       | 96,144 |   | 104,311 |   |
| Diluted                                                                        |       | 105,424                          |       | 106,683                         |       | 97,571 |   | 104,311 |   |

 

*See accompanying notes.*

 

5

----

 

**EXCO RESOURCES, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

* *
| ** **                                                                                                        | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                        | ** ** | **September 30,**          | ** ** |
| **(in thousands)**                                                                                           | ** ** | **2006**                        | ** ** | **2007** | ** ** |
| ** **                                                                                                        | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **Operating Activities:**                                                                                         |       |                            |       |   |   |
| Net income                                                                                                        |       | $                               | 139,920    |   | $ | 51,651 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                                |       |                            |       |   |   |
| Equity in net income of TXOK Acquisition,  Inc.                                                                   |       | (1,593                          | )          | — |   |
| Settlements of derivative financial  instruments with a financing element                                         |       | —                          |       | 8,020 |   |
| Gain on sale of other assets                                                                                      |       | (89                             | )          | (653 | ) |
| Depreciation, depletion and amortization                                                                          |       | 81,329                          |       | 265,797 |   |
| Stock option compensation expense                                                                                 |       | 2,427                           |       | 6,728 |   |
| Accretion of discount on asset retirement  obligations                                                            |       | 1,078                           |       | 3,534 |   |
| Non-cash change in fair value of  derivatives                                                                     |       | (164,618                        | )          | 4,821 |   |
| Deferred income taxes                                                                                             |       | 89,185                          |       | 64,918 |   |
| Amortization of deferred financing costs,  premium on 7 1/4% senior notes due 2011 and discount on long-term debt |       | 4,505                           |       | 10,800 |   |
| Effect of changes in:                                                                                             |       |                            |       |   |   |
| Accounts receivable                                                                                               |       | 42,944                          |       | (62,522 | ) |
| Other current assets                                                                                              |       | (773                            | )          | (2,547 | ) |
| Accounts payable and other current  liabilities                                                                   |       | (21,421                         | )          | 29,751 |   |
| Net cash provided by operating activities                                                                         |       | 172,894                         |       | 380,298 |   |
| **Investing Activities:**                                                                                         |       |                            |       |   |   |
| Additions to oil and natural gas  properties, gathering systems and equipment                                     |       | (342,634                        | )          | (323,907 | ) |
| Acquisitions, including corporate  acquisitions                                                                   |       | (188,265                        | )          | (2,189,956 | ) |
| Advance on pending disposition                                                                                    |       | —                          |       | 1,500 |   |
| Proceeds from sale of Crimson stock                                                                               |       | —                          |       | 5,228 |   |
| Proceeds from disposition of property and  equipment and other                                                    |       | 4,613                           |       | 478,583 |   |
| Net cash used in investing activities                                                                             |       | (526,286                        | )          | (2,028,552 | ) |
| **Financing Activities:**                                                                                         |       |                            |       |   |   |
| Borrowings under credit agreements                                                                                |       | 498,000                         |       | 2,008,000 |   |
| Repayments under credit agreements                                                                                |       | (615,849                        | )          | (2,113,532 | ) |
| Payments on interim bank loan                                                                                     |       | (350,000                        | )          | — |   |
| Settlements of derivative financial  instruments with a financing element                                         |       | (38,098                         | )          | (8,020 | ) |
| Proceeds from issuance of common stock, net  of underwriter commissions and initial public offering costs         |       | 656,598                         |       | 3,175 |   |
| Proceeds from issuance of preferred stock                                                                         |       | —                          |       | 2,000,000 |   |
| Payments for preferred stock issuance costs                                                                       |       | —                          |       | (7,501 | ) |
| Payment of preferred stock dividends                                                                              |       | —                          |       | (92,134 | ) |
| Deferred financing costs                                                                                          |       | (1,521                          | )          | (17,759 | ) |
| Net cash provided by financing activities                                                                         |       | 149,130                         |       | 1,772,229 |   |
| Net increase (decrease) in cash                                                                                   |       | (204,262                        | )          | 123,975 |   |
| Cash at beginning of period                                                                                       |       | 226,953                         |       | 22,822 |   |
| Cash at end of period                                                                                             |       | $                               | 22,691     |   | $ | 146,797 |   |
|                                                                                                              |       |                            |       |   |   |
| Supplemental Cash Flow Information:                                                                               |       |                            |       |   |   |
| Interest paid                                                                                                     |       | $                               | 49,983     |   | $ | 154,200 |   |
| Value of shares issued in connection with  redemption of TXOK Acquisition, Inc. preferred stock                   |       | $                               | 4,667      |   | $ | — |   |
| Long-term debt assumed in TXOK Acquisition,  Inc. acquisition                                                     |       | $                               | 508,750    |   | $ | — |   |
| Derivative financial instruments assumed in  Vernon Acquisition                                                   |       | $                               | —     |   | $ | (60,015 | ) |
| Derivative financial instruments assumed in  Southern Gas Acquisition                                             |       | $                               | —     |   | $ | (42,204 | ) |
| Value of shares received for sale of  properties                                                                  |       | $                               | —     |   | $ | 4,575 |   |

 

*See accompanying notes.*

 

6

----

 

**EXCO RESOURCES, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

**(Unaudited)**

 
| ** **                                     | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **             | ** ** | **Total**  | ** ** |
|------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|------------------------|------------|------------|------------|
| ** **                                     | ** ** | **Common Stock** | ** ** | **paid-in** | ** ** | **Retained**   | ** ** | **shareholders’** | ** ** |
| **(in thousands)**                        | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **capital**    | ** ** | **earnings**           | ** ** | **equity** | ** ** |
| ** **                                     | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **             | ** ** | ** ** | ** ** |
| Balance at December 31, 2005                   |       | 50,000                |       | $           | 50         |           | $          | 354,482                |       | $          | 16,350     |   | $ | 370,882 |   |
| Issuance of common stock, net of expenses      |       | 54,004                |       | 54          |       | 666,760        |       | —                 |       | 666,814    |       |
| Issuance of common stock, exercise of  options |       | 63                    |       | —      |       | 476            |       | —                 |       | 476        |       |
| Deferred initial public offering costs         |       | —                |       | —      |       | (6,027         | )          | —                 |       | (6,027     | )          |
| Share-based compensation                       |       | —                |       | —      |       | 3,217          |       | —                 |       | 3,217      |       |
| Net income                                     |       | —                |       | —      |       | —         |       | 139,920                |       | 139,920    |       |
| Balance at September 30, 2006                  |       | 104,067               |       | $           | 104        |           | $          | 1,018,908              |       | $          | 156,270    |   | $ | 1,175,282 |   |
|                                           |       |                  |       |        |       |           |       |                   |       |       |       |
| Balance at December 31, 2006                   |       | 104,162               |       | $           | 104        |           | $          | 1,024,442              |       | $          | 155,304    |   | $ | 1,179,850 |   |
| Issuance of common stock, exercise of  options |       | 298                   |       | —      |       | 3,175          |       | —                 |       | 3,175      |       |
| Preferred stock dividends                      |       | —                |       | —      |       | —         |       | (97,968                | )          | (97,968    | )          |
| Share-based compensation                       |       | —                |       | —      |       | 8,059          |       | —                 |       | 8,059      |       |
| Net income                                     |       | —                |       | —      |       | —         |       | 51,651                 |       | 51,651     |       |
| Balance at September 30, 2007                  |       | 104,460               |       | $           | 104        |           | $          | 1,035,676              |       | $          | 108,987    |   | $ | 1,144,767 |   |

 

*See accompanying notes.*

 

7

----

 

**EXCO RESOURCES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**(Unaudited)**

 

**1.****             Organization and basis of presentation**

 

*Unless the context requires otherwise,references in this quarterly report to “EXCO,” “EXCO Resources,” “Company,” “we,”“us,” and “our” are to EXCO Resources, Inc., its consolidated subsidiaries andEXCO Holdings Inc., or EXCO Holdings, our former parent company. On February14, 2006, EXCO Holdings merged with and into EXCO Resources.*

 

EXCO Resources, Inc., a Texas corporation, is an independent oil andnatural gas company engaged in the acquisition, development and exploitation ofonshore North American oil and natural gas properties. Our principal operationsare located in the East Texas/North Louisiana, Appalachia, Mid-Continent andPermian producing areas. Our assets in East Texas/North Louisiana are owned byour subsidiary, EXCO Partners Operating Partnership, LP and its subsidiariesand are collectively referred to as EPOP. Organizationally, EPOP is an indirectwholly-owned subsidiary of EXCO Resources. EPOP’s debt is not guaranteed byEXCO Resources and EPOP does not guarantee EXCO Resources’ debt.

 

The accompanying condensed consolidated balance sheets as ofDecember 31, 2006 and September 30, 2007, the results of operations forthe three and nine months ended September 30, 2006 and 2007, cash flows for thenine months ended September 30, 2006 and 2007 and the changes in shareholders’equity for the nine months ended September 30, 2006 and 2007, are for EXCO, itssubsidiaries, and prior to the initial public offering, its parent. Allintercompany transactions have been eliminated.

 

We have prepared the accompanying unauditedinterim financial statements pursuant to the rules and regulations of theSecurities and Exchange Commission, or SEC, and in the opinion of management,such financial statements reflect all adjustments necessary to present fairlythe consolidated financial position of EXCO at September 30, 2007 and itsresults of operations and cash flows for the periods presented. We have omittedcertain information and disclosures normally included in annual financialstatements prepared in accordance with accounting principles generally acceptedin the United States pursuant to those rules and regulations, although webelieve that the disclosures we have made are adequate to make the informationpresented not misleading. These unaudited interim financial statements shouldbe read in conjunction with our audited financial statements and notes includedin our Annual Report on Form 10-K for the year ended December 31, 2006.

 

The results of operations for the interimperiods are not necessarily indicative of the results we expect for the fullyear.

 

**2.****             Significantrecent transactions**

 

**Private placement of preferred stock**

 

On March 30, 2007, we completed a private placement, or Private Placement, of an aggregate of $390.0 million of 7.0% Cumulative Convertible Perpetual Preferred Stock, or 7.0% Preferred Stock, and $1.61 billion of Hybrid Preferred Stock, or Hybrid Preferred Stock, to accredited investors pursuant to the terms and conditions of a Preferred Stock Purchase Agreement dated March 28, 2007. The purchase price for each share was $10,000 (which equals the liquidation preference per share on March 30, 2007).  The issuance and sale of the shares in the Private Placement was exempt from registration under the Securities Act of 1933, or Securities Act, pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.

 

The net proceeds of the Private Placement were used to fund the purchase price of approximately $1.5 billion for the acquisition on March 30, 2007 of substantially all of the oil and natural gas properties, acreage and related assets, including derivative financial instruments in respect of a significant portion of estimated production for 2007, 2008 and 2009, from Anadarko Petroleum Corporation, or Anadarko, in the Vernon and Ansley Fields located in Jackson Parish, Louisiana, or the Vernon Acquisition, and to repay certain outstanding indebtedness.

 

8

 

The 7.0% Preferred Stock is convertible into shares of our common stock at an initial conversion price of $19.00 per share, subject to anti-dilution adjustments, which equates to each share of 7.0% Preferred Stock being initially convertible into approximately 526.3 shares of our common stock, subject to adjustment for fractional shares. The Hybrid Preferred Stock was not initially convertible into shares of our common stock. Under applicable New York Stock Exchange, or NYSE, rules, shareholder approval is required to issue common stock, or securities convertible into or exercisable for common stock, if (i) such common stock has, or will have upon issuance, 20.0% or more of the voting power outstanding before the issuance, (ii) the number of shares of common stock to be issued is, or will be upon issuance, equal to 20.0% or more of the number of shares of common stock outstanding before the issuance, (iii) such common stock, or securities convertible into or exercisable for common stock, will be issued to a director, officer or substantial security holder of a company and such securities exceed either a threshold of one percent or, if issued to a substantial security holder who is not a director or officer at a price that is not less than the book and market value of the common stock, five percent of the number of shares of common stock or the voting power outstanding before the issuance or (iv) such issuance will result in a change of control of a company.

 

Absent NYSErules, we likely would have issued 200,000 shares of 7.0% Preferred Stock tofund the Vernon Acquisition and to repay certain outstanding indebtedness. As aresult of the limited time period to fund the Vernon Acquisition and the timerequired to organize a special meeting of shareholders, we were unable to holda special meeting of our shareholders to approve the issuance of 200,000 sharesof 7.0% Preferred Stock prior to the Vernon Acquisition. Therefore, in theinterim, we issued (i) 39,008 shares of 7.0% Preferred Stock, consisting of23,408 shares of Series A-1 7.0% Preferred Stock, 975 shares of Series A-2 7.0%Preferred Stock, 11,700 shares of Series B 7.0% Preferred Stock and 2,925shares of Series C 7.0% Preferred Stock, which shares by their terms wereconvertible into 19.7% of the number of shares of common stock outstandingbefore the preferred stock issuance and (ii) 160,992 shares of HybridPreferred Stock, consisting of 149,441 shares of Series A-1 Hybrid PreferredStock and 11,551 shares of Series A-2 Hybrid Preferred Stock.

 

We agreed with the preferred stock investors to seek the shareholder approval required by the NYSE, or NYSE Shareholder Approval, to transform the terms of the Hybrid Preferred Stock into the same terms as the 7.0% Preferred Stock. On August 30, 2007, NYSE Shareholder Approval was obtained and the designations, preferences, limitations and relative voting rights of the Series A-1 Hybrid Preferred Stock and Series A-2 Hybrid Preferred Stock became identical to the designations, preferences, limitations and relative voting rights of the Series A-1 7.0% Preferred Stock and the Series A-2 7.0% Preferred Stock, respectively, including the right to receive dividends at an annual rate of 7.0% and the right to convert into shares of our common stock at an initial conversion price of $19.00 per share, subject to anti-dilution adjustments.

 

## ***Principal terms ofthe Preferred Stock***

##  

The following summarizes the principal terms of the 7.0% Preferred Stock and the Hybrid Preferred Stock. This discussion is not complete and is qualified in its entirety by, and should be read in conjunction with, the Statements of Designation establishing each series of the 7.0% Preferred Stock and the Hybrid Preferred Stock, which are filed as exhibits to our Current Report on Form 8-K dated March 28, 2007 and filed with the SEC on April 2, 2007 and are incorporated by reference herein.

 

## Series A-1 7.0% Preferred Stock

##  

The Series A-17.0% Preferred Stock has an initial liquidation preference equal to $10,000 pershare and is convertible into common stock at a price of $19.00 per share, asmay be adjusted in accordance with the terms of the Series A-1 7.0% PreferredStock. We may force the conversion of the Series A-1 7.0% Preferred Stock atany time if the common stock trades for 20 days within a period of 30consecutive days at a price (i) above 175% of the then effective conversionprice ($33.25 per share at the current conversion price of $19.00 per share) atany time during the 24 months after issuance, (ii) above 150% of the theneffective conversion price ($28.50 per share at the current conversion price of$19.00 per share) thereafter through the 48th month after issuanceand (iii) above 125% of the then effective conversion price ($23.75 per shareat the current conversion price of $19.00 per share) at any time thereafter. Cashdividends will accrue at the rate of 7.0% per annum prior to March 30, 2013 andat the rate of 9.0% per annum thereafter. In lieu of paying cash dividends, wemay, under certain circumstances prior to March 30, 2013, pay dividends at arate of 9.0% per annum by adding the dividends to the liquidation preference ofthe shares of Series A-1 7.0% Preferred Stock. Upon the occurrence of a changeof control, holders of the Series A-1 7.0% Preferred Stock may require us torepurchase their shares for cash at the liquidation preference plus accumulateddividends. Holders of the Series A-1 7.0% Preferred Stock have the right tovote with the holders of common stock, the holders of other series of 7.0%Preferred Stock and the holders of Hybrid Preferred Stock, together as a singleclass, on all matters submitted to our shareholders (except the election ofdirectors) on an as-converted basis. Holders

 

9

----

 

of Series A-1 7.0%Preferred Stock, Series B 7.0% Preferred Stock, Series C 7.0% Preferred Stockand Series A-1 Hybrid Preferred Stock have the right to separately elect up tofour directors, subject to the rights of the holders of Series B 7.0% PreferredStock and Series C 7.0% Preferred Stock to vote as separate classes to eachelect one of such preferred directors. In addition, upon the occurrence ofspecified defaults in the Statements of Designation for the 7.0% PreferredStock and the Hybrid Preferred Stock, the holders of the 7.0% Preferred Stockand Hybrid Preferred Stock, voting together as a class, have the right to electfour additional directors, or Default Directors, until such default is cured.

 

## Series A-2 7.0% Preferred Stock

##  

The Series A-27.0% Preferred Stock has substantially the same rights as the Series A-1 7.0%Preferred Stock, except that holders of Series A-2 7.0% Preferred Stock do nothave the right to elect directors (other than the Default Directors) and do nothave any registration rights under the registration rights agreement with the7.0% Preferred Stock investors, or 7.0% Registration Rights Agreement. Sharesof Series A-2 7.0% Preferred Stock automatically convert into shares of SeriesA-1 7.0% Preferred Stock when the holder thereof has provided assurance to theCompany that either no filing is required under the Hart-Scott-Rodino AntitrustImprovements Act of 1976, as amended, or HSR Act, with respect to such holder’sacquisition of the shares of Series A-1 7.0% Preferred Stock or the waitingperiod applicable to such holder under the HSR Act has expired.

 

The holders of theSeries A-2 7.0% Preferred Stock have provided assurance to EXCO that allcriteria required by the HSR Act had been satisfied. As a result, all SeriesA-2 7.0% Preferred Stock were automatically converted into Series A-1 7.0%Preferred Stock.

 

## Series B 7.0% Preferred Stock

##  

The Series B 7.0%Preferred Stock has substantially the same rights as the Series A-1 7.0%Preferred Stock, except that the holders of Series B 7.0% Preferred Stock havethe right to designate one of the preferred directors and do not haveregistration rights under the 7.0% Registration Rights Agreement. The Series B7.0% Preferred Stock is convertible into Series A-1 7.0% Preferred Stock at anytime at the election of the holder and will automatically convert into SeriesA-1 7.0% Preferred Stock when such holder ceases to own an aggregate of 10,000shares of Series B 7.0% Preferred Stock and/or Hybrid Preferred Stock.

 

## Series C 7.0% Preferred Stock

##  

The Series C 7.0%Preferred Stock has substantially the same rights as the Series A-1 7.0%Preferred Stock, except that the holders of Series C 7.0% Preferred Stock havethe right to designate one of the preferred directors and do not have anyregistration rights under the 7.0% Registration Rights Agreement. The Series C7.0% Preferred Stock is convertible into Series A-1 7.0% Preferred Stock at anytime at the election of the holder and will automatically convert into SeriesA-1 7.0% Preferred Stock when such holder ceases to own an aggregate of 10,000shares of Series C 7.0% Preferred Stock and/or Hybrid Preferred Stock.

 

Series A-1 HybridPreferred Stock

 

Since NYSEShareholder Approval was obtained on August 30, 2007, the designations,preferences, limitations and relative voting rights of the Series A-1 HybridPreferred Stock became identical to the designations, preferences, limitationsand relative voting rights of the Series A-1 7.0% Preferred Stock, includingthe right to dividends and the right to convert into our common stock.

 

## Series A-2 Hybrid Preferred Stock

##  

The Series A-2Hybrid Preferred Stock has substantially the same rights as the Series A-1Hybrid Preferred Stock, except that holders of Series A-2 Hybrid PreferredStock do not have any registration rights or the right to elect directors(other than the Default Directors). Since NYSE Shareholder Approval wasobtained on August 30, 2007, the designations, preferences, limitations andrelative voting rights of the Series A-2 Hybrid Preferred Stock becameidentical to the designations, preferences, limitations and relative votingrights of the Series A-2 7.0% Preferred Stock, including the right to dividendsand the right to convert into our common stock. Shares of Series A-2 HybridPreferred Stock automatically convert into shares of Series A-1 HybridPreferred Stock when the holder thereof has provided assurance to the Company

 

10

----

 

that either nofiling is required under the HSR Act with respect to such holder’s acquisitionof the shares of Series A-1 Hybrid Preferred Stock or the waiting periodapplicable to such holder under the HSR Act has expired.

 

The holders of allthe Series A-2 Hybrid Preferred Stock have provided assurance to EXCO that allcriteria required by the HSR Act had been satisfied. As a result, all shares ofthe Series A-2 Hybrid Preferred Stock were automatically converted to SeriesA-1 Hybrid Preferred Stock.

 

***7.0%Preferred Stock Registration Rights Agreement***

 

In connection with the Private Placement, we entered into the 7.0%Registration Rights Agreement with the Preferred Stock investors. The 7.0%Registration Rights Agreement contemplates the registration of the resale ofthe shares of common stock underlying the 7.0% Preferred Stock and the HybridPreferred Stock. The 7.0% Registration Rights Agreement contains customaryterms and conditions for a transaction of this type.  We agreed to filewith the SEC, not later than September 26, 2007, a registration statement toregister the offer and sale of the common shares issuable upon conversion ofthe 7.0% Preferred Stock and the Hybrid Preferred Stock and to use our bestefforts to have the registration statement declared effective by March 24, 2008. If any shares of 7.0% Preferred Stock or Hybrid Preferred are outstanding onMarch 30, 2011, we agreed to file a registration statement with the SEC by June28, 2011 registering such shares for resale and to use our best efforts to havesuch registration statement declared effective by September 26, 2011.  Ifwe are unable to meet the deadlines described above, if a registrationstatement ceases to remain effective or if we restrict sales under aregistration statement under certain “blackout provisions” for longer than thecontractually permitted period, we must pay liquidated damages at a rate of0.5% per annum of the liquidation preference applicable to the 7.0% PreferredStock and the Hybrid Preferred Stock for the first 90 days and thereafter for eachsubsequent 90-day period at an additional rate of 0.25% up to a maximum of 2.0%per annum during any default period.  We also agreed to indemnify holdersagainst certain liabilities under the Securities Act in respect of any suchresale registration. On September 5, 2007, we filed an automatically effectiveregistration statement on Form S-3 with the SEC to register for resale theshares of common stock issuable upon conversion of the Series A-1 HybridPreferred Stock and the Series A-1 7.0% Preferred Stock.

 

***Hybrid Preferred Stock Registration RightsAgreement***

 

In connection with the Private Placement, we entered into aregistration rights agreement, or Hybrid Registration Rights Agreement, withthe Hybrid Preferred Stock investors. The Hybrid Registration Rights Agreementcontemplates the registration of the resale of the shares of Series A-1 HybridPreferred Stock.  If NYSE Shareholder Approval had not been obtained bySeptember 26, 2007, we would have been required to file a registration statementwith the SEC by December 24, 2007, covering the resale prior to suchshareholder approval of shares of Hybrid Preferred Stock and to use our bestefforts to have the registration statement declared effective by March 24,2008.  The Hybrid Registration Rights Agreement and the obligation of theparties thereunder terminated on August 30, 2007 because NYSE ShareholderApproval was obtained.

 

## **Amendedand restated credit agreement of EPOP**

##  

On March 30, 2007, EPOP,entered into an Amended and Restated Credit Agreement, or the EPOP CreditAgreement, among EPOP, as borrower, certain subsidiaries of EPOP, asguarantors,and certain lenders. The initial interest rate was LIBOR plus 150 basispoints (bps) with a maximum rate of LIBOR plus 175 bps.  The materialchanges reflected in the EPOP Credit Agreement include an increase in theborrowing base from $750.0 million to $1.3 billion, principally to reflect theassets acquired in the Vernon Acquisition.  EPOP applied $416.2 million(plus $252.5 million of EXCO’s capital contribution) to repay its Senior TermCredit Facility plus accrued interest of $5.7 million and a prepayment premiumof $13.0 million.  Upon consummation of the transactions, approximately$1.1 billion was outstanding under the EPOP Credit Agreement.  Financialcovenants contained within the EPOP Credit Agreement include a ConsolidatedCurrent Ratio (as defined) as of the end of any fiscal quarter ending on orafter June 30, 2007 to be at least 1.00 to 1.00.  For any fiscal quarterending June 30, 2007 and thereafter, the ratio of Consolidated FundedIndebtedness (as defined) to Consolidated EBITDAX (as defined) must be nogreater than 3.50 to 1.00.  For any quarter beginning June 30, 2007 andthereafter, the ratio of Consolidated EBITDAX to Consolidated Interest Expense(as defined) must be at least 2.50 to 1.00.  EPOP has also agreed to havein place commodity derivative contracts covering on a rolling basis no morethan 80% of its forecasted production from total proved reserves for the firsttwo years and 70% in the third, fourth and fifth years.  EPOP shall havein place mortgages covering 80% of its proved reserve value.  Finally,EPOP is permitted to pay dividends to EXCO up to $200.0 million per annumprovided that (i) EPOP is not in default under the EPOP Credit Agreement and(ii) the amount borrowed under the EPOP Credit Agreement does not exceed 90% ofthe then-permitted borrowing base.

 

11

----

 

**VernonAcquisition**

 

On March30, 2007, EPOP completed the purchase of substantially all of the oil andnatural gas properties and assets related to the Vernon and Ansley fieldslocated in Jackson Parish, Louisiana from Anadarko for approximately $1.5billion in cash, net of purchase price adjustments. Pursuant to the purchaseand sale agreement, the purchase price and resulting allocation was finalizedduring the third quarter of 2007. The Vernon Acquisition was funded by a $1.75billion capital contribution from EXCO to EPOP. The capital contributionconsisted of $1.67 billion in cash and an $80.0 million deposit made by EXCO inDecember 2006. Our final allocation of value to the Vernon Acquisition ispresented on the following table:

 
| **(in thousands)**                                             | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|
| **Acquisition cost:**                                               |       |       |       |
| Purchase price                                                      |       | $          | 1,520,183  |   |
| Acquisition related expenses                                        |       | 1,755      |       |
| Total acquisition cost                                              |       | $          | 1,521,938  |   |
|                                                                |       |       |       |
| **Allocation of acquisition cost:**                                 |       |       |       |
| Proved oil and natural gas properties                               |       | $          | 1,417,823  |   |
| Unproved oil and natural gas properties                             |       | 58,192     |       |
| Gas gathering and related facilities                                |       | 119,409    |       |
| Fair value (liability) of assumed  derivative financial instruments |       | (60,015    | )          |
| Asset retirement obligations                                        |       | (10,726    | )          |
| Other liabilities, net                                              |       | (2,745     | )          |
| Total allocation of acquisition cost                                |       | $          | 1,521,938  |   |

 

**SouthernGas Acquisition**

 

On May 2,2007, we completed the purchase of oil and natural gas properties and relatedassets, including derivative financial instruments, covering asignificant portion of estimated production for 2007, 2008 and 2009 fromentities affiliated with Anadarko in multiple fields primarily located inOklahoma, Texas and Louisiana for approximately $750.2 million in cash, includingacquisition related expenses, net of preliminary purchase price adjustments, orthe Southern Gas Acquisition. Pursuant to the purchase and sale agreement, thepurchase price and resulting allocation will be finalized during the fourthquarter of 2007. The acquisition was funded with cash on hand of $134.3million, including $133.0 million from escrow accounts from prior sales,borrowings under the EXCO Resources credit agreement of $572.9 million and theapplication of a $43.0 million deposit paid by EXCO to Anadarko in February2007.

 

The preliminary allocation of the purchase price to the assets andliabilities of the Southern Gas Acquisition is presented in the followingtable:

 
| **(in thousands)**                                             | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|
| **Acquisition cost:**                                               |       |       |       |
| Preliminary purchase price                                          |       | $          | 748,936    |   |
| Acquisition related expenses                                        |       | 1,252      |       |
| Total acquisition cost                                              |       | $          | 750,188    |   |
|                                                                |       |       |       |
| **Allocation of acquisition cost:**                                 |       |       |       |
| Proved oil and natural gas properties                               |       | $          | 554,650    |   |
| Unproved oil and natural gas properties                             |       | 4,469      |       |
| Gulf Coast Sale                                                     |       | 245,405    |       |
| Fair value (liability) of assumed  derivative financial instruments |       | (42,204    | )          |
| Asset retirement obligations                                        |       | (12,566    | )          |
| Other, net                                                          |       | 434        |       |
| Total allocation of acquisition cost                                |       | $          | 750,188    |   |

 

On May 2, 2007, in connection with the Southern Gas Acquisition, EXCOentered into the Second Amended and Restated Credit Agreement, or the EXCOResources Credit Agreement, among EXCO, as borrower, certain subsidiaries of

 

12

----

 

EXCO, as guarantors, and a group of lenders. As a result of theSouthern Gas Acquisition, EXCO and the lenders agreed to increase the borrowingbase from $750.0 million to $1.0 billion.

 

**Gulf CoastSale**

 

On May 8, 2007, we completed the sale of a portionof the oil and natural gas properties and related assets in multiplefields primarily located in South Texas and South Louisiana acquired in theSouthern Gas Acquisition to an entity affiliated with Crimson Exploration Inc.,or Crimson, for an aggregate sale price of $245.4 million in cash, net of preliminarypurchase price adjustments, and 750,000 shares of unregisteredrestricted Crimson common stock, or the Gulf Coast Sale. In connection with theclosing of the Gulf Coast Sale, the borrowing base on the EXCO Resources CreditAgreement was reduced from $1.0 billion to $900.0 million.

 

OnAugust 15, 2007, we sold the 750,000 shares of unregistered restricted commonstock of Crimson for an aggregate sales price of approximately $5.2 million. Werecorded a gain of $0.7 million on the sale, which is included in other incomefor the three and nine months ended September 30, 2007.

 

**Pro formaresults of operations**

 

Thefollowing table reflects the unaudited pro forma results of operations asthough the acquisitions of TXOK Acquisition, Inc., Power Gas Marketing &Transmission, Inc., Winchester Acquisition, Inc., or Winchester, (see ourAnnual Report on Form 10-K filed on March 19, 2007 for a discussion ofthese acquisitions), the Vernon Acquisition, the Southern Gas Acquisition andthe Gulf Coast Sale had occurred on January 1, 2006.

 
| ** **                                                         | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                         | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| **(in thousands, except per share data)** | ** ** | **2006**                                           | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenues and other income                                          |       | $                                                  | 384,718    |                                              | $          | 326,228 |   | $ | 1,104,914 |   | $ | 831,906 |   |
| Net income                                                         |       | $                                                  | 141,073    |                                              | $          | 56,438 |   | $ | 424,165 |   | $ | 93,887 |   |
| Preferred stock dividends                                          |       | (35,288                                            | )          | (35,288                                           | )          | (104,712 | ) | (104,712 | ) |
| Net income (loss) available to common  shareholders                |       | $                                                  | 105,785    |                                              | $          | 21,150 |   | $ | 319,453 |   | $ | (10,825 | ) |
| Basic earnings (loss) per share                                    |       | $                                                  | 1.02       |                                              | $          | 0.20 |   | $ | 3.32 |   | $ | (0.10 | ) |
| Diluted earnings (loss) per share                                  |       | $                                                  | 0.67       |                                              | $          | 0.20 |   | $ | 2.09 |   | $ | (0.10 | ) |

 

**Sales ofoil and natural gas properties**

 

On January5, 2007, we completed the sale of oil and natural gas properties andundeveloped drilling locations in the Wattenberg field area of the DJ Basin, orthe Wattenberg Field, for approximately $129.6 million in cash, net ofcontractual adjustments. The transaction included substantially all of theassets EXCO held in the area. Proceeds from the sale were deposited with athird party intermediary pending closing of the Southern Gas Acquisition tofacilitate a like-kind exchange for federal income tax purposes.

 

On July 13,2007, we completed the sale of substantially all of our interest in the CementField, located in Caddo and Grady Counties Oklahoma in our Mid-Continent areafor approximately $100.8 million, after contractual purchase price adjustments.Proceeds from this sale were deposited with a third party intermediary pendingclosing of assets purchased in West Texas in October 2007 in a like-kindexchange transaction for federal tax purposes (see Note 14. Subsequent events).

 

No gain orloss was recognized from these sales as we use the full cost method ofaccounting.

 

**3.****             Recent accounting pronouncements**

 

In****July 2006, theFinancial Accounting Standards Board, or FASB, issued Financial InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48. FIN 48clarifies the accounting for uncertainty in income taxes recognized in acompany’s financial statements in accordance with Statement of FinancialAccounting Standards, or SFAS, No. 109, “Accounting for Income Taxes.”  FIN 48 provides guidance on recognizing,measuring, presenting and disclosing in the financial statements uncertain taxpositions that a company has taken or expects to take on a tax return. Weadopted FIN

 

13

----

 

48 on January 1, 2007. The adoption of FIN 48 did not have amaterial impact on our consolidated financial position or results ofoperations.

 

The FASB issued FASB Staff Position EITF 00-19-2 “Accounting forRegistration Payment Arrangements,” or FSP 00-19-2, on December 21, 2006. FSP00-19-2 requires contingent obligations to make future payments under aregistration payment arrangement to be recognized separately in accordance withSFAS No. 5, “Accounting for Contingencies,” or SFAS No. 5. SFAS No. 5 requiresthat an estimated loss from a loss contingency be accrued if the loss isprobable and can reasonably be estimated. Our 7.0% Preferred Stock and HybridPreferred Stock contain requirements for EXCO to register shares on behalf ofthe preferred stockholders. If such registration deadlines are not met, or aprior registration statement ceases to remain effective, we may be obligated topay liquidated damages. We adopted FSP 00-19-2 upon issuance of the 7.0%Preferred Stock and the Hybrid Preferred Stock. We do not believe any of thecontingencies associated with the registration rights of the preferredstockholders are probable as of September 30, 2007 and therefore are not valuedseparately at September 30, 2007.

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFASNo. 157, which defines fair value, establishes a framework for measuringfair value in GAAP and expands disclosures about fair value measurements. SFASNo. 157 is effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. We will be required toadopt SFAS No. 157 in the first quarter of fiscal year 2008. The effect ofadopting SFAS No. 157 is not expected to have a significant effect on ourreported financial position or earnings.

 

In February 2007, theFASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities –Including an Amendment of FASB Statement No. 115,” or SFAS No. 159.SFAS No. 159 permits an entity to choose to measure many financialinstruments and certain other items at fair value. The fair value optionestablished by SFAS No. 159 permits all entities to choose to measureeligible items at fair value at specified election dates. Unrealized gains andlosses on items for which the fair value option has been elected are to berecognized in earnings at each subsequent reporting date. SFAS No. 159 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and as such, will be adopted by us on January 1, 2008. Theeffect of adopting SFAS No. 159 is not expected to have a significanteffect on our reported financial position or earnings.

 

**4.****             Significant accounting policies**

 

We consider accountingpolicies related to estimates of Proved Reserves, accounting for derivatives,business combinations, share-based payments, accounting for oil and natural gasproperties, goodwill, asset retirement obligations and accounting for incometaxes as significant accounting policies. When we acquire oil and natural gasproperties, the application of purchase accounting is also a significantaccounting policy. The policies include significant estimates made bymanagement using information available at the time the estimates are made.However, these estimates could change materially if different information orassumptions were used. These policies are summarized in our Annual Report onForm 10-K for the year ended December 31, 2006.

 

**5.****             Assetretirement obligations**

 

The following is a reconciliation of our assetretirement obligations for the nine months ended September 30, 2006 and 2007(in thousands):

 

14

----

 
| ** **                                                  | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **September 30,**          | ** ** |
| **(unaudited)**                                             | ** ** | **2006**                        | ** ** | **2007** | ** ** |
| Asset retirement obligation at January 1                    |       | $                               | 15,823     |   | $ | 56,149 |   |
| Activity during the nine months ended  September 30:        |       |                            |       |   |   |
| Acquisition of TXOK Acquisition, Inc                        |       | 8,203                           |       | — |   |
| Acquisition of Power Gas Marketing &  Transmission, Inc |       | 1,527                           |       | — |   |
| Liabilities incurred during the period                      |       | 2,174                           |       | 1,901 |   |
| Liabilities settled during the period                       |       | (238                            | )          | (3,321 | ) |
| Adjustment to liability due to Vernon  Acquisition          |       | —                          |       | 10,726 |   |
| Adjustment to liability due to Southern Gas  Acquisition    |       | —                          |       | 12,566 |   |
| Accretion of discount                                       |       | 1,078                           |       | 3,534 |   |
| Asset retirement obligations as of  September 30            |       | 28,567                          |       | 81,555 |   |
| Less current portion                                        |       | 1,428                           |       | 1,617 |   |
| Long-term portion                                           |       | $                               | 27,139     |   | $ | 79,938 |   |

 

We have no assets that are legally restrictedfor purposes of settling asset retirement obligations.

 

**6.****     Oil and natural gasproperties**

 

We record oil and natural gas properties atcost using the full cost method of accounting. Under the full cost method, allcosts associated with the acquisition, exploration or development of oil andnatural gas properties are capitalized as part of the full cost pool.Capitalized costs are limited to the aggregate of the present value of futurenet revenues plus the lower of cost or fair market value of unproved propertiesless the income tax effects related to the book and tax basis of the oil andnatural gas properties involved. The full cost pool is comprised of lease andwell equipment and exploration and development costs incurred, plus intangibleacquired proved leaseholds.

 

Unproved oil and natural gas properties areexcluded from the calculation of depreciation, depletion and amortization untilit is determined whether or not Proved Reserves can be assigned to suchproperties. At December 31, 2006 and September 30, 2007,$297.9 million and $327.9 million, respectively, in unproved oil andnatural gas properties were excluded from our full cost pool in calculating ourdepreciation, depletion and amortization. We assess our unproved oil andnatural gas properties for impairment on a quarterly basis.

 

Sales, dispositions and other oil and naturalgas property retirements are accounted for as adjustments to the full costpool, with no recognition of gain or loss unless the disposition wouldsignificantly alter the amortization rate.

 

At the end of each quarterly period, theunamortized cost of proved oil and natural gas properties, net of relateddeferred income taxes, is limited to the sum of the estimated future netrevenues from proved properties using current period-end prices discounted at10%, adjusted for related income tax effects (ceiling test).

 

As of September 30, 2007, pursuant to Rule 4-10(c)(4)(i)(A) ofRegulation S-X, we were required to compute our ceiling test using theSeptember 30, 2007 spot prices for oil and natural gas. The computationresulted in the carrying costs of our unamortized proved oil and natural gasproperties, net of deferred taxes, exceeding the September 30, 2007 presentvalue of future net revenues by approximately $541.1 million. As a result ofincreases in spot prices combined with the temporary exemption received fromthe SEC to exclude Winchester, the Vernon Acquisition and the Southern GasAcquisition from our ceiling test discussed below, the need to recognize animpairment for the quarter ended September 30, 2007 was eliminated.

 

Winchester, the Vernon Acquisition and the Southern Gas Acquisitionrepresent approximately 59.3% of EXCO’s consolidated full cost pool and are allrecent acquisitions. Our pricing for these acquisitions are based on modelswhich incorporate, among other things, market prices based on NYMEX futures.The ceiling test requires companies using the full cost accounting method toprice period ending Proved Reserves at the period end spot price, which may notbe indicative of actual market values. Given the significance of Winchester,the Vernon Acquisition and the Southern Gas Acquisition and the short passageof time between closing of these acquisitions and the required ceiling testcomputation, the Company requested, and received, an exemption from the SEC toexclude the Winchester, Vernon and Southern Gas acquisitions from the full costpool ceiling test assessments for a period of twelve months following thecorresponding acquisition dates.

 

15

----

 

The book value of the proved properties of Winchester, the VernonAcquisition and the Southern Gas Acquisition totaled approximately $2.7billion, which represents over half of our consolidated oil and natural gasassets. The request for exemption was made because the Company believes the fairvalue of the aforementioned acquisitions can be demonstrated beyond areasonable doubt to exceed their unamortized costs. The Company’s expectationof future prices is principally based on NYMEX futures contracts, adjusted forbasis differentials, for a period of five years. After a five year period wehave historically elected to use flat pricing as the volume on NYMEX futurescontracts traded on the public exchanges decreases significantly. Generally,the flat price used for the sixth year through the economic life of theproperty is management’s internal long-term price estimate, which is, in part,based on an extension of the NYMEX pricing. EXCO believes the NYMEX futurescontract reflects an independent proxy for fair value. Management’s internalvaluation model demonstrated that the fair value of Winchester, the VernonAcquisition and the Southern Gas Acquisition clearly exceeded the carryingcosts as of September 30, 2007 beyond a reasonable doubt.

 

We recognize that, due to the volatility associated with oil andnatural gas prices, a downward trend in market prices could occur. If such acase were to occur and is deemed to be other than a temporary trend, we wouldassess these acquisitions for impairment during the requested exemption period.Further, if we cannot demonstrate that fair value exceeds the unamortizedcarrying costs during the requested exemption periods prior to issuance of ourfinancial statements, we will recognize impairment related to theseacquisitions.

 

The calculation of the ceiling test is basedupon estimates of Proved Reserves. There are numerous uncertainties inherent inestimating quantities of Proved Reserves, in projecting the future rates ofproduction and in the timing of development activities. The accuracy of anyreserve estimate is a function of the quality of available data and ofengineering and geological interpretation and judgment. Results of drilling,testing and production subsequent to the date of the estimate may justifyrevision of such estimate. Accordingly, reserve estimates are often differentfrom the quantities of oil and natural gas that are ultimately recovered.

 

**7.****             Earnings (loss) pershare**

 

We account for earningsper share in accordance with SFAS No. 128, “Earnings per share,” or SFASNo. 128. SFAS No. 128 requires companies to present two calculations ofearnings per share; basic and diluted. Basic earnings (loss) per common sharefor the three and nine months ended September 30, 2006 and 2007 equals the netincome (loss) divided by the weighted average common shares outstanding duringthe period. Diluted earnings (loss) per common share for the three and ninemonths ended September 30, 2006 and 2007 equals net income (loss) divided bythe sum of weighted average common shares outstanding during the period plusany dilutive common stock equivalents assumed to be issued. Common stockequivalents for the three and nine months ended September 30, 2006 and 2007 areshares assumed to be issued if our outstanding stock options were in-the-moneyand exercised. We have excluded 2,541,801 stock options from the computation ofearnings per share as they are antidilutive due to the net loss available tocommon shareholders for the nine months ended September 30, 2007. The assumedconversion of the 7.0% Preferred Stock and the Hybrid Preferred Stock have beenexcluded from the three and nine months ended September 30, 2007 as they areanti-dilutive.

 

The following tablepresents the basic and diluted earnings (loss) per share computations for thethree and nine months ended September 30, 2006 and 2007:

 

16

----

 

 
| ** **                                                                     | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(in thousands, except per share data)**             | ** ** | **2006**                                                 | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic earnings (loss) per common share:                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income                                                                     |       | $                                                        | 71,745     |                                                    | $          | 56,462 |   | $ | 139,920 |   | $ | 51,651 |   |
| Preferred stock dividends                                                      |       | —                                                   |       | (45,733                                                 | )          | — |   | (97,968 | ) |
| Net income (loss) available to common  shareholders                            |       | $                                                        | 71,745     |                                                    | $          | 10,729 |   | $ | 139,920 |   | $ | (46,317 | ) |
|                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Shares:                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average number of common shares  outstanding                          |       | 104,056                                                  |       | 104,415                                                 |       | 96,144 |   | 104,311 |   |
|                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic earnings (loss) per share:                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income (loss) available to common  shareholders per common share           |       | $                                                        | 0.69       |                                                    | $          | 0.10 |   | $ | 1.46 |   | $ | (0.44 | ) |
|                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Diluted earnings (loss) per share:                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income (loss) available to common  shareholders                            |       | $                                                        | 71,745     |                                                    | $          | 10,729 |   | $ | 139,920 |   | $ | (46,317 | ) |
|                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Shares:                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average number of common shares  outstanding                          |       | 104,056                                                  |       | 104,415                                                 |       | 96,144 |   | 104,311 |   |
| Dilutive effect of stock options                                               |       | 1,369                                                    |       | 2,268                                                   |       | 1,427 |   | — |   |
| Weighted average common shares and common  stock equivalent shares outstanding |       | 105,425                                                  |       | 106,683                                                 |       | 97,571 |   | 104,311 |   |
|                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Diluted earnings (loss) per share:                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income (loss) available to common  shareholders per common share           |       | $                                                        | 0.68       |                                                    | $          | 0.10 |   | $ | 1.43 |   | $ | (0.44 | ) |

 

**8.****            ****Stock options**

 

We adopted SFAS No.123(R), “Share-Based Compensation,” or SFAS No. 123(R), on October 3, 2005. Asrequired by SFAS No. 123(R), the granting of options to our employeesunder the 2005 Long-Term Incentive Plan, or the 2005 Incentive Plan, areshare-based payment transactions and are to be treated as compensation expenseby us with a corresponding increase to additional paid-in capital. Volatilitywas determined based on the combination of the weighted average volatility ofour common stock and the daily closing prices from five comparable publiccompanies during the period when we were privately held. For the three and ninemonths ended September 30, 2007, total share-based compensation was $2.7million and $8.1 million, respectively, of which $2.3 million and $6.7 millionis included in general administrative and lease operating expense and$0.4 million and 1.4 million was capitalized as part of proved developedand undeveloped oil and natural gas properties. Total share-based compensationto be recognized on unvested awards as of September 30, 2007 is $15.2 millionover a weighted average period of 1.6 years.

 

During the nine months ended September 30, 2007, options to purchase1,576,700 shares were granted under the 2005 Incentive Plan at prices rangingfrom $16.00 to $18.44 per share with fair values ranging from $5.57 to $6.53per share. The options expire ten years following the date of grant. Pursuantto the 2005 Incentive Plan, 25% of the options vest immediately with anadditional 25% to vest on each of the next three anniversaries of the date ofthe grant. On August 30, 2007, shareholder approval was obtained to increasethe number of shares authorized to be issued under the 2005 Long-Term IncentivePlan by an additional 10,000,000 shares to a total of 20,000,000 shares. Therefore,as of December 31, 2006 and September 30, 2007, there were 1,574,475 and10,276,150 shares available to be granted under the 2005 Incentive Plan,respectively.

 

**9.****             Geographicoperating segment information**

 

We follow SFAS No. 131, “Disclosures About Segments of an Enterpriseand Related Information,” or SFAS No. 131. We have operations in only oneindustry segment, that being the oil and natural gas exploration and productionindustry. In prior periods, the Company provided geographic segment financialinformation for the following regions within the United States: EXCO (excludingAppalachia) and Appalachia. Effective in the fourth quarter of 2006, we nolonger present separate financial information for geographic regions within acountry. We now present industry segment information on a basis consistent withthe determination of our full cost pools.

 

**10.****         ****Derivative financialinstruments**

 

We do not designate our derivative financialinstruments as hedging instruments for financial accounting purposes and, as aresult, we recognize the change in the derivative’s fair value currently inearnings.

 

17

----

 

The following table setsforth our oil and natural gas derivatives as of September 30, 2007 and includesthe assumed derivative contracts acquired in connection with the VernonAcquisition and the Southern Gas Acquisition. The fair values at September 30,2007 are estimated from quotes from public market sources and represent theamount that we would expect to receive or pay to terminate the contracts atSeptember 30, 2007. We have the right to offset amounts we expect to receive orpay among our individual counterparties. As a result, we have offset amountsfor financial statement presentation purposes.

 
| ** **                                       | ** ** | ** **     | ** ** | **Weighted**            | ** ** | ** **                       | ** ** |
|--------------------------------------------------|------------|----------------|------------|-------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **Volume**     | ** ** | **average strike** | ** ** | **Fair value at**      | ** ** |
| **(in thousands, except prices)** | ** ** | **Mmbtu/Bbls** | ** ** | **price**               | ** ** | **September 30, 2007** | ** ** |
|                                             |       |           |       |                    |       |                             |       |
| **Natural Gas:**                                 |       |           |       |                    |       |                             |       |
| Swaps NYMEX:                                     |       |           |       |                    |       |                             |       |
| Remainder of 2007                                |       | 30,428         |       | $                       | 8.06       |                             | $          | 32,182 |   |
| 2008                                             |       | 100,110        |       | 8.36                    |       | 39,124                           |       |
| 2009                                             |       | 73,395         |       | 7.90                    |       | (25,204                          | )          |
| 2010                                             |       | 11,548         |       | 7.18                    |       | (9,308                           | )          |
| 2011                                             |       | 1,825          |       | 4.51                    |       | (5,105                           | )          |
| 2012                                             |       | 1,830          |       | 4.51                    |       | (4,503                           | )          |
| 2013                                             |       | 1,825          |       | 4.51                    |       | (3,993                           | )          |
| **Total Natural Gas**                            |       | 220,961        |       |                    |       | 23,193                           |       |
|                                             |       |           |       |                    |       |                             |       |
| **Oil:**                                         |       |           |       |                    |       |                             |       |
| Swaps:                                           |       |           |       |                    |       |                             |       |
| Remainder of 2007                                |       | 375            |       | 64.08                   |       | (6,004                           | )          |
| 2008                                             |       | 1,095          |       | 61.09                   |       | (16,150                          | )          |
| 2009                                             |       | 886            |       | 60.68                   |       | (10,480                          | )          |
| 2010                                             |       | 108            |       | 59.85                   |       | (1,162                           | )          |
| **Total Oil**                                    |       | 2,464          |       |                    |       | (33,796                          | )          |
| **Total Oil and Natural Gas**                    |       |           |       |                    |       | $                                | (10,603    | ) |
|                                                  |            |                |            |                         |            |                                  |            |  |  |

 

At September 30, 2007, the average forwardNYMEX oil prices per Bbl for the remainder of 2007 and for 2008 were $80.26 and$76.41, respectively, and the average forward NYMEX natural gas price per Mmbtufor the remainder of 2007 and for 2008 were $7.00 and $7.95, respectively.

 

**11.****          Long-term debt**

 

Long-term debt issummarized as follows: 

 
| ** **                                                 | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| **(in thousands)**                                    | ** ** | **2006**              | ** ** | **2007**               | ** ** |
| ** **                                                 | ** ** | ** **            | ** ** | ** **             | ** ** |
| Short-term debt:                                           | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current portion of long-term debt                          |       | $                     | 6,500      |                   | $          | — |   |
| Long-term debt:                                            |       |                  |       |                   |       |
| EPOP Credit Agreement                                      |       | $                     | 643,500    |                   | $          | 1,040,000 |   |
| EPOP Senior Term Credit Agreement                          |       | 643,500               |       | —                 |       |
| EXCO Resources Credit Agreement                            |       | 339,000               |       | 484,000                |       |
| Unamortized discount on EPOP Senior Term  Credit Agreement |       | (3,180                | )          | —                 |       |
| 7 1/4% senior notes due 2011                               |       | 444,720               |       | 444,720                |       |
| Unamortized premium on 7 1/4% senior notes  due 2011       |       | 14,113                |       | 11,760                 |       |
| Total                                                      |       | $                     | 2,081,653  |                   | $          | 1,980,480 |   |

 

18

----

 

**Credit agreements**

 

*EPOP Credit Agreement*

 

The EPOP Credit Agreement has a borrowing base of $1.3 billion andapproximately $1.0 billion drawn as of September 30, 2007. The borrowing baseis scheduled to be redetermined on a semi-annual basis, with EPOP and thelenders having the right to interim unscheduled redeterminations in certaincircumstances. Scheduled redeterminations will be made on or about April 1 andOctober 1 of each year, beginning October 1, 2007. EPOP has scheduled asemi-annual redetermination with the lending group during November 2007 andexpects to have an updated borrowing base established prior to December 2007.The EPOP Credit Agreement is secured by a first priority lien on the assets ofEPOP, including 100% of the equity of EPOP’s subsidiaries, and is guaranteed byall existing and future subsidiaries of EPOP. EPOP has agreed to have in placederivative financial instruments covering on a rolling basis no more than 80%of the forecasted production from total proved reserves (as defined) for the firsttwo years and 70% in the third, fourth and fifth years. The foregoingdescription is not complete and is qualified in its entirety by the EPOP CreditAgreement. As of September 30, 2007, EPOP was in compliance with the financialcovenants contained in the EPOP Credit Agreement which require that EPOP:

 

•      maintain aconsolidated current ratio (as defined under the EPOP Credit Agreement) of atleast 1.0 to 1.0 at the end of any fiscal quarter, beginning with the quarterending June 30, 2007;

 

•      not permit ourratio of consolidated indebtedness to consolidated EBITDAX (as defined underthe EPOP Credit Agreement) to be greater than 3.5 to 1.0 at the end of eachfiscal quarter, beginning with the quarter ending June 30, 2007; and

 

•      not permit ourinterest coverage ratio (as defined under the EPOP Credit Agreement) to be lessthan 2.5 to 1.0 at the end of each fiscal quarter, beginning with the quarterending June 30, 2007.

 

The EPOP Credit Agreement contains representations, warranties,covenants, events of default, and indemnities customary for agreements of thistype. The EPOP Credit Agreement matures March 30, 2012. Interest under the EPOPCredit Agreement ranges from LIBOR plus 100 bps to 175 bps or an Alternate BaseRate (ABR), as defined, ranging from ABR plus 0 bps to 75 bps.

 

At December 31, 2006and September 30, 2007, the six month LIBOR rates were 5.37% and 5.13%,respectively, which resulted in interest rates of approximately 7.19% and6.63%, respectively. At December 31, 2006 and September 30, 2007, we had$643.5 million and $1.0 billion, respectively, of outstanding indebtednessunder the EPOP Credit Agreement.

 

*EXCO Resources Credit Agreement*

 

The EXCO Resources Credit Agreement has a borrowing base of $900.0million. The borrowing base is redetermined semi-annually with EXCO and thelenders having the right to interim unscheduled redeterminations in certaincircumstances. Scheduled redeterminations are on or about April 1 and October 1of each year beginning on September 1, 2007. EXCO has scheduled a semi-annualredetermination with the lending group during November 2007 and expects to havean updated borrowing base established prior to December 2007. The interest rateranges from LIBOR plus 100 bps to LIBOR plus 175 bps depending upon borrowingbase usage.  The facility also includes an ABR pricing alternative rangingfrom ABR plus 0 bps to ABR plus 75 bps depending upon borrowing base usage. Borrowings under the EXCO Resources Credit Agreement are collateralized by afirst lien mortgage providing a security interest in our oil and natural gasproperties. EXCO has also agreed to have in place commodity derivativecontracts covering no more than 80% of its forecasted production from totalproved reserves (as defined) for the next two years and 70% in the third,fourth and fifth years.  EXCO will have in place mortgages covering 80% ofthe engineered value of its Borrowing Base Properties (as defined).  Theforegoing description is not complete and is qualified in its entirety by theEXCO Resources Credit Agreement. As of September 30, 2007, EXCO was incompliance with the financial covenants contained in the EXCO Resources CreditAgreement which require that we:

 

•      maintaina Consolidated Current Ratio (as defined) of at least 1.0 to 1.0 as of the endof any fiscal quarter ending on or after September 30, 2007;

 

•      notpermit our ratio of Consolidated Funded Indebtedness (as defined) to ConsolidatedEBITDAX (as defined) to be greater than 3.5 to 1.0 at the end of any fiscalquarter ending on or after September 30, 2007; and

 

19

----

 

•      maintaina Consolidated EBITDAX to Consolidated Interest Expense (as defined) ratio ofat least 2.5 to 1.0 at the end of any fiscal quarter ending on or afterSeptember 30, 2007.

 

AtDecember 31, 2006 and September 30, 2007, the six month LIBOR rates were5.37% and 5.13%, respectively, which resulted in interest rates ofapproximately 6.62% and 6.38%, respectively. At December 31, 2006 andSeptember 30, 2007, we had $339.0 million and $484.0 million, respectively, ofoutstanding indebtedness under the EXCO Resources Credit Agreement.

 

**71⁄4% senior notes due January 15, 2011**

 

As of September 30, 2007,$444.7 million in principal was outstanding on our 7 1⁄4% senior notes dueJanuary 15, 2011, or senior notes. Unamortized premium on the senior notes was$11.8 million at September 30, 2007. The estimated fair value of the seniornotes, based on quoted market prices for the senior notes, was $444.7 millionon September 30, 2007.

 

Interest is payable onthe senior notes semi-annually in arrears on January 15 and July 15of each year. The senior notes mature on January 15, 2011. We may redeemsome or all of the senior notes beginning on January 15, 2007 for theredemption price set forth in the senior notes.

 

The indenture governingthe senior notes contains covenants which limit our ability and the ability ofour subsidiaries to:

 

•      incuror guarantee additional debt and issue certain types of preferred stock;

 

•      paydividends on our capital stock or redeem, repurchase or retire our capitalstock or subordinated debt;

 

•      makeinvestments;

 

•      create liens on our assets;

 

•      enterinto sale/leaseback transactions;

 

•      createrestrictions on the ability of our restricted subsidiaries to pay dividends ormake other payments to us;

 

•      engagein transactions with our affiliates;

 

•      transferor issue shares of stock of subsidiaries;

 

•      transferor sell assets; and

 

•      consolidate,merge or transfer all or substantially all of our assets and the assets of oursubsidiaries.

 

**12.****          Preferredstock**

 

The 7.0%Preferred Stock and Hybrid Preferred Stock were issued in several series at apurchase price of $10,000 per share. All of the shares of Series A-2 7.0%Preferred Stock and Series A-2 Hybrid Preferred Stock have automaticallyconverted into Series A-1 7.0% Preferred Stock and Series A-1 Hybrid PreferredStock, respectively, as the holders provided assurance to EXCO that suchholders have satisfied any necessary filing requirements under the HSR Act orare able to avail themselves of an exemption therefrom. The following table accounts for these automatic conversions and presentsthe carrying value, net of issuance costs, for each series of our 7.0%Preferred Stock and Hybrid Preferred Stock at September 30, 2007:

 

20

----

 

**(in thousands, except shares)**

 
| **Series**              | ** ** | **Number of issued  shares** | ** ** | **Purchase price** | ** ** | **Balance as of  September 30, 2007** | ** ** |
|-------------------------|------------|----------------------------------------|------------|-------------------------|------------|-----------------------------------------------------------|------------|
| 7.0% Preferred Stock:   | ** ** | ** **                             | ** ** | ** **              | ** ** | ** **                                                | ** ** |
| Series A-1              |       | 24,383                                 |       | $                       | 243,830    |                                                      | $          | 242,868 |   |
| Series B                |       | 11,700                                 |       | 117,000                 |       | 116,539                                                   |       |
| Series C                |       | 2,925                                  |       | 29,250                  |       | 29,135                                                    |       |
| Subtotal                |       | 39,008                                 |       | 390,080                 |       | 388,542                                                   |       |
| Hybrid Preferred Stock: |       |                                   |       |                    |       |                                                      |       |
| Series A-1              |       | 160,992                                |       | 1,609,920               |       | 1,603,571                                                 |       |
| Subtotal                |       | 160,992                                |       | 1,609,920               |       | 1,603,571                                                 |       |
| Total preferred stock   |       | 200,000                                |       | $                       | 2,000,000  |                                                      | $          | 1,992,113 |   |

 

We paiddividends of $42.6 million on September 4, 2007 for dividends accrued from June16, 2007 through August 30, 2007. During that period, the Hybrid PreferredStock accrued dividends at 11.0% per annum and the 7.0% Preferred Stock accrueddividends at 7.0% per annum. We also paid dividends of $5.8 million onSeptember 15, 2007 for the period from August 31, 2007 through September 15,2007. During that period, all preferred stock dividends were accrued at a rateof 7.0% per annum. In addition, accrued dividends of $5.8 million are includedin current liabilities at September 30, 2007.

 

**13.****          Master Limited Partnership**

 

EXCO Partners, LP, orEXCO Partners, is a Delaware limited partnership recently formed by us toacquire, exploit and develop oil and natural gas properties. On September 13,2007, a registration statement relating to the initial public offering, or IPO,of common units representing limited partner interests of EXCO Partners wasfiled with the SEC but has not yet become effective.  In connection withthe proposed IPO, we expect to contribute proved developed producing oil andnatural gas wellbores to EXCO Partners in our East Texas/North Louisiana,Mid-Continent and Permian operating areas. We also expect to contribute to EXCOPartners all of our properties, including our undeveloped properties, in ourAppalachian operating area.

 

EXCO Partners expects tosell 51% (before underwriters’ over-allotment option) of its common units tothe public in the IPO and receive estimated net proceeds of approximately $1.43billion from the IPO, net of underwriting discounts and estimated offering expenses.

 

A registration statementrelating to common units of EXCO Partners has been filed with the SEC but hasnot yet become effective. These securities may not be sold nor may offers tobuy be accepted prior to the time the registration statement becomes effective.This quarterly report shall notconstitute an offer to sell or the solicitation of an offer to buy anysecurities.

 

Any offering of commonunits will be made only by means of a prospectus. A copy of the finalprospectus, when available, may be obtained by submitting requests to Goldman,Sachs & Co., 85 Broad Street, New York, NY 10004, via fax at 212-902-9316or via e-mail at prospectus-ny@ny.email.gs.com.

 

**14.****         ****Subsequent events**

 

On October 9, 2007, we completed theacquisition of an additional 45.0% interest in 28,000 acres of leaseholdinterests and 135 producing wells in our Canyon Sand field in West Texas for$156.6 million, subject to customary post-closing purchase price adjustments.

 

21

----

 

**15.****          Condensed********consolidating financial statements**

 

Set forth below are condensed consolidating financial statements ofEXCO, the guarantor subsidiaries and the non-guarantor subsidiaries. The seniornotes are jointly and severally guaranteed by some of our subsidiaries(referred to as guarantor subsidiaries). Each of the guarantor subsidiaries arewholly-owned subsidiaries of EXCO Resources, or Resources, and the guaranteesare unconditional as it relates to the assets of the guarantor subsidiaries.

 

On April 30, 2007, TXOK and its subsidiary, previously guarantorsubsidiaries, were merged into and with Resources. As a result, theconsolidating balance sheets, the consolidating statements of operations andconsolidating statements of cash flows for the respective periods in 2006 havebeen restated to reflect these guarantor subsidiaries as if they had beenmerged into and with Resources for all periods presented.

 

The following financial information presents consolidating financialstatements, which include:

 

•      Resources;

 

•      the guarantorsubsidiaries on a combined basis;

 

•      thenon-guarantor subsidiaries;

 

•      eliminationentries necessary to consolidate Resources, the guarantor subsidiaries and thenon-guarantor subsidiaries; and

 

•      EXCO on aconsolidated basis.

 

Investments insubsidiaries are accounted for using the equity method of accounting. Thefinancial information for the guarantor and non-guarantor subsidiaries arepresented on a combined basis. The elimination entries primarily eliminateinvestments in subsidiaries and intercompany balances and transactions.

 

22

----

 

**EXCORESOURCES, INC.**

 

**CONDENSEDCONSOLIDATING BALANCE SHEET**

 

**December 31,2006**

 
| **(in thousands)**                                          | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                       |       |          |       |                        |       |                              |       |             |       |             |       |
| Current  assets:                                                 |       |          |       |                        |       |                              |       |             |       |             |       |
| Cash and cash  equivalents                                       |       | $             | 6,522      |                        | $          | 6,233                             |       | $                | 10,067     |             | $          | — |   | $ | 22,822 |   |
| Other  current assets                                            |       | 44,050        |       | 36,484                      |       | 133,354                           |       | —           |       | 213,888          |       |
| Total  current assets                                            |       | 50,572        |       | 42,717                      |       | 143,421                           |       | —           |       | 236,710          |       |
| Oil and  natural gas properties (full cost accounting method):   |       |          |       |                        |       |                              |       |             |       |             |       |
| Unproved oil  and natural gas properties                         |       | 88,299        |       | 19,921                      |       | 189,699                           |       | —           |       | 297,919          |       |
| Proved  developed and undeveloped oil and natural gas properties |       | 607,892       |       | 818,427                     |       | 1,066,544                         |       | —           |       | 2,492,863        |       |
| Allowance  for depreciation, depletion and amortization          |       | (43,863       | )          | (43,260                     | )          | (55,468                           | )          | —           |       | (142,591         | )          |
| Oil and  natural gas properties, net                             |       | 652,328       |       | 795,088                     |       | 1,200,775                         |       | —           |       | 2,648,191        |       |
| Gas  gathering, office and field equipment, net                  |       | 5,911         |       | 33,367                      |       | 174,883                           |       | —           |       | 214,161          |       |
| Deferred  financing costs                                        |       | 946           |       | —                      |       | 14,983                            |       | —           |       | 15,929           |       |
| Deferred tax  asset                                              |       | —        |       | —                      |       | —                            |       | —           |       | —           |       |
| Oil and  natural gas derivatives                                 |       | 4,950         |       | 6,440                       |       | 30,079                            |       | —           |       | 41,469           |       |
| Goodwill                                                         |       | 110,800       |       | 164,469                     |       | 194,808                           |       | —           |       | 470,077          |       |
| Investments  in and advances to affiliates                       |       | 1,167,846     |       | (465,797                    | )          | —                            |       | (702,049         | )          | —           |       |
| Advance on  probable acquisition                                 |       | 80,000        |       | —                      |       | —                            |       | —           |       | 80,000           |       |
| Other  assets, net                                               |       | 17            |       | 471                         |       | 32                                |       | —           |       | 520              |       |
| Total assets                                                     |       | $             | 2,073,370  |                        | $          | 576,755                           |       | $                | 1,758,981  |             | $          | (702,049 | ) | $ | 3,707,057 |   |
|                                                             |       |          |       |                        |       |                              |       |             |       |             |       |
| **Liabilities  and shareholders’ equity**                   |       |          |       |                        |       |                              |       |             |       |             |       |
| Current  liabilities                                             |       | $             | 66,859     |                        | $          | 25,098                            |       | $                | 98,967     |             | $          | — |   | $ | 190,924 |   |
| Long-term  debt                                                  |       | 797,832       |       | —                      |       | 1,283,821                         |       | —           |       | 2,081,653        |       |
| Deferred  income taxes                                           |       | 11,147        |       | 154,989                     |       | —                            |       | —           |       | 166,136          |       |
| Other  liabilities                                               |       | 17,682        |       | 60,116                      |       | 10,696                            |       | —           |       | 88,494           |       |
| Payable to  parent                                               |       | —        |       | —                      |       | 16,385                            |       | (16,385          | )          | —           |       |
| Commitments  and contingencies                                   |       | —        |       | —                      |       | —                            |       | —           |       | —           |       |
| Shareholders’  equity                                       |       | 1,179,850     |       | 336,552                     |       | 349,112                           |       | (685,664         | )          | 1,179,850        |       |
| Total  liabilities and shareholders’ equity                 |       | $             | 2,073,370  |                        | $          | 576,755                           |       | $                | 1,758,981  |             | $          | (702,049 | ) | $ | 3,707,057 |   |

 

23

----

 

**EXCORESOURCES, INC.**

 

**CONDENSEDCONSOLIDATING BALANCE SHEET**

**(Unaudited)**

 

**September 30,2007**

 
| **(in thousands)**                                          | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                       |       |          |       |                        |       |                              |       |             |       |             |       |
| Current  assets:                                                 |       |          |       |                        |       |                              |       |             |       |             |       |
| Cash and  cash equivalents                                       |       | $             | 116,105    |                        | $          | 11,229                            |       | $                | 19,463     |             | $          | — |   | $ | 146,797 |   |
| Other  current assets                                            |       | 99,638        |       | 46,354                      |       | 153,497                           |       | —           |       | 293,824          |       |
| Total  current assets                                            |       | 215,743       |       | 57,583                      |       | 172,960                           |       | —           |       | 446,286          |       |
| Oil and  natural gas properties (full cost accounting method):   |       |          |       |                        |       |                              |       |             |       |             |       |
| Unproved oil  and natural gas properties                         |       | 77,054        |       | 17,753                      |       | 233,055                           |       | —           |       | 327,862          |       |
| Proved  developed and undeveloped oil and natural gas properties |       | 1,019,320     |       | 865,937                     |       | 2,727,224                         |       | —           |       | 4,612,481        |       |
| Allowance  for depreciation, depletion and amortization          |       | (87,969       | )          | (71,903                     | )          | (236,097                          | )          | —           |       | (395,969         | )          |
| Oil and  natural gas properties, net                             |       | 1,008,405     |       | 811,787                     |       | 2,724,182                         |       | —           |       | 4,544,374        |       |
| Gas  gathering, office and field equipment, net                  |       | 7,174         |       | 32,740                      |       | 296,966                           |       | —           |       | 336,880          |       |
| Deferred  financing costs                                        |       | 7,853         |       | —                      |       | 12,895                            |       | —           |       | 20,748           |       |
| Oil and  natural gas hedge derivatives                           |       | 2,041         |       | 1,274                       |       | 9,251                             |       | —           |       | 12,566           |       |
| Goodwill                                                         |       | 110,800       |       | 164,469                     |       | 194,808                           |       | —           |       | 470,077          |       |
| Investments  in and advances to affiliates                       |       | 2,497,388     |       | —                      |       | —                            |       | (2,497,388       | )          | —           |       |
| Other  assets, net                                               |       | 295           |       | 468                         |       | —                            |       | —           |       | 763              |       |
| Total assets                                                     |       | $             | 3,849,699  |                        | $          | 1,068,321                         |       | $                | 3,411,062  |             | $          | (2,497,388 | ) | $ | 5,831,694 |   |
|                                                             |       |          |       |                        |       |                              |       |             |       |             |       |
| **Liabilities  and shareholders’ equity**                   |       |          |       |                        |       |                              |       |             |       |             |       |
| Current  liabilities                                             |       | $             | 81,553     |                        | $          | 31,705                            |       | $                | 138,540    |             | $          | — |   | $ | 251,798 |   |
| Long-term  debt                                                  |       | 940,480       |       | —                      |       | 1,040,000                         |       | —           |       | 1,980,480        |       |
| Deferred income  taxes                                           |       | 116,722       |       | 184,847                     |       | —                            |       | —           |       | 301,569          |       |
| Other  liabilities                                               |       | 54,152        |       | 62,698                      |       | 44,117                            |       | —           |       | 160,967          |       |
| Payable to  parent                                               |       | (480,088      | )          | 455,866                     |       | 24,222                            |       | —           |       | —           |       |
| Commitments  and contingencies                                   |       | —        |       | —                      |       | —                            |       | —           |       | —           |       |
| Preferred  stock                                                 |       | 1,992,113     |       | —                      |       | —                            |       | —           |       | 1,992,113        |       |
| Shareholders’  equity                                       |       | 1,144,767     |       | 333,205                     |       | 2,164,183                         |       | (2,497,388       | )          | 1,144,767        |       |
| Total  liabilities and shareholders’ equity                 |       | $             | 3,849,699  |                        | $          | 1,068,321                         |       | $                | 3,411,062  |             | $          | (2,497,388 | ) | $ | 5,831,694 |   |

 

24

----

 

**EXCORESOURCES, INC.**

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**(Unaudited)**

 

**For thethree months ended September 30, 2006**

 
| ** **                                             | ** ** | ** **    | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | ** **    | ** ** | **Guarantor**    | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **(in thousands)**                                | ** ** | **Resources** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues  and other income:**                        |       |          |       |             |       |             |       |             |       |             |       |
| Oil and  natural gas sales                             |       | $             | 35,895     |             | $          | 28,669           |       | $                | 20,326     |             | $          | — |   | $ | 84,890 |   |
| Derivative  financial instruments                      |       | 62,954        |       | 36,807           |       | —           |       | —           |       | 99,761           |       |
| Other income  (loss)                                   |       | 13,311        |       | 369              |       | 425              |       | (13,427          | )          | 678              |       |
| Equity in  earnings of subsidiaries                    |       | 23,060        |       | —           |       | —           |       | (23,060          | )          | —           |       |
| Total  revenues and other income                       |       | 135,220       |       | 65,845           |       | 20,751           |       | (36,487          | )          | 185,329          |       |
|                                                   |       |          |       |             |       |             |       |             |       |             |       |
| **Costs  and expenses:**                               |       |          |       |             |       |             |       |             |       |             |       |
| Oil and  natural gas production                        |       | 6,187         |       | 5,411            |       | 4,085            |       | —           |       | 15,683           |       |
| Depreciation,  depletion and amortization              |       | 11,274        |       | 9,743            |       | 10,337           |       | —           |       | 31,354           |       |
| Accretion of  discount on asset retirement obligations |       | 171           |       | 173              |       | 50               |       | —           |       | 394              |       |
| General and  administrative                            |       | 3,758         |       | 1,833            |       | 2,798            |       | —           |       | 8,389            |       |
| Interest                                               |       | 13,280        |       | 7,474            |       | 5,953            |       | (13,427          | )          | 13,280           |       |
| Total costs  and expenses                              |       | 34,670        |       | 24,634           |       | 23,223           |       | (13,427          | )          | 69,100           |       |
| Income  (loss) before income taxes                     |       | 100,550       |       | 41,211           |       | (2,472           | )          | (23,060          | )          | 116,229          |       |
| Income tax  expense                                    |       | 28,805        |       | 15,679           |       | —           |       | —           |       | 44,484           |       |
| Net income  (loss)                                     |       | $             | 71,745     |             | $          | 25,532           |       | $                | (2,472     | )                | $          | (23,060 | ) | $ | 71,745 |   |

 

25

----

 

**EXCORESOURCES, INC.**

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**(Unaudited)**

 

**For thenine months ended September 30, 2006**

 
| ** **                                             | ** ** | ** **    | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | ** **    | ** ** | **Guarantor**    | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **(in thousands)**                                | ** ** | **Resources** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues  and other income:**                        |       |          |       |             |       |             |       |             |       |             |       |
| Oil and  natural gas sales                             |       | $             | 86,605     |             | $          | 91,498           |       | $                | 56,531     |             | $          | — |   | $ | 234,634 |   |
| Derivative  financial instruments                      |       | 91,124        |       | 84,644           |       | —           |       | —           |       | 175,768          |       |
| Other income  (loss)                                   |       | 36,688        |       | 1,324            |       | 1,008            |       | (35,448          | )          | 3,572            |       |
| Equity in  earnings of subsidiaries                    |       | 70,825        |       | —           |       | —           |       | (70,825          | )          | —           |       |
| Total  revenues and other income                       |       | 285,242       |       | 177,466          |       | 57,539           |       | (106,273         | )          | 413,974          |       |
|                                                   |       |          |       |             |       |             |       |             |       |             |       |
| **Costs  and expenses:**                               |       |          |       |             |       |             |       |             |       |             |       |
| Oil and  natural gas production                        |       | 16,429        |       | 14,741           |       | 10,772           |       | —           |       | 41,942           |       |
| Depreciation,  depletion and amortization              |       | 28,963        |       | 27,481           |       | 24,885           |       | —           |       | 81,329           |       |
| Accretion of  discount on asset retirement obligations |       | 471           |       | 477              |       | 130              |       | —           |       | 1,078            |       |
| General and  administrative                            |       | 12,879        |       | 4,488            |       | 3,461            |       | —           |       | 20,828           |       |
| Interest                                               |       | 41,285        |       | 20,626           |       | 14,822           |       | (35,448          | )          | 41,285           |       |
| Total costs  and expenses                              |       | 100,027       |       | 67,813           |       | 54,070           |       | (35,448          | )          | 186,462          |       |
| Equity in  earnings of TXOK Acquisition, Inc.          |       | 1,593         |       | —           |       | —           |       | —           |       | 1,593            |       |
| Income  (loss) before income taxes                     |       | 186,808       |       | 109,653          |       | 3,469            |       | (70,825          | )          | 229,105          |       |
| Income tax  expense                                    |       | 46,888        |       | 42,297           |       | —           |       | —           |       | 89,185           |       |
| Net income  (loss)                                     |       | $             | 139,920    |             | $          | 67,356           |       | $                | 3,469      |             | $          | (70,825 | ) | $ | 139,920 |   |

 

26

----

 

**EXCORESOURCES, INC.**

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**(Unaudited)**

 

**For thethree months ended September 30, 2007**

 
| ** **                                             | ** ** | ** **    | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | ** **    | ** ** | **Guarantor**    | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **(in thousands)**                                | ** ** | **Resources** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues  and other income:**                        |       |          |       |             |       |             |       |             |       |             |       |
| Oil and  natural gas sales                             |       | $             | 58,944     |             | $          | 27,974           |       | $                | 132,007    |             | $          | — |   | $ | 218,925 |   |
| Derivative  financial instruments                      |       | 16,528        |       | 9,620            |       | 72,104           |       | —           |       | 98,252           |       |
| Other income  (loss)                                   |       | 9,180         |       | (7,104           | )          | 6,976            |       | —           |       | 9,052            |       |
| Equity in  earnings of subsidiaries                    |       | 81,349        |       | —           |       | —           |       | (81,349          | )          | —           |       |
| Total  revenues and other income                       |       | 166,001       |       | 30,490           |       | 211,087          |       | (81,349          | )          | 326,229          |       |
|                                                   |       |          |       |             |       |             |       |             |       |             |       |
| **Costs  and expenses:**                               |       |          |       |             |       |             |       |             |       |             |       |
| Oil and  natural gas production                        |       | 12,924        |       | 6,274            |       | 25,613           |       | —           |       | 44,811           |       |
| Depreciation,  depletion and amortization              |       | 19,504        |       | 10,768           |       | 79,053           |       | —           |       | 109,325          |       |
| Accretion of  discount on asset retirement obligations |       | 439           |       | 486              |       | 399              |       | —           |       | 1,324            |       |
| General and  administrative                            |       | 10,442        |       | 2,068            |       | 4,500            |       | —           |       | 17,010           |       |
| Interest                                               |       | 16,293        |       | —           |       | 20,230           |       | —           |       | 36,523           |       |
| Total costs  and expenses                              |       | 59,602        |       | 19,596           |       | 129,795          |       | —           |       | 208,993          |       |
| Income  before income taxes                            |       | 106,399       |       | 10,894           |       | 81,292           |       | (81,349          | )          | 117,236          |       |
| Income tax  expense                                    |       | 49,937        |       | 10,837           |       | —           |       | —           |       | 60,774           |       |
| Net income  (loss)                                     |       | 56,462        |       | 57               |       | 81,292           |       | (81,349          | )          | 56,462           |       |
| Preferred  stock dividends                             |       | (45,733       | )          | —           |       | —           |       | —           |       | (45,733          | )          |
| Net income  (loss) available to common shareholders    |       | $             | 10,729     |             | $          | 57               |       | $                | 81,292     |             | $          | (81,349 | ) | $ | 10,729 |   |

 

27

----

 

**EXCORESOURCES, INC.**

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**(Unaudited)**

 

**For thenine months ended September 30, 2007**

 
| ** **                                             | ** ** | ** **    | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | ** **    | ** ** | **Guarantor**    | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **(in thousands)**                                | ** ** | **Resources** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues  and other income:**                        |       |          |       |             |       |             |       |             |       |             |       |
| Oil and  natural gas sales                             |       | $             | 145,605    |             | $          | 90,030           |       | $                | 354,174    |             | $          | — |   | $ | 589,809 |   |
| Derivative  financial instruments                      |       | 17,736        |       | (4,886           | )          | 67,280           |       | —           |       | 80,130           |       |
| Other income  (loss)                                   |       | 27,394        |       | (21,743          | )          | 19,541           |       | —           |       | 25,192           |       |
| Equity in  earnings of subsidiaries                    |       | 61,721        |       | —           |       | —           |       | (61,721          | )          | —           |       |
| Total  revenues and other income                       |       | 252,456       |       | 63,401           |       | 440,995          |       | (61,721          | )          | 695,131          |       |
|                                                   |       |          |       |             |       |             |       |             |       |             |       |
| **Costs  and expenses:**                               |       |          |       |             |       |             |       |             |       |             |       |
| Oil and  natural gas production                        |       | 32,352        |       | 18,272           |       | 71,732           |       | —           |       | 122,356          |       |
| Depreciation,  depletion and amortization              |       | 45,585        |       | 31,139           |       | 189,073          |       | —           |       | 265,797          |       |
| Accretion of  discount on asset retirement obligations |       | 1,075         |       | 1,439            |       | 1,020            |       | —           |       | 3,534            |       |
| General and  administrative                            |       | 25,607        |       | 7,400            |       | 13,168           |       | —           |       | 46,175           |       |
| Interest                                               |       | 45,843        |       | —           |       | 100,932          |       | —           |       | 146,775          |       |
| Total costs  and expenses                              |       | 150,462       |       | 58,250           |       | 375,925          |       | —           |       | 584,637          |       |
| Income  (loss) before income taxes                     |       | 101,994       |       | 5,151            |       | 65,070           |       | (61,721          | )          | 110,494          |       |
| Income tax  expense (benefit)                          |       | 50,343        |       | 8,500            |       | —           |       | —           |       | 58,843           |       |
| Net (income)  loss                                     |       | 51,651        |       | (3,349           | )          | 65,070           |       | (61,721          | )          | 51,651           |       |
| Preferred  stock dividends                             |       | (97,968       | )          | —           |       | —           |       | —           |       | (97,968          | )          |
| Net income  (loss) available to common shareholders    |       | $             | (46,317    | )                | $          | (3,349           | )          | $                | 65,070     |             | $          | (61,721 | ) | $ | (46,317 | ) |

 

28

----

 

**EXCORESOURCES, INC.**

 

**CONDENSED CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**(Unaudited)**

 

**For thenine months ended September 30, 2006**

 
| **(in thousands)**                                                       | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Operating  Activities:**                                                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Net cash provided  by operating activities                                    |       | $             | 79,531     |                        | $          | 57,346                            |       | $                | 36,017     |             | $          | — |   | $ | 172,894 |   |
| **Investing  Activities:**                                                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Additions to  oil and natural gas properties, gathering systems and equipment |       | (143,649      | )          | (86,416                     | )          | (112,569                          | )          | —           |       | (342,634         | )          |
| Corporate  acquisitions                                                       |       | —        |       | (61,776                     | )          | —                            |       | —           |       | (61,776          | )          |
| Advance to  TXOK Acquisition, Inc.                                            |       | (158,750      | )          | —                      |       | —                            |       | —           |       | (158,750         | )          |
| Proceeds  from dispositions of property and equipment                         |       | 3,834         |       | 761                         |       | 18                                |       | —           |       | 4,613            |       |
| Advances/investments  with affiliates                                         |       | (152,592      | )          | 117,924                     |       | 34,668                            |       | —           |       | —           |       |
| Cash  acquired in acquisition of TXOK Acquisition, Inc.                       |       | 8,882         |       | —                      |       | 23,379                            |       | —           |       | 32,261           |       |
| Net cash  used in investing activities                                        |       | (442,275      | )          | (29,507                     | )          | (54,504                           | )          | —           |       | (526,286         | )          |
| **Financing  Activities:**                                                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Borrowings under  credit agreement                                            |       | 498,000       |       | —                      |       | —                            |       | —           |       | 498,000          |       |
| Repayments  under credit agreement                                            |       | (602,749      | )          | (13,100                     | )          | —                            |       | —           |       | (615,849         | )          |
| Payments on  interim bank loan                                                |       | (350,000      | )          | —                      |       | —                            |       | —           |       | (350,000         | )          |
| Settlements  of derivative financial instruments with a financing element     |       | —        |       | (38,098                     | )          | —                            |       | —           |       | (38,098          | )          |
| Proceeds  from issuance of common stock, net                                  |       | 656,598       |       | —                      |       | —                            |       | —           |       | 656,598          |       |
| Deferred  financing costs and other                                           |       | (1,521        | )          | —                      |       | —                            |       | —           |       | (1,521           | )          |
| Net cash  provided by (used in) financing activities                          |       | 200,328       |       | (51,198                     | )          | —                            |       | —           |       | 149,130          |       |
| Net decrease  in cash                                                         |       | (162,416      | )          | (23,359                     | )          | (18,487                           | )          | —           |       | (204,262         | )          |
| Cash at  beginning of period                                                  |       | 191,500       |       | 35,453                      |       | —                            |       | —           |       | 226,953          |       |
| Cash at end  of period                                                        |       | $             | 29,084     |                        | $          | 12,094                            |       | $                | (18,487    | )                | $          | — |   | $ | 22,691 |   |

 

29

----

 

**EXCORESOURCES, INC.**

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**(Unaudited)**

 

**For thenine months ended September 30, 2007**

 
| **(in thousands)**                                                      | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Operating  Activities:**                                                   |       |          |       |                        |       |                              |       |             |       |             |       |
| Net cash  provided by operating activities                                   |       | $             | 66,699     |                        | $          | 52,806                            |       | $                | 260,793    |             | $          | — |   | $ | 380,298 |   |
| **Investing  Activities:**                                                   |       |          |       |                        |       |                              |       |             |       |             |       |
| Additions to  oil and natural gas properties, gathering systems andequipment |       | (59,486       | )          | (36,295                     | )          | (228,126                          | )          | —           |       | (323,907         | )          |
| Acquisitions,  including corporate acquisitions                              |       | (750,318      | )          | —                      |       | (1,439,638                        | )          | —           |       | (2,189,956       | )          |
| Proceeds  from dispositions of property and equipment                        |       | 476,516       |       | 34                          |       | 2,033                             |       | —           |       | 478,583          |       |
| Proceeds  from sale of Crimson stock                                         |       | 5,228         |       | —                      |       | —                            |       | —           |       | 5,228            |       |
| Advance  received on property sale                                           |       | 1,500         |       | —                      |       | —                            |       | —           |       | 1,500            |       |
| Advances/investments  with affiliates                                        |       | (1,665,863    | )          | (11,549                     | )          | 1,677,412                         |       | —           |       | —           |       |
| Net cash  provided by (used in) investing activities                         |       | (1,992,423    | )          | (47,810                     | )          | 11,681                            |       | —           |       | (2,028,552       | )          |
| **Financing  Activities:**                                                   |       |          |       |                        |       |                              |       |             |       |             |       |
| Proceeds  from long-term debt                                                |       | 838,000       |       | —                      |       | 1,170,000                         |       | —           |       | 2,008,000        |       |
| Payments on  long-term debt                                                  |       | (693,000      | )          | —                      |       | (1,420,532                        | )          | —           |       | (2,113,532       | )          |
| Settlements  of derivative financial instruments with a financing element    |       | (5,383        | )          | —                      |       | (2,637                            | )          | —           |       | (8,020           | )          |
| Proceeds  from issuance of common stock, net                                 |       | 3,175         |       | —                      |       | —                            |       | —           |       | 3,175            |       |
| Proceeds  from issuance of preferred stock, net                              |       | 2,000,000     |       | —                      |       | —                            |       | —           |       | 2,000,000        |       |
| Payment of  preferred stock dividends                                        |       | (92,134       | )          | —                      |       | —                            |       | —           |       | (92,134          | )          |
| Issuance  costs                                                              |       | (7,501        | )          | —                      |       | —                            |       | —           |       | (7,501           | )          |
| Deferred  financing costs and other                                          |       | (7,850        | )          | —                      |       | (9,909                            | )          | —           |       | (17,759          | )          |
| Net cash  provided by (used in) financing activities                         |       | 2,035,307     |       | —                      |       | (263,078                          | )          | —           |       | 1,772,229        |       |
| Net increase  in cash                                                        |       | 109,583       |       | 4,996                       |       | 9,396                             |       | —           |       | 123,975          |       |
| Cash at  beginning of period                                                 |       | 6,522         |       | 6,233                       |       | 10,067                            |       | —           |       | 22,822           |       |
| Cash at end  of period                                                       |       | $             | 116,105    |                        | $          | 11,229                            |       | $                | 19,463     |             | $          | — |   | $ | 146,797 |   |

 

30

----

 

 

***Item 2*. *Management’s Discussion andAnalysis of Financial Condition and Results of Operations***

 

**Forward-looking statements**

 

This quarterly report contains forward-looking statements, as definedin Section 27A of the Securities Act of 1933, or the Securities Act, andSection 21E of the Securities Exchange Act of 1934, or the Exchange Act.These forward-looking statements relate to, among other things, the following:

 

•             ourfuture financial and operating performance and results;

 

•             ourbusiness strategy;

 

•             marketprices;

 

•             ourfuture derivative financial instrument activities; and

 

•             ourplans and forecasts.

 

We have based these forward-looking statements on our currentassumptions, expectations and projections about future events.

 

We use the words “may,” “expect,” “anticipate,” “estimate,” “believe,” “continue,”“intend,” “plan,” “budget” and other similar words to identify forward-lookingstatements. You should read statements that contain these words carefullybecause they discuss future expectations, contain projections of results ofoperations or of our financial condition and/or state other “forward-looking”information. We do not undertake any obligation to update or revise publiclyany forward-looking statements, except as required by law. These statementsalso involve risks and uncertainties that could cause our actual results orfinancial condition to materially differ from our expectations in thisquarterly report, including, but not limited to:

 

•             fluctuationsin prices of oil and natural gas;

 

•             imports of foreign oil and natural gas,including LNG;

 

•             futurecapital requirements and availability of financing;

 

•             estimatesof reserves and economic assumptions used in connection with our acquisitions;

 

•             geologicalconcentration of our reserves;

 

•             risksassociated with drilling and operating wells;

 

•             risksassociated with the operation of natural gas pipelines and gathering systems;

 

•             discovery,acquisition, development and replacement of oil and natural gas reserves;

 

•             cashflow and liquidity;

 

•             impactsof our recent private placement of preferred stock and the impact of dividendson our capital resources and liquidity;

 

•             timingand amount of future production of oil and natural gas;

 

•             availabilityof drilling and production equipment;

 

•             marketingof oil and natural gas;

 

31

----

 

•             developmentsin oil-producing and natural gas-producing countries;

 

•             title to our properties;

 

•             litigation;

 

•             competition;

 

•             generaleconomic conditions, including costs associated with drilling and operations ofour properties;

 

•             governmentalregulations;

 

•             receiptof amounts owed to us by purchasers of our production and counterparties to ourderivative financial instruments;

 

•             decidingwhether or not to enter into derivative financial instruments;

 

•             eventssimilar to those of September 11, 2001;

 

•             actionsof third party co-owners of interests in properties in which we also own aninterest;

 

•             fluctuationsin interest rates; and

 

•             ourability to effectively integrate companies and properties that we acquire.

 

We believe that it is important tocommunicate our expectations of future performance to our investors. However,events may occur in the future that we are unable to accurately predict, orover which we have no control. You are cautioned not to place undue reliance ona forward-looking statement. When considering our forward-looking statements,keep in mind the risk factors and other cautionary statements in this quarterlyreport, and the risk factors included in our Annual Report on Form 10-K for theyear ended December 31, 2006.

 

Our revenues, operating results, financialcondition and ability to borrow funds or obtain additional capital dependsubstantially on prevailing prices for oil and natural gas. Declines in oil ornatural gas prices may materially adversely affect our financial condition,liquidity, ability to obtain financing and operating results. Lower oil ornatural gas prices also may reduce the amount of oil or natural gas that we canproduce economically. A decline in oil or natural gas prices could have amaterial adverse effect on the estimated value and estimated quantities of ouroil and natural gas reserves, our ability to fund our operations and ourfinancial condition, cash flow, results of operations and access to capital.Historically, oil and natural gas prices and markets have been volatile, withprices fluctuating widely, and they are likely to continue to be volatile.

 

**Overview**

 

We are an independent oil and natural gas company engaged in theacquisition, development and exploitation of onshore North American oil andnatural gas properties. We expect to continue to grow by leveraging ourmanagement team’s experience, exploiting our multi-year inventory ofdevelopment drilling locations and exploitation projects, and selectivelypursuing acquisitions that meet our strategic and financial objectives. Weemploy the use of debt and equity along with a comprehensive derivativefinancial instrument program to support our acquisition strategy. This approachenhances our ability to execute our business plan over the entire commodityprice cycle, protect our returns on investment, and manage our capitalstructure.

 

On average, oil and natural gas prices have increased significantlysince the beginning of 2004, but remain volatile. Significant factors that willimpact near-term commodity prices include political developments in Iraq, Iranand other oil producing countries, the extent to which members of the OPEC andother oil exporting nations are able to manage oil supply through export quotasand variations in key North American natural gas and refined products supplyand demand indicators. A substantial portion of our estimated production iscurrently covered by derivative financial instruments through 2009, and we haveadopted a commodity price risk management program under which we intend toenter into additional derivative 

 

32

----

 

financial instruments that willcover substantial percentages of our estimated production for the next threeyears to mitigate the impact of price volatility on our oil and natural gasreserves.

 

The increase in commodity prices has resulted in increased drillingactivity and demand for drilling and operating services and equipment in ouroperating areas. Due to the expected continued favorable commodity priceenvironment and related demand pressures, we anticipate drilling service andlabor costs, as well as costs of equipment and raw materials, to remain at orexceed the levels experienced in 2007.

 

Our 2007 budget, as amended to reflect our acquisitions in 2007, totals$502.9 million, which includes $443.3 million for drilling, exploitation andproduction operations, $48.6 million for midstream projects and $11.0 millionfor corporate projects. We do not budget for property acquisitions as thesetransactions are opportunistic in nature. Our future earnings and cash flowsare dependent upon our ability to manage our overall cost structure to a levelthat allows for profitable production.

 

Like all oil and natural gas production companies, we face thechallenge of natural production declines. Oil and natural gas production from agiven well naturally decreases over time. We attempt to overcome this naturaldecline by drilling to develop and identify additional reserves and byacquisitions. Our future growth will depend upon our ability to continue to addoil and natural gas reserves in excess of production at a reasonable cost. Wewill maintain our focus on the costs of adding reserves through drilling andacquisitions as well as the costs necessary to produce such reserves.

 

On March 30, 2007, we completed a private placement, or Private Placement, of an aggregate of $390.0 million of 7.0% Cumulative Convertible Perpetual Preferred Stock, or 7.0% Preferred Stock, and $1.61 billion of Hybrid Preferred Stock, or Hybrid Preferred Stock, to accredited investors pursuant to the terms and conditions of a Preferred Stock Purchase Agreement dated March 28, 2007. The purchase price for each share was $10,000. The liquidation preference equals the purchase price plus any accrued but unpaid dividends.  The net proceeds of the Private Placement were used to fund the purchase price of approximately $1.5 billion for the Vernon acquisition and to repay certain outstanding indebtedness. The issuance and sale of the shares in the Private Placement were exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.

 

On March 30,2007, EXCO Partners Operating Partnership, LP, or EPOP, a wholly-ownedsubsidiary of EXCO, completed the purchase of substantially all of the oil andnatural gas properties and related assets related to the Vernon and AnsleyFields located in Jackson Parish, Louisiana from entities affiliated withAnadarko Petroleum Corporation, or Anadarko, for approximately $1.5 billion incash, net of purchase price adjustments, or the Vernon Acquisition. Ourallocation of value to the Vernon Acquisition, which includes the assumption ofderivative financial instruments covering a significant portion of estimatedproduction for 2007, 2008 and 2009 was $1.4 billion to proved properties, $58.2million to unproved properties and $119.4 million to gathering and treating facilities,respectively. The fair value of the assumed derivative financial instrumentswas a liability of approximately $60.0 million.

 

On May 2, 2007, we completed the purchase of oiland natural gas properties and related assets, including derivative financialinstruments in respect of a significant portion of estimated production for2007, 2008 and 2009 from entities affiliated with Anadarko in multiple fieldsprimarily located in Oklahoma, Texas and Louisiana for approximately $750.2million in cash,net of preliminary purchase price adjustments, or the Southern Gas Acquisition.

 

On May 8, 2007, we completed the sale of a portionof the oil and natural gas properties and related assets acquired in theSouthern Gas Acquisition in multiple fields primarily located in South Texasand South Louisiana, or the Gulf Coast Sale, to an entity affiliated withCrimson Exploration Inc., or Crimson, for an aggregate sale price of $245.4million in cash, net of preliminary purchase price adjustments, and 750,000shares of unregistered restricted Crimson common stock, initially valued at$4.5 million and later sold for approximately $5.2 million. Our preliminaryallocation of value to the Southern Gas Acquisition, excluding the value ofproperties sold in the Gulf Coast Sale, was approximately $554.6 million toproved properties and $4.5 million to unproved properties.

 

For the nine months endedSeptember 30, 2007, we have completed additional sales of oil and natural gasproperties totaling approximately $232.4 million.

 

We also face the challenge of financing future acquisitions. Inconnection with the Vernon Acquisition, the Southern Gas Acquisition and thePrivate Placement, we amended our credit agreements to increase our borrowingcapacity to an aggregate of $2.2 billion as of September 30, 2007. EPOP’scredit agreement, as amended, or the EPOP Credit 

 

33

----

 

Agreement, provides for an aggregate borrowing base of$1.3 billion, of which $1.0 billion is drawn as of September 30, 2007. TheEXCO Resources credit agreement as amended and restated on May 2, 2007, or theEXCO Resources Credit Agreement, reflects the Southern Gas Acquisition whichincreased the borrowing base to $1.0 billion. On May 8, 2007, in connectionwith the Gulf Coast Sale, the borrowing base on the amended and restated EXCOResources Credit Agreement was reduced from $1.0 billion to $900.0 million. Asof September 30, 2007, outstanding borrowings on the EXCO Resources CreditAgreement were $484.0 million. With these credit agreements, we believe ourunused borrowing capacity of approximately $671.7 million will be sufficient tomeet our commitments. Funding for future acquisitions may require additionalsources of financing, which may not be available.

 

**Critical accounting policies**

 

We consider accountingpolicies related to estimates of Proved Reserves, accounting for derivatives,business combinations, share-based payments, accounting for oil and natural gasproperties, goodwill, asset retirement obligations and accounting for incometaxes as critical accounting policies. When we acquire oil and natural gasproperties, the application of purchase accounting is also a criticalaccounting policy. The policies include significant estimates made bymanagement using information available at the time the estimates are made.However, these estimates could change materially if different information orassumptions were used. These policies are summarized in Management’s Discussionand Analysis of Financial Condition and Results of Operations in our AnnualReport on Form 10-K for the year ended December 31, 2006.

 

**Recent accounting pronouncements**

 

In****July 2006, theFinancial Accounting Standards Board, or FASB, issued Financial InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48. FIN 48clarifies the accounting for uncertainty in income taxes recognized in acompany’s financial statements in accordance with Statement of FinancialAccounting Standards No. 109, “Accounting for Income Taxes.” FIN 48provides guidance on recognizing, measuring, presenting and disclosing in thefinancial statements uncertain tax positions that a company has taken orexpects to take on a tax return. We adopted FIN 48 on January 1, 2007. Theadoption of FIN 48 did not have a material impact on our consolidated financialposition or results of operations.

 

The FASB issued FASB Staff Position EITF 00-19-2 “Accounting forRegistration Payment Arrangements,” or FSP 00-19-2, on December 21, 2006. FSP00-19-2 requires contingent obligations to make future payments under aregistration payment arrangement to be recognized separately in accordance withStatement of Financial Accounting Standards No. 5, “Accounting forContingencies,” or SFAS No. 5. SFAS No. 5 requires that an estimated loss froma loss contingency be accrued if the loss is probable and can reasonably beestimated. Our 7.0% Preferred Stock and Hybrid Preferred Stock containrequirements for EXCO to register shares on behalf of the preferredstockholders. If such registration deadlines are not met, or a priorregistration statement ceases to remain effective, we may be obligated to payliquidated damages. We adopted FSP 00-19-2 upon issuance of the 7.0% PreferredStock and the Hybrid Preferred Stock. We do not believe any of thecontingencies associated with the registration rights of the preferredstockholders exist as of September 30, 2007 and therefore are not valuedseparately at September 30, 2007.

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFASNo. 157, which defines fair value, establishes a framework for measuringfair value in GAAP and expands disclosures about fair value measurements. SFASNo. 157 is effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. We will be required toadopt SFAS No. 157 in the first quarter of fiscal year 2008. The effect ofadopting SFAS No. 157 is not expected to have a significant effect on ourreported financial position or earnings.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities – Including an Amendment of FASB StatementNo. 115*,*”**or SFAS No. 159. SFAS No. 159permits an entity to choose to measure many financial instruments and certainother items at fair value. The fair value option established by SFASNo. 159 permits all entities to choose to measure eligible items at fairvalue at specified election dates. Unrealized gains and losses on items forwhich the fair value option has been elected are to be recognized in earningsat each subsequent reporting date. SFAS No. 159 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andas such, will be adopted by us on January 1, 2008. The effect of adopting SFASNo. 159 is not expected to have a significant effect on our reportedfinancial position or earnings.

 

34

----

 

**Our results of operations**

 

A summary of key financial data for the threeand nine months ended September 30, 2006 and 2007 related to our results ofoperations is presented below:

 
| ** **                                                                                            | ** ** | **Three months ended** | ** ** | **Quarter to**     | ** ** | **Nine months ended** | ** ** | **Year to**     | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|---------------------------------|------------|----------------------|------------|
| ** **                                                                                            | ** ** | **September 30,**           | ** ** | **quarter change** | ** ** | **September 30,**          | ** ** | **year change** | ** ** |
| **(in thousands, except production volumes, prices and expenses)** | ** ** | **2006**                         | ** ** | **2007**                | ** ** | **2006 - 2007**       | ** ** | **2006**             | ** ** | **2007** | ** ** | **2006 - 2007** | ** ** |
| **Production:**                                                                                       |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| Oil (Mbbls)                                                                                           |       | 241                              |       | 475                     |       | 234                             |       | 611                  |       | 1,176 |   | 565 |   |
| Natural gas  (Mmcf)                                                                                   |       | 10,460                           |       | 31,608                  |       | 21,148                          |       | 27,637               |       | 79,591 |   | 51,954 |   |
| Total production  (Mmcfe)                                                                             |       | 11,906                           |       | 34,458                  |       | 22,552                          |       | 31,303               |       | 86,647 |   | 55,344 |   |
| **Oil and  natural gas revenues before derivative financial instrument activities:**                  |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| Oil revenues                                                                                          |       | $                                | 16,437     |                    | $          | 34,520                          |       | $                    | 18,083     |   | $ | 40,265 |   | $ | 75,682 |   | $ | 35,417 |   |
| Natural gas  revenues                                                                                 |       | 68,453                           |       | 184,405                 |       | 115,952                         |       | 194,369              |       | 514,127 |   | 319,758 |   |
| Total oil and  natural gas revenues                                                                   |       | $                                | 84,890     |                    | $          | 218,925                         |       | $                    | 134,035    |   | $ | 234,634 |   | $ | 589,809 |   | $ | 355,175 |   |
| **Derivative  financial instruments:**                                                                |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| Cash settlements  on derivative financial instruments                                                 |       | $                                | 8,722      |                    | $          | 46,249                          |       | $                    | 37,527     |   | $ | 11,150 |   | $ | 84,951 |   | $ | 73,801 |   |
| Non-cash change  in fair value of derivative financial instruments                                    |       | 91,039                           |       | 52,003                  |       | (39,036                         | )          | 164,618              |       | (4,821 | ) | (169,439 | ) |
| Total derivative financial  instrument activities                                                     |       | $                                | 99,761     |                    | $          | 98,252                          |       | $                    | (1,509     | ) | $ | 175,768 |   | $ | 80,130 |   | $ | (95,638 | ) |
| **Average  sales price (before cash settlements of derivative financial instruments):**               |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| Oil (per Bbl)                                                                                         |       | $                                | 68.20      |                    | $          | 72.67                           |       | $                    | 4.47       |   | $ | 65.90 |   | $ | 64.36 |   | $ | (1.54 | ) |
| Natural gas (per  Mcf)                                                                                |       | 6.54                             |       | 5.83                    |       | (0.71                           | )          | 7.03                 |       | 6.46 |   | (0.57 | ) |
| Natural gas  equivalent (per Mcfe)                                                                    |       | 7.13                             |       | 6.35                    |       | (0.78                           | )          | 7.50                 |       | 6.81 |   | (0.69 | ) |
| **Oil and  natural gas production costs:**                                                            |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| Oil and natural  gas operating costs                                                                  |       | $                                | 10,492     |                    | $          | 30,507                          |       | $                    | 20,015     |   | $ | 27,778 |   | $ | 82,677 |   | $ | 54,899 |   |
| Production and ad  valorem taxes                                                                      |       | 5,191                            |       | 14,304                  |       | 9,113                           |       | 14,164               |       | 39,679 |   | 25,515 |   |
| Depletion                                                                                             |       | 30,121                           |       | 104,174                 |       | 74,053                          |       | 77,812               |       | 253,378 |   | 175,566 |   |
| General and  administrative                                                                           |       | 8,389                            |       | 17,010                  |       | 8,621                           |       | 20,828               |       | 46,175 |   | 25,347 |   |
| Interest expense                                                                                      |       | 13,280                           |       | 36,523                  |       | 23,243                          |       | 41,285               |       | 146,775 |   | 105,490 |   |
| **Expenses  (per Mcfe):**                                                                             |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| Operating costs                                                                                       |       | $                                | 0.88       |                    | $          | 0.89                            |       | $                    | 0.01       |   | $ | 0.89 |   | $ | 0.95 |   | $ | 0.06 |   |
| Production and ad  valorem taxes                                                                      |       | 0.44                             |       | 0.42                    |       | (0.02                           | )          | 0.45                 |       | 0.46 |   | 0.01 |   |
| Depletion                                                                                             |       | 2.53                             |       | 3.02                    |       | 0.49                            |       | 2.49                 |       | 2.92 |   | 0.43 |   |
| General and  administrative                                                                           |       | 0.70                             |       | 0.49                    |       | (0.21                           | )          | 0.67                 |       | 0.53 |   | (0.14 | ) |

 

The following is a discussion of ourfinancial condition and results of operations for the three and nine monthsended September 30, 2006 and 2007.

 

The comparability of our results ofoperations from period to period is impacted by:

 

•                  the acquisitions of TXOK Acquisition, Inc., or TXOK,on February 14, 2006, Winchester Energy Company, Ltd., or Winchester, onOctober 2, 2006, the Vernon Acquisition on March 30, 2007 and the Southern GasAcquisition on May 2, 2007;

 

•                  dispositions including the Wattenbergfield area of the DJ Basin, or the Wattenberg Field, in January 2007 and sale of our non-operatinginterests in the Cement Field in Oklahoma in July 2007. The Gulf Coast Sale inMay 2007 does not impact comparability from period to period as results ofoperations from those properties have never been included in our consolidatedresults of operations;

 

•                  significant changes in the amount of our long-termdebt and the issuance of $2.0 billion of preferred stock related to theacquisitions of Winchester, Vernon and Southern Gas;

 

•                  changes in Proved Reserves and their impact ondepletion;

 

•                  fluctuations due to the use of mark-to-marketaccounting for our derivative financial instruments; and

 

•                  significant fluctuations for oil and natural gasprices which impact our oil and natural gas reserves, revenues and ceiling testresults and our derivative financial instruments.

 

***General***

 

The availability of a ready market for oiland natural gas and the prices of oil and natural gas are dependent upon anumber of factors that are beyond our control. These factors include, amongother things:

 

•                  the level of domestic production and economicactivity generally;

 

•                  the availability of imported oil and natural gas;

 

35

----

 

•                  actions taken by foreign oil producing nations;

 

•                  the cost and availability of natural gas pipelineswith adequate capacity and other transportation facilities;

 

•                  the cost and availability of other competitivefuels, fluctuating and seasonal demand for oil, natural gas and refinedproducts; and

 

•                  the extent of governmental regulation and taxation(under both present and future legislation) of the production, refining,transportation, pricing, use and allocation of oil, natural gas, refinedproducts and substitute fuels.

 

Accordingly, in light of the manyuncertainties affecting the supply and demand for oil, natural gas and refinedpetroleum products, we cannot accurately predict the prices or marketability ofthe oil and natural gas from any producing well in which we have or may acquirean interest.

 

***Marketingarrangements***

 

We produce oil and natural gas. We do notrefine or process the oil we produce.

 

We sell the majority of the oil we produceunder short-term contracts using market sensitive pricing. The majority of ourcontracts are based on NYMEX pricing, which is typically calculated as theaverage of the daily closing prices of oil to be delivered one month in thefuture. We also sell a portion of our oil at F.O.B. field prices posted by theprincipal purchaser of oil where our producing properties are located. Our salescontracts are of a type common within the industry, and we usually negotiate aseparate contract for each property. Generally, we sell our oil to purchasersand refiners near the areas of our producing properties.

 

We sell the majority of our natural gas underindividually negotiated gas purchase contracts using market sensitive pricing.Our sales contracts vary in length from spot market sales of a single day toterm agreements that may extend for a year or more. Our natural gas customersinclude utilities, natural gas marketing companies and a variety of commercialand industrial end users. The natural gas purchase contracts define the termsand conditions unique to each of these sales. The price received for naturalgas sold on the spot market varies daily, reflecting changing marketconditions. We also gather and transport natural gas for other producers forwhich we are compensated.

 

We may not be able to market all of the oiland natural gas we produce. If our oil and natural gas can be marketed, we maynot be able to negotiate favorable price and contractual terms. Changes in oilor natural gas prices may significantly affect our revenues, cash flows, thevalue of our oil and natural gas properties and the estimates of recoverableoil and natural gas contained in our properties. Further, significant declinesin the prices of oil or natural gas may have a material adverse effect on ourbusiness and on our financial condition.

 

We engage in oil and natural gas productionactivities in geographic regions where, from time to time, the supply of oil ornatural gas available for delivery exceeds the demand. In this situation,companies purchasing oil or natural gas in these areas reduce the amount of oilor natural gas that they purchase from us. If we cannot locate other buyers forour production or for any of our newly discovered oil or natural gas reserves,we may shut-in our oil or natural gas wells for periods of time. If thisoccurs, we may incur additional payment obligations under our oil and naturalgas leases and, under certain circumstances, the oil and natural gas leasesmight be terminated.

 

**Summary**

 

For the three months ended September 30,2007, we reported net income available to common shareholders of $10.7 millioncompared to net income of $71.7 million for the quarter ended September 30,2006. For the nine months ended September 30, 2007, we reported a net lossavailable to common shareholders of $46.3 million compared with net income of$139.9 million for the nine months ended September 30, 2006. For the threemonths ended September 30, 2007, our oil and natural gas revenues, before theimpact of derivative financial instruments increased from $84.9 million to$218.9 million, an increase of 157.9%, when compared to the same period in 2006.For the nine months ended September 30, 2007, our oil and natural gas revenues,before the impact of derivative financial instruments increased from $234.6million to $589.8 million, an increase of 151.4%, when compared to the sameperiod in 2006. Our equivalent production of natural gas was 11.9 Bcfe for thequarter ended September 30, 2006, while equivalent natural gas production forthe quarter ended September 30, 2007 increased to 34.5 Bcfe. Our equivalentproduction of natural gas was 31.3 Bcfe for the nine months ended September 30,

 

36

----

 

2006, while equivalent natural gas production for the same period endedSeptember 30, 2007 increased to 86.6 Bcfe. Our operating costs, includingproduction and ad valorem taxes, also increased from $15.7 million ($1.32 perMcfe) for the three months ended September 30, 2006 to $44.8 million ($1.30 perMcfe) for the three months ended September 30, 2007. Our operating costs,including production and ad valorem taxes, also increased from $41.9 million($1.34 per Mcfe) for the nine months ended September 30, 2006 to $122.4 million($1.41 per Mcfe) for the nine months ended September 30, 2007. The increasesfrom the prior year’s revenues, production and operating costs are attributableto our significant 2006 and 2007 acquisitions, primarily TXOK, Winchester,Vernon and Southern Gas. Derivative financial instruments also had asignificant impact on our results of operations as we do not designate ourderivative financial instruments as hedges. As a result, we mark the change inthe fair value of our derivatives to market at the end of each reporting period.For the three and nine months ended September 30, 2006, we recognized gainsfrom our derivative financial instruments of $99.8 million and $175.8 million,respectively, of which $91.0 million and $164.6 million were unrealized. Forthe three months ended September 30, 2007, we recognized gains of $98.3million on our derivative financial instruments, representing income from cashsettlements of $46.3 million and $52.0 million of unrealized gains. For thenine months ended September 30, 2007, we recognized gains of $80.1 million onour derivative financial instruments, representing income from cash settlementsof $84.9 million and $4.8 million of unrealized losses.

 

***Oil and natural gasrevenues, production and prices***

 

For the three months ended September 30, 2007, total oil and naturalgas revenues, excluding the impact of derivative financial instruments, were$218.9 million, a 157.9% increase over the three months ended September 30,2006 total oil and natural gas revenues of $84.9 million. Total equivalentproduction volumes were 34.5 Bcfe for the three months ended September 30,2007, a 190.0% increase over the prior years comparable period production of11.9 Bcfe. The increased volumes are primarily attributable to the impacts ofWinchester, the Vernon Acquisition and the Southern Gas Acquisition. Partiallyoffsetting the increased volumes from these acquisitions were decreased volumesresulting from the sale of our Wattenberg Field assets in January 2007 ofapproximately 5.6 Mmcfe per day and the sale of our Cement field ofapproximately 8.0 Mmcfe per day in July 2007. In addition, production for thethree months ended September 30, 2007 was negatively impacted by shut-in of athird party pipeline due to flooding in our Mid-Continent producing area. Overall,the net increase in total oil and natural gas revenues, excluding the impact ofderivative financial instruments of $134.0 million for the three months endedSeptember 30, 2007 compared to the prior year three month period, was due tofavorable impacts from higher volumes of $143.2 million, which was partiallyoffset by the impact of lower prices of $0.78 per Mcfe from the prior yearsthree month period totaling $9.2 million

 

Total oil and natural gas revenues, excluding the impact of derivativefinancial instruments, increased $355.2 million, or 151.4%, for the nine monthsended September 30, 2007 over the same period in the prior year due to higherequivalent production volumes. Production volumes increased by 55.3 Bcfe, or176.8%, reflecting the favorable impact of acquisitions partially offset bylower volumes from the sale of our Wattenberg Field in January of 2007 and CementField in July 2007, which decreased total volumes by 1.4 Bcfe, or 5.1 Mmcfe perday, and a decrease in our average sales price of $0.69 per equivalent Mmcfefor the nine months ended September 30, 2007 compared so the same period in2006. The remaining increase in volumes in 2007 reflects the impacts of ourdevelopment drilling activities which have more than offset normal declines. Theincrease in production volumes for the nine months ended September 30, 2007compared to the nine months ended September 30, 2006 is primarily due to thefollowing transactions:

 

•                  the acquisition of TXOK on February 14, 2006, whichcontributed a full nine months of production for the period ended September 30,2007 compared to seven and a half months for the period ended September 30,2006, resulted in an increase of 1.9 Bcfe;

 

•                  the acquisition of Power Gas Marketing &Transmission, Inc., or PGMT, on April 28, 2006, which contributed a full ninemonths of production to the results ended September 30, 2007 compared toonly five months for the period ended September 30, 2006, resulted in anincrease of 617 Mmcfe;

 

•                  the Winchester Acquisition on October 2, 2006, whichaccounted for a 19.6 Bcfe increase from the same period in 2006;

 

•                  the Vernon Acquisition on March 30, 2007, whichcontributed six months to the results ended September 30, 2007 resulting in anincrease of 27.0 Bcfe; and

 

•                   the Southern Gas Acquisition on May 2, 2007, whichcontributed five full months to the results ended September 30, 2007 resultingin an increase of 6.3 Bcfe. We do not include any production or revenues 

 

37

----

 

attributable to properties included in the Gulf Coast Sale.

 

Prices, excluding the impact of derivativefinancial instruments, decreased for oil during the nine months ended September30, 2007 compared to the nine months ended September 30, 2006 by $1.54 per Bbl(to $64.36 from $65.90) or 2.3%. Natural gas prices averaged $6.46, a decreaseof 8.1% for the nine months ended September 30, 2007 compared with $7.03 perMcf for the nine months ended September 30, 2006. Overall, the net increase intotal oil and natural gas revenues, excluding the impact of derivativefinancial instruments for the nine months ended September 30, 2007 compared tothe prior years nine month period of $355.2 million was due to favorableimpacts from higher production volumes of $376.8 million, which was partiallyoffset by the impact of lower prices of $0.69 per Mcfe from the prior yeartotaling $21.6 million.

 

***Derivative financial instruments***

 

Our cash settlements from derivativefinancial instruments increased revenue by $46.3 million and $84.9 million forthe three and nine months ended September 30, 2007 compared with $8.7 millionand $11.2 million of cash settlements, which increased revenue for the threeand nine months ended September 30, 2006.

 

For the three months ended September 30,2007, we recognized an increase in revenue of $52.0 million from thechange in the fair value of our derivative financial instruments. For the ninemonths ended September 30, 2007, we recognized a decrease in revenue of$4.8 million from the change in the fair value of our derivative financialinstruments. For the three and nine months ended September 30, 2006, werecognized an increase in revenue of $91.0 million and $164.6 million,respectively, from the change in the fair value of our derivative financialinstruments. We expect that our revenues will continue to be significantlyimpacted in future periods by changes in the fair value of our derivativefinancial instruments as a result of the volatility in oil and natural gasprices. The volume of expected future oil and natural gas sales covered underour derivative financial instrument program for the three and nine months endedSeptember 30, 2007 was 77.6% and 77.9%, respectively, of oil production and96.1% and 89.5%, respectively, of natural gas production.

 

***Other income***

 

Our other income increased to $9.1 millionand $25.2 million for the three and nine months ended September 30, 2007 from$0.7 million and $3.6 million, respectively, for the same periods in the prioryear. The increase is primarily due to natural gas gathering and transportationactivities related to the Winchester acquisition and the Vernon Acquisition andhigher interest income due to higher cash balances during 2007. The increasedcash balances are the result of the proceeds received from asset sales placedin like-kind exchange escrow accounts and our recent sale of 750,000 shares ofunregistered restricted Crimson common stock, which yielded a $0.7 million gain.Our income from natural gas gathering and transportation activities for thethree and nine month periods ended September 30, 2007 increased approximately$6.1 million and $17.4 million, respectively, when compared to the same periodsin the prior year, which is due primarily to mid-stream activities from theWinchester acquisition in October 2006 and the Vernon Acquisition in March2007.

 

***Oil and natural gasoperating costs***

 

Our oil and natural gas operating costs forthe three and nine months ended September 30, 2007 increased $20.0 million and$54.9 million, or 190.8% and 197.6%, from the same periods in 2006. Theincrease in oil and natural gas operating costs was primarily attributable to:

 

•                  the acquisition of TXOK on February 14, 2006, whichcontributed a full nine months of production expenses for the period endingSeptember 30, 2007 compared to only seven and a half months for the periodended September 30, 2006;

 

•                    the acquisition of PGMT on April 28, 2006, whichcontributed a full nine months of production expenses to the results endedSeptember 30, 2007 compared to only 5 months for the period ended September 30,2006;

 

•                  the Winchester Acquisition on October 2, 2006 whichcontributed a full nine months of production expenses when compared to the sameperiod in 2006;

 

•                  the Vernon Acquisition on March 30, 2007, whichcontributed a full six months of production expenses for the nine months endedSeptember 30, 2007 when compared to the same period in 2006;

 

38

----

 

•                  the Southern Gas Acquisition on May 2, 2007, whichcontributed five full months of production expenses for the nine months endedSeptember 30, 2007 when compared to the same period in 2006. We do not includeany production or revenues attributable to properties included in the GulfCoast Sale;

 

•                  a general increase in thecost of goods and services used in our oil and natural gas operations during2007; and

 

•                  new wells added throughour development and exploitation capital program.

 

The oil and natural gas operating cost perunit increased from $0.88 per Mcfe for the three months ended September 30,2006 to $0.89 per Mcfe, or 1.1%, for the three months ended September 30, 2007.The oil and natural gas operating cost per unit increased from $0.89 per Mcfefor the nine months ended September 30, 2006 to $0.95 per Mcfe, or 6.7%, forthe nine months ended September 30, 2007. This increase for the nine monthsended September 30, 2007 in operating costs per unit reflects the generalincrease in the costs of goods and services used in our operations and anincrease in workover activities. During the nine months ended September 30,2007, notable increases in operating expenses occurred in sub-surface repairand maintenance costs, saltwater disposal fees, compression expenses and roadrepairs. While our 2007 operating expenses reflect increases from theaforementioned services, the operating cost per unit of $0.89 per Mcfe for thethree months ended September 30, 2007 was 29.4% less than the operating costper unit for the three months ended March 31, 2007 of $1.26 per Mcfe, which didnot include the Vernon Acquisition. The reduction in the unit rate reflects theimpact of significant volumes from the Vernon Acquisition, which has lowoperating expenses.

 

***Production and ad valorem taxes***

 

Production and ad valorem taxes for the threeand nine months ended September 30, 2007 increased by $9.1 million, or 175.6%,and $25.5 million, or 180.1%, respectively, over the same periods in 2006.These increases are primarily attributable and correspond to the increase inoil and natural gas revenues resulting from 2006 and 2007 acquisitions and therelated increase in sales volumes. On a percentage of revenue basis, productionand ad valorem taxes were 6.5% and 6.7% of gross oil and natural gas sales forthe three and nine months ended September 30, 2007 compared with 6.1% and 6.0%during the same periods in the prior year. The increase in the overall tax rateis the result of higher percentages of our revenues being derived fromproperties in Texas and Louisiana and a lower percentage of total sales beingderived from our Appalachia region production. Production and ad valorem taxestend to be lower in Appalachia than in the Texas and Louisiana areas.Production taxes are set by the state and local governments and vary as to thetax rate and the value to which that rate is applied. Further, ad valorem taxesin Texas and other states are based partially on the value of oil and naturalgas reserves, which have increased significantly in 2007 as compared with 2006due to acquisitions made during 2006 and 2007. These taxes are generally basedupon the price received for production.

 

***Depletion***

 

Our depletion costs for the three and nine months ended September 30,2007 increased by $74.1 million, or 245.9%, and $175.6 million, or 225.6%, fromthe same periods in 2006. The primary reasons for the increases were from a189.4% and 176.8% increase in oil and natural gas sales volumes for the threeand nine months ended September 30, 2007, respectively, directly related to theacquisitions made during 2006 and 2007, and an increase in the per unitdepletion rate from $2.53 per Mcfe and $2.49 per Mcfe for the three and ninemonths ended September 30, 2006 to $3.02 per Mcfe and $2.92 per Mcfe for thethree and nine months ended September 30, 2007.

 

***General and administrative***

 

Our general and administrative costs for the three and nine monthsended September 30, 2007 increased by $8.6 million, or 102.8%, and $25.3million, or 121.7%, over the same periods in 2006. Significant components ofthe increase for the nine months ended September 30, 2007 include thefollowing items:

 

•                  increased personnel costs of $15.2 million over thenine month period due to additional headcount of 216 employees relatedprimarily to our acquisitions and an overall increase in our accountingactivities due to being a public company;

 

•                  an increase in share-based compensation costs for the nine month periodof $2.8 million due primarily to additional headcount;

 

39

----

 

•                  increased consulting and contract labor costs overthe nine month period of $3.5 million due primarily to acquisitions andSarbanes-Oxley compliance;

 

•                  increased IT related costs over the nine monthperiod of $3.8 million due to our information systems conversion and trainingcosts that do not qualify for capital treatment;

 

•                  increased legal fees over the nine month period of$1.5 million;

 

•                  increased audit and tax fees over the nine monthperiod of approximately $2.4 million reflecting incremental fees attributableto compliance with the Sarbanes-Oxley audits and fees incurred in connectionwith audited financial statements of our Vernon Acquisition and Southern GasAcquisition;

 

•                  increased occupancy costs over the nine month periodof $0.6 million resulting from expansion of corporate facilities; and

 

•                    the remaining increase in expenses is related to theoverall growth of our business.

 

Partiallyoffsetting the above increases in general and administrative costs wereincreased operator overhead recoveries of $12.8 million for the nine monthsending September 30, 2007, a $7.6 million increase from the same period in theprior year, primarily resulting from the acquisitions mentioned above.

 

Thefollowing table presents the components of our general and administrativeexpenses:

 
| ** **                                       | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                       | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| **(in thousands)**                          | ** ** | **2006**                                           | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** |
| Gross general and administrative expenses        |       | $                                                  | 11,228     |                                              | $          | 23,957 |   | $ | 28,221 |   | $ | 62,938 |   |
| Capitalized general and administrative  expenses |       | (824                                               | )          | (1,674                                            | )          | (2,196 | ) | (3,993 | ) |
| Reimbursed general and administrative  expenses  |       | (2,015                                             | )          | (5,273                                            | )          | (5,197 | ) | (12,770 | ) |
| Net general and administrative expenses          |       | $                                                  | 8,389      |                                              | $          | 17,010 |   | $ | 20,828 |   | $ | 46,175 |   |

 

***Interest expense***

 

Our interest expense for the three and nine months ended September 30,2007 increased $23.2 million and $105.5 million, respectively, from the sameperiods in 2006. The increase is primarily due to interest expense associatedwith the amended credit agreements used to fund the acquisitions of TXOK,Winchester, PGMT, Vernon and Southern Gas, which increased our outstandingdebt, excluding our senior notes, from $404.0 million at September 30, 2006 to$1.5 billion at September 30, 2007. Interest expense for the nine months endedSeptember 30, 2007 includes non-recurring charges totaling $32.1 millionattributable to (a) redemption premium of $13.0 million from retirement of theEPOP Senior Term Credit Agreement, (b) write-off of $12.2 million for deferredfinancing costs and unamortized original issue discount on the EPOP Senior TermCredit Agreement and (c) expensed fees of $6.9 million associated withcommitment letters from members of our banking group which were not utilized asa result of the Private Placement on March 30, 2007.

 

***Income taxes***

 

Our effective income tax rate for the three and nine months endedSeptember 30, 2007 was 51.8% and 53.2%, respectively. Our effective tax rate onnet income from operations for the three and nine months ended September 30,2006 was 38.3% and 38.9%, respectively. A substantial portion of ourstock-based compensation included in our results of operations for the threeand nine months ended September 30, 2007 are in the form of incentive stockoptions which are not deductible for tax purposes until a disqualifying eventoccurs. The non-deductible portion of stock compensation increased oureffective rate by approximately 0.4% and 1.3% for the three and nine monthsended September 30, 2007, respectively. The rate differential from the taxreturn true-up is related to a valuation allowance required on foreign taxcredits attributable to a gain on the sale of our Canadian subsidiary in 2005and an election made in the third quarter of 2007 to carryback a net operatingloss instead of carrying the net operating loss forward creating an effectiverate impact of 9.4% and 9.9% for the three and nine months ended September 30,2007, respectively. The remainder of the tax rate change over 

 

40

----

 

the prior year is a result of the state tax rate increase resultingfrom the increased taxable income in Louisiana, Pennsylvania and Texaspartially offset by percentage depletion deductions.

 

**Our liquidity, capital resources and capitalcommitments**

 

***General***

 

Most of our growth has resulted fromacquisitions and our development and exploitation program. Consistent with ourstrategy of acquiring and developing reserves, we have an objective ofmaintaining financing flexibility. In the past, we have utilized a variety ofsources of capital to fund our acquisition, development and exploitationprograms and to fund our operations. Our general financial strategy is to use acombination of cash flow from operations, bank financing, cash received fromthe sale of oil and natural gas properties and the sale or issuance of equityand debt securities to fund our operations, conduct development and exploitationactivities and to fund acquisitions. As of November 1, 2007, the aggregateborrowing base under our credit agreements totaled $2.2 billion. We do not havea set budget for acquisitions as these tend to be opportunity driven. Historically,we have used the proceeds from the issuance of equity and debt securities andborrowings under our credit agreements to raise cash to fund acquisitions. Ourability to borrow from sources other than our credit agreements is subject torestrictions imposed by our lenders. In addition, our indenture governing oursenior notes contain restrictions on incurring indebtedness and pledging ourassets.

 

On March 30, 2007, we issued 200,000 shares of preferred stock for $2.0billion in cash in connection with the Vernon Acquisition. In conjunction withthe Vernon Acquisition, the Southern Gas Acquisition and the Gulf Coast Sale,we amended our credit agreements which increased our aggregate borrowing baseto $2.2 billion. Additional liquidity totaling approximately $474.4 million,net of contractual purchase price adjustments, has been generated from the saleof oil and natural gas properties through October 2007.

 

Net cash provided by operating activities was $380.3 million for thenine months ended September 30, 2007 compared with $172.9 million for the ninemonths ended September 30, 2006. The increase is attributable primarily to thecash provided from the operations of 2006 and 2007 acquisitions which arepartially offset by higher interest costs and lower product prices. AtSeptember 30, 2007, our cash and cash equivalents balance was $146.8 million,an increase of $124.0 million from December 31, 2006 primarily as a resultof proceeds from the sale of our Cement field. On July 15, 2007, we made aninterest payment on our 71⁄4% senior notes of $16.1 million and we made adividend payment to our preferred shareholders of $42.6 million on September 4,2007 and another payment of $5.8 million on September 12, 2007.

 

***Acquisitions andcapital expenditures***

 

The following table presents our capitalexpenditures for the nine months ended September 30, 2006 and 2007. Ouracquisition of TXOK did not result in any property acquisition expenditures asthe acquisition was consummated by the redemption of TXOK’s preferred stock andfor the assumption of TXOK’s debt. The capital expenditures for the nine monthsended September 30, 2006 include capital expenditures of TXOK during the periodfrom February 14, 2006 to September 30, 2006.

 

41

----

 
| ** **                                                                                                                                       | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **September 30,**          | ** ** |
| **(unaudited, in thousands)**                                                                                                          | ** ** | **2006**                        | ** ** | **2007** | ** ** |
| **Capital expenditures:**                                                                                                                        |       |                            |       |   |   |
| Property acquisitions excluding TXOK  Acquisition, Inc.                                                                                          |       | $                               | 215,438    |   | $ | — |   |
| Acquisition of TXOK Acquisition, Inc.  preferred stock, net of cash acquired                                                                     |       | 126,489                         |       | — |   |
| Acquisition of Power Gas Marketing &  Transmission, Inc., net of cash acquired, excluding debt and derivative financial  instruments assumed |       | 61,776                          |       | — |   |
| Property purchases including the Vernon  Acquisition and the Southern Gas Acquisiton                                                             |       | —                          |       | 2,288,003 |   |
| Lease purchases                                                                                                                                  |       | 2,926                           |       | 17,310 |   |
| Development capital expenditures                                                                                                                 |       | 120,173                         |       | 304,404 |   |
| Other                                                                                                                                            |       | 6,735                           |       | 14,205 |   |
| Total capital expenditures                                                                                                                       |       | $                               | 533,537    |   | $ | 2,623,922 |   |

 

On March30, 2007, we completed the purchase of substantially all of the oil and naturalgas properties and related assets related to the Vernon and Ansley Fieldslocated in Jackson Parish, Louisiana from Anadarko in exchange for $1.5 billionin cash, net of purchase price adjustments. The assets include producing andundeveloped acreage in Jackson Parish, Louisiana. The acquisition was financedby our Private Placement of preferred stock along with EPOP’s amended andrestated credit agreement, or EPOP Credit Agreement, with certain lenders.

 

On May 2, 2007, we completed the purchase of oil and natural gasproperties and related assets from Anadarko in multiple fields primarilylocated in Oklahoma, Texas and Louisiana for approximately $750.2 million incash, net of preliminary purchase price adjustments. Pursuant to the purchase and sale agreement,the final purchase price, and resulting final allocation is expected to befinalized during the fourth quarter of 2007. In connection with theSouthern Gas Acquisition, we amended and restated our existing EXCO ResourcesCredit Agreement and increased the borrowing base from $750.0 million to $1.0billion. In connection with the sale of oil and natural gas properties andrelated assets in multiple fields primarily located in the Gulf Coast area toCrimson for $245.4 million in cash, net of preliminary purchase adjustments,and 750,000 shares of Crimson’s unregistered restricted common stock, which wassold for approximately $5.2 million during the third quarter of 2007, theborrowing base under the EXCO Resources Credit Agreement was reduced from $1.0billion to $900.0 million.

 

For the year 2007, we have budgeted approximately $502.9 millionfor our development, exploitation and exploration activities. As of September30, 2007, we were contractually obligated to spend $141.9 million for ourdevelopment and exploitation activities for the remainder of 2007.

 

We expect to utilize our current cash balance, cash flow fromoperations and available funds under our credit agreements to fund ouracquisitions, capital expenditures and working capital. In order to meetstrategic objectives, we may sell non-strategic assets during the remainder of2007.

 

We believe that our capital resources from existing cash balances, cashflow from operating activities and borrowing capacity under our credit agreementsare adequate to meet the cash requirements of our business. However, futurecash flows are subject to a number of variables including production volumesand oil and natural gas prices. If cash flows decline we may be required toreduce our capital expenditure budget, which in turn may affect our productionin future periods. Our operations and other capital resources may not providecash in sufficient amounts to maintain or initiate planned levels of capitalexpenditures. We have experienced increased costs for tubular goods and forcertain services during 2006 and 2007. Further, we have encountereddifficulties in contracting for drilling rigs and other services due to highdemand. Currently, we do not believe that these conditions have had a significantimpact upon our capital expenditures programs or our results of operations. Ifthe conditions continue, however, projects may be delayed due to lack ofservices or materials or we may have to delay projects to stay within ourcapital budget.

 

42

----

 

***Master LimitedPartnership***

 

EXCO Partners, LP, orEXCO Partners, is a Delaware limited partnership recently formed by EXCOResources to acquire, exploit and develop oil and natural gas properties. OnSeptember 13, 2007, a registration statement relating to the initial publicoffering, or IPO, of common units representing limited partner interests ofEXCO Partners was filed with the Securities and Exchange Commission but has notyet become effective.  In connection with the proposed IPO, EXCO Resourcesexpects to contribute proved developed producing oil and natural gas wellboresto EXCO Partners in its East Texas/North Louisiana, Mid-Continent and Permianoperating areas. EXCO Resources also expects to contribute to EXCO Partners allof its properties, including its undeveloped properties, in its Appalachianoperating area.

 

EXCO Partners expects tosell 51% (before underwriters’ over-allotment option) of its common units tothe public in the IPO and receive estimated net proceeds of approximately $1.43billion from the IPO, net of underwriting discounts and estimated offeringexpenses.

 

A registration statementrelating to common units of EXCO Partners has been filed with the SEC but hasnot yet become effective. These securities may not be sold nor may offers tobuy be accepted prior to the time the registration statement becomes effective.This quarterly report shall notconstitute an offer to sell or the solicitation of an offer to buy anysecurities.

 

Any offering of commonunits will be made only by means of a prospectus. A copy of the finalprospectus, when available, may be obtained by submitting requests to Goldman,Sachs & Co., 85 Broad Street, New York, NY 10004, via fax at 212-902-9316or via e-mail at prospectus-ny@ny.email.gs.com.

 

***7***1⁄4***% senior notes due January 15, 2011***

 

As of September 30, 2007,$444.7 million in principal was outstanding on our 7 1⁄4% senior notes dueJanuary 15, 2011, or senior notes. Unamortized premium on the senior notes was$11.8 million. The estimated fair value of the senior notes, based on quotedmarket prices for the senior notes, was $444.7 million on September 30, 2007.

 

Interest is payable onthe senior notes semi-annually in arrears on January 15 and July 15of each year. The senior notes mature on January 15, 2011. We may redeemsome or all of the senior notes beginning on January 15, 2007 for theredemption price set forth in the senior notes.

 

The indenture governingthe senior notes contains covenants, which limit our ability and the ability ofour subsidiaries to:

 

•                  incur orguarantee additional debt and issue certain types of preferred stock;

 

•                  pay dividends onour capital stock or redeem, repurchase or retire our capital stock orsubordinated debt;

 

•                  make investments;

 

•                  create liens onour assets;

 

•                  enter intosale/leaseback transactions;

 

•                  createrestrictions on the ability of our restricted subsidiaries to pay dividends ormake other payments to us;

 

43

----

 

•                  engage intransactions with our affiliates;

 

•                  transfer orissue shares of stock of subsidiaries;

 

•                  transfer or sellassets; and

 

•                  consolidate,merge or transfer all or substantially all of our assets and the assets of oursubsidiaries.

 

***Credit agreements***

 

*EPOP Credit Agreement*

 

The EPOP Credit Agreement has a borrowing base of $1.3 billion. Theborrowing base is scheduled to be redetermined on a semi-annual basis, withEPOP and the lenders having the right to interim unscheduled redeterminationsin certain circumstances. Scheduled redeterminations will be made on or aboutApril 1 and October 1 of each year, beginning October 1, 2007. EPOP hasscheduled a semi-annual redetermination with the lending group during November2007 and expects to have an updated borrowing base established prior toDecember 2007.The EPOP Credit Agreement is secured by a first priority lien onthe assets of EPOP, including 100% of the equity of EPOP’s subsidiaries, and isguaranteed by all existing and future subsidiaries of EPOP. EPOP has agreed tohave in place derivative financial instruments covering no more than 80.0% ofthe “forecasted production from total proved reserves” (as defined) for thenext two years and 70.0% of the forecasted production from total ProvedReserves in the third, fourth and fifth years. The foregoing description is notcomplete and is qualified in its entirety by the EPOP Credit Agreement. As ofSeptember 30, 2007, EPOP was in compliance with the financial covenantscontained in the EPOP Credit Agreement, which require that EPOP:

 

•                  maintaina consolidated current ratio (as defined under the EPOP Credit Agreement) of atleast 1.0 to 1.0 at the end of any fiscal quarter, beginning with the quarterending June 30, 2007;

 

•                  notpermit our ratio of consolidated indebtedness to consolidated EBITDAX (asdefined under the EPOP Credit Agreement) to be greater than 3.5 to 1.0 at theend of each fiscal quarter, beginning with the quarter ending June 30, 2007;and

 

•                  notpermit our interest coverage ratio (as defined under the EPOP Credit Agreement)to be less than 2.5 to 1.0 at the end of each fiscal quarter, beginning withthe quarter ending June 30, 2007.

 

The EPOP Credit Agreement contains representations, warranties,covenants, events of default, and indemnities customary for agreements of thistype. The EPOP Credit Agreement matures March 30, 2012. Interest under the EPOPCredit Agreement ranges from LIBOR plus 100 basis points (bps) to 175 bps or anAlternate Base Rate (ABR), as defined, ranging from ABR plus 0 bps to ABR plus75 bps.

 

At September 30, 2007,the six month LIBOR rate was 5.13%, which would result in an interest rate ofapproximately 6.63% on any new indebtedness we may incur under the EPOP CreditAgreement. At September 30, 2007 and November 1, 2007, we had $1.0 billion and$1.0 billion, respectively of outstanding indebtedness under the EPOP CreditAgreement.

 

*EXCOResources Credit Agreement*

 

The EXCO Resources Credit Agreement has a borrowing base of $900.0million. The borrowing base is redetermined semi-annually with EXCO and thelenders having the right to interim unscheduled redeterminations in certaincircumstances. Scheduled rederminations are on April 1 and October 1 of eachyear beginning on September 1, 2007. EXCO has scheduled the semi-annual redeterminationwith the lending group during November 2007 and expects to have an updatedborrowing base established prior to December 2007.The interest rate ranges fromLIBOR plus 100 bps to LIBOR plus 175 bps depending upon borrowing baseusage.  The facility also includes an ABR pricing alternative ranging fromABR plus 0 bps to ABR plus 75 bps depending upon borrowing base usage. Borrowings under the EXCO Resources Credit Agreement are collateralized by afirst lien mortgage providing a security interest in our oil and natural gasproperties. EXCO has also agreed to have in place commodity derivativecontracts covering no more than 80% of its “forecasted production from totalproved reserves” (as defined) for the next two years and 70% in the third, fourthand fifth years.  EXCO 

 

44

----

 

will have in place mortgagescovering 80% of the Engineered Value of its Borrowing Base Properties (asdefined).  The foregoing description is not complete and is qualified inits entirety by the EXCO Resources Credit Agreement. As of September 30, 2007,EXCO was in compliance with the financial covenants contained in the EXCOResources Credit Agreement, which require that we:

 

•                  maintain aConsolidated Current Ratio (as defined) of at least 1.0 to 1.0 as of the end ofany fiscal quarter ending on or after September 30, 2007;

 

•                  not permit ourratio of Consolidated Funded Indebtedness (as defined) to Consolidated EBITDAX(as defined) to be greater than 3.5 to 1.0 at the end of any fiscal quarterending on or after September 30, 2007; and

 

•                  maintain aConsolidated EBITDAX to Consolidated Interest Expense (as defined) ratio of atleast 2.5 to 1.0 at the end of any fiscal quarter ending on or after September30, 2007.

 

At September 30, 2007,the six month LIBOR rate was 5.13%, which would result in an interest rate ofapproximately 6.38%, on any new indebtedness we may incur under the EXCOResources Credit Agreement. At September 30, 2007 and November 1, 2007, we had$484.0 million and $549.0 million, respectively, of outstanding indebtednessunder the EXCO Resources Credit Agreement.

 

***Preferred stock***

 

The 7.0% Preferred Stockand Hybrid Preferred Stock were issued in several series at a purchase price of$10,000 per share. The Series A-2 7.0% Preferred Stock and the Series A-2Hybrid Preferred Stock automatically convert into Series A-1 7.0% PreferredStock and Series A-1 Hybrid Preferred Stock, respectively, upon the holdersproviding assurance to EXCO that such holders have satisfied any necessaryfiling requirements under the HSR Act or are able to avail themselves of anexemption therefrom. All of the sharesof the Series A-2 7.0% Preferred Stock and Series A-2 Hybrid Preferred Stockhave been converted into Series A-1 7.0% Preferred Stock and Series A-1 HybridPreferred Stock, respectively, as all of the holders of those series providedassurance to us that the necessary requirements under the HSR Act weresatisfied. These conversions had no impact on the carrying value of the 7% PreferredStock and the Hybrid Preferred Stock when taken as a collective group atSeptember 30, 2007.

 

Asof September 30, 2007, the liquidation preference of the 7.0% Preferred Stockand the Hybrid Preferred Stock was $0.4 billion and $1.6 billion, respectively.

 

Wepaid dividends totaling $42.6 million on September 4, 2007 and dividendstotaling $5.8 million on September 15, 2007. We have accrued dividends of $5.8million as of September 30, 2007. EXCO held its annual meeting of shareholderson August 30, 2007. During this meeting, shareholders voted in favor of thetransformation of the Hybrid Preferred Stock into terms identical to the 7.0%Preferred Stock. As a result, the annual dividend requirement on the HybridPreferred Stock is reduced from $177.1 million to $112.7 million, a reductionof $64.4 million per annum.

 

***Derivative financialinstruments***

 

We use derivative financial instruments to manage exposure to commodityprices and interest rate risks. Our objectives for holding derivatives are tominimize risks using the most effective methods to eliminate or reduce theimpacts of these exposures.

 

Our production is generally sold at prevailing market prices. However,we periodically enter into derivative financial instrument contracts for aportion of our production when market conditions are deemed favorable and oiland natural gas prices exceed our minimum internal price targets.

 

Our objective in entering into derivative financial instruments is tomanage price fluctuations and achieve a more predictable cash flow associatedwith our acquisition activities and borrowings under our credit agreements.These transactions limit exposure to declines in prices, but also limit thebenefits we would realize if prices increase.

 

As of November 1, 2007, we had contracts in place for the volumes andprices shown in the table below.

 

45

----

 
| ** **                                       | ** ** | **NYMEX gas** | ** ** | **Weighted**                  | ** ** | ** **                  | ** ** | **Weighted**                | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **volume -**  | ** ** | **average contract**     | ** ** | **NYMEX oil**          | ** ** | **average contract**   | ** ** |
| **(in thousands, except prices)** | ** ** | **Mmbtu**          | ** ** | **price per Mmbtu** | ** ** | **volume - Bbls** | ** ** | **price per Bbl** | ** ** |
| Swaps NYMEX:                                     |       |               |       |                          |       |                        |       |                        |       |
| Q4 2007                                          |       | 20,214             |       | $                             | 8.11       |                        | 251        |                        | $          | 64.17 |   |
| 2008                                             |       | 100,110            |       | 8.36                          |       | 1,095                       |       | 61.09                       |       |
| 2009                                             |       | 80,695             |       | 7.94                          |       | 886                         |       | 60.68                       |       |
| 2010                                             |       | 29,798             |       | 7.79                          |       | 108                         |       | 59.85                       |       |
| 2011                                             |       | 1,825              |       | 4.51                          |       | —                      |       | —                      |       |
| 2012                                             |       | 1,830              |       | 4.51                          |       | —                      |       | —                      |       |
| 2013                                             |       | 1,825              |       | 4.51                          |       | —                      |       | —                      |       |
|                                                  |            |                    |            |                               |            |                             |            |                             |            |  |  |

 

We occasionally enter into fixed-price physical delivery contracts aswell as commodity price swap derivatives to manage price risk with regard to aportion of our oil and natural gas production.

 

***Off-balance sheetarrangements***

 

None.

 

46

----

 

***Contractualobligations and commercial commitments***

 

The following table presents a summary of our contractual obligationsat September 30, 2007:

 
| ** **                                            | ** ** | **Less than one** | ** ** | **One to three** | ** ** | **Three to five** | ** ** | **More than five** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|-----------------------------|------------|------------------------------|------------|------------|------------|
| **(in thousands)**                               | ** ** | **year**                    | ** ** | **years**                  | ** ** | **years**                   | ** ** | **years**                    | ** ** | **Total**  | ** ** |
| **Contractual obligations:**                          |       |                        |       |                       |       |                        |       |                         |       |       |       |
| Long-term debt - senior notes (1)                     |       | $                           | —     |                       | $          | —                      |       | $                            | 456,480    |       | $          | — |   | $ | 456,480 |   |
| Long-term debt - EXCO Resources Credit  Agreement (2) |       | —                      |       | —                     |       | 484,000                     |       | —                       |       | 484,000    |       |
| Long-term debt - EPOP Credit Agreement (3)            |       | —                      |       | —                     |       | 1,040,000                   |       | —                       |       | 1,040,000  |       |
| Operating leases                                      |       | 14,304                      |       | 27,015                     |       | 15,439                      |       | 543                          |       | 57,301     |       |
| Drilling/work commitments                             |       | 31,692                      |       | 20,932                     |       | —                      |       | —                       |       | 52,624     |       |
| Total contractual cash obligations(4)                 |       | $                           | 45,996     |                       | $          | 47,947                      |       | $                            | 1,995,919  |       | $          | 543 |   | $ | 2,090,405 |   |

 

----

(1)          Our senior notes are due on January 15, 2011. Theannual interest obligation is $32.2 million.

(2)          The EXCO Resources Credit Agreement matures onMarch 30, 2012.

(3)          The EPOP Credit Agreement matures on October2, 2012.

(4)   Excludesannual dividends of $140.0 million on our 7.0% Preferred and Hybrid Preferred Stock.Such dividends are payable when, and as declared, by the Board of Directors.

 

47

----

 

***Item 3****. **Quantitative and Qualitative Disclosures AboutMarket Risk***

 

Some of the information below contains forward-looking statements. Theprimary objective of the following information is to provide forward-lookingquantitative and qualitative information about our potential exposure to marketrisks. The term “market risk” refers to the risk of loss arising from adversechanges in oil and natural gas prices, interest rates charged on borrowings andearned on cash equivalent investments, and adverse changes in the market valueof marketable securities. The disclosure is not meant to be a precise indicatorof expected future losses, but rather an indicator of reasonably possiblelosses. This forward-looking information provides an indicator of how we viewand manage our ongoing market risk exposures. Our market risk sensitiveinstruments were entered into for hedging and investment purposes, not fortrading purposes.

 

***Commodity price risk***

 

Our major market risk exposure is in the pricing applicable to our oiland natural gas production. Realized pricing is primarily driven by theprevailing worldwide price for crude oil and spot market prices for naturalgas. Pricing for oil and natural gas production is volatile.

 

The following table sets forth our derivative financial instrumentsmanagement activities as of September 30, 2007.

 
| ** **                                       | ** ** | ** **     | ** ** | **Weighted**            | ** ** | ** **                       | ** ** |
|--------------------------------------------------|------------|----------------|------------|-------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **Volume**     | ** ** | **average strike** | ** ** | **Fair value at**      | ** ** |
| **(in thousands, except prices)** | ** ** | **Mmbtu/Bbls** | ** ** | **price**               | ** ** | **September 30, 2007** | ** ** |
|                                             |       |           |       |                    |       |                             |       |
| **Natural Gas:**                                 |       |           |       |                    |       |                             |       |
| Swaps NYMEX:                                     |       |           |       |                    |       |                             |       |
| Remainder of 2007                                |       | 30,428         |       | $                       | 8.06       |                             | $          | 32,182 |   |
| 2008                                             |       | 100,110        |       | 8.36                    |       | 39,124                           |       |
| 2009                                             |       | 73,395         |       | 7.90                    |       | (25,204                          | )          |
| 2010                                             |       | 11,548         |       | 7.18                    |       | (9,308                           | )          |
| 2011                                             |       | 1,825          |       | 4.51                    |       | (5,105                           | )          |
| 2012                                             |       | 1,830          |       | 4.51                    |       | (4,503                           | )          |
| 2013                                             |       | 1,825          |       | 4.51                    |       | (3,993                           | )          |
| **Total Natural Gas**                            |       | 220,961        |       |                    |       | 23,193                           |       |
|                                             |       |           |       |                    |       |                             |       |
| **Oil:**                                         |       |           |       |                    |       |                             |       |
| Swaps:                                           |       |           |       |                    |       |                             |       |
| Remainder of 2007                                |       | 375            |       | 64.08                   |       | (6,004                           | )          |
| 2008.                                            |       | 1,095          |       | 61.09                   |       | (16,150                          | )          |
| 2009                                             |       | 886            |       | 60.68                   |       | (10,480                          | )          |
| 2010                                             |       | 108            |       | 59.85                   |       | (1,162                           | )          |
| **Total Oil**                                    |       | 2,464          |       |                    |       | (33,796                          | )          |
| **Total Oil and Natural Gas**                    |       |           |       |                    |       | $                                | (10,603    | ) |
|                                                  |            |                |            |                         |            |                                  |            |  |  |

 

At September 30, 2007, the average forward NYMEX oil prices per Bbl forthe remainder of 2007 were $80.26 and $76.41 for 2008 and the average forwardNYMEX natural gas prices per Mmbtu for the remainder of 2007 and for calendar2008 were $7.00 and $7.95, respectively.

 

Realized gains or losses from the settlement of derivative financialinstruments are recorded in our financial statements as increases or decreases inderivative financial instrument activities. For example, using the oil swaps inplace at September 30, 2007, for the remainder of 2007, if the settlement priceexceeded the actual weighted average strike price of $64.08, then a reductionin derivative financial instrument activities revenue would have been recordedfor the difference between the settlement price and $65.08, multiplied by thehedged volume of 375 Mbbls. Conversely, if the settlement price was less than$64.08, then an increase in derivative financial instrument activities revenuewould have been recorded for the difference between the settlement price and$63.08, multiplied by the hedged volume of 375 Mbbls. For example, for a 

 

48

----

 

hedged volume of 375 Mbbls, ifthe settlement price was $65.08, then derivative financial instrumentactivities revenue would have decreased by $0.4 million. Conversely, if thesettlement price was $63.08, derivative financial instrument activities revenuewould have increased by $0.4 million.

 

***Interest rate risk***

 

At September 30, 2007, our exposure to interest rate changes relatedprimarily to borrowings under our credit agreements and interest earned on ourshort-term investments. The interest rate is fixed at 71/4%on the $444.7 million in senior notes we have outstanding. As of September30, 2007, we were not using any derivatives to manage interest rate risk. Interestis payable on borrowings under our credit agreements based on a floating rateas more fully described in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Our liquidity, capital resources andcapital commitments.”  At September 30,2007, we had $1.5 billion in outstanding borrowings under our creditagreements. A 1% change in interest rates based on the borrowings as ofSeptember 30, 2007 would result in an increase or decrease in our interestcosts of $15.0 million per year. The interest we pay on these borrowingsis set periodically based upon market rates.

 

***Preferred stock liquidated damages risk***

 

In connection with the Private Placement, we entered into aregistration rights agreement, or 7.0% Registration Rights Agreement, with thePreferred Stock investors. If any shares of 7.0% Preferred Stock or Hybrid PreferredStock are outstanding on March 30, 2011, we agreed to file a registrationstatement with the SEC by June 28, 2011 registering such shares for resale andto use our best efforts to have such registration statement declared effectiveby September 26, 2011. In connection with the Private Placement, we alsoentered into a registration rights agreement, or Hybrid Registration RightsAgreement, with the Hybrid Preferred Stock investors. The Hybrid RegistrationRights Agreement and the obligation of the parties thereunder terminated onAugust 30, 2007.

 

If we are unable to meet the registrationdeadlines described above, if a registration statement ceases to remaineffective or if we restrict sales under a registration statement under certain “blackoutprovisions” for longer than the contractually permitted period, we must payliquidated damages at a rate of 0.5% per annum of the Preferred Stockliquidation preference for the first 90 days and thereafter for each subsequent90-day period at an additional rate of 0.25% up to a maximum of 2.0% per annumduring any default period.  Since NYSE Shareholder Approval was obtained,we may become obligated to pay the aforementioned liquidated damages under the7.0% Registration Rights Agreement, the initial 0.5% increase of liquidateddamages would be approximately $2.5 million for the first 90 days and anadditional $1.3 million for each successive 90 day period. The maximum amountof potential liquidated damages under the 7.0% Registration Rights Agreementwould total $40.0 million per annum.

 

***Item 4.******          Controls and Procedures***

 

**Evaluation of disclosure controls andprocedures**

 

We maintain “disclosure controls andprocedures,” as such term is defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934, as amended, or the Exchange Act, that aredesigned to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized, and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer (CEO), Chief FinancialOfficer (CFO) and Chief Accounting Officer (CAO), as appropriate, to allowtimely decisions regarding required disclosure. In designing and evaluating ourdisclosure controls and procedures, management recognizes that disclosurecontrols and procedures, no matter how well conceived and operated, can provideonly reasonable assurance of achieving the desired control objectives, and weare required to apply our judgment in evaluating the cost-benefit relationshipof possible disclosure controls and procedures.

 

Our management evaluated, under thesupervision and with the participation of our CEO, CFO and CAO, the effectivenessof the design and operation of our disclosure controls and procedures as ofSeptember 30, 2007 and concluded our controls were effective.

 

49

----

 

**Changes in internal control over financialreporting**

 

There have been no changes during the quarterended September 30, 2007 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

The Vernon Acquisition and Southern GasAcquisition have significantly increased our number of properties that weoperate and assets that we manage. Management believes its controls areadequate to effectively integrate these assets into our existing controlenvironment.

 

At the end of 2007, Section 404 of the Sarbanes-OxleyAct will require our management to provide an assessment of the effectivenessof our internal control over financial reporting, and our independentregistered public accountants will also be required to report on theeffectiveness of our internal control over financing reporting. We are in theprocess of performing the system and process documentation, evaluation andtesting required for management to make this assessment and for its independentregistered public accountants to provide their attestation report. We have notcompleted this process or assessment, and this process will require significantamounts of management time and resources. In the course of evaluation andtesting, management may identify deficiencies that will need to be addressedand remediated.

 

50

----

 

**PARTII—OTHER INFORMATION**

 

**Item1A.****                     RiskFactors**

 

Our business has manyrisks. The risk factors noted in this section and other factors notedthroughout this report, including those risks identified in Part I, Item 2. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,”describe examples of risks, uncertainties and events that may cause our actualresults to differ materially from those contained in any forward-lookingstatement. If one or more of these risks or uncertainties materialize, or ifunderlying assumptions prove incorrect, actual outcomes may vary materiallyfrom those included in this report. Additional factors that could materiallyand adversely affect our business, financial condition, operating results or liquidityand the trading price of our common stock are described under the caption “RiskFactors” in Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2006, which was filed with the SEC on March 19, 2007. Thisinformation should be considered carefully, together with other information inthis report and other reports and materials we file with the SEC.

 

**Risks relating to the master limited partnership**

 

On September 13, 2007, aregistration statement relating to the initial public offering, or IPO, ofcommon units representing limited partner interests of EXCO Partners was filedwith the Securities and Exchange Commission but has not yet becomeeffective.  Completion of the registration is subject to market conditionsand numerous other risks beyond the control of the Company and therefore it ispossible that the master limited partnership will not complete an offering ofsecurities, will not raise the planned amount of capital even if an offering ofsecurities is completed, and will not be able to complete its proposed actionson the timetable indicated. Furthermore, the structure, nature, purpose,proposed assets and liabilities, and proposed manner of offering of the masterlimited partnership may change materially from those anticipated. In addition,the master limited partnership, and therefore the Company’s retained investmentin the partnership, will be subject to the risks normally attendant in the oiland gas industry, including most of the same risks to which the Company is subject.

 

A registration statementrelating to common units of EXCO Partners has been filed with the SEC but hasnot yet become effective. These securities may not be sold nor may offers tobuy be accepted prior to the time the registration statement becomes effective.This quarterly report shall not constitute an offer to sell or the solicitationof an offer to buy any securities.

 

**Risks relating to our preferred stock**

 

***The holders of 7.0% Preferred Stock andHybrid Preferred Stock have rights that could adversely affect an investment inour common stock.***

 

On March 30, 2007, wecompleted the Private Placement of an aggregate of $390.0 million of 7.0%Preferred Stock and $1.61 billion of Hybrid Preferred Stock to accreditedinvestors pursuant to the terms and conditions of a Preferred Stock PurchaseAgreement dated March 28, 2007. The purchase price for each share was $10,000(which equals the liquidation preference per share on March 30, 2007). The 7.0%Preferred Stock and the Hybrid Preferred Stock are convertible into shares ofour common stock at an initial conversion price of $19.00 per share, subject toadjustment. Since NYSE Shareholder Approval was obtained, the designations,preferences, limitations and relative voting rights of the Hybrid PreferredStock are identical to the designations, preferences, limitations and relativevoting rights of the 7.0% Preferred Stock, including the right to dividends andthe right to convert into shares of our common stock.

 

The initial $19.00per share conversion price of the 7.0% Preferred Stock and the Hybrid PreferredStock equates to each share of 7.0% Preferred Stock and the Hybrid PreferredStock being initially convertible into approximately 526.3 shares of our commonstock, subject to adjustment for fractional shares. The Statement ofDesignation for each series of the 7.0% Preferred Stock and the HybridPreferred Stock contain weighted average anti-dilution provisions that providefor an adjustment to the conversion price of the 7.0% Preferred Stock and theHybrid Preferred Stock upon (i) the issuance of stock, convertible securitiesor options at a price below the then-current conversion price, (ii) theissuance of options to holders of common stock at less than the current marketprice, (iii) a dividend or distribution to holders of common stock in excess of$0.06 per share in any quarter or (iv) an equity tender offer or sharerepurchase by us at a price in excess of the current market price. The exactnumber of shares of common stock into which the 7.0% Preferred Stock and theHybrid Preferred Stock may ultimately be converted may vary over time as aresult of the effects of these anti-dilutive adjustments to the 

 

51

----

 

conversion price. Assumingno adjustment to the $19.00 conversion price, the 7.0% Preferred Stock and theHybrid Preferred Stock are convertible into a total of 105,263,115 shares ofour common stock.

 

The holders of7.0% Preferred Stock and the Hybrid Preferred Stock also have the right toreceive cash dividends at the rate of 7.0% per annum prior to March 30, 2013and at the rate of 9.0% per annum thereafter. In lieu of paying cash dividends,we may, under certain circumstances prior to March 30, 2013, pay such dividendat a rate of 9.0% per annum by adding the dividend to the liquidationpreference of the shares of 7.0% Preferred Stock and the Hybrid Preferred Stock.Upon the occurrence of a change of control, holders of 7.0% Preferred Stock andthe Hybrid Preferred Stock may require us to repurchase their shares for cashat the liquidation preference plus accumulated dividends. These anti-dilution,dividend and liquidation provisions could substantially dilute our commonshareholders’ interest and may otherwise adversely affect an investment in ourcommon stock.

 

***The holders of 7.0% Preferred Stock and Hybrid Preferred Stock could restrict our ability to enter into various corporate transactions that may be beneficial to our business strategy.***

 

Without the prior consent of the holders of our 7.0% Preferred Stock and/or Hybrid Preferred Stock, we are generally prohibited from, among other things, the following:

 

•                  issuing shares of senior, parity or disqualified junior stock;

 

•                  amending our charter if the amendment would adversely affect any holder of 7.0% Preferred Stock or Hybrid Preferred Stock;

 

•                  increasing the size of our board of directors;

 

•                  entering into any merger or consolidation that is not permitted by our charter;

 

•                  effecting a change of control;

 

•                  distributing property or issuing dividends (other than as permitted by our charter) or engaging in an equity self-tender offer or share repurchase program; and

 

•                  effecting a sale or transfer of substantially all of our assets.

 

These restrictions may limit our ability to engage in activities which could expand our business, including obtaining future financing, making needed capital expenditures, or taking advantage of business opportunities such as strategic acquisitions and dispositions.

 

***The 7.0% Registration Rights Agreement andthe Hybrid Registration Rights Agreement contain liquidated damages, indemnityand other provisions that could adversely affect our cash flows or otherwisecause our stock price to decline.***

 

In connection with the Private Placement, we entered into the 7.0%Registration Rights Agreement with the Preferred Stock investors. The 7.0%Registration Rights Agreement contemplates the registration of the resale ofthe shares of common stock underlying the 7.0% Preferred Stock and the HybridPreferred Stock. We agreed to file with the SEC, not later than September 26,2007, a registration statement to register the offer and sale of the commonshares issuable upon conversion of the 7.0% Preferred Stock and the HybridPreferred Stock and to use our best efforts to have the registration statementdeclared effective by March 24, 2008.  If any shares of 7.0% PreferredStock or Hybrid Preferred Stock are outstanding on March 30, 2011, we agreed tofile a registration statement with the SEC by June 28, 2011 registering such sharesfor resale and to use our best efforts to have such registration statementdeclared effective by September 26, 2011.  If we are unable to meet thedeadlines described above, if a registration statement ceases to remaineffective or if we restrict sales under a registration statement under certain “blackoutprovisions” for longer than the contractually permitted period, we must payliquidated damages at a rate of 0.5% per annum of the Preferred Stockliquidation preference for the first 90 days and thereafter for each subsequent90-day period at an additional rate of 0.25% up to a maximum of 2.0% per annumduring any default period.  We also agreed to indemnify holders againstcertain liabilities under the Securities Act in respect of any such resale registration.

 

52

----

 

On September 5, 2007, wefiled an automatically effective registration statement on Form S-3 with theSEC to register for resale the shares of common stock issuable upon conversionof the Series A-1 Hybrid Preferred Stock and the Series A-1 7.0% PreferredStock. The sale of a significant amount of shares in the open market as aresult of registering the resale of shares under the 7.0% Registration RightsAgreement or the Hybrid Registration Rights Agreement, or the perception thatthese sales may occur, could cause the trading price of our common stock todecline or become highly volatile.

 

**Item 4.****           Submission of matters to a vote of securityholders**

 

For adescription of the matters submitted to a vote of our security holders, pleasesee our Current Report on Form 8-K dated August 30, 2007 and filed September5, 2007 and incorporated by reference herein.

 

**Item 6. Exhibits**

 

See “Indexto Exhibits” for a description of our exhibits.

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                               | EXCO  RESOURCES, INC. |
|------------------------------------|----------------------------|
|                               | (Registrant)               |
|                               |                       |
| Date:  November  6, 2007 | By:                        | /s/ DOUGLAS  H. MILLER |   |
|                               |                       | Douglas H.  Miller |
|                               |                       | Chairman and  Chief Executive Officer |
|                               |                       |   |
|                               | By:                        | /s/ J.  DOUGLAS RAMSEY |   |
|                               |                       | J. Douglas  Ramsey, Ph.D. |
|                               |                       | Vice  President and Chief Financial Officer |
|                               |                       |   |
|                               | By:                        | /s/ MARK E.  WILSON |   |
|                               |                       | Mark E.  Wilson Vice President, Chief Accounting Officer |
|                               |                       | and  Controller |
|                                    |                            |  |  |  |

 

53

----

 

**Index toExhibits**

 
| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.1                 |       | Agreement and Plan of Merger between EXCO Holdings Inc. and EXCO  Resources, Inc., dated February 9, 2006, filed as an  Exhibit to EXCO’s Current Report on Form 8-K, dated  February 8, 2006 and filed February 14, 2006 and incorporated by  reference herein.                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.2                 |       | Merger Agreement, dated July 22, 2006, by and among Winchester  Acquisition, LLC, Progress Fuels Corporation, Winchester Energy Company,  Ltd., and WGC Holdco, LLC, filed as an Exhibit to EXCO’s Current Report  on Form 8-K, dated July 22, 2006 and filed on July 25, 2006  and incorporated by reference herein.                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.3                 |       | First Amendment to Agreement and Plan of Merger, dated as of  September 28, 2006, by and among Winchester Acquisition, LLC, Progress  Fuels Corporation, Winchester Energy Company, Ltd., and WGC Holdco, LLC,  filed as an Exhibit to EXCO’s Current Report on Form 8- K/A-Amendment  No. 2, dated July 22, 2006 and filed on October 4, 2006 and  incorporated by reference herein.                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.4                 |       | Purchase and Sale Agreement by and among Anadarko Petroleum  Corporation and Anadarko Gathering Company, as Seller, and Vernon Holdings,  LLC, as Purchaser, dated December 22, 2006, filed as an Exhibit to  EXCO’s Pre-Effective Amendment No. 1 to the Registration Statement on  Form S-1 (File No. 333-139568) filed on January 16, 2007 and  incorporated by reference herein.                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.5                 |       | Purchase and Sale Agreement by and among EXCO Resources, Inc.,  as Purchaser, Anadarko Petroleum Corporation, Anadarko E&P Company, LP,  Howell Petroleum Corporation and Kerr-McGee Oil & Gas Onshore LP, as  Seller, dated February 1, 2007, filed as an Exhibit to EXCO’s Annual Report  on Form 10-K filed on March 19, 2007 and incorporated by reference  herein.                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.6                 |       | First Amendment to Purchase and Sale Agreement and Assignment of  Partial Interest in the Purchase and Sale Agreement by and among Anadarko  Petroleum Corporation, Anadarko Gathering Company, EXCO Partners Operating  Partnership, LP (successor by merger to Vernon Holdings, LLC) and Vernon  Gathering, LLC, dated March 30, 2007, filed as an Exhibit to EXCO’s  Form 8-K dated March 28, 2007 and filed on April 2, 2007 and  incorporated by reference herein. |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.7                 |       | First Amendment Letter Agreement by and among EXCO  Resources, Inc., Southern G Holdings, LLC, Anadarko Petroleum  Corporation, Anadarko E&P Company, LP, Howell Petroleum Corporation, and  Kerr-McGee Oil & Gas Onshore LP, dated April 13, 2007, filed as an  Exhibit to EXCO’s Form 8-K dated May 2, 2007 and filed on May  8, 2007 and incorporated by reference herein.                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.8                 |       | Second Amendment to Purchase and Sale Agreement, effective as of  February 1, 2007, by and among Anadarko Petroleum Corporation, Anadarko  E&P Company LP, Howell Petroleum Corporation, Kerr-McGee Oil & Gas  Onshore LP, EXCO Resources, Inc. and Southern G Holdings, LLC, filed as an  Exhibit to EXCO’s Form 8-K dated May 2, 2007 and filed on May 8, 2007 and  incorporated by reference herein.                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.9                 |       | Third Amendment to Purchase and Sale Agreement and Assignment of  Partial Interest in the Purchase and Sale Agreement, effective as of February  1, 2007, by and among Anadarko Petroleum Corporation, Anadarko E&P  Company LP, Howell Petroleum Corporation, Kerr-McGee Oil & Gas Onshore  LP, EXCO Resources, Inc. and Southern G Holdings, LLC, filed as an Exhibit to  EXCO’s Form 8-K dated May 2, 2007 and filed on May 8, 2007 and incorporated  by reference herein.            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.10                |       | Membership Interest Purchase and Sale Agreement, dated May 8, 2007,  by and among EXCO Resources, Inc., Southern G Holdings, LLC and Crimson  Exploration Inc. and Crimson Exploration Operating, Inc., filed as an Exhibit  to EXCO’s Form 8-K dated May 2, 2007 and filed on May 8, 2007 and incorporated  by reference herein.                                                                                                                                                                |

 

54

----

 
| 3.1    |   | Third Amended and Restated Articles of Incorporation of EXCO  Resources, Inc., filed as an Exhibit to EXCO’s Current Report on  Form 8-K, dated February 8, 2006 and filed on February 14,  2006 and incorporated by reference herein.                                                                                                       |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2    |   | Articles of Amendment to the Third Amended and Restated Articles of  Incorporation of EXCO Resources, Inc., filed as an Exhibit to EXCO’s Current  Report on Form 8-K, dated August 30, 2007 and filed on September 5, 2007 and  incorporated by reference herein.                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 3.3    |   | Amended and Restated Bylaws of EXCO Resources, Inc., filed as an  Exhibit to EXCO’s Current Report on Form 8-K, dated August 8, 2007  and filed on August 10, 2007 and incorporated by reference herein.                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 3.4    |   | Statement of Designation of Series A-1 7.0% Cumulative  Convertible Perpetual Preferred Stock of EXCO Resources, Inc., filed as  an Exhibit to EXCO’s Form 8-K dated March 28, 2007 and filed  on April 2, 2007 and incorporated by reference herein.                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 3.5    |   | Statement of Designation of Series A-2 7.0% Cumulative  Convertible Perpetual Preferred Stock of EXCO Resources, Inc., filed as  an Exhibit to EXCO’s Form 8-K dated March 28, 2007 and filed  on April 2, 2007 and incorporated by reference herein.                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 3.6    |   | Statement of Designation of Series B 7.0% Cumulative Convertible  Perpetual Preferred Stock of EXCO Resources, Inc., filed as an  Exhibit to EXCO’s Form 8-K dated March 28, 2007 and filed on  April 2, 2007 and incorporated by reference herein.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 3.7    |   | Statement of Designation of Series C 7.0% Cumulative Convertible  Perpetual Preferred Stock of EXCO Resources, Inc., filed as an  Exhibit to EXCO’s Form 8-K dated March 28, 2007 and filed on  April 2, 2007 and incorporated by reference herein.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 3.8    |   | Statement of Designation of Series A-1 Hybrid Preferred Stock of  EXCO Resources, Inc., filed as an Exhibit to EXCO’s Form 8-K  dated March 28, 2007 and filed on April 2, 2007 and incorporated by  reference herein.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 3.9    |   | Statement of Designation of Series A-2 Hybrid Preferred Stock of  EXCO Resources, Inc., filed as an Exhibit to EXCO’s Form 8-K  dated March 28, 2007 and filed on April 2, 2007 and incorporated by  reference herein.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.1    |   | Indenture among EXCO Resources, Inc., the Subsidiary Guarantors  and Wilmington Trust Company, as Trustee, dated as of January 20, 2004,  filed as exhibit (b)(2) to Amendment No. 4 to the Schedule TO filed  by NCE Acquisition, Inc. and EXCO Resources, Inc. on  January 21, 2004 and incorporated by reference herein.             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.2    |   | First Supplemental Indenture by and among EXCO Resources, Inc.,  North Coast Energy, Inc., North Coast Energy Eastern, Inc. and  Wilmington Trust Company, as Trustee, dated as of January 27, 2004,  filed as an Exhibit to EXCO’s Registration Statement on Form S-4  filed March 25, 2004 and incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3    |   | Second Supplemental Indenture by and among EXCO Resources, Inc.,  Pinestone Resources, LLC and Wilmington Trust Company, as Trustee, filed as  an Exhibit to EXCO’s Annual Report on Form 10-K for 2004 filed  March 31, 2005 and incorporated by reference herein.                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.4    |   | Third Supplemental Indenture by and among EXCO Resources, Inc.,  TXOK Acquisition, Inc. and Wilmington Trust Company, as Trustee, filed  as an Exhibit to EXCO’s Current Report on Form 8-K filed on  February 21, 2006 and incorporated by reference herein.                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.5    |   | Form of 71¤4%  Global Note Due 2011, filed as an Exhibit to EXCO’s Pre-effective  Amendment No. 1 to its Registration Statement on Form S-4 filed April 20,  2004 and incorporated by reference herein.                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.6    |   | Specimen Stock Certificate for EXCO’s common stock, filed as an  Exhibit to EXCO’s Amendment No. 2 to the Form S-1 (File  No. 333- 129935) filed on January 27, 2006 and incorporated by  reference herein.                                                                                                                             |

 

55

----

 
| 4.7    |   | Fourth Supplemental Indenture, dated as of May 4, 2006, by and  among EXCO Resources, Inc., Power Gas Marketing &  Transmission, Inc. and Wilmington Trust Company, as Trustee, filed as an  Exhibit to EXCO’s Current Report on Form 8-K, dated May 4,  2006 and filed on May 10, 2006 and incorporated by reference herein.                                                                                                                                                                                                                               |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.8    |   | Fifth Supplemental Indenture, dated as of May 2, 2007, by and  among EXCO Resources, Inc., Southern G Holdings, LLC and Wilmington  Trust Company, as Trustee, filed as an Exhibit to EXCO’s Current Report  on Form 8-K, dated May 2, 2007 and filed on May 8, 2007 and  incorporated by reference herein.                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.9    |   | First Amended and Restated Registration Rights Agreement, by and  among EXCO Holdings Inc. and the Initial Holders (as defined therein),  effective January 5, 2006, filed as an Exhibit to EXCO’s Amendment  No. 1 to its Registration Statement on Form S-1 (File  No. 333-129935) filed on January 6, 2006 and incorporated by  reference herein.                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.10   |   | Registration Rights Agreement, dated March 28, 2007, by and  among EXCO Resources, Inc. and the other parties thereto with respect to  the 7.0% Cumulative Convertible Perpetual Preferred Stock and the Hybrid  Preferred Stock, filed as an Exhibit to EXCO’s Form 8-K dated  March 28, 2007 and filed on April 2, 2007 and incorporated by  reference herein.                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.11   |   | Registration Rights Agreement, dated March 28, 2007, by and  among EXCO Resources, Inc. and the other parties thereto with respect to  the Hybrid Preferred Stock, filed as an Exhibit to EXCO’s Form 8-K  dated March 28, 2007 and filed on April 2, 2007 and incorporated by  reference herein.                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1   |   | Indenture among EXCO Resources, Inc., the Subsidiary Guarantors  and Wilmington Trust Company, as Trustee, dated as of January 20, 2004,  filed as exhibit (b)(2) to Amendment No. 4 to the Schedule TO filed  by NCE Acquisition, Inc. and EXCO Resources, Inc. on  January 21, 2004 and incorporated by reference herein.                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.2   |   | First Supplemental Indenture by and among EXCO Resources, Inc.,  North Coast Energy, Inc., North Coast Energy Eastern, Inc. and  Wilmington Trust Company, as Trustee, dated as of January 27, 2004,  filed as an Exhibit to EXCO’s Registration Statement on Form S-4  filed March 25, 2004 and incorporated by reference herein.                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.3   |   | Second Supplemental Indenture by and among EXCO Resources, Inc.,  Pinestone Resources, LLC and Wilmington Trust Company, as Trustee, dated as  of December 21, 2004, filed as an Exhibit to EXCO’s Annual Report on  Form 10-K for 2004 filed March 31, 2005 and incorporated by  reference herein.                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.4   |   | Third Supplemental Indenture by and among EXCO Resources, Inc.,  TXOK Acquisition, Inc. and Wilmington Trust Company, as Trustee, filed  as an Exhibit to EXCO’s Current Report on Form 8-K/A-Amendment  No. 1, dated February 8, 2006 and filed on February 21, 2006  and incorporated by reference herein.                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.5   |   | Fourth Supplemental Indenture, dated as of May 4, 2006, by and  among EXCO Resources, Inc., Power Gas Marketing & Transmission, Inc.  and Wilmington Trust Company, as Trustee, filed as an Exhibit to EXCO’s  Current Report on Form 8-K, dated May 4, 2006 and filed on  May 10, 2006 and incorporated by reference herein.                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.6   |   | Form of 71¤4%  Global Note Due 2011, filed as an Exhibit to EXCO’s Pre-effective  Amendment No. 1 to its Registration Statement on Form S-4 filed  April 20, 2004 and incorporated by reference herein.                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.7   |   | Letter Agreement, dated October 3, 2005, between EXCO  Resources, Inc. and JPMorgan Chase Bank, N.A., as agent for certain  lenders under the Credit Agreement by and among EXCO Holdings II, Inc.  (EXCO Holdings Inc. as successor by merger) as Borrower and JPMorgan Chase  Bank, N.A., as Administrative Agent for itself and the Lenders defined therein,  dated October 3, 2005, as filed as an Exhibit to EXCO’s Quarterly  Report on Form 10-Q for the Quarter ended September 30, 2005 filed  November 14, 2005 and incorporated by reference herein. |

 

56

----

 
| 10.8   |   | Promissory Note in the maximum amount of $10,000,000, dated  October 7, 2005, made by EXCO Holdings Inc., payable to EXCO  Resources, Inc., filed as an Exhibit to EXCO’s Quarterly Report on  Form 10-Q for the Quarter ended September 30, 2005 filed  November 14, 2005 and incorporated by reference herein.                                                                                                                                                                                                                                        |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.9   |   | First Amended and Restated Registration Rights Agreement, by and  among EXCO Holdings Inc. and the Initial Holders (as defined therein),  effective January 5, 2006, filed as an Exhibit to EXCO’s Amendment  No. 1 to its Registration Statement on Form S-1 (File  No. 333-129935) filed on January 6, 2006 and incorporated by  reference herein.                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.10  |   | Agreement and Plan of Merger between EXCO Holdings Inc. and EXCO  Resources, Inc., dated February 9, 2006, filed as an  Exhibit to EXCO’s Current Report on Form 8-K, dated  February 8, 2006 and filed February 14, 2006 and incorporated by  reference herein.                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | Credit Agreement for Senior Secured Revolving Credit Facility, dated  as of September 27, 2005, by and among TXOK Acquisition, Inc., as  Borrower, certain subsidiaries of Borrower, as Guarantors, the Lenders (as  defined therein), JPMorgan Chase Bank, N.A., as Administrative Agent, and  J.P. Morgan Securities Inc., as Sole Bookrunner and Lead Arranger, filed  as an Exhibit to EXCO’s Current Report on Form 8-K/A-Amendment  No. 1, dated February 8, 2006 and filed on February 21, 2006  and incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.12  |   | First Amendment to Revolving Credit Agreement, dated as of  December 15, 2005, by and among TXOK Acquisition, Inc., as  Borrower, certain subsidiaries of Borrower, as Guarantors, the Lenders (as  defined herein), and JPMorgan Chase Bank, N.A., as Administrative Agent,  filed as an Exhibit to EXCO’s Current Report on Form 8-K/A-Amendment  No. 1, dated February 8, 2006 and filed on February 21, 2006  and incorporated by reference herein.                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.13  |   | Second Amendment to Revolving Credit Agreement, dated as of  February 6, 2006, by and among TXOK Acquisition, Inc., as Borrower,  certain subsidiaries of Borrower, as Guarantors, the Lenders (as defined  therein), and JPMorgan Chase Bank, N.A., as Administrative Agent, filed as an  Exhibit to EXCO’s Current Report on Form 8-K/A-Amendment No. 1,  dated February 8, 2006 and filed on February 21, 2006 and incorporated  by reference herein.                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.14  |   | Subsidiary Guaranty, dated February 14, 2006, among TXOK  Acquisition, Inc., TXOK Energy Resources Company, TXOK Energy Holdings,  L.L.C., TXOK Texas Energy Holdings, LLC and TXOK Texas Energy Resources,  L.P., as Subsidiary Guarantors, in favor of JPMorgan Chase Bank, NA, as agent  for itself and the Lenders defined therein, filed as an Exhibit to  EXCO’s Current Report on Form 8-K/A-Amendment No. 1, dated  February 8, 2006 and filed on February 21, 2006 and incorporated by  reference herein.                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.15  |   | Amended and Restated Credit Agreement, dated as of March 17,  2006, among EXCO Resource, Inc. as Borrower, certain of its  subsidiaries, as Guarantors, the Lenders defined therein, JPMorgan Chase  Bank, N.A., as Administrative Agent, and J.P. Morgan Securities Inc., as Sole  Bookrunner and Lead Manager, filed as an Exhibit to EXCO’s Current  Report on Form 8-K, dated March 17, 2006 and filed on  March 23, 2006 and incorporated by reference herein.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.16  |   | EXCO Resources, Inc. 2005 Long-Term Incentive Plan, filed as an  Exhibit to EXCO’s Registration Statement on Form S-8 (File  No. 333-132551) filed on March 17, 2006 and incorporated by  reference herein.*                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17  |   | Amendment to the EXCO Resources, Inc. 2005 Long-Term Incentive Plan,  filed as an Exhibit to EXCO’s Current Report on Form 8-K, dated August 30,  2007 and filed on September 5, 2007 and incorporated by reference herein.*                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.18  |   | Form of Incentive Stock Option Agreement for the EXCO  Resources, Inc. 2005 Long-Term Incentive Plan, filed as an Exhibit to  EXCO’s Annual Report on Form 10-K filed on March 19, 2007 and  incorporated by reference herein.*                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.19  |   | Form of Nonqualified Stock Option Agreement for the EXCO  Resources, Inc. 2005 Long-Term Incentive Plan, filed as an Exhibit to  EXCO’s Annual Report on Form 10-K filed on March 19, 2007 and  incorporated by reference herein.*                                                                                                                                                                                                                                                                                                                                |

 

57

----

 
| 10.20  |   | Form of Restricted Stock Award Agreement for the EXCO  Resources, Inc. 2005 Long-Term Incentive Plan, filed as an  Exhibit to EXCO’s Registration Statement on Form S-8 (File  No. 333-132551) filed on March 17, 2006 and incorporated by  reference herein.*                                                                                                                                                                                    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.21  |   | Merger Agreement, dated July 22, 2006, by and among Winchester  Acquisition, LLC, Progress Fuels Corporation, Winchester Energy Company,  Ltd., and WGC Holdco, LLC., filed as an Exhibit to EXCO’s Current Report  on Form 8-K, dated July 22, 2006 and filed on July 25, 2006  and incorporated by reference herein.                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.22  |   | First Amendment to Agreement and Plan of Merger, dated as of  September 28, 2006, by and among Winchester Acquisition, LLC, Progress  Fuels Corporation, Winchester Energy Company, Ltd., and WGC Holdco, LLC,  filed as an Exhibit to EXCO’s Current Report on Form 8-K/A-Amendment  No. 2, dated July 22, 2006 and filed on October 4, 2006 and  incorporated by reference herein.                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.23  |   | Payment Performance Guaranty, dated July 22, 2006, by and  between Progress Fuels Corporation and EXCO Resources, Inc., filed as an  exhibit to EXCO’s Current Report on Form 8-K, dated July 22, 2006  and filed on July 24, 2006 and incorporated by reference herein.                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.24  |   | Senior Revolving Credit Agreement, dated October 2, 2006, among  EXCO Partners Operating Partnership, LP, certain of its subsidiaries,  JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders party  thereto, filed as an Exhibit to EXCO’s Current Report on  Form 8-K/A-Amendment No. 2, dated July 22, 2006 and filed on  October 4, 2006 and incorporated by reference herein.                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.25  |   | Senior Term Credit Agreement, dated October 2, 2006, among EXCO  Partners Operating Partnership, LP, certain of its subsidiaries, JPMorgan  Chase Bank, N.A., as Administrative Agent, and the lenders party thereto,  filed as an Exhibit to EXCO’s Current Report on  Form 8-K/A-Amendment No. 2, dated July 22, 2006 and filed on  October 4, 2006 and incorporated by reference herein.                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.26  |   | First Amendment to Credit Agreement, dated October 2, 2006,  among EXCO Resources, Inc., certain of its subsidiaries, JPMorgan Chase  Bank, N.A., as Administrative Agent, and the lenders party thereto, filed as  an Exhibit to EXCO’s Current Report on Form 8-K/A-Amendment  No. 2, dated July 22, 2006 and filed on October 4, 2006 and  incorporated by reference herein.                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.27  |   | Amended and Restated Equity Contribution Agreement, dated  October 4, 2006, among EXCO Resources, Inc., EXCO Partners  Operating Partnership, LP, and JPMorgan Chase Bank, N.A., as Administrative  Agent, filed as an Exhibit to EXCO’s Current Report on Form 8-K/A-Amendment  No. 2, dated July 22, 2006 and filed on October 4, 2006 and  incorporated by reference herein.                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.28  |   | Senior Term Credit Agreement, dated October 2, 2006, as amended  and restated as of October 13, 2006, among EXCO Partners Operating Partnership,  LP, certain of its subsidiaries, JPMorgan Chase Bank, N.A., as Administrative  Agent, and the lenders party thereto, filed as an Exhibit to EXCO’s  Current Report on Form 8-K/A-Amendment No. 3, dated July 22,  2006 and filed on October 19, 2006 and incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.29  |   | Second Amended and Restated Equity Contribution Agreement, dated  October 13, 2006, among EXCO Resources, Inc., EXCO Partners  Operating Partnership, LP, and JPMorgan Chase Bank, N.A., as Administrative  Agent, filed as an Exhibit to EXCO’s Current Report on  Form 8-K/A-Amendment No. 3, dated July 22, 2006 and filed on  October 19, 2006 and incorporated by reference herein.                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.30  |   | Second Amended and Restated EXCO Resources, Inc. Severance Plan,  filed as an Exhibit to EXCO’s Current Report on Form 8-K, dated  November 8, 2006 and filed on November 9, 2006 and incorporated by  reference herein.*                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.31  |   | Amended and Restated 2007 Director Plan of EXCO Resources, Inc.,  filed as an Exhibit to EXCO’s Current Report on Form 8-K, dated  January 15, 2007 and filed on January 16, 2007 and incorporated by  reference herein.                                                                                                                                                                                                                               |

 

58

----

 
| 10.32  |   | Purchase and Sale Agreement by and among Anadarko Petroleum  Corporation and Anadarko Gathering Company, as Seller, and Vernon Holdings,  LLC, as Purchaser, dated December 22, 2006, filed as an Exhibit to  EXCO’s Pre-Effective Amendment No. 1 to the Registration Statement on  Form S-1 (File No. 333-139568) filed on January 16, 2007 and  incorporated by reference herein.                                                                               |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.33  |   | First Amendment to Purchase and Sale Agreement and Assignment of  Partial Interest in the Purchase and Sale Agreement by and among Anadarko  Petroleum Corporation, Anadarko Gathering Company, EXCO Partners Operating  Partnership, LP (successor by merger to Vernon Holdings, LLC) and Vernon  Gathering, LLC, dated March 30, 2007, filed as an Exhibit to EXCO’s  Form 8-K dated March 28, 2007 and filed on April 2, 2007 and  incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.34  |   | Guaranty dated December 22, 2006 by EXCO Resources, Inc. in  favor of Anadarko Petroleum Corporation and Anadarko Gathering Company, filed  as an Exhibit to EXCO’s Pre-Effective Amendment No. 1 to the  Registration Statement on Form S-1 (File No. 333-139568) filed on  January 16, 2007 and incorporated by reference herein.                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.35  |   | Purchase and Sale Agreement by and among EXCO Resources, Inc.,  Anadarko Petroleum Corporation, Anadarko E&P Company, LP, Howell  Petroleum Corporation, and Kerr-McGee Oil & Gas Onshore LP, dated  February 1, 2007, filed as an Exhibit to EXCO’s Annual Report on  Form 10-K filed on March 19, 2007 and incorporated by reference  herein.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.36  |   | First Amendment to Credit Agreement effective as of December 31,  2006 among EXCO Partners Operating Partnership, LP, certain of its  subsidiaries, JPMorgan Chase Bank, N.A., as Administrative Agent, and the  lenders party thereto, filed as an exhibit to EXCO’s Current Report on  Form 8-K, dated March 8, 2007 and filed March 13, 2007 and  incorporated by reference herein.                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.37  |   | Preferred Stock Purchase Agreement, dated March 28, 2007, by and  among EXCO Resources, Inc. and the other parties thereto filed as an  Exhibit to EXCO’s Form 8-K dated March 28, 2007 and filed on  April 2, 2007 and incorporated by reference herein.                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.38  |   | Letter Agreement, dated March 28, 2007, with OCM Principal  Opportunities Fund IV, L.P. and OCM EXCO Holdings, LLC, filed as an  Exhibit to EXCO’s Form 8-K dated March 28, 2007 and filed on  April 2, 2007 and incorporated by reference herein.*                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.39  |   | Letter Agreement, dated March 28, 2007, with Ares Corporate  Opportunities Fund, ACOF EXCO, L.P., ACOF EXCO 892 Investors, L.P., Ares  Corporate Opportunities Fund II, L.P., Ares EXCO, L.P. and Ares EXCO 892  Investors, L.P, filed as an Exhibit to EXCO’s Form 8-K dated  March 28, 2007 and filed on April 2, 2007 and incorporated by  reference herein.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.40  |   | Amended and Restated Credit Agreement, dated as of March 30, 2007,  among EXCO Partners Operating Partnership, LP, as Borrower, certain subsidiaries  of Borrower, as Guarantors, the lenders party thereto, JPMorgan Chase Bank,  N.A., as Administrative Agent, and J.P. Morgan Securities Inc., as Sole  Bookrunner and Lead Arranger, filed as an Exhibit to EXCO’s  Form 8-K dated March 28, 2007 and filed on April 2, 2007 and  incorporated by reference herein.     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.41  |   | Registration Rights Agreement, dated March 28, 2007, by and  among EXCO Resources, Inc. and the other parties thereto with respect to  the 7.0% Cumulative Convertible Perpetual Preferred Stock and the Hybrid  Preferred Stock, filed as an Exhibit to EXCO’s Form 8-K dated  March 28, 2007 and filed on April 2, 2007 and incorporated by  reference herein.                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.42  |   | Registration Rights Agreement, dated March 28, 2007, by and  among EXCO Resources, Inc. and the other parties thereto with respect to  the Hybrid Preferred Stock, filed as an Exhibit to EXCO’s Form 8-K  dated March 28, 2007 and filed on April 2, 2007 and incorporated by  reference herein.                                                                                                                                                                  |

 

59

----

 
| 10.43  |   | First Amendment to Letter Agreement by and among EXCO  Resources, Inc., Southern G Holdings, LLC, Anadarko Petroleum  Corporation, Anadarko E&P Company, LP, Howell Petroleum Corporation, and  Kerr-McGee Oil & Gas Onshore LP, dated April 13, 2007, filed as an  Exhibit to EXCO’s Form 8-K dated May 2, 2007 and filed on May  8, 2007 and incorporated by reference herein.                                                                     |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.44  |   | Second Amended and Restated Credit Agreement, dated as of May 2,  2007, among EXCO Resources, Inc. as Borrower, certain of its subsidiaries,  as Guarantors, the Lenders defined therein, JPMorgan Chase Bank, N.A., as  Administrative Agent, and J.P. Morgan Securities Inc., as Sole Bookrunner and  Lead Arranger, filed as an Exhibit to EXCO’s Form 8-K dated  May 2, 2007 and filed on May 8, 2007 and incorporated by reference  herein.             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.45  |   | Fifth Supplemental Indenture, dated as of May 2, 2007, by and  among EXCO Resources, Inc., Southern G Holdings, LLC and Wilmington  Trust Company, as Trustee, filed as an Exhibit to EXCO’s Current Report  on Form 8-K, dated May 2, 2007 and filed on May 8, 2007 and  incorporated by reference herein.                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.46  |   | Second Amendment to Purchase and Sale Agreement, effective as of  February 1, 2007, by and among Anadarko Petroleum Corporation, Anadarko  E&P Company LP, Howell Petroleum Corporation, Kerr-McGee Oil & Gas  Onshore LP, EXCO Resources, Inc. and Southern G Holdings, LLC, filed as an  Exhibit to EXCO’s Form 8-K dated May 2, 2007 and filed on May 8, 2007 and  incorporated by reference herein.                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.47  |   | Third Amendment to Purchase and Sale Agreement and Assignment of  Partial Interest in the Purchase and Sale Agreement, effective as of February  1, 2007, by and among Anadarko Petroleum Corporation, Anadarko E&P  Company LP, Howell Petroleum Corporation, Kerr-McGee Oil & Gas Onshore  LP, EXCO Resources, Inc. and Southern G Holdings, LLC, filed as an Exhibit to  EXCO’s Form 8-K dated May 2, 2007 and filed on May 8, 2007 and incorporated  by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.48  |   | Membership Interest Purchase and Sale Agreement, dated May 8, 2007,  by and among EXCO Resources, Inc., Southern G Holdings, LLC, Crimson  Exploration Inc. and Crimson Exploration Operating, Inc., filed as an Exhibit  to EXCO’s Form     8-K dated May 2, 2007 and filed  on May 8, 2007 and incorporated by reference herein.                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.49  |   | Purchase Agreement, effective August 15, 2007, between OCM GW  Holdings, LLC and EXCO Resources, Inc., filed as an Exhibit to EXCO’s Current  Report on Form 8-K, dated August 15, 2007 and filed on August 21, 2007 and  incorporated by reference herein.                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1   |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 of Chief Executive Officer of EXCO Resources, Inc., filed  herewith.                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.2   |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 of Chief Financial Officer of EXCO Resources, Inc., filed  herewith.                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.3   |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 of Chief Accounting Officer of EXCO Resources, Inc., filed  herewith.                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 32.1   |   | Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 of Chief Executive Officer and Chief Financial Officer of EXCO  Resources, Inc., filed herewith.                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 99.1   |   | Audit Committee Charter, filed as an Exhibit to EXCO’s  Form 8-K filed November 24, 2004 and incorporated by reference  herein.                                                                                                                                                                                                                                                                                                                                        |

 

----

*  Theseexhibits are management contracts.

 

60

----