**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 June 30, 2007** |
| ** **                                        | ** ** | ** **                                                                                                    |
| **OR**                                            |
| ** **                                        | ** ** | ** **                                                                                                    |
| **o**                                             | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom              to**

**Commission File 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 checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES x   NO o

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

Large acceleratedfiler o                Acceleratedfiler o                Non-acceleratedfiler x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

YES o   NO x

The number of shares ofcommon stock, par value $0.001 per share, outstanding as of August 7, 2007 was 104,400,470.

 

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**EXCORESOURCES, INC.**

**INDEX**
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                     | ** ** |
|--------------|-------------------------------------------------------------------------------------------------------------------------------|------------|
|         |                                                                                                                          |       |
| Item 1.      | Financial  Statements (Unaudited)                                                                                             |       |
|         | Condensed  Consolidated Balance Sheets at December 31, 2006 and June 30, 2007                                       |       |
|         | Condensed Consolidated Statements of Operations for  the Three and Six Months Ended June 30, 2006 and 2007               |       |
|         | Condensed Consolidated Statements of Cash Flows for  the Six Months Ended June 30, 2006 and 2007                         |       |
|         | Condensed  Consolidated Statements of Changes in Shareholders’ Equity for the Six Months  Ended   June 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  6.     | Exhibits                                                                                                                      |       |
|         | Signatures                                                                                                                    |       |
|         | Index  to Exhibits                                                                                                            |       |

 

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**PART I—FINANCIAL INFORMATION**

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

**EXCORESOURCES, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**
| ** **                                                       | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| **(in thousands)**                                          | ** ** | **2006**              | ** ** | **2007**          | ** ** |
| ** **                                                       | ** ** | ** **            | ** ** | **(Unaudited)**   | ** ** |
| Assets                                                           |       |                  |       |              |       |
| Current assets:                                                  |       |                  |       |              |       |
| Cash and cash  equivalents                                       |       | $                     | 22,822     |              | $          | 53,281 |   |
| Accounts  receivable:                                            |       |                  |       |              |       |
| Oil and natural  gas                                             |       | 84,078                |       | 181,757           |       |
| Joint interest                                                   |       | 14,902                |       | 16,312            |       |
| Interest and  other                                              |       | 12,199                |       | 4,198             |       |
| Oil and natural  gas derivatives                                 |       | 91,614                |       | 67,655            |       |
| Deferred income  taxes                                           |       | —                |       | 37,996            |       |
| Other                                                            |       | 11,095                |       | 10,974            |       |
| Total current  assets                                            |       | 236,710               |       | 372,173           |       |
| Oil and natural gas  properties (full cost accounting method):   |       |                  |       |              |       |
| Unproved oil and  natural gas properties                         |       | 297,919               |       | 352,052           |       |
| Proved developed  and undeveloped oil and natural gas properties |       | 2,492,863             |       | 4,522,720         |       |
| Accumulated  depreciation, depletion and amortization            |       | (142,591              | )          | (291,795          | )          |
| Oil and natural  gas properties, net                             |       | 2,648,191             |       | 4,582,977         |       |
| Gas gathering assets                                             |       | 203,537               |       | 326,581           |       |
| Accumulated  depreciation, depletion and amortization            |       | (4,181                | )          | (9,073            | )          |
| Gas gathering assets,  net                                       |       | 199,356               |       | 317,508           |       |
| Office and field  equipment, net                                 |       | 14,805                |       | 16,033            |       |
| Advance on pending  acquisition                                  |       | 80,000                |       | —            |       |
| Oil and natural gas  derivatives                                 |       | 41,469                |       | 11,640            |       |
| Deferred financing  costs, net                                   |       | 15,929                |       | 22,711            |       |
| Other assets                                                     |       | 520                   |       | 4,529             |       |
| Goodwill                                                         |       | 470,077               |       | 470,077           |       |
| Total assets                                                     |       | $                     | 3,707,057  |              | $          | 5,797,648 |   |

 

*Seeaccompanying notes.*

3

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**EXCORESOURCES, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                           | ** ** | **December 31,** | ** ** | **June 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     |              | $          | 101,598 |   |
| Accrued interest  payable                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 36,000                |       | 24,690            |       |
| Revenues and  royalties payable                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 53,994                |       | 88,763            |       |
| Income taxes  payable                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 89                    |       | 87                |       |
| Deferred income  taxes payable                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 32,639                |       | —            |       |
| Current portion  of asset retirement obligations                                                                                                                                                                                                                                                                                                                                                                                                     |       | 1,579                 |       | 1,576             |       |
| Current portion  of long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 6,500                 |       | —            |       |
| Oil and natural  gas derivatives                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 5,721                 |       | 40,252            |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 190,924               |       | 256,966           |       |
| Long-term debt,  net of current portion                                                                                                                                                                                                                                                                                                                                                                                                              |       | 2,081,653             |       | 1,991,277         |       |
| Asset retirement  obligations and other long-term liabilities                                                                                                                                                                                                                                                                                                                                                                                        |       | 57,570                |       | 88,300            |       |
| Deferred income  taxes                                                                                                                                                                                                                                                                                                                                                                                                                               |       | 166,136               |       | 236,963           |       |
| Oil and natural  gas derivatives                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 30,924                |       | 101,650           |       |
| Commitments and  contingencies                                                                                                                                                                                                                                                                                                                                                                                                                       |       | —                |       | —            |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                  |       |              |       |
| 7.0% Cumulative  Convertible Perpetual Preferred Stock, par value $0.001 per share, 39,008  shares outstanding at June 30, 2007, liquidation preference of $391,218 at  June 30, 2007                                                                                                                                                                                                                                                                |       | —                |       | 388,542           |       |
| Hybrid Preferred  Stock, par value $0.001 per share, 160,992 shares outstanding at June 30,  2007, liquidation preference of $1,617,299 at June 30, 2007                                                                                                                                                                                                                                                                                             |       | —                |       | 1,603,571         |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                  |       |              |       |
| Shareholders'  equity:                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                  |       |              |       |
| Preferred stock,  par value $0.001 per share; 10,000,000 shares authorized at June 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; no shares of preferred stock other than the 7.0% Cumulative Convertible  Perpetual and Hybrid Preferred Stock (presented above) are issued and outstanding  at June 30, 2007 |       | —                |       | —            |       |
| Common stock,  $.001 par value; Authorized shares - 250,000,000; issued and outstanding  shares - 104,162,241 at December 31, 2006 and 104,383,980 at June 30, 2007                                                                                                                                                                                                                                                                                  |       | 104                   |       | 104               |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 1,024,442             |       | 1,032,017         |       |
| Retained  earnings                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 155,304               |       | 98,258            |       |
| Total  shareholders' equity                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 1,179,850             |       | 1,130,379         |       |
| Total liabilities and  shareholders' equity                                                                                                                                                                                                                                                                                                                                                                                                          |       | $                     | 3,707,057  |              | $          | 5,797,648 |   |

 

*See accompanying notes.*

4

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**EXCORESOURCES, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                                                             | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands, except per share and share data)** | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Revenues  and other income:**                                                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil and natural  gas                                                                   |       | $                                               | 80,004     |                                          | $          | 253,073 |   | $ | 149,733 |   | $ | 370,884 |   |
| Gain (loss) on  derivative financial instruments                                       |       | 35,232                                          |       | 77,897                                        |       | 76,007 |   | (18,122 | ) |
| Other income                                                                           |       | 628                                             |       | 9,415                                         |       | 2,903 |   | 16,140 |   |
| Total revenues  and other income                                                       |       | 115,864                                         |       | 340,385                                       |       | 228,643 |   | 368,902 |   |
| **Costs  and expenses:**                                                               | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil and natural  gas production                                                        |       | 15,139                                          |       | 47,330                                        |       | 26,257 |   | 77,545 |   |
| Depreciation,  depletion and amortization                                              |       | 29,298                                          |       | 105,148                                       |       | 49,975 |   | 156,472 |   |
| Accretion of  discount on asset retirement obligations                                 |       | 382                                             |       | 1,267                                         |       | 684 |   | 2,210 |   |
| General and  administrative                                                            |       | 6,530                                           |       | 14,990                                        |       | 12,439 |   | 29,165 |   |
| Interest                                                                               |       | 11,660                                          |       | 33,543                                        |       | 28,005 |   | 110,252 |   |
| Total costs and  expenses                                                              |       | 63,009                                          |       | 202,278                                       |       | 117,360 |   | 375,644 |   |
| Equity in net  income of TXOK Acquisition, Inc.                                        |       | —                                          |       | —                                        |       | 1,593 |   | — |   |
| Income (loss)  before income taxes                                                     |       | 52,855                                          |       | 138,107                                       |       | 112,876 |   | (6,742 | ) |
| Income tax  expense (benefit)                                                          |       | 21,832                                          |       | 55,221                                        |       | 44,701 |   | (1,931 | ) |
| Net income  (loss)                                                                     |       | 31,023                                          |       | 82,886                                        |       | 68,175 |   | (4,811 | ) |
| Preferred stock  dividends                                                             |       | —                                          |       | (51,099                                       | )          | — |   | (52,235 | ) |
| Net income  (loss) available to common shareholders                                    |       | $                                               | 31,023     |                                          | $          | 31,787 |   | $ | 68,175 |   | $ | (57,046 | ) |
| Net income  (loss) per common share:                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Net income  (loss) available to common shareholders per common share - basic           |       | $                                               | 0.30       |                                          | $          | 0.30 |   | $ | 0.74 |   | $ | (0.55 | ) |
| Net income  (loss) available to common shareholder per common share - diluted          |       | $                                               | 0.29       |                                          | $          | 0.30 |   | $ | 0.73 |   | $ | (0.55 | ) |
| Weighted average  shares:                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                                  |       | 104,014,259                                     |       | 104,313,580                                   |       | 92,634,465 |   | 104,257,983 |   |
| Diluted                                                                                |       | 105,271,160                                     |       | 106,909,382                                   |       | 94,020,033 |   | 104,257,983 |   |

 

*Seeaccompanying notes.*

5

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**EXCORESOURCES, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                                                        | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                                                                           | ** ** | **2006**                                      | ** ** | **2007** | ** ** |
| ** **                                                                                                        | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Operating  Activities:                                                                                            |       |                                          |       |   |   |
| Net income  (loss)                                                                                                |       | $                                             | 68,175     |   | $ | (4,811 | ) |
| Adjustments to  reconcile net income (loss) 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                                         |       | —                                        |       | 3,678 |   |
| Gain on sale of other assets                                                                                      |       | (50                                           | )          | — |   |
| Depreciation, depletion and amortization                                                                          |       | 49,975                                        |       | 156,472 |   |
| Stock option compensation expense                                                                                 |       | 1,729                                         |       | 4,465 |   |
| Accretion of discount on asset retirement  obligations                                                            |       | 684                                           |       | 2,210 |   |
| Non-cash change in fair value of derivatives                                                                      |       | (73,579                                       | )          | 56,824 |   |
| Deferred income taxes                                                                                             |       | 44,701                                        |       | (1,931 | ) |
| Amortization of deferred financing costs, premium on  7 1/4% senior notes due 2011 and discount on long-term debt |       | 5,194                                         |       | 9,916 |   |
| Effect of changes in:                                                                                             |       |                                          |       |   |   |
| Accounts receivable                                                                                               |       | 64,372                                        |       | (91,091 | ) |
| Other current assets                                                                                              |       | 1,679                                         |       | (755 | ) |
| Accounts payable and other current liabilities                                                                    |       | (18,613                                       | )          | 34,149 |   |
| Net cash provided  by operating activities                                                                        |       | 142,674                                       |       | 169,126 |   |
| Investing  Activities:                                                                                            |       |                                          |       |   |   |
| Additions to oil  and natural gas properties, gathering systems and equipment                                     |       | (211,832                                      | )          | (188,359 | ) |
| Acquisitions,  including corporate acquisitions                                                                   |       | (188,265                                      | )          | (2,165,348 | ) |
| Advance on  pending disposition                                                                                   |       | —                                        |       | 5,000 |   |
| Proceeds from  disposition of property and equipment and other                                                    |       | 609                                           |       | 376,041 |   |
| Net cash used in  investing activities                                                                            |       | (399,488                                      | )          | (1,972,666 | ) |
| Financing  Activities:                                                                                            |       |                                          |       |   |   |
| Borrowings under  credit agreements                                                                               |       | 418,000                                       |       | 1,928,000 |   |
| Repayments under  credit agreements                                                                               |       | (615,847                                      | )          | (2,023,532 | ) |
| Payments on  interim bank loan                                                                                    |       | (350,000                                      | )          | — |   |
| Settlements of  derivative financial instruments with a financing element                                         |       | (38,098                                       | )          | (3,678 | ) |
| Proceeds from  issuance of common stock, net of underwriter commissions and initial public  offering costs        |       | 656,305                                       |       | 2,228 |   |
| Proceeds from  issuance of preferred stock                                                                        |       | —                                        |       | 2,000,000 |   |
| Payments for preferred  stock issuance costs                                                                      |       | —                                        |       | (7,498 | ) |
| Payment of  preferred stock dividends                                                                             |       | —                                        |       | (43,717 | ) |
| Deferred  financing costs                                                                                         |       | (1,052                                        | )          | (17,804 | ) |
| Net cash provided  by financing activities                                                                        |       | 69,308                                        |       | 1,833,999 |   |
| Net increase  (decrease) in cash                                                                                  |       | (187,506                                      | )          | 30,459 |   |
| Cash at  beginning of period                                                                                      |       | 226,953                                       |       | 22,822 |   |
| Cash at end of  period                                                                                            |       | $                                             | 39,447     |   | $ | 53,281 |   |
|                                                                                                              |       |                                          |       |   |   |
| Supplemental  Cash Flow Information:                                                                              |       |                                          |       |   |   |
| Interest paid                                                                                                     |       | $                                             | 29,971     |   | $ | 108,662 |   |
| 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                                                                  |       | $                                             | —     |   | $ | 3,431 |   |

* *

*Seeaccompanying notes.*

6

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**EXCORESOURCES, 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 |       | 31                    |       | —         |       | 239          |       | —                 |       | 239 |   |
| Deferred initial  public offering costs        |       | —                |       | —         |       | (6,027       | )          | —                 |       | (6,027 | ) |
| Share-based  compensation                      |       | —                |       | —         |       | 2,214        |       | —                 |       | 2,214 |   |
| Net income                                     |       | —                |       | —         |       | —       |       | 68,175                 |       | 68,175 |   |
| Balance at June 30,  2006                      |       | 104,035               |       | $              | 104        |         | $          | 1,017,668              |       | $ | 84,525 |   | $ | 1,102,297 |   |
|                                           |       |                  |       |           |       |         |       |                   |       |   |   |
| Balance at  December 31, 2006                  |       | 104,162               |       | $              | 104        |         | $          | 1,024,442              |       | $ | 155,304 |   | $ | 1,179,850 |   |
| Issuance of  common stock, net of expenses     |       | 222                   |       | —         |       | 2,228        |       | —                 |       | 2,228 |   |
| Preferred stock  dividends                     |       | —                |       | —         |       | —       |       | (52,235                | )          | (52,235 | ) |
| Share-based  compensation                      |       | —                |       | —         |       | 5,347        |       | —                 |       | 5,347 |   |
| Net loss                                       |       | —                |       | —         |       | —       |       | (4,811                 | )          | (4,811 | ) |
| Balance at June 30,  2007                      |       | 104,384               |       | $              | 104        |         | $          | 1,032,017              |       | $ | 98,258 |   | $ | 1,130,379 |   |

 

*Seeaccompanying notes.*

** **

7

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**EXCORESOURCES, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

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

*Unlessthe context requires otherwise, references in this quarterly report to “EXCO,” “EXCOResources,” “Company,” “we,” “us,” and “our” are to EXCO Resources, Inc., itsconsolidated subsidiaries and EXCO Holdings Inc., or EXCO Holdings, our formerparent company. On February 14, 2006, EXCO Holdings merged with and into EXCOResources.*

EXCO Resources, Inc., a Texas corporation, is anindependent oil and natural gas company engaged in the acquisition, developmentand exploitation of onshore North American oil and natural gas properties.  During 2006, we completed acquisitions of oiland natural gas properties, acreage and related gathering facilities totalingin excess of $2.0 billion, the largest of which was Winchester Energy Company,Ltd., or Winchester, for approximately $1.1 billion.  The Winchester acquisition, which consisted ofoil and natural gas properties, gathering facilities and acreage located in theEast Texas/North Louisiana area, was completed within our subsidiary, EXCOPartners, LP, or EXCO Partners. Concurrent with the acquisition of Winchester, EXCO Resources contributedall of its assets and subsidiaries that conducted business in the EastTexas/North Louisiana area to EXCO Partners. Organizationally, EXCO Partners and its subsidiaries are indirectwholly-owned subsidiaries of EXCO Resources. EXCO Partners’ debt is not guaranteed by EXCO Resources and EXCOPartners does not guarantee EXCO Resources’ debt.

The accompanyingcondensed consolidated balance sheets as of December 31, 2006 and June 30,2007, the results of operations for the three and six months ended June 30,2006 and 2007, cash flows for the six months ended June 30, 2006 and 2007 andthe changes in shareholders’ equity for the six months ended June 30, 2006 and2007, are for EXCO, its subsidiaries, and prior to the initial public offering,its parent.  All intercompanytransactions have been eliminated. Certain prior year amounts have been reclassified to conform to thecurrent year presentation.

Wehave prepared the accompanying unaudited interim financial statements pursuantto the rules and regulations of the Securities and Exchange Commission, or SEC,and in the opinion of management, such financial statements reflect alladjustments necessary to present fairly the consolidated financial position ofEXCO at June 30, 2007 and its results of operations and cash flows for theperiods 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.  Theseunaudited interim financial statements should be read in conjunction with ouraudited financial statements and notes included in our Annual Report on Form10-K for the year ended December 31, 2006.

Theresults of operations for the interim periods are not necessarily indicative ofthe results we expect for the full year.

**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 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.

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 is not

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currently 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 NYSE rules, we likely would have issued 200,000shares of 7.0% Preferred Stock to fund the Vernon Acquisition and to repaycertain 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 the interim, we issued (i)39,008 shares of 7.0% Preferred Stock, consisting of 23,408 shares of SeriesA-1 7.0% Preferred Stock, 975 shares of Series A-2 7.0% Preferred Stock, 11,700shares of Series B 7.0% Preferred Stock and 2,925 shares of Series C 7.0%Preferred Stock, which shares by their terms were convertible into 19.7% of thenumber of shares of common stock outstanding before the preferred stockissuance and (ii) 160,992 shares of Hybrid Preferred Stock, consisting of149,441 shares of Series A-1 Hybrid Preferred Stock and 11,551 shares of SeriesA-2 Hybrid Preferred Stock, which shares are not currently convertible intocommon stock and which do not have general voting rights.

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.  If NYSE Shareholder Approval is obtained, the designations, preferences, limitations and relative voting rights of the Series A-1 Hybrid Preferred Stock and Series A-2 Hybrid Preferred Stock will become 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 dividends 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.

If NYSEShareholder Approval is not obtained at our annual meeting to be held on August30, 2007, the Hybrid Preferred Stock will remain outstanding and the 11.0% perannum dividend rate will be increased by 0.5% per annum for the first 90-dayperiod thereafter and by an additional rate of 0.5% per annum for eachsubsequent 90-day period thereafter, up to a maximum rate of 18.0% per annumuntil NYSE Shareholder Approval is obtained. In addition, the Hybrid Preferred Stock will continue to have the termsdescribed below under “Principal terms of the Hybrid Preferred Stock,”including restrictive covenants on our right to incur additional indebtedness,the requirement for us to repurchase the shares following certain assetdispositions and a mandatory redemption by us on April 18, 2011 at 125% of theliquidation preference plus accumulated dividends.

## ***Principal terms ofthe 7.0% Preferred Stock***

The following summarizes the principal terms of the 7.0% 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, 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 issuance and (iii) above 125% ofthe then effective conversion price ($23.75 per share at the current conversionprice of $19.00 per share) at any time thereafter.  Cash dividends will accrue at the rate of7.0% per annum prior to March 30, 2013 and at the rate of 9.0% per annumthereafter.  In lieu of paying cashdividends, we may, under certain circumstances prior to March 30, 2013, paydividends at a rate of 9.0% per annum by adding the dividends to theliquidation preference of the shares of Series A-1 7.0% Preferred Stock.  Upon the occurrence of a change of control,holders of the Series A-1 7.0% Preferred Stock may require us to repurchasetheir shares for cash at the liquidation preference plus accumulateddividends.  Holders of the Series A-17.0% Preferred Stock have the right to vote with the

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holders of commonstock, the holders of other series of 7.0% Preferred Stock and, if NYSEShareholder Approval is obtained, the holders of Hybrid Preferred Stock,together as a single class, on all matters submitted to our shareholders(except the election of directors) on an as-converted basis.  Holders of Series A-1 7.0% Preferred Stock,Series B 7.0% Preferred Stock, Series C 7.0% Preferred Stock and, if NYSEShareholder Approval is obtained, Series A-1 Hybrid Preferred Stock have theright to separately elect up to four directors, subject to the rights of theholders of Series B 7.0% Preferred Stock and Series C 7.0% Preferred Stock tovote as separate classes to each elect one of such preferred directors.  In addition, upon the occurrence of specifieddefaults in the Statements of Designation for the 7.0% Preferred Stock and theHybrid Preferred Stock, the holders of the 7.0% Preferred Stock and HybridPreferred Stock, voting together as a class, have the right to elect fouradditional 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.  Shares of Series A-2 7.0% Preferred Stockautomatically convert into shares of Series A-1 7.0% Preferred Stock when theholder thereof has provided the Company with a certificate certifying thateither no filing is required under the Hart-Scott-Rodino Antitrust ImprovementsAct of 1976, as amended, or HSR Act, with respect to such holder’s acquisitionof the shares of Series A-1 7.0% Preferred Stock or the waiting periodapplicable to such holder under the HSR Act has expired.

## 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 B 7.0% Preferred Stock isconvertible into Series A-1 7.0% Preferred Stock at any time at the election ofthe holder and will automatically convert into Series A-1 7.0% Preferred Stockwhen such holder ceases to own an aggregate of 10,000 shares 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 C 7.0% Preferred Stock isconvertible into Series A-1 7.0% Preferred Stock at any time at the election ofthe holder and will automatically convert into Series A-1 7.0% Preferred Stockwhen such holder ceases to own an aggregate of 10,000 shares of Series C 7.0%Preferred Stock and/or Hybrid Preferred Stock.

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

The following summarizes the principal terms of 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 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 HybridPreferred Stock

Initially, theSeries A-1 Hybrid Preferred Stock is not convertible into common stock.  If NYSE Shareholder Approval is obtained,then the designations, preferences, limitations and relative voting rights ofthe Series A-1 Hybrid Preferred Stock will become identical to thedesignations, preferences, limitations and relative voting rights of the SeriesA-1 7.0% Preferred Stock, including the right to dividends and the right toconvert into our common stock.

If NYSEShareholder Approval is not obtained prior to September 26, 2007, cashdividends will continue to accrue on the Series A-1 Hybrid Preferred Stock at arate of 11.0% per annum and the annual dividend rate will increase by 0.5% perquarter thereafter (up to a maximum rate of 18% per annum) until NYSEShareholder Approval is obtained.  Priorto the earlier of September 26, 2007 and the date that NYSE ShareholderApproval is obtained, the Series A-1 Hybrid Preferred Stock may be redeemedonly with the consent of the holders of the Hybrid Preferred Stock at aredemption price equal to 100.0% of the liquidation preference plus accrueddividends.  After September 26, 2007 andprior to the date that NYSE Shareholder Approval is obtained, the Series A-1Hybrid Preferred Stock is redeemable at our option at any time, and must beredeemed on April 18, 2011, for cash at 125.0% of the

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liquidationpreference plus accrued dividends.  Uponthe occurrence of a change of control, holders of Series A-1 Hybrid PreferredStock may require us to repurchase their shares for cash at 101% of theliquidation preference plus accrued dividends. In addition, upon the occurrence of specified defaults in the Statementsof Designation for the Hybrid Preferred Stock, the holders of 7.0% PreferredStock and Hybrid Preferred Stock, voting together as a class, have the right toelect four default directors until such default is cured.  Prior to obtaining NYSE Shareholder Approval,the Series A-1 Hybrid Preferred Stock contains covenants that restrict ourability to incur additional indebtedness and require us to repurchase the sharesfollowing certain asset dispositions.

## 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. Initially the Series A-2 Hybrid Preferred Stock is not convertible intoour common stock.  If NYSE ShareholderApproval is obtained, then the designations, preferences, limitations andrelative voting rights of the Series A-2 Hybrid Preferred Stock will becomeidentical 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 Hybrid Preferred Stock automatically convert intoshares of Series A-1 Hybrid Preferred Stock when the holder thereof hasprovided us with a certificate certifying that either no filing is requiredunder the HSR Act with respect to such holder’s acquisition of the shares ofSeries A-1 Hybrid Preferred Stock or the waiting period applicable to suchholder under the HSR Act has expired.

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

In connection withthe Private Placement, we entered into the 7.0% Registration Rights Agreementwith the Preferred Stock investors. The 7.0% Registration Rights Agreementcontemplates the registration of the resale of the shares of common stockunderlying the 7.0% Preferred Stock and, if NYSE Shareholder Approval is obtained,the Hybrid Preferred Stock. The 7.0% Registration Rights Agreement containscustomary terms and conditions for a transaction of this type.  We agreedto file with the SEC, not later than September 26, 2007, a registrationstatement to register the offer and sale of the common shares issuable uponconversion of the 7.0% Preferred Stock and to use our best efforts to have theregistration statement declared effective by March 24, 2008.  If anyshares of 7.0% Preferred Stock are outstanding on March 30, 2011, we agreed tofile a registration statement with the SEC by June 28, 2011 registering suchshares for resale and to use our best efforts to have such registrationstatement declared effective by September 26, 2011.  If we are unable tomeet the deadlines described above, if a registration statement ceases toremain effective or if we restrict sales under a registration statement undercertain “blackout provisions” for longer than the contractually permittedperiod, we must pay liquidated damages at a rate of 0.5% per annum of the 7.0%Preferred Stock liquidation preference for the first 90 days and thereafter foreach subsequent 90-day period at an additional rate of 0.25% up to a maximum of2.0% per annum during any default period.  We also agreed to indemnifyholders against certain liabilities under the Securities Act in respect of anysuch resale registration.

***HybridPreferred Stock Registration Rights Agreement***

In connection withthe Private Placement, we entered into a registration rights agreement, orHybrid Registration Rights Agreement, with the Hybrid Preferred Stockinvestors. The Hybrid Registration Rights Agreement contemplates theregistration of the resale of the shares of Series A-1 Hybrid PreferredStock.  If NYSE Shareholder Approval is not obtained by September 26,2007, we agreed to file a registration statement with the SEC by December 24,2007, covering the resale prior to such shareholder approval of shares ofHybrid Preferred Stock and to use our best efforts to have the registrationstatement declared effective by March 24, 2008.  The Hybrid RegistrationRight Agreement contains liquidated damages payment provisions andindemnification obligations similar to those contained in the 7.0% RegistrationRights Agreement.

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

On March 30, 2007, EXCOPartners Operating Partnership, LP, or EPOP, entered into an Amended andRestated Credit Agreement, or the EPOP Credit Agreement, among EPOP, asborrower, certain subsidiaries of EPOP, as guarantors, and certain lenders, JPMorgan Chase Bank,N.A., as administrative agent, and J.P. Morgan Securities Inc., as sole bookrunner and lead arranger. The initial interest rate was LIBOR plus 150basis points with a maximum rate of LIBOR plus 175 basis points.  Thematerial changes reflected in the EPOP Credit Agreement include anincrease in the borrowing base from $750.0 million to $1.3 billion, principallyto reflect the assets acquired in the Vernon Acquisition.  EPOP applied$416.2 million (plus $252.5 million of EXCO’s capital contribution) to repayits Senior Term Credit Facility plus accrued interest of $5.7 million and aprepayment premium of $13.0 million.  Upon consummation of thetransactions, approximately $1.1 billion was outstanding under the EPOP CreditAgreement.  Financial covenants contained within the EPOP Credit Agreementinclude a Consolidated Current Ratio (as defined) as of the end of

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any fiscal quarter ending on or after June 30, 2007 tobe at least 1.00 to 1.00.  For any fiscal quarter ending June 30, 2007 andthereafter, the ratio of Consolidated Funded Indebtedness (as defined) toConsolidated EBITDAX (as defined) must be no greater than 3.50 to 1.00. For any quarter beginning June 30, 2007 and thereafter, the ratio of ConsolidatedEBITDAX to Consolidated Interest Expense (as defined) must be at least 2.50 to1.00.  EPOP 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.  EPOP shall have in place mortgages covering 80%of its proved reserve value.  Finally, EPOP is permitted to dividend toits parent, EXCO Partners, up to $200.0 million per annum provided that (i)EPOP is not in default under the EPOP Credit Agreement and (ii) the amountborrowed under the EPOP Credit Agreement does not exceed 90% of thethen-permitted borrowing base.

**Vernon Acquisition**

On March 30, 2007, EPOP completed the purchaseof substantially all of the oil and natural gas properties and assets relatedto the Vernon and Ansley fields located in Jackson Parish, Louisiana fromAnadarko for approximately $1.5 billion in cash, net of preliminary purchaseprice adjustments.  Pursuant to the purchaseand sale agreement, the purchase price and resulting allocation is to befinalized during the third quarter of 2007. The Vernon Acquisition was fundedby a $1.75 billion capital contribution from EXCO to EPOP.  The capital contribution consisted of $1.67billion in cash and an $80.0 million deposit made by EXCO in December 2006. Ourpreliminary allocation of value to the Vernon Acquisition is presented on thefollowing table:
| (in thousands)                                                 | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|
| Acquisition cost:                                                   |       |       |       |
| Preliminary purchase price                                          |       | $          | 1,487,599  |   |
| Acquisition related expenses                                        |       | 1,100      |       |
| Total acquisition cost                                              |       | $          | 1,488,699  |   |
|                                                                |       |       |       |
| Allocation of  acquisition cost:                                    |       |       |       |
| Proved oil and natural gas properties                               |       | $          | 1,386,643  |   |
| Unproved oil and natural gas properties                             |       | 56,990     |       |
| Gas gathering and related facilities                                |       | 117,000    |       |
| Fair value (liability) of assumed derivative  financial instruments |       | (60,015    | )          |
| Asset retirement obligations                                        |       | (10,726    | )          |
| Other liabilities, net                                              |       | (1,193     | )          |
| Total allocation of acquisition cost                                |       | $          | 1,488,699  |   |

 

**Southern Gas Acquisition**

On May 2, 2007, we completed the purchase ofoil and natural gas properties and related assets, including derivativefinancial instruments, covering a significant portion of estimated productionfor 2007, 2008 and 2009 from entities affiliated with Anadarko in multiplefields primarily located in Oklahoma, Texas and Louisiana for approximately$750.2 million in cash, including acquisition related expenses, net of preliminary purchaseprice adjustments, or the Southern Gas Acquisition. Pursuant to thepurchase and sale agreement, the purchase price and resulting allocation is tobe finalized during the fourth quarter of 2007. The acquisition wasfunded with cash on hand of $134.3 million, including $133.0 million fromescrow accounts from prior sales, borrowings under the EXCO Resources creditagreement of $572.9 million and the application of a $43.0 million deposit paidby EXCO to Anadarko in February 2007.

The preliminary allocationof the purchase price to the assets and liabilities of the Southern GasAcquisition is presented in the following table:

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| (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, inconnection with the Southern Gas Acquisition, EXCO entered into the SecondAmended and Restated Credit Agreement, or the EXCO Resources Credit Agreement,among EXCO, as borrower, certain subsidiaries of EXCO, as guarantors, thelenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, andJ.P. Morgan Securities Inc., as sole bookrunner and lead arranger. The EXCOResources Credit Agreement increased the borrowing base from $750.0 million to$1.0 billion. The borrowing base will be redetermined on a semi-annual basis, withEXCO Resources and the lenders having the right to interim unscheduledredeterminations in certain circumstances. Scheduled redeterminations will be made on March 1 and September 1 ofeach year, beginning September 1, 2007. Borrowings under the EXCO Resources Credit Agreement will becollateralized by a first lien mortgage providing a security interest in ouroil and natural gas properties.

**Sale of South and Gulf Coast oil and natural gasproperties in Texas and Louisiana**

On May 8, 2007, we completed the sale of oil andnatural gas properties and related assets in multiple fields primarilylocated in South Texas and South Louisiana to an entity affiliated with CrimsonExploration Inc., or Crimson, for an aggregate sale price of $245.4 million incash, net ofpreliminary purchase price adjustments, and 750,000 shares ofunregistered restricted Crimson common stock, or the Gulf Coast Sale.  The stock may only be registered after a12-month waiting period.  The stock wasvalued at $3.8 million at June 30, 2007 and is included in other long-termassets on the accompanying condensed consolidated balance sheet as of June 30,2007.  In connection with the closing ofthe Gulf Coast Sale, the borrowing base on the EXCO Resources Credit Agreementwas reduced from $1.0 billion to $900.0 million.

**Pro forma results of operations**

The following table reflects the unaudited proforma results of operations as though the acquisitions of TXOK Acquisition,Inc., Power Gas Marketing & Transmission, Inc., Winchester Acquisition,Inc. (see our Annual Report on Form 10-K filed on March 19, 2007 for a discussionof these acquisitions), the Vernon Acquisition, the Southern Gas Acquisitionand the Gulf Coast Sale had occurred on January 1, 2006.

|                                                                    | ** ** | **For the three months ended June 30,** | ** ** | **For the six months ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **2006**                                                              | ** ** | **2007**                                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenues and  other income                                         |       | $                                                                     | 315,142    |                                                                | $          | 350,248 |   | $ | 721,808 |   | $ | 510,139 |   |
| Net income                                                         |       | $                                                                     | 105,978    |                                                                | $          | 97,847 |   | $ | 282,996 |   | $ | 99,666 |   |
| Preferred stock  dividends                                         |       | (51,099                                                               | )          | (51,099                                                             | )          | (102,198 | ) | (102,198 | ) |
| Net income  available to common shareholders                       |       | $                                                                     | 54,879     |                                                                | $          | 46,748 |   | $ | 180,798 |   | $ | (2,532 | ) |
| Basic earnings  per share                                          |       | $                                                                     | 0.53       |                                                                | $          | 0.45 |   | $ | 1.95 |   | $ | (0.02 | ) |
| Diluted earnings  per share                                        |       | $                                                                     | 0.49       |                                                                | $          | 0.42 |   | $ | 1.49 |   | $ | (0.02 | ) |

 

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**Sale of Colorado oil and natural gas properties**

On January 5, 2007, we completed the sale ofoil and natural gas properties and undeveloped drilling locations in theWattenberg field area of the DJ Basin, or the Wattenberg Field, forapproximately $129.6 million in cash, net of contractual adjustments.  The transaction included substantially all ofthe assets EXCO held in the area. No gain or loss was recognized from this saleas we use the full cost method of accounting. Proceeds from the sale were deposited with a third party intermediarypending closing of the Southern Gas Acquisition to facilitate a like-kindexchange for federal income tax purposes.

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

In****July 2006,the Financial Accounting Standards Board, or FASB, issued FinancialInterpretation No. 48, “Accounting for Uncertainty in Income Taxes,” orFIN 48. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements in accordance with Statement ofFinancial Accounting Standards (SFAS) No. 109, “Accounting for IncomeTaxes.”  FIN 48 provides guidance onrecognizing, measuring, presenting and disclosing in the financial statementsuncertain tax positions that a company has taken or expects to take on a taxreturn. We adopted FIN 48 on January 1, 2007. The adoption of FIN 48 didnot have a material impact on our consolidated financial position or results ofoperations.

The FASB issuedFASB Staff Position EITF 00-19-2 “Accounting for Registration PaymentArrangements,” or FSP 00-19-2, on December 21, 2006.  FSP 00-19-2 requires contingent obligationsto make future payments under a registration payment arrangement to berecognized separately in accordance with SFAS No. 5, “Accounting forContingencies,” or SFAS No. 5.  SFAS No.5 requires that an estimated loss from a loss contingency be accrued if theloss is probable and can reasonably be estimated.  Our 7.0% Preferred Stock and Hybrid PreferredStock contain requirements for EXCO to register shares on behalf of thepreferred stockholders.  If suchregistration deadlines are not met, or a prior registration statement ceases toremain effective, we may be obligated to pay liquidated damages.  We adopted FSP 00-19-2 upon issuance of the7.0% Preferred Stock and the Hybrid Preferred Stock.  We do not believe any of the contingenciesassociated with the registration rights of the preferred stockholders areprobable as of June 30, 2007 and therefore are not valued separately at June30, 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. We arecurrently evaluating the impact of SFAS No. 157 on our financialstatements.

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. 159 permits an entity tochoose to measure many financial instruments and certain other items at fairvalue. The fair value option established by SFAS No. 159 permits allentities to choose to measure eligible items at fair value at specifiedelection dates. Unrealized gains and losses on items for which the fair valueoption has been elected are to be recognized in earnings at each subsequentreporting date. SFAS No. 159 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and as such, will be adoptedby us on January 1, 2008.  The effect ofadopting SFAS No. 159 is not expected to have a significant effect on our reportedfinancial 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.

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**5.****             Asset retirement obligations**

Thefollowing is a reconciliation of our asset retirement obligations as of June30, 2006 and 2007 (in thousands):
|                                                              | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **June 30,**              | ** ** |
| **(Unaudited)**                                              | ** ** | **2006**                       | ** ** | **2007** | ** ** |
| Asset retirement  obligation at January 1                    |       | $                              | 15,823     |   | $ | 56,149 |   |
| Activity during  the six months ended June 30:               |       |                           |       |   |   |
| Acquisition of  TXOK Acquisition, Inc.                       |       | 8,203                          |       | — |   |
| Acquisition of  Power Gas Marketing & Transmission, Inc. |       | 1,527                          |       | — |   |
| Liabilities  incurred during the period                      |       | 531                            |       | 918 |   |
| Liabilities  settled during the period                       |       | —                         |       | (1,955 | ) |
| Adjustment to  liability due to Vernon Acquisition           |       | —                         |       | 10,726 |   |
| Adjustment to  liability due to Southern Gas Acquisition     |       | —                         |       | 12,566 |   |
| Accretion of  discount                                       |       | 684                            |       | 2,210 |   |
| Asset retirement  obligations as of June 30                  |       | 26,768                         |       | 80,614 |   |
| Less current  portion                                        |       | 1,407                          |       | 1,576 |   |
| Long-term  portion                                           |       | $                              | 25,361     |   | $ | 79,038 |   |

 

Wehave no assets that are legally restricted for purposes of settling assetretirement obligations.

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

Werecord oil and natural gas properties at cost using the full cost method ofaccounting. Under the full cost method, all costs associated with theacquisition, exploration or development of oil and natural gas properties arecapitalized as part of the full cost pool. Capitalized costs are limited to theaggregate of the present value of future net revenues plus the lower of cost orfair market value of unproved properties less the income tax effects related tothe book and tax basis of the oil and natural gas properties involved. The fullcost pool is comprised of lease and well equipment and exploration anddevelopment costs incurred, plus intangible acquired proved leaseholds.

Unprovedoil and natural gas properties are excluded from the calculation ofdepreciation, depletion and amortization until it is determined whether or notProved Reserves can be assigned to such properties. At December 31, 2006and June 30, 2007, $297.9 million and $352.1 million, respectively,in unproved oil and natural gas properties were excluded from our full costpool in calculating our depreciation, depletion and amortization. We assess ourunproved oil and natural gas properties for impairment on a quarterly basis.

Sales,dispositions and other oil and natural gas property retirements are accountedfor as adjustments to the full cost pool, with no recognition of gain or lossunless the disposition would significantly alter the amortization rate.

At theend of each quarterly period, the unamortized cost of proved oil and naturalgas properties, net of related deferred income taxes, is limited to the sum ofthe estimated future net revenues from proved properties using currentperiod-end prices discounted at 10%, adjusted for related income tax effects(ceiling test).

As of June 30,2007, pursuant to Rule 4-10(c)(4)(i)(A) of Regulation S-X, the Company was requiredto compute its ceiling test using the June 30, 2007 spot prices for oil andnatural gas. The computation resulted in the carrying costs of our unamortizedproved oil and natural gas properties, net of deferred taxes, exceeding theJune 30, 2007 present value of future net revenues by approximately $189.4million. As a result of a temporary exemption received from the SEC to excludeWinchester, the Vernon Acquisition and the Southern Gas Acquisition from ourceiling test, the need to recognize an impairment for the quarter ended June30, 2007 was eliminated.

Winchester,the Vernon Acquisition and the Southern Gas Acquisition represent approximately58.6% of EXCO’s consolidated full cost pool and are all recent acquisitions.Our pricing for these acquisitions are based on models which incorporate, amongother things, market prices based on NYMEX futures. The ceiling test requirescompanies using the full cost accounting method to price period ending ProvedReserves at the period end spot price, which may not be indicative of actualmarket values. Given the significance of Winchester, the Vernon Acquisition andthe Southern Gas Acquisition and the short passage of time

15

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between closing of theseacquisitions and the required ceiling test computation, the Company requested,and received, an exemption from the SEC to exclude the Winchester, Vernon andSouthern Gas acquisitions from the full cost pool ceiling test assessments fora period of twelve months following the corresponding acquisition dates.

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 thefair value 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 for basisdifferentials, for a period of five years. After a five year period we havehistorically elected to use flat pricing as the NYMEX futures contracts becomemore thinly traded. Generally, the flat price used for the sixth year throughthe economic life of the property is management’s internal long-term priceestimate, which is, in part, based on an extension of the NYMEX pricing.  EXCO believes the NYMEX futures contractreflects an independent proxy for fair value. Management’s internal valuation model demonstrated that the fair valueof Winchester, the Vernon Acquisition and the Southern Gas Acquisition clearlyexceeded the carrying costs as of June 30, 2007 beyond a reasonable doubt.

We recognize that, due to the volatility associated with oil and naturalgas prices, a downward trend in market prices could occur.  If such a case were to occur and is deemed tobe other than a temporary trend, we would assess these acquisitions forimpairment during the requested exemption period.  Further, if we cannot demonstrate that fairvalue exceeds the unamortized carrying costs during the requested exemptionperiods prior to issuance of our financial statements, we will recognize animpairment related to these acquisitions.

Thecalculation of the ceiling test is based upon estimates of Proved Reserves.There are numerous uncertainties inherent in estimating quantities of ProvedReserves, in projecting the future rates of production and in the timing ofdevelopment activities. The accuracy of any reserve estimate is a function ofthe quality of available data and of engineering and geological interpretationand judgment. Results of drilling, testing and production subsequent to thedate of the estimate may justify revision of such estimate. Accordingly,reserve estimates are often different from the quantities of oil and naturalgas 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 companiesto present two calculations of earnings per share; basic and diluted. Basicearnings (loss) per common share for the three and six months ended June 30,2006 and 2007 equals the net income (loss) divided by the weighted averagecommon shares outstanding during the period. Diluted earnings (loss) per common share for the three and six monthsended June 30, 2006 and 2007 equals net income (loss) divided by the sum ofweighted average common shares outstanding during the period plus any dilutivecommon stock equivalents assumed to be issued. Common stock equivalents for the three and six months ended June 30,2006 and 2007 are shares assumed to be issued if our outstanding stock optionswere in-the-money and exercised.   Wehave excluded 2,487,983 stock options from the computation of earnings pershare as they are antidilutive due to the net loss for the six months endedJune 30, 2007. The assumed conversion of the 7.0% Preferred Stock has beenexcluded from the three and six months ended June 30, 2007 as they areanti-dilutive.

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

16

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** **
|                                                                                           | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands, except per share and share amounts)** | ** ** | **2006**                                            | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Basic earnings  (loss) per common share:                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss)                                                                         |       | $                                                   | 31,023     |                                              | $          | 82,886 |   | $ | 68,175 |   | $ | (4,811 | ) |
| Preferred stock dividends                                                                 |       | —                                              |       | 51,099                                            |       | — |   | 52,235 |   |
| Net income (loss) available to common shareholders                                        |       | $                                                   | 31,023     |                                              | $          | 31,787 |   | $ | 68,175 |   | $ | (57,046 | ) |
|                                                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Shares:                                                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average number of common shares outstanding                                      |       | 104,014,259                                         |       | 104,313,580                                       |       | 92,634,465 |   | 104,257,983 |   |
|                                                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Basic earnings  (loss) per share:                                                         |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss) available to common shareholders  per common share                      |       | $                                                   | 0.30       |                                              | $          | 0.30 |   | $ | 0.74 |   | $ | (0.55 | ) |
|                                                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Diluted earnings  (loss) per share:                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss) available to common shareholders                                        |       | $                                                   | 31,023     |                                              | $          | 31,787 |   | $ | 68,175 |   | $ | (57,046 | ) |
|                                                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Shares:                                                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average number of common shares outstanding                                      |       | 104,014,259                                         |       | 104,313,580                                       |       | 92,634,465 |   | 104,257,983 |   |
| Dilutive effect of stock options                                                          |       | 1,256,901                                           |       | 2,595,802                                         |       | 1,385,568 |   | — |   |
| Weighted average common shares and common stock  equivalent shares outstanding            |       | 105,271,160                                         |       | 106,909,382                                       |       | 94,020,033 |   | 104,257,983 |   |
|                                                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Diluted earnings  (loss) per share:                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss) available to common shareholders  per common share                      |       | $                                                   | 0.29       |                                              | $          | 0.30 |   | $ | 0.73 |   | $ | (0.55 | ) |

 

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

We adopted SFAS No.123(R), “Share-Based Compensation,” or SFAS No. 123(R), on October 3, 2005. Asrequired by SFAS 123(R), the granting of options to our employees underthe 2005 Long-Term Incentive Plan, or the 2005 Incentive Plan, are share-basedpayment transactions and are to be treated as compensation expense by us with acorresponding increase to additional paid-in capital. Volatility was determinedbased on the combination of the weighted average volatility of our common stockand the daily closing prices from five comparable public companies during theperiod when we were privately held. For the three and six months ended June 30,2007, total share-based compensation was $3.1 million and $5.3 million,respectively, of which $2.6 million and $4.5 million is included in generaladministrative and lease operating expense and $0.5 million and $0.8million was capitalized as part of proved developed and undeveloped oil andnatural gas properties. Total share-based compensation to be recognized onunvested awards as of June 30, 2007 is $15.8 million over a weightedaverage period of 1.8 years.

During the sixmonths ended June 30, 2007, options to purchase 1,189,700 shares were grantedunder the 2005 Incentive Plan at prices ranging from $16.00 to $18.44 per sharewith fair values ranging from $5.60 to $6.53 per share. The options expire tenyears following the date of grant. Pursuant to the 2005 Incentive Plan, 25% ofthe options vest immediately with an additional 25% to vest on each of the nextthree anniversaries of the date of the grant. As of December 31, 2006 andJune 30, 2007, there were 1,574,475 and 531,900 shares available to be grantedunder the 2005 Incentive Plan, respectively.

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

We follow SFAS No. 131, “Disclosures About Segments of anEnterprise and Related Information,” or SFAS No. 131. We have operations inonly one industry segment, that being the oil and natural gas exploration andproduction industry.   In prior periods,the Company provided geographic segment financial information for the followingregions within the United States: EXCO (excluding Appalachia) and Appalachia.  Effective in the fourth quarter of 2006, weno longer present separate financial information for geographic regions withina country.  We now present industrysegment information on a basis consistent with the determination of our fullcost pools.

**10.****         ****Derivative financial instruments**

We donot designate our derivative financial instruments as hedging instruments forfinancial accounting purposes and, as a result, we recognize the change in thederivative’s fair value currently in earnings.

The following table setsforth our oil and natural gas derivatives as of June 30, 2007 and includes theassumed derivative contracts acquired in connection with the Vernon Acquisitionand the Southern Gas Acquisition. The fair values at June 30, 2007 areestimated from quotes from public market sources and represent the amount thatwe would expect to receive or pay to terminate the

17

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contracts at June 30, 2007. We have the right tooffset amounts we expect to receive or pay among our individual counterparties.As a result, we have offset amounts for financial statement presentationpurposes.
| (in thousands, except prices) | ** ** | **Volume  Mmbtus/Bbls** | ** ** | **Weighted  average strike  price** | ** ** | **Fair value at**

**June 30, 2007** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|------------------------------------------|------------|----------------------------------------------------------|------------|
|                                         |       |                    |       |                                     |       |                                                     |       |
| **Natural  Gas:**                            | ** ** | ** **              | ** ** | ** **                               | ** ** | ** **                                               | ** ** |
| Swaps NYMEX:                                 |       |                    |       |                                     |       |                                                     |       |
| Remainder of  2007                           |       | 60,776                  |       | $                                        | 7.95       |                                                     | $          | 37,215 |   |
| 2008                                         |       | 99,870                  |       | 8.36                                     |       | (4,348                                                   | )          |
| 2009                                         |       | 73,155                  |       | 7.89                                     |       | (43,324                                                  | )          |
| 2010                                         |       | 6,985                   |       | 6.63                                     |       | (10,318                                                  | )          |
| 2011                                         |       | 1,825                   |       | 4.51                                     |       | (5,270                                                   | )          |
| 2012                                         |       | 1,830                   |       | 4.51                                     |       | (4,624                                                   | )          |
| 2013                                         |       | 1,825                   |       | 4.51                                     |       | (4,141                                                   | )          |
| **Total  Natural Gas**                       |       | 246,266                 |       |                                     |       | (34,810                                                  | )          |
|                                         |       |                    |       |                                     |       |                                                     |       |
| **Oil:**                                     | ** ** | ** **              | ** ** | ** **                               | ** ** | ** **                                               | ** ** |
| Swaps NYMEX:                                 |       |                    |       |                                     |       |                                                     |       |
| Remainder of  2007                           |       | 738                     |       | 63.65                                    |       | (5,507                                                   | )          |
| 2008.                                        |       | 1,059                   |       | 60.55                                    |       | (11,823                                                  | )          |
| 2009                                         |       | 850                     |       | 60.09                                    |       | (9,371                                                   | )          |
| 2010                                         |       | 108                     |       | 59.85                                    |       | (1,096                                                   | )          |
| **Total  Oil**                               |       | 2,755                   |       |                                     |       | (27,797                                                  | )          |
| **Total Oil and Natural Gas**                |       |                    |       |                                     |       | $                                                        | (62,607    | ) |
|                                              |            |                         |            |                                          |            |                                                          |            |  |  |

 

AtJune 30, 2007, the average forward NYMEX oil prices per Bbl for the remainderof 2007 and for 2008 were $71.23 and $72.36, respectively, and the averageforward NYMEX natural gas price per Mmbtu for the remainder of calendar 2007and for 2008 were $7.33 and $8.41, respectively.

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

Long-term debt issummarized as follows:
|                                                            | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| **(in thousands)**                                    | ** ** | **2006**              | ** ** | **2007**          | ** ** |
|                                                       |       |                  |       |              |       |
| Short-term debt:                                           |       |                  |       |              |       |
| Current portion  of long-term debt                         |       | $                     | 6,500      |              | $          | — |   |
| Long-term debt:                                            |       |                  |       |              |       |
| EPOP Credit  Agreement                                     |       | $                     | 643,500    |              | $          | 1,090,000 |   |
| EPOP Senior Term  Credit Agreement                         |       | 643,500               |       | —            |       |
| EXCO Resources  Credit Agreement                           |       | 339,000               |       | 444,000           |       |
| 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                |       | 12,557            |       |
| Total                                                      |       | $                     | 2,081,653  |              | $          | 1,991,277 |   |

 

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**Credit agreements**

*EPOP Credit Agreement*

The EPOP CreditAgreement has a borrowing base of $1.3 billion and approximately $1.1 billiondrawn as of June 30, 2007. The borrowing base will be redetermined on asemi-annual basis, with EPOP and the lenders having the right to interimunscheduled redeterminations in certain circumstances. Scheduledredeterminations will be made on or about April 1 and October 1 of each year,beginning October 1, 2007.  The EPOPCredit Agreement is secured by a first priority lien on the assets of EPOP,including 100% of the equity of EPOP’s subsidiaries, and is guaranteed by allexisting and future subsidiaries of EPOP. EPOP has agreed to have in placederivative financial instruments covering no more than 80.0% of the forecasted productionfrom total proved reserves (as defined) for the next two years and 70.0% in thethird, fourth and fifth years.  Theforegoing description is not complete and is qualified in its entirety by theEPOP Credit Agreement. Financial covenants under the EPOP Credit Agreement,with which EPOP was in compliance as of June 30, 2007, 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 CreditAgreement contains representations, warranties, covenants, events of default,and indemnities customary for agreements of this type. The EPOP CreditAgreement matures March 30, 2012. Interest under the EPOP Credit Agreement ranges from LIBOR plus 100basis points (bps) to 175 bps or an Alternate Base Rate (ABR), as defined,ranging from ABR plus 0 bps to ABR plus 75 bps.

At December 31, 2006and June 30, 2007, the six month LIBOR rates were 5.37% and 5.39%,respectively, which resulted in interest rates of approximately 7.19% and 6.89%,respectively.  At December 31, 2006and June 30, 2007, we had $643.5 million and $1.1 billion, respectively, ofoutstanding indebtedness under the EPOP Credit Agreement.

*EXCO Resources Credit Agreement*

The EXCO ResourcesCredit Agreement has a borrowing base of $900.0 million. 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 baseusage.  Borrowings under the EXCO Resources Credit Agreement arecollateralized by a first lien mortgage providing a security interest in ouroil and natural gas properties.  EXCO hasalso agreed to have in place commodity derivative contracts covering no morethan 80% of its forecasted production from total proved reserves (as defined)for the next two years and 70% in the third, fourth and fifth years.  EXCOwill have in place mortgages covering 80% of the Engineered Value of itsBorrowing Base Properties (as defined).  The foregoing description is notcomplete and is qualified in its entirety by the EXCO Resources CreditAgreement.  Financial covenants under theEXCO Resources Credit Agreement require that we:

·      maintain a ConsolidatedCurrent Ratio (as defined) of at least 1.00 to 1.00 as of the end of any fiscalquarter ending on or after September 30, 2007; 

·      not permit our ratio of ConsolidatedFunded Indebtedness (as defined) to Consolidated EBITDAX (as defined) to begreater than 3.50 to 1.00 at the end of any fiscal quarter ending on or afterSeptember 30, 2007; and

·      maintain a ConsolidatedEBITDAX to Consolidated Interest Expense (as defined) ratio of at least 2.50 to1.00 at the end of any fiscal quarter ending on or after September 30, 2007.

AtDecember 31, 2006 and June 30, 2007, the six month LIBOR rates were 5.37%and 5.39%, respectively, which resulted in interest rates of approximately6.62% and 6.39%, respectively.  AtDecember 31, 2006 and June 30, 2007, we had $339.0 million and $444.0million, respectively, of outstanding indebtedness under the EXCO ResourcesCredit Agreement.

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

As of June 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 $12.6 million at June 30,2007.  The estimated fair value of thesenior notes, based on quoted market prices for the senior notes, was $444.2million on June 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 or guaranteeadditional debt and issue certain types of preferred stock;

·      pay dividends on our capitalstock or redeem, repurchase or retire our capital stock or subordinated debt;

·      make investments;

·      create liens on our assets;

·      enter into sale/leasebacktransactions;

·      create restrictions on theability of our restricted subsidiaries to pay dividends or make other paymentsto us;

·      engage in transactions withour affiliates;

·      transfer or issue shares ofstock of subsidiaries;

·      transfer or sell assets; and

·      consolidate, merge ortransfer all or substantially all of our assets and the assets of oursubsidiaries.

**12.****          Preferred stock**

The 7.0% Preferred Stock and Hybrid Preferred Stockwere issued in several series at a purchase price of $10,000 per share.  The Series A-2 7.0% Preferred Stock and theSeries A-2 Hybrid Preferred Stock automatically convert to Series A-1 7.0%Preferred Stock and Series A-1 Hybrid Preferred Stock, respectively, upon theholders providing assurance to EXCO that such holders have satisfied anynecessary filing requirements under the HSR Act or are able to avail themselvesof an exemption therefrom.  During the quarter, all of the shares of theSeries A-2 7.0% Preferred Stock were converted to Series A-1 7.0% PreferredStock, as all of the holders of that series provided assurance to us that thenecessary requirements under the HSR Act were satisfied.  None of the holders of the Series A-2 HybridPreferred Stock provided assurance to us that the requirements of the HSR Actwere satisfied during the quarter.  Thefollowing table accounts for these automatic conversions and presents thecarrying value, net of issuance costs, for each series of our 7.0% PreferredStock and Hybrid Preferred Stock at June 30, 2007:

20

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| (in thousands, except shares)  Series | ** ** | **Number of  issued shares** | ** ** | **Purchase price** | ** ** | **Balance as of June  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                                           |       | 149,441                                |       | 1,494,410               |       | 1,488,517                                            |       |
| Series A-2                                           |       | 11,551                                 |       | 115,510                 |       | 115,054                                              |       |
| Subtotal                                             |       | 160,992                                |       | 1,609,920               |       | 1,603,571                                            |       |
| Total preferred  stock                               |       | 200,000                                |       | $                       | 2,000,000  |                                                 | $          | 1,992,113 |   |

 

We paid dividends of $43.7million on June 15, 2007.  In addition,accrued dividends of $8.5 million are included in current liabilities at June30, 2007.

**13.****         ****Subsequent events**

On July 13, 2007,we completed the sale of certain oil and natural gas properties in Oklahoma for$102.3 million in cash after preliminary contractual purchase priceadjustments. These proceeds will be recorded as a reduction to our full costpool in the third quarter of 2007. No gain or loss will be recognized from thissale as we follow the full cost method of accounting.

**14.****          Condensed********consolidating financial statements**

Setforth below are condensed consolidating financial statements of EXCO, theguarantor subsidiaries and the non-guarantor subsidiaries. The senior notes arejointly and severally guaranteed by some of our subsidiaries (referred to asguarantor subsidiaries). Each of the guarantor subsidiaries are wholly-ownedsubsidiaries of EXCO Resources, or Resources, and the guarantees areunconditional as it relates to the assets of the guarantor subsidiaries. 

On April30, 2007, TXOK and its subsidiary, previously guarantor subsidiaries, weremerged into and with Resources.  As aresult, the consolidating balance sheets, the consolidating statements ofoperations and consolidating statements of cash flows for the respectiveperiods in 2006 have been restated to reflect these guarantor subsidiaries asif they had been merged into and with Resources for all periods presented.

Thefollowing financial information presents consolidating financial statements,which include:

·      Resources;

·      theguarantor subsidiaries on a combined basis;

·      thenon-guarantor subsidiaries;

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

·      EXCOon a consolidated 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 eliminate investmentsin subsidiaries and intercompany balances and transactions.

21

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**EXCORESOURCES, INC.**

**CONDENSED CONSOLIDATING BALANCE SHEET**

**December31, 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 |   |

 

22

----

**EXCO RESOURCES, INC.**

**CONDENSED CONSOLIDATING BALANCE SHEET**

**(Unaudited)**

**June 30, 2007**
| **(in thousands)**                                          | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
|                                                             |       |          |       |                        |       |                              |       |             |       |             |       |
| **Assets**                                                       |       |          |       |                        |       |                              |       |             |       |             |       |
| Current assets:                                                  |       |          |       |                        |       |                              |       |             |       |             |       |
| Cash and cash  equivalents                                       |       | $             | 12,237     |                        | $          | 11,450                            |       | $                | 29,594     |             | $          | — |   | $ | 53,281 |   |
| Other current  assets                                            |       | 86,775        |       | 48,847                      |       | 183,270                           |       | —           |       | 318,892          |       |
| Total current  assets                                            |       | 99,012        |       | 60,297                      |       | 212,864                           |       | —           |       | 372,173          |       |
| Oil and natural  gas properties (full cost accounting method):   |       |          |       |                        |       |                              |       |             |       |             |       |
| Unproved oil and  natural gas properties                         |       | 93,488        |       | 18,365                      |       | 240,199                           |       | —           |       | 352,052          |       |
| Proved developed  and undeveloped oil and natural gas properties |       | 1,079,435     |       | 848,618                     |       | 2,594,667                         |       | —           |       | 4,522,720        |       |
| Allowance for  depreciation, depletion and amortization          |       | (69,012       | )          | (62,024                     | )          | (160,759                          | )          | —           |       | (291,795         | )          |
| Oil and natural  gas properties, net                             |       | 1,103,911     |       | 804,959                     |       | 2,674,107                         |       | —           |       | 4,582,977        |       |
| Gas gathering,  office and field equipment, net                  |       | 6,175         |       | 33,187                      |       | 294,179                           |       | —           |       | 333,541          |       |
| Deferred  financing costs                                        |       | 8,596         |       | —                      |       | 14,115                            |       | —           |       | 22,711           |       |
| Deferred tax  asset                                              |       | —        |       | —                      |       | —                            |       | —           |       | —           |       |
| Oil and natural  gas derivatives                                 |       | 1,065         |       | 1,666                       |       | 8,909                             |       | —           |       | 11,640           |       |
| Goodwill                                                         |       | 110,800       |       | 164,469                     |       | 194,808                           |       | —           |       | 470,077          |       |
| Investments in  and advances to affiliates                       |       | 2,416,037     |       | —                      |       | —                            |       | (2,416,037       | )          | —           |       |
| Advance on  probable acquisition                                 |       | —        |       | —                      |       | —                            |       | —           |       | —           |       |
| Other assets,  net                                               |       | 4,061         |       | 468                         |       | —                            |       | —           |       | 4,529            |       |
| Total assets                                                     |       | $             | 3,749,657  |                        | $          | 1,065,046                         |       | $                | 3,398,982  |             | $          | (2,416,037 | ) | $ | 5,797,648 |   |
|                                                             |       |          |       |                        |       |                              |       |             |       |             |       |
| **Liabilities  and shareholders’ equity**                   |       |          |       |                        |       |                              |       |             |       |             |       |
| Current  liabilities                                             |       | $             | 74,409     |                        | $          | 30,765                            |       | $                | 151,792    |             | $          | — |   | $ | 256,966 |   |
| Long-term debt                                                   |       | 901,277       |       | —                      |       | 1,090,000                         |       | —           |       | 1,991,277        |       |
| Deferred income  taxes                                           |       | 62,507        |       | 174,456                     |       | —                            |       | —           |       | 236,963          |       |
| Other  liabilities                                               |       | 64,241        |       | 66,049                      |       | 59,660                            |       | —           |       | 189,950          |       |
| Payable to  parent                                               |       | (475,269      | )          | 460,629                     |       | 14,640                            |       | —           |       | —           |       |
| Commitments and  contingencies                                   |       | —        |       | —                      |       | —                            |       | —           |       | —           |       |
| Preferred stock                                                  |       | 1,992,113     |       | —                      |       | —                            |       | —           |       | 1,992,113        |       |
| Shareholders’  equity                                       |       | 1,130,379     |       | 333,147                     |       | 2,082,890                         |       | (2,416,037       | )          | 1,130,379        |       |
| Total liabilities  and shareholders’ equity                 |       | $             | 3,749,657  |                        | $          | 1,065,046                         |       | $                | 3,398,982  |             | $          | (2,416,037 | ) | $ | 5,797,648 |   |

 

23

----

**EXCO RESOURCES, INC.**

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**(Unaudited)**

**For the three months ended June30, 2006**
| **(in thousands)**                                | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
|                                                   |       |          |       |                        |       |                              |       |             |       |             |       |
| **Revenues  and other income:**                        |       |          |       |                        |       |                              |       |             |       |             |       |
| Oil and natural  gas sales                             |       | $             | 29,405     |                        | $          | 28,535                            |       | $                | 22,064     |             | $          | — |   | $ | 80,004 |   |
| Derivative  financial instruments                      |       | 18,345        |       | 16,887                      |       | —                            |       | —           |       | 35,232           |       |
| Other income  (loss)                                   |       | 7,115         |       | (6,538                      | )          | 51                                |       | —           |       | 628              |       |
| Equity in earnings  of subsidiaries                    |       | 17,269        |       | —                      |       | —                            |       | (17,269          | )          | —           |       |
| Total revenues  and other income                       |       | 72,134        |       | 38,884                      |       | 22,115                            |       | (17,269          | )          | 115,864          |       |
|                                                   |       |          |       |                        |       |                              |       |             |       |             |       |
| **Costs  and expenses:**                               |       |          |       |                        |       |                              |       |             |       |             |       |
| Oil and natural  gas production                        |       | 6,014         |       | 5,079                       |       | 4,046                             |       | —           |       | 15,139           |       |
| Depreciation,  depletion and amortization              |       | 11,275        |       | 9,093                       |       | 8,930                             |       | —           |       | 29,298           |       |
| Accretion of  discount on asset retirement obligations |       | 171           |       | 161                         |       | 50                                |       | —           |       | 382              |       |
| General and administrative                             |       | 5,112         |       | 1,448                       |       | (30                               | )          | —           |       | 6,530            |       |
| Interest                                               |       | 5,772         |       | —                      |       | 5,888                             |       | —           |       | 11,660           |       |
| Total costs and  expenses                              |       | 28,344        |       | 15,781                      |       | 18,884                            |       | —           |       | 63,009           |       |
| Income (loss)  before income taxes                     |       | 43,790        |       | 23,103                      |       | 3,231                             |       | (17,269          | )          | 52,855           |       |
| Income tax  expense                                    |       | 12,767        |       | 9,065                       |       | —                            |       | —           |       | 21,832           |       |
| Net income  (loss)                                     |       | $             | 31,023     |                        | $          | 14,038                            |       | $                | 3,231      |             | $          | (17,269 | ) | $ | 31,023 |   |

 

24

----

**EXCO RESOURCES, INC.**

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**(Unaudited)**

**For the six months ended June 30, 2006**
| **(in thousands)**                                | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
|                                                   |       |          |       |                        |       |                              |       |             |       |             |       |
| **Revenues  and other income:**                        |       |          |       |                        |       |                              |       |             |       |             |       |
| Oil and natural  gas sales                             |       | $             | 50,699     |                        | $          | 62,829                            |       | $                | 36,205     |             | $          | — |   | $ | 149,733 |   |
| Derivative  financial instruments                      |       | 28,171        |       | 47,836                      |       | —                            |       | —           |       | 76,007           |       |
| Other income  (loss)                                   |       | 14,520        |       | (12,199                     | )          | 582                               |       | —           |       | 2,903            |       |
| Equity in  earnings of subsidiaries                    |       | 56,634        |       | —                      |       | —                            |       | (56,634          | )          | —           |       |
| Total revenues  and other income                       |       | 150,024       |       | 98,466                      |       | 36,787                            |       | (56,634          | )          | 228,643          |       |
|                                                   |       |          |       |                        |       |                              |       |             |       |             |       |
| **Costs  and expenses:**                               |       |          |       |                        |       |                              |       |             |       |             |       |
| Oil and natural  gas production                        |       | 10,240        |       | 9,330                       |       | 6,687                             |       | —           |       | 26,257           |       |
| Depreciation,  depletion and amortization              |       | 17,691        |       | 17,736                      |       | 14,548                            |       | —           |       | 49,975           |       |
| Accretion of  discount on asset retirement obligations |       | 301           |       | 303                         |       | 80                                |       | —           |       | 684              |       |
| General and  administrative                            |       | 9,123         |       | 2,653                       |       | 663                               |       | —           |       | 12,439           |       |
| Interest                                               |       | 28,005        |       | —                      |       | —                            |       | —           |       | 28,005           |       |
| Total costs and  expenses                              |       | 65,360        |       | 30,022                      |       | 21,978                            |       | —           |       | 117,360          |       |
| Equity in  earnings of TXOK Acquisition, Inc.          |       | 1,593         |       | —                      |       | —                            |       | —           |       | 1,593            |       |
| Income (loss)  before income taxes                     |       | 86,257        |       | 68,444                      |       | 14,809                            |       | (56,634          | )          | 112,876          |       |
| Income tax  expense                                    |       | 18,082        |       | 26,619                      |       | —                            |       | —           |       | 44,701           |       |
| Net income  (loss)                                     |       | $             | 68,175     |                        | $          | 41,825                            |       | $                | 14,809     |             | $          | (56,634 | ) | $ | 68,175 |   |

 

25

----

**EXCORESOURCES, INC.**

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**(Unaudited)**

**For the three months ended June 30, 2007**
| **(in thousands)**                                | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
|                                                   |       |          |       |                        |       |                              |       |             |       |             |       |
| **Revenues  and other income:**                        |       |          |       |                        |       |                              |       |             |       |             |       |
| Oil and natural  gas sales                             |       | $             | 57,879     |                        | $          | 32,756                            |       | $                | 162,438    |             | $          | — |   | $ | 253,073 |   |
| Derivative  financial instruments                      |       | 14,795        |       | 8,165                       |       | 54,937                            |       | —           |       | 77,897           |       |
| Other income  (loss)                                   |       | 8,476         |       | (7,251                      | )          | 8,190                             |       | —           |       | 9,415            |       |
| Equity in  earnings of subsidiaries                    |       | 99,428        |       | —                      |       | —                            |       | (99,428          | )          | —           |       |
| Total revenues and  other income                       |       | 180,578       |       | 33,670                      |       | 225,565                           |       | (99,428          | )          | 340,385          |       |
|                                                   |       |          |       |                        |       |                              |       |             |       |             |       |
| **Costs  and expenses:**                               |       |          |       |                        |       |                              |       |             |       |             |       |
| Oil and natural  gas production                        |       | 12,726        |       | 6,406                       |       | 28,198                            |       | —           |       | 47,330           |       |
| Depreciation,  depletion and amortization              |       | 13,938        |       | 10,473                      |       | 80,737                            |       | —           |       | 105,148          |       |
| Accretion of  discount on asset retirement obligations |       | 387           |       | 480                         |       | 400                               |       | —           |       | 1,267            |       |
| General and  administrative                            |       | 8,130         |       | 2,293                       |       | 4,567                             |       | —           |       | 14,990           |       |
| Interest                                               |       | 12,847        |       | —                      |       | 20,696                            |       | —           |       | 33,543           |       |
| Total costs and  expenses                              |       | 48,028        |       | 19,652                      |       | 134,598                           |       | —           |       | 202,278          |       |
| Income before  income taxes                            |       | 132,550       |       | 14,018                      |       | 90,967                            |       | (99,428          | )          | 138,107          |       |
| Income tax expense                                     |       | 49,664        |       | 5,557                       |       | —                            |       | —           |       | 55,221           |       |
| Net income  (loss)                                     |       | 82,886        |       | 8,461                       |       | 90,967                            |       | (99,428          | )          | 82,886           |       |
| Preferred stock  dividends                             |       | (51,099       | )          | —                      |       | —                            |       | —           |       | (51,099          | )          |
| Net income  (loss) available to common shareholders    |       | $             | 31,787     |                        | $          | 8,461                             |       | $                | 90,967     |             | $          | (99,428 | ) | $ | 31,787 |   |

 

26

----

**EXCORESOURCES, INC.**

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**(Unaudited)**

**For the six months ended June 30, 2007**
| **(in thousands)**                                | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
|                                                   |       |          |       |                        |       |                              |       |             |       |             |       |
| **Revenues  and other income:**                        |       |          |       |                        |       |                              |       |             |       |             |       |
| Oil and natural  gas sales                             |       | $             | 86,661     |                        | $          | 62,056                            |       | $                | 222,167    |             | $          | — |   | $ | 370,884 |   |
| Derivative  financial instruments                      |       | 1,208         |       | (14,506                     | )          | (4,824                            | )          | —           |       | (18,122          | )          |
| Other income  (loss)                                   |       | 18,214        |       | (14,639                     | )          | 12,565                            |       | —           |       | 16,140           |       |
| Equity in  earnings of subsidiaries                    |       | (19,628       | )          | —                      |       | —                            |       | 19,628           |       | —           |       |
| Total revenues  and other income                       |       | 86,455        |       | 32,911                      |       | 229,908                           |       | 19,628           |       | 368,902          |       |
|                                                   |       |          |       |                        |       |                              |       |             |       |             |       |
| **Costs  and expenses:**                               |       |          |       |                        |       |                              |       |             |       |             |       |
| Oil and natural  gas production                        |       | 19,428        |       | 11,998                      |       | 46,119                            |       | —           |       | 77,545           |       |
| Depreciation,  depletion and amortization              |       | 26,081        |       | 20,371                      |       | 110,020                           |       | —           |       | 156,472          |       |
| Accretion of  discount on asset retirement obligations |       | 636           |       | 953                         |       | 621                               |       | —           |       | 2,210            |       |
| General and  administrative                            |       | 15,165        |       | 5,332                       |       | 8,668                             |       | —           |       | 29,165           |       |
| Interest                                               |       | 29,550        |       | —                      |       | 80,702                            |       | —           |       | 110,252          |       |
| Total costs and  expenses                              |       | 90,860        |       | 38,654                      |       | 246,130                           |       | —           |       | 375,644          |       |
| Income (loss)  before income taxes                     |       | (4,405        | )          | (5,743                      | )          | (16,222                           | )          | 19,628           |       | (6,742           | )          |
| Income tax  expense (benefit)                          |       | 406           |       | (2,337                      | )          | —                            |       | —           |       | (1,931           | )          |
| Net (income)  loss                                     |       | (4,811        | )          | (3,406                      | )          | (16,222                           | )          | 19,628           |       | (4,811           | )          |
| Preferred stock  dividends                             |       | (52,235       | )          | —                      |       | —                            |       | —           |       | (52,235          | )          |
| Net income  (loss) available to common shareholders    |       | $             | (57,046    | )                           | $          | (3,406                            | )          | $                | (16,222    | )                | $          | 19,628 |   | $ | (57,046 | ) |

 

 

27

----

**EXCO RESOURCES, INC.**

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**(Unaudited)**

**For the six months ended June 30, 2006**
| **(in thousands)**                                                       | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                    | ** ** | ** **    | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Operating  Activities:**                                                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Net cash  provided by operating activities                                    |       | $             | 75,270     |                        | $          | 43,628                            |       | $                | 23,776     |             | $          | — |   | $ | 142,674 |   |
| **Investing  Activities:**                                                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Additions to oil  and natural gas properties, gathering systems and equipment |       | (122,804      | )          | (23,887                     | )          | (65,141                           | )          | —           |       | (211,832         | )          |
| Corporate  acquisitions                                                       |       | (149,868      | )          | (61,776                     | )          | 23,379                            |       | —           |       | (188,265         | )          |
| Proceeds from  dispositions of property and equipment                         |       | 49            |       | 524                         |       | 36                                |       | —           |       | 609              |       |
| Advances/investments  with affiliates                                         |       | (61,345       | )          | 71,428                      |       | (10,083                           | )          | —           |       | —           |       |
| Net cash used in  investing activities                                        |       | (333,968      | )          | (13,711                     | )          | (51,809                           | )          | —           |       | (399,488         | )          |
| **Financing  Activities:**                                                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Borrowings under  credit agreement                                            |       | 418,000       |       | —                      |       | —                            |       | —           |       | 418,000          |       |
| Repayments under  credit agreement                                            |       | (602,749      | )          | (13,098                     | )          | —                            |       | —           |       | (615,847         | )          |
| 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                                  |       | 656,305       |       | —                      |       | —                            |       | —           |       | 656,305          |       |
| Deferred  financing costs and other                                           |       | (1,052        | )          | —                      |       | —                            |       | —           |       | (1,052           | )          |
| Net cash  provided by (used in) financing activities                          |       | 120,504       |       | (51,196                     | )          | —                            |       | —           |       | 69,308           |       |
| Net decrease in  cash                                                         |       | (138,194      | )          | (21,279                     | )          | (28,033                           | )          | —           |       | (187,506         | )          |
| Cash at beginning  of period                                                  |       | 191,500       |       | 35,453                      |       | —                            |       | —           |       | 226,953          |       |
| Cash at end of period                                                         |       | $             | 53,306     |                        | $          | 14,174                            |       | $                | (28,033    | )                | $          | — |   | $ | 39,447 |   |

 

28

----

**EXCO RESOURCES, INC.**

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**(Unaudited)**

**For the six months ended June 30, 2007**
| **(in thousands)**                                                       | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
|                                                                          |       |          |       |                        |       |                              |       |             |       |             |       |
| **Operating  Activities:**                                                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Net cash  provided by operating activities                                    |       | $             | 33,521     |                        | $          | 32,540                            |       | $                | 103,065    |             | $          | — |   | $ | 169,126 |   |
| **Investing  Activities:**                                                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Additions to oil  and natural gas properties, gathering systems and equipment |       | (40,975       | )          | (21,123                     | )          | (126,261                          | )          | —           |       | (188,359         | )          |
| Acquisitions,  including corporate acquisitions                               |       | (751,012      | )          | —                      |       | (1,414,336                        | )          | —           |       | (2,165,348       | )          |
| Proceeds from  dispositions of property and equipment                         |       | 374,008       |       | —                      |       | 2,033                             |       | —           |       | 376,041          |       |
| Advance received  on property sale                                            |       | 5,000         |       | —                      |       | —                            |       | —           |       | 5,000            |       |
| Advances/investments  with affiliates                                         |       | (1,661,810    | )          | (6,200                      | )          | 1,668,010                         |       | —           |       | —           |       |
| Net cash  provided by (used in) investing activities                          |       | (2,074,789    | )          | (27,323                     | )          | 129,446                           |       | —           |       | (1,972,666       | )          |
| **Financing  Activities:**                                                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Proceeds from  long-term debt                                                 |       | 758,000       |       | —                      |       | 1,170,000                         |       | —           |       | 1,928,000        |       |
| Payments on  long-term debt                                                   |       | (653,000      | )          | —                      |       | (1,370,532                        | )          | —           |       | (2,023,532       | )          |
| Settlements of  derivative financial instruments with a financing element     |       | (1,041        | )          | —                      |       | (2,637                            | )          | —           |       | (3,678           | )          |
| Proceeds from  issuance of common stock, net                                  |       | 2,228         |       | —                      |       | —                            |       | —           |       | 2,228            |       |
| Proceeds from  issuance of preferred stock, net                               |       | 2,000,000     |       | —                      |       | —                            |       | —           |       | 2,000,000        |       |
| Payment of  preferred stock dividends                                         |       | (43,717       | )          | —                      |       | —                            |       | —           |       | (43,717          | )          |
| Issuance costs                                                                |       | (7,498        | )          | —                      |       | —                            |       | —           |       | (7,498           | )          |
| Deferred  financing costs and other                                           |       | (7,989        | )          | —                      |       | (9,815                            | )          | —           |       | (17,804          | )          |
| Net cash  provided by (used in) financing activities                          |       | 2,046,983     |       | —                      |       | (212,984                          | )          | —           |       | 1,833,999        |       |
| Net increase  (decrease) in cash                                              |       | 5,715         |       | 5,217                       |       | 19,527                            |       | —           |       | 30,459           |       |
| Cash at beginning  of period                                                  |       | 6,522         |       | 6,233                       |       | 10,067                            |       | —           |       | 22,822           |       |
| Cash at end of period                                                         |       | $             | 12,237     |                        | $          | 11,450                            |       | $                | 29,594     |             | $          | — |   | $ | 53,281 |   |

 

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***Item2*.  *Management’s Discussion andAnalysis of Financial Condition and Results of Operations***

**Forward-LookingStatements**

This quarterlyreport contains forward-looking statements, as defined in Section 27A ofthe Securities Act of 1933, or the Securities Act, and Section 21E of theSecurities Exchange Act of 1934, or the Exchange Act. These forward-lookingstatements 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 basedthese forward-looking statements on our current assumptions, expectations andprojections about future events.

We use the words “may,”“expect,” “anticipate,” “estimate,” “believe,” “continue,” “intend,” “plan,” “budget”and other similar words to identify forward-looking statements. You should readstatements that contain these words carefully because they discuss futureexpectations, contain projections of results of operations or of our financialcondition and/or state other “forward-looking” information. We do not undertakeany obligation to update or revise publicly any forward-looking statements,except as required by law. These statements also involve risks anduncertainties that could cause our actual results or financial condition tomaterially differ from our expectations in this quarterly report, including,but not limited to:

·      fluctuations in prices of oil andnatural gas;

·      future capital requirements andavailability of financing;

·      estimates of reserves and economicassumptions used in connection with our acquisitions;

·      geological concentration of ourreserves;

·      risks associated with drilling andoperating wells;

·      risks associated with the operationof natural gas pipelines and gathering systems;

·      discovery, acquisition, developmentand replacement of oil and natural gas reserves;

·      cash flow and liquidity;

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

·      timing and amount of futureproduction of oil and natural gas;

·      availability of drilling andproduction equipment;

·      marketing of oil and natural gas;

·      developments in oil-producing andnatural gas-producing countries;

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·      title to our properties;

·      litigation;

·      competition;

·      general economic conditions,including costs associated with drilling and operations of our properties;

·      governmental regulations;

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

·      deciding whether or not to enterinto derivative financial instruments;

·      events similar to those ofSeptember 11, 2001;

·      actions of third party co-owners ofinterests in properties in which we also own an interest;

·      fluctuations in interest rates; and

·      our ability to effectivelyintegrate companies and properties that we acquire.

Webelieve that it is important to communicate our expectations of future performanceto our investors. However, events may occur in the future that we are unable toaccurately predict, or over which we have no control. You are cautioned not toplace undue reliance on a forward-looking statement. When considering ourforward-looking statements, keep in mind the risk factors and other cautionarystatements in this quarterly report, and the risk factors included in ourAnnual Report on Form 10-K for the year ended December 31, 2006.

Ourrevenues, operating results, financial condition and ability to borrow funds orobtain additional capital depend substantially on prevailing prices for oil andnatural gas. Declines in oil or natural gas prices may materially adverselyaffect our financial condition, liquidity, ability to obtain financing andoperating results. Lower oil or natural gas prices also may reduce the amountof oil or natural gas that we can produce economically. A decline in oil ornatural gas prices could have a material adverse effect on the estimated valueand estimated quantities of our oil and natural gas reserves, our ability tofund our operations and our financial condition, cash flow, results ofoperations and access to capital. Historically, oil and natural gas prices andmarkets have been volatile, with prices fluctuating widely, and they are likelyto continue to be volatile.

**Overview**

We are anindependent oil and natural gas company engaged in the acquisition, developmentand exploitation of onshore North American oil and natural gas properties. Weexpect to continue to grow by leveraging our management team’s experience,exploiting our multi-year inventory of development drilling locations andexploitation projects, and selectively pursuing acquisitions that meet ourstrategic and financial objectives. We employ the use of debt and equity alongwith a comprehensive derivative financial instrument program to support ouracquisition strategy.  This approachenhances our ability to execute our business plan over the entire commodityprice cycle, protect our returns on investment, and manage our capitalstructure.

As oil and naturalgas prices have increased, we have seen an increase in demand for drillingrigs, field supplies and other related field services.  This has resulted in increases in the costsof these goods and services and some difficulty in timely scheduling ofdrilling rigs and other field services required to perform operations on ourproperties.  To date, however, we havenot encountered any significant operational problems or delays as a result ofthe difficulty in scheduling these services. Our 2007 budget, as amended to reflect the Vernon acquisition and theSouthern Gas acquisition, totals $502.9 million, which includes $443.3 millionfor drilling, exploitation and production operations, $48.6 million for midstreamprojects and $11.0 million for corporate projects. We do not budget forproperty acquisitions as these transactions are opportunistic in nature.  Our future earnings and cash flows aredependent upon our ability to manage our overall cost structure to a level thatallows for profitable production.

Like all oil andnatural gas production companies, we face the challenge of natural productiondeclines. Oil and natural gas production from a given well naturally decreasesover time. We attempt to overcome this natural decline by drilling to developand identify additional reserves and by acquisitions. Our future growth willdepend upon our ability to continue to add oil and natural gas reserves inexcess of production at a reasonable cost. We will maintain our focus on thecosts of adding reserves through drilling and acquisitions as well as the costsnecessary to produce such reserves.

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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 accrued dividends at June 30, 2007.  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 OperatingPartnership, LP, or EPOP, a wholly-owned subsidiary of EXCO Partners, LP,completed the purchase of substantially all of the oil and natural gasproperties and related assets related to the Vernon and Ansley Fields locatedin Jackson Parish, Louisiana from entities affiliated with Anadarko forapproximately $1.5 billion in cash, net of preliminary purchase priceadjustments, or the Vernon Acquisition. Our preliminary allocation of value to the Vernon Acquisition, whichincludes the assumption of derivative financial instruments covering asignificant portion of estimated production for 2007, 2008 and 2009 wasapproximately $1.39 billion to proved properties, $57.0 million to unprovedproperties and $117.0 million to gathering and treating facilities,respectively.  The fair value of theassumed derivative financial instruments was a liability of approximately $60.0million.

On May 2, 2007, we completed the purchase of oiland natural gas properties and related assets, including derivativefinancial instruments in respect of a significant portion of estimatedproduction for 2007, 2008 and 2009 from entities affiliated with Anadarko inmultiple fields primarily located in Oklahoma, Texas and Louisiana forapproximately $750.2 million in cash, net of preliminary purchase price adjustments, orthe Southern Gas Acquisition.

On May 8, 2007, we completed the sale of oil andnatural gas properties and related assets in multiple fields primarilylocated in South Texas and South Louisiana, or the Gulf Coast Sale, to anentity affiliated with Crimson Exploration Inc., or Crimson, for an aggregatesale price of $245.4 million in cash, net of preliminary purchase price adjustments,and 750,000 shares of unregistered restricted Crimson common stock, initiallyvalued at $3.4 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.

We also face thechallenge of financing future acquisitions. In connection with the Vernon Acquisition, the Southern Gas Acquisitionand the issuance of the 7.0% Preferred Stock and Hybrid Preferred Stock, weamended our credit agreements to increase our borrowing capacity from $2.1billion to an aggregate of $2.2 billion as of June 30, 2007.  EPOP’s credit agreement, as amended, providesfor an aggregate borrowing base of $1.3 billion, of which $1.1 billion isdrawn as of June 30, 2007.  The EXCOResources credit agreement was amended and restated on May 2, 2007 to reflectthe Southern Gas Acquisition which increased the borrowing base to $1.0billion. On May 8, 2007, in connection with the Gulf Coast Sale, the borrowingbase on the amended and restated EXCO Resources Credit Agreement was reducedfrom $1.0 billion to $900.0 million.  Asof June 30, 2007, outstanding borrowings on the EXCO Resources Credit Agreementwere $444.0 million. With these credit agreements, we believe we will haveadequate unused borrowing capacity in addition to cash flow from operations, tofund capital development and working capital needs for the next 12 months.  Funding for future acquisitions may requireadditional sources of financing, which may not be available.

**Criticalaccounting 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.

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**Recent accounting pronouncements**

In****July 2006,the Financial Accounting Standards Board, or FASB, issued FinancialInterpretation No. 48, “Accounting for Uncertainty in Income Taxes,” orFIN 48. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements in accordance with Statement ofFinancial Accounting Standards No. 109, “Accounting for Income Taxes.” FIN48 provides guidance on recognizing, measuring, presenting and disclosing inthe financial 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 issuedFASB Staff Position EITF 00-19-2 “Accounting for Registration PaymentArrangements,” or FSP 00-19-2, on December 21, 2006.  FSP 00-19-2 requires contingent obligationsto make future payments under a registration payment arrangement to berecognized separately in accordance with Statement of Financial AccountingStandards No. 5, “Accounting for Contingencies,” or SFAS No. 5.  SFAS No. 5 requires that an estimated lossfrom a loss contingency be accrued if the loss is probable and can reasonablybe estimated.  Our 7.0% Preferred Stock andHybrid Preferred Stock contain requirements for EXCO to register shares onbehalf of the preferred stockholders.  Ifsuch registration deadlines are not met, or a prior registration statementceases to remain effective, we may be obligated to pay liquidated damages.  We adopted FSP 00-19-2 upon issuance of the7.0% Preferred Stock and the Hybrid Preferred Stock.  We do not believe any of the contingenciesassociated with the registration rights of the preferred stockholders exist asof June 30, 2007 and therefore are not valued separately at June 30, 2007.

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements,” or SFAS No. 157, which defines fair value, establishes aframework for measuring fair value in GAAP and expands disclosures about fairvalue measurements. SFAS No. 157 is effective for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years. Wewill be required to adopt SFAS No. 157 in the first quarter of fiscal year2008. We are currently evaluating the impact of SFAS No. 157 on ourfinancial statements.

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. 159 permits an entity to choose tomeasure many financial instruments and certain other items at fair value. Thefair value option established by SFAS No. 159 permits all entities tochoose to measure eligible items at fair value at specified election dates.Unrealized gains and losses on items for which the fair value option has beenelected are to be recognized in earnings at each subsequent reporting date.SFAS No. 159 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and as such, will be adopted by us onJanuary 1, 2008.  The effect of adoptingSFAS No. 159 is not expected to have a significant effect on our reportedfinancial position or earnings.

**Ourresults of operations**

Asummary of key financial data for the three and six months ended June 30, 2006and 2007 related to our results of operations is presented below:
| ** **                                                                                            | ** ** | **Three months ended  June 30,** | ** ** | **Quarter to  quarter change** | ** ** | **Six months ended  June 30,** | ** ** | **Year to  year change** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-------------------------------|------------|
| **(in thousands, except production volumes, prices and expenses)** | ** ** | **2006**                              | ** ** | **2007**                            | ** ** | **2006 - 2007**           | ** ** | **2006**                      | ** ** | **2007** | ** ** | **2006 - 2007** | ** ** |
| **Production:**                                                                                       | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil (Mbbls)                                                                                           |       | 222                                   |       | 426                                 |       | 204                                 |       | 370                           |       | 701 |   | 331 |   |
| Natural gas (Mmcf)                                                                                    |       | 9,972                                 |       | 32,320                              |       | 22,348                              |       | 17,177                        |       | 47,983 |   | 30,806 |   |
| Total production (Mmcfe)                                                                              |       | 11,304                                |       | 34,876                              |       | 23,572                              |       | 19,397                        |       | 52,189 |   | 32,792 |   |
| **Oil and natural gas revenues before derivative  financial instrument activities:**                  | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil revenues                                                                                          |       | $                                     | 14,831     |                                | $          | 26,057                              |       | $                             | 11,226     |   | $ | 23,826 |   | $ | 41,162 |   | $ | 17,336 |   |
| Natural gas revenues                                                                                  |       | 65,173                                |       | 227,016                             |       | 161,843                             |       | 125,907                       |       | 329,722 |   | 203,815 |   |
| Total oil and natural gas revenues                                                                    |       | $                                     | 80,004     |                                | $          | 253,073                             |       | $                             | 173,069    |   | $ | 149,733 |   | $ | 370,884 |   | $ | 221,151 |   |
| **Derivative financial instruments:**                                                                 | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash settlements on derivative financial instruments                                                  |       | $                                     | 5,223      |                                | $          | 6,630                               |       | $                             | 1,407      |   | $ | 2,428 |   | $ | 38,702 |   | $ | 36,274 |   |
| Non-cash change in fair value of derivative financial  instruments                                    |       | 30,009                                |       | 71,267                              |       | 41,258                              |       | 73,579                        |       | (56,824 | ) | (130,403 | ) |
| Total derivative financial instrument activities                                                      |       | $                                     | 35,232     |                                | $          | 77,897                              |       | $                             | 42,665     |   | $ | 76,007 |   | $ | (18,122 | ) | $ | (94,129 | ) |
| **Average sales price (before cash settlements of  derivative financial instruments)**                | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil (Bbl)                                                                                             |       | $                                     | 66.81      |                                | $          | 61.17                               |       | $                             | (5.64      | ) | $ | 64.39 |   | $ | 58.72 |   | $ | (5.67 | ) |
| Natural gas (per Mcf)                                                                                 |       | 6.54                                  |       | 7.02                                |       | 0.48                                |       | 7.33                          |       | 6.87 |   | (0.46 | ) |
| Natural gas equivalent (per Mcfe)                                                                     |       | 7.08                                  |       | 7.26                                |       | 0.18                                |       | 7.72                          |       | 7.11 |   | (0.61 | ) |
| **Oil and natural gas production costs:**                                                             | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil and natural gas operating costs                                                                   |       | $                                     | 10,365     |                                | $          | 30,331                              |       | $                             | 19,966     |   | $ | 17,283 |   | $ | 52,170 |   | $ | 34,887 |   |
| Production and ad valorem taxes                                                                       |       | 4,774                                 |       | 16,999                              |       | 12,225                              |       | 8,974                         |       | 25,375 |   | 16,401 |   |
| Depreciation, depletion and amortization                                                              |       | 29,298                                |       | 105,148                             |       | 75,850                              |       | 49,975                        |       | 156,472 |   | 106,497 |   |
| General and administrative                                                                            |       | 6,530                                 |       | 14,987                              |       | 8,457                               |       | 12,439                        |       | 29,165 |   | 16,726 |   |
| Interest expense                                                                                      |       | 11,660                                |       | 33,543                              |       | 21,883                              |       | 28,005                        |       | 110,252 |   | 82,247 |   |
| **Expenses (per Mcfe):**                                                                              | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating costs                                                                                       |       | $                                     | 0.92       |                                | $          | 0.87                                |       | $                             | (0.05      | ) | $ | 0.89 |   | $ | 1.00 |   | $ | 0.11 |   |
| Production and ad valorem taxes                                                                       |       | 0.42                                  |       | 0.49                                |       | 0.07                                |       | 0.46                          |       | 0.49 |   | 0.03 |   |
| Depreciation, depletion and amortization                                                              |       | 2.59                                  |       | 3.01                                |       | 0.42                                |       | 2.58                          |       | 3.00 |   | 0.42 |   |
| General and administrative                                                                            |       | 0.58                                  |       | 0.43                                |       | (0.15                               | )          | 0.64                          |       | 0.56 |   | (0.08 | ) |
| **Net  income (loss) available to common shareholders**                                               |       | $                                     | 31,023     |                                | $          | 31,787                              |       | $                             | 764        |   | $ | 68,175 |   | $ | (57,046 | ) | $ | (125,221 | ) |

 

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Thefollowing is a discussion of our financial condition and results of operationsfor the three and six months ended June 30, 2006 and 2007.

Thecomparability of our results of operations from period to period is impactedby:

·                  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 Wattenberg fieldarea of the DJ Basin, or the Wattenberg Field, in January 2007, but excluding the Gulf Coast Sale as results ofoperations from those properties are not included in either period;

·                  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 ondepreciation, depletion and amortization;

·                  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***

Theavailability of a ready market for oil and natural gas and the prices of oiland natural gas are dependent upon a number of factors that are beyond ourcontrol. These factors include, among other things:

·                  the level of domestic production and economicactivity generally;

·                  the availability of imported oil and natural gas;

·                  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 many uncertainties affecting the supply and demand for oil,natural gas and refined petroleum products, we cannot accurately predict theprices or marketability of the oil and natural gas from any producing well inwhich we have or may acquire an interest.

***Marketing arrangements***

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

Wesell the majority of the oil we produce under short-term contracts using marketsensitive 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 ouroil at F.O.B. field prices posted by the principal purchaser of oil where ourproducing properties are located.  Oursales contracts are of a type common within the industry, and we usuallynegotiate a separate contract for each property.  Generally, we sell our oil to purchasers andrefiners near the areas of our producing properties.

We sellthe majority of our natural gas under individually negotiated gas purchasecontracts using market sensitive pricing. Our sales contracts vary in lengthfrom spot market sales of a single day to term agreements that may extend for ayear or more. Our natural gas customers include utilities, natural gasmarketing companies and a variety of commercial and industrial end users. Thenatural gas purchase contracts define the terms and conditions unique to eachof these sales. The price received for natural gas sold on

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the spot marketvaries daily, reflecting changing market conditions. We also gather andtransport natural gas for other producers for which we are compensated.

We maynot be able to market all of the oil and natural gas we produce. If our oil andnatural gas can be marketed, we may not be able to negotiate favorable priceand contractual terms. Changes in oil or natural gas prices may significantlyaffect our revenues, cash flows, the value of our oil and natural gasproperties and the estimates of recoverable oil and natural gas contained inour properties. Further, significant declines in the prices of oil or naturalgas may have a material adverse effect on our business and on our financialcondition.

Weengage in oil and natural gas production activities in geographic regionswhere, from time to time, the supply of oil or natural gas available fordelivery exceeds the demand. In this situation, companies purchasing oil ornatural gas in these areas reduce the amount of oil or natural gas that theypurchase from us. If we cannot locate other buyers for our production or forany of our newly discovered oil or natural gas reserves, we may shut-in our oilor natural gas wells for periods of time. If this occurs, we may incuradditional payment obligations under our oil and natural gas leases and, undercertain circumstances, the oil and natural gas leases might be terminated.

**Summary**

Forthe three months ended June 30, 2007, we reported net income available tocommon shareholders of $31.8 million compared to net income of $31.0 millionfor the quarter ended June 30, 2006.  Forthe six months ended June 30, 2007, we reported a net loss available to commonshareholders of $57.0 million compared with net income of $68.2 million for thesix months ended June 30, 2006.   For thethree months ended June 30, 2007, our oil and natural gas revenues, before theimpact of derivative financial instruments increased from $80.0 million to$253.1 million, an increase of 216.3%, when compared to the same period in 2006.  For the six months ended June 30, 2007, ouroil and natural gas revenues, before the impact of derivative financialinstruments increased from $149.7 million to $370.9 million, an increase of147.7%, when compared to the same period in 2006.  Our equivalent production of natural gas was11.3 Bcfe for the quarter ended June 30, 2006, while equivalent natural gasproduction for the quarter ended June 30, 2007 increased to 34.9 Bcfe.  Our equivalent production of natural gas was19.4 Bcfe for the six months ended June 30, 2006, while equivalent natural gasproduction for the same period ended June 30, 2007 increased to 52.2 Bcfe.  Our operating costs, including production andad valorem taxes, also increased from $15.1 million ($1.34 per Mcfe) for thethree months ended June 30, 2006 to $47.3 million ($1.36 per Mcfe) for thethree months ended June 30, 2007.  Ouroperating costs, including production and ad valorem taxes, also increased from$26.3 million ($1.35 per Mcfe) for the six months ended June 30, 2006 to $77.5million ($1.49 per Mcfe) for the six months ended June 30, 2007.  The increases from the prior year’s revenues,production and operating costs are attributable to our significant 2006 and2007 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 in the fair value of our derivatives tomarket at the end of each reporting period. For the three and six months ended June 30, 2006, we recognized gainsfrom our derivative financial instruments of $35.2 million and $76.0 million,respectively, of which $30.0 million and $73.6 million was unrealized.  For the three months ended June 30,2007, we recognized gains of $77.9 million on our derivative financialinstruments, representing income from cash settlements of $6.6 million and$71.3 million of unrealized gains.  Forthe six months ended June 30, 2007, we incurred losses of $18.1 million on ourderivative financial instruments, representing income from cash settlements of$38.7 million and $56.8 million of unrealized losses.

***Oil and natural gas revenues, production and prices***

Total oil andnatural gas revenues, excluding the impact of derivative financial instrumentsincreased by $173.1 million, or 216.3% for the three months ended June 30, 2007over the same period in the prior year due to higher equivalent productionvolumes and an increase in our average sales price.  Production volumes when compared to the sameperiod in 2006, increased by 23.6 Mmcfe, or 208.5% and our average sales pricefor the three months ended June 30, 2007 increased $0.18 per Mmcfe. Total oiland natural gas revenues, excluding the impact of derivative financialinstruments, increased $221.1 million, or 147.7%, for the six months ended June30, 2007 over the same period in the prior year due to higher equivalentproduction volumes.  Production volumesincreased by 32.8 Mmcfe, or 169.1%, but were partially offset by a decrease inour average sales price of $0.61 per equivalent Mmcfe for the six months endedJune 30, 2007 compared so the same period in 2006. The higher volumes resultedin increased revenues of $169.4 million and $231.1 million for the three andsix month periods ended June 30, 2007. Our TXOK, Power Gas Marketing & Transmission, Inc., or PGMT,Winchester, Vernon and Southern Gas acquisitions accounted for 32.1 Bcfe, or165.3%, increase in volumes for the six months ended June 30, 2007.  The increase in production volumes is dueprimarily to:

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·                  the acquisition of TXOK on February 14, 2006, whichcontributed a full six months of production for the period ended June 30, 2007compared to four and a half months for the period ended June 30, 2006, resultedin an increase of 1.9 Bcfe;

·                  the acquisition of PGMT on April 28, 2006, whichcontributed a full six months of production to the results ended June 30,2007 compared to only two months for the period ended June 30, 2006, resultedin an increase of 617 Mmcfe;

·                  the acquisition of Winchester on October 2, 2006,which accounted for a 12.5 Bcfe increase from the same period in 2006;

·                  the acquisition of Vernon on March 30, 2007, whichcontributed a full quarter to the results ended June 30, 2007 resulting in anincrease of 14.2 Bcfe; and

·                   the acquisition of Southern Gas on May 2, 2007,which contributed two full months to the results ended June 30, 2007 resultingin an increase of 2.8 Bcfe. We do not include any production or revenuesattributable to properties included in the Gulf Coast Sale.

Prices,excluding the impact of derivative financial instruments, decreased for oilduring the three and six months ended June 30, 2007 compared to the sameperiods in the prior year.  The oilprices decreased by $5.64 per Bbl (to $61.17 from $66.81) or 8.4%, and $5.67per Bbl (to $58.72 from $64.39) or 8.8%, respectively.  Natural gas prices averaged $7.02, anincrease of 10.4%, and $6.87 per Mcf, a decrease of 6.3%, for the three and sixmonths ended June 30, 2007 compared with $6.54 and $7.33 per Mcf for the threeand six months ended June 30, 2006.

***Derivativefinancial instruments***

Ourcash settlements from derivative financial instruments increased revenue by$6.6 million and $38.7 million for the three and six months ended June 30, 2007compared with $5.2 million and $2.4 million of cash settlements, whichincreased revenue for the three and six months ended June 30, 2006.

Forthe three months ended June 30, 2007, we recognized an increase in revenue of$71.3 million from the change in the fair value of our derivativefinancial instruments. For the six months ended June 30, 2007, we recognized adecrease in revenue of $56.8 million from the change in the fair value ofour derivative financial instruments.  For the three and six months ended June 30, 2006, we recognized anincrease in revenue of $30.0 million and $73.6 million, respectively, from thechange in the fair value of our derivative financial instruments.  We expect that our revenues will continue tobe significantly impacted in future periods by changes in the fair value of ourderivative financial instruments as a result of the volatility in oil andnatural gas prices and the volume of future oil and natural gas sales coveredunder our derivative financial instrument program.  For the three and six months ended June 30,2007, 66.0% and 78.1% of oil production and 75.8% and 85.1% of natural gasproduction, respectively, were subject to derivative financial instruments.

***Otherincome***

Ourother income increased to $9.4 million and $16.1 million for the three and sixmonths ended June 30, 2007 from $0.6 million and $2.9 million for the sameperiods in the prior year. The increase is primarily due to natural gasgathering and transportation activities related to the Winchester acquisitionand the Vernon acquisition and higher interest income due to higher cashbalances during 2007, reflecting the proceeds received from the sale of theWattenberg Field.  Our income fromnatural gas gathering and transportation activities for the three and six monthperiods ended June 30, 2007 increased approximately $6.7 million and $11.3million when compared to the same periods in the prior year, which is dueprimarily to mid-stream activities from the Winchester acquisition in October2006 and the Vernon acquisition in March 2007.

***Oil and natural gas operating costs***

Ouroil and natural gas operating costs for the three and six months ended June 30,2007 increased $20.0 million and $34.9 million, or 192.6% and 201.9%, from thesame periods in 2006. The increase in oil and natural gas operating costs wasprimarily attributable to:

·                  the acquisition of TXOK on February 14, 2006, whichcontributed a full six months of production expenses for the period ending June30, 2007 compared to only four and a half months for the period ended June 30,2006;

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·                    the acquisition of PGMT on April 28, 2006, whichcontributed a full six months of production expenses to the results ended June30, 2007 compared to only two months for the period ended June 30, 2006;

·                  the acquisition of Winchester on October 2, 2006which contributed a full six months of production expenses when compared to thesame period in 2006;

·                  the acquisition of Vernon on March 30, 2007, whichcontributed a full quarter of production expenses for the six months ended June30, 2007 when compared to the same period in 2006;

·                  the acquisition of Southern Gas on May 2, 2007,which contributed two full months of production expenses for the six months endedJune 30, 2007 when compared to the same period in 2006. We do not include anyproduction or revenues attributable to properties included in the Gulf CoastSale;

·                  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.

Theoil and natural gas operating cost per unit decreased from $0.92 per Mcfe forthe three months ended June 30, 2006 to $0.87 per Mcfe, or 5.4%, for the threemonths ended June 30, 2007.   The oil andnatural gas operating cost per unit increased from $0.89 per Mcfe for the sixmonths ended June 30, 2006 to $1.00 per Mcfe, or 12.4%, for the six monthsended June 30, 2007.   This increase forthe six months ended June 30, 2007 in operating costs per unit reflects thegeneral increase in the costs of goods and services used in our operations andan increase in workover activities. Oil and natural gas operating costsincreased primarily due to acquisitions made during 2006 and 2007 that were notincluded in 2006 operations.  During thesix months ended June 30, 2007, notable increases in operating expensesoccurred in sub-surface repair and maintenance costs, saltwater disposal fees,compression expenses and road repairs. While our 2007 operating expensesreflect increases from the aforementioned services, the operating cost per unitof $0.87 per Mcfe for the three months ended June 30, 2007 was 31% less thanthe operating cost per unit for the three months ended March 31, 2007 of $1.26per Mcfe. The reduction in the unit rate reflects the impact of significantvolumes from the Vernon Acquisition, which has low operating expenses.

***Productionand ad valorem taxes***

Productionand ad valorem taxes for the three and six months ended June 30, 2007 increasedby $12.2 million, or 256.1%, and $16.4 million, or 182.8%, respectively, overthe same periods in 2006. These increases are primarily attributable andcorrespond to the increase in oil and natural gas revenues resulting from 2006and 2007 acquisitions and the related increase in sales volumes.  On a percentage of revenue basis, productionand ad valorem taxes were 6.7% and 6.8% of gross oil and natural gas sales forthe three and six months ended June 30, 2007 compared with 6.0% and 6.0% duringthe same periods in the prior year.  Theincrease in the overall tax rate is the result of higher percentages of ourrevenues being derived from properties in Texas and Louisiana and a lower percentageof total sales being derived from our Appalachia region production.  Production and ad valorem taxes tend to belower in Appalachia than in the Texas and Louisiana areas. Production taxes areset by the state and local governments and vary as to the tax rate and thevalue to which that rate is applied. Further, ad valorem taxes in Texas andother states are based partially on the value of oil and natural gas reserves,which have increased significantly in 2007 as compared with 2006 due toacquisitions made during 2006 and 2007. These taxes are generally based upon the price received for production.

***Depreciation,depletion and amortization***

Our depreciation,depletion and amortization costs for the three and six months ended June 30,2007 increased by $75.9 million, or 258.9%, and $106.5 million, or 213.1%, fromthe same periods in 2006.  The primaryreasons for the increases were from a 208.5% and 169.1% increase in oil andnatural gas sales volumes for the three and six months ended June 30, 2007, respectively,directly related to the acquisitions made during 2006 and 2007, and an increasein the per unit depletion rate from $2.59 per Mcfe and $2.58 per Mcfe for thethree and six months ended June 30, 2006 to $3.01 per Mcfe and $3.00 per Mcfefor the three and six months ended June 30, 2007.

***Generaland administrative***

Our general andadministrative costs for the three and six months ended June 30, 2007 increasedby $8.5 million, or 129.5%, and $16.7 million, or 134.5%, over the same periodsin 2006. Significant components of the increase for the six months ended June 30,2007 include the following items:

·                  increased personnel costs of $7.8 million over thesix month period due to additional headcount of 201 employees related primarilyto our acquisitions and an overall increase in our accounting activities due tobeing a public company;

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·                  an increase in share-based compensation costs for the six month periodof $2.0 million due primarily to additional headcount;

·                  increased consulting and contract labor costs overthe six month period of $2.2 million due to the acquisitions and systemsconversion discussed above;

·                  increased IT related costs over the six month periodof $2.6 million due to our information systems conversion and training coststhat do not qualify for capital treatment;

·                  increased legal fees over the six month period of$1.1 million;

·                  increased audit and tax fees over the six monthperiod of approximately $2.3 million;

·                  increased occupancy costs over the six month periodof $0.4 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 $7.5 million for the six monthsending June 30, 2007, a $4.3 million increase from the same period in the prioryear, primarily resulting from the acquisitions mentioned above.

The followingtable presents the components of our general and administrative expenses:
|                                                  | ** ** | **For the six months ended June 30,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(in thousands)**                          | ** ** | **2006**                                                            | ** ** | **2007** | ** ** |
| Gross general  and administrative expenses       |       | $                                                                   | 16,995     |   | $ | 38,981 |   |
| Capitalized  general and administrative expenses |       | (1,373                                                              | )          | (2,319 | ) |
| Reimbursed  general and administrative expenses  |       | (3,183                                                              | )          | (7,497 | ) |
| Net general and  administrative expenses         |       | $                                                                   | 12,439     |   | $ | 29,165 |   |

 

***Interest expense***

Our interestexpense for the three and six months ended June 30, 2007 increased $21.9million and $82.2 million from the same periods in 2006. The increase isprimarily due to interest expense associated with the amended credit agreementsused to fund the acquisitions of TXOK, Winchester, PGMT, Vernon and SouthernGas, which increased our outstanding debt, excluding our senior notes, from$324.0 million at June 30, 2006 to $1.5 billion at June 30, 2007.  Interest expense for the six months endedJune 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 with commitmentletters from members of our banking group which were not utilized as a resultof the Private Placement on March 30, 2007.

***Incometaxes***

Our effectiveincome tax rate for the three and six months ended June 30, 2007 was 40.0% anda benefit of 28.6%, respectively.  Oureffective tax rate on net income (loss) from continuing operations for thethree and six months ended June 30, 2006 was 41.3% and 39.6%,respectively.  A substantial portion ofour stock-based compensation included in our results of operations for thethree and six months ended June 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 decreased our effectivebenefit rate by approximately 7.5% for the six months ended June 30, 2007.  The remainder of the tax rate change over theprior year is a result of the state tax rate increase resulting from theincreased applicable taxable income to Louisiana and Texas Margin Tax primarilyoffset by percentage depletion deductions.

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**Ourliquidity, capital resources and capital commitments**

***General***

Mostof our growth has resulted from acquisitions and our development andexploitation program. Consistent with our strategy of acquiring and developingreserves, we have an objective of maintaining 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.  Ourgeneral financial strategy is to use a combination of cash flow fromoperations, bank financing, cash received from the sale of oil and natural gasproperties and the sale or issuance of equity and debt securities to fund ouroperations, conduct development and exploitation activities and to fundacquisitions.  As of August 1, 2007, theaggregate borrowing base under our credit agreements totaled $2.2 billion. Wedo not have a set budget for acquisitions as these tend to be opportunitydriven.  Historically, we have used theproceeds from the issuance of equity and debt securities and borrowings underour credit agreements to raise cash to fund acquisitions.  Our ability to borrow from sources other thanour credit agreements is subject to restrictions imposed by our lenders. Inaddition, our indenture governing our senior notes and the terms of ourpreferred stock contain restrictions on incurring indebtedness and pledging ourassets.

On March 30, 2007,we issued 200,000 shares of preferred stock for $2.0 billion in cash inconnection with the Vernon Acquisition. In conjunction with the Vernon Acquisition, the Southern Gas Acquisitionand the Gulf Coast Sale, we amended our credit agreements which increased ouraggregate borrowing base to $2.2 billion. Additional liquidity totalingapproximately $478.0 million has been generated from the sale of oil andnatural gas properties through July 2007.

Netcash provided by operating activities was $169.1 million for the six monthsended June 30, 2007, which is attributable primarily to the non-cash change infair value of our derivatives of $56.8 million. At June 30, 2007, our cash and cash equivalents balance was $53.3million, an increase of $30.5 million from December 31, 2006 primarily asa result of proceeds from the sale of our Wattenberg fields.  On July 16, 2007, we made an interest paymenton our 71⁄4% senior notes of $16.1 million and we made a dividend payment to ourpreferred shareholders of $43.7 million on June 15, 2007.

***Acquisitions and capital expenditures***

Thefollowing table presents our capital expenditures for the six months ended June30, 2006 and 2007.  Our acquisition ofTXOK did not result in any property acquisition expenditures as the acquisitionwas consummated by the redemption of TXOK’s preferred stock and for theassumption of TXOK’s debt.  The capitalexpenditures for the six months ended June 30, 2006 include capitalexpenditures of TXOK during the period from February 14, 2006 to June 30, 2006.
|                                                                                                                                                  | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(unaudited, in thousands)**                                                                                                          | ** ** | **2006**                                      | ** ** | **2007** | ** ** |
| **Capital  expenditures:**                                                                                                                       | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Property  acquisitions excluding TXOK Acquisition, Inc.                                                                                          |       | $                                             | 137,016    |   | $ | — |   |
| Acquisition of  Power Gas Marketing & Transmission, Inc., net of cash acquired, excluding  debt and derivative financial instruments assumed |       | 61,776                                        |       | — |   |
| Property  purchases including Vernon and Southern Gas                                                                                            |       | —                                        |       | 2,260,964 |   |
| Lease purchases                                                                                                                                  |       | 1,444                                         |       | 11,498 |   |
| Development  capital expenditures                                                                                                                |       | 73,730                                        |       | 180,032 |   |
| Other                                                                                                                                            |       | 4,060                                         |       | 9,768 |   |
| Total capital  expenditures                                                                                                                      |       | $                                             | 278,026    |   | $ | 2,462,262 |   |

 

On March 30, 2007, we completed the purchaseof substantially all of the oil and natural gas properties and related assetsrelated to the Vernon and Ansley Fields located in Jackson Parish, Louisianafrom Anadarko in exchange for $1.5 billion in cash, net of preliminary purchaseprice adjustments.  Pursuant to thepurchase and sale agreement, the final purchase price, and resulting finalallocation is to be finalized during the third quarter of 2007. The assetsinclude producing and undeveloped acreage in Jackson Parish, Louisiana.  The acquisition was financed by our PrivatePlacement of preferred stock along with EPOP’s amended and restated creditagreement, or EPOP Credit Agreement, with certain lenders, JPMorgan Chase Bank,N.A., as administrative agent and J.P. Morgan Securities Inc., as solebookrunner and lead arranger.

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On May 2, 2007, wecompleted the purchase of oil and natural gas properties and related assetsfrom Anadarko in multiple fields primarily located in Oklahoma, Texas andLouisiana for approximately $750.2 million in cash, net of preliminary purchaseprice adjustments.  Pursuant to thepurchase and sale agreement, the final purchase price, and resulting finalallocation is to be finalized during the fourth quarter of 2007.Inconnection with the Southern Gas Acquisition, we amended and restated ourexisting EXCO Resources Credit Agreement and increased the borrowing base from$750.0 million to $1.0 billion.  Inconnection with the sale of oil and natural gas properties and related assetsin multiple fields primarily located in South Texas and South Louisiana toCrimson for $245.4 million in cash, net of preliminary purchase adjustments,and 750,000 shares of Crimson’s unregistered restricted common stock, the borrowingbase under the EXCO Resources Credit Agreement was reduced from $1.0 billion to$900.0 million.

For the year 2007,we have budgeted approximately $502.9 million for our development,exploitation and exploration activities. As of June 30, 2007, we were contractually obligated to spend $151.9million for our development and exploitation activities for the remainder of2007.

We expect toutilize our current cash balance, cash flow from operations and available fundsunder our credit agreements to fund our acquisitions, capital expenditures andworking capital.  In order to meetstrategic objectives, we may sell non-strategic assets during the remainder of2007.

We believe thatour capital resources from existing cash balances, cash flow from operating activitiesand borrowing capacity under our credit agreements are adequate to meet thecash requirements of our business. However, future cash flows are subject to a number of variablesincluding production volumes and 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 andother capital resources may not provide cash in sufficient amounts to maintainor initiate planned levels of capital expenditures. We have experiencedincreased costs for tubular goods and for certain services during 2006 and2007.  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 asignificant impact upon our capital expenditures programs or our results ofoperations. If the conditions continue, however, projects may be delayed due tolack of services or materials or we may have to delay projects to stay withinour capital budget.

***Master Limited Partnership***

On July 30, 2007,******we announced our intention topursue an initial public offering of units representing limited partnerinterests of a master limited partnership, or MLP, subsidiary to be formed byus to own a substantial portion of our mature producing oil and natural gasproperties located in the Appalachian, East Texas/North Louisiana,Mid-Continent and Permian Basin areas. We currently expect that a registrationstatement for the initial public offering will be filed in the third quarter of2007 and that the offering will close during the first quarter of 2008.Approximately $1.5 billion of the MLP’s common units are expected to be offeredto the public, subject to market conditions. We will own the general partner ofthe MLP and expect to retain a substantial portion of the MLP’s common units.The common units retained by us will have terms identical to those offered tothe public.

The purpose of the MLPoffering is to provide us with the opportunity to enhance the valuation of asubstantial portion of our mature producing properties by contributing theseassets to a tax-efficient vehicle that can subsequently pursue the acquisitionof additional mature producing properties, either from us or from thirdparties.  The MLP intends to use the proceeds from its initial publicoffering to retire debt associated with the contributed assets and to provideworking capital.

This QuarterlyReport on Form 10-Q shall not constitute an offer to sell or the solicitationof an offer to buy any securities. Any offers, solicitations of offers to buy,or any sales of securities will only be made in accordance with theregistration requirements of the Securities Act of 1933 or an exemptiontherefrom.

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

As of June 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 $12.6 million.  The estimated fair value of the senior notes,based on quoted market prices for the senior notes, was $444.2 million on June30, 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:

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·                  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;

·                  makeinvestments;

·                  create liens onour assets;

·                  enter into sale/leasebacktransactions;

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

·                  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 CreditAgreement has an initial borrowing base of $1.3 billion. The borrowing basewill be redetermined on a semi-annual basis, with EPOP and the lenders havingthe right to interim unscheduled redeterminations in certain circumstances.Scheduled redeterminations will be made on or about April 1 and October 1 ofeach year, beginning October 1, 2007. The EPOP Credit Agreement is secured by a first priority lien on theassets 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 not complete and is qualified in itsentirety by the EPOP Credit Agreement. Financial covenants under the EPOPCredit Agreement, with which EPOP was in compliance as of June 30, 2007, requirethat EPOP:

·                  maintain a consolidated current ratio(as defined under the EPOP Credit Agreement) of at least 1.0 to 1.0 at the endof any fiscal quarter, beginning with the quarter ending June 30, 2007;

·                  not permit our ratio of consolidatedindebtedness to consolidated EBITDAX (as defined under the EPOP CreditAgreement) to be greater than 3.5 to 1.0 at the end of each fiscal quarter,beginning with the quarter ending June 30, 2007; and

·                  not permit our interest coverageratio (as defined under the EPOP Credit Agreement) to be less than 2.5 to 1.0at the end of each fiscal quarter, beginning with the quarter ending June 30,2007.

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

At June 30, 2007, the sixmonth LIBOR rate was 5.39%, which would result in an interest rate ofapproximately 6.89% on any new indebtedness we may incur under the EPOP CreditAgreement.   At June 30, 2007 and August1, 2007, we had $1,090.0 million and $1,065.0 million, respectively ofoutstanding indebtedness under the EPOP Credit Agreement.

*EXCO Resources Credit Agreement*

The EXCO ResourcesCredit Agreement has a borrowing base of $900.0 million. 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 ranging

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from ABR plus 0 bps toABR plus 75 bps depending upon borrowing base usage.  Borrowings under theEXCO Resources Credit Agreement are collateralized by a first lien mortgageproviding a security interest in our oil and natural gas properties.  EXCO has also agreed to have in placecommodity derivative contracts covering no more than 80% of its “forecastedproduction from total proved reserves” (as defined) for the next two years and70% in the third, fourth and fifth years.  EXCO will have in placemortgages covering 80% of the Engineered Value of its Borrowing Base Properties(as defined).  The foregoing description is not complete and is qualifiedin its entirety by the EXCO Resources Credit Agreement.  Financial covenants under the EXCO ResourcesCredit Agreement require that we:

·                  maintaina Consolidated Current Ratio (as defined) of at least 1.00 to 1.00 as of theend of any fiscal quarter ending on or after September 30, 2007;

·                  notpermit our ratio of Consolidated Funded Indebtedness (as defined) toConsolidated EBITDAX (as defined) to be greater than 3.50 to 1.00 at the end ofany fiscal quarter ending on or after September 30, 2007; and

·                  maintaina Consolidated EBITDAX to Consolidated Interest Expense (as defined) ratio ofat least 2.50 to 1.00 at the end of any fiscal quarter ending on or afterSeptember 30, 2007.

At June 30, 2007, the sixmonth LIBOR rate was 5.39%, which would result in an interest rate of approximately6.39%, on any new indebtedness we may incur under the EXCO Resources CreditAgreement. At June 30, 2007 and August 1, 2007, we had $444.0 and $474.0million, respectively, of outstanding indebtedness under the EXCO ResourcesCredit 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-2 Hybrid Preferred Stock automatically convertto Series A-1 7.0% Preferred Stock and Series A-1 Hybrid Preferred Stock,respectively, upon the holders providing assurance to EXCO that such holdershave satisfied any necessary filing requirements under the HSR Act or are ableto avail themselves of an exemption therefrom. During the quarter, all of theshares of the Series A-2 7.0% Preferred Stock were converted to Series A-1 7.0%Preferred Stock, as all of the holders of that series provided assurance to usthat the necessary requirements under the HSR Act were satisfied.  None of the holders of the Series A-2 HybridPreferred Stock provided assurance to us that the requirements of the HSR Actwere satisfied during the quarter.  Theseconversions had no impact on the carrying value of the 7% Preferred Stock andthe Hybrid Preferred Stock when taken as a collective group at June 30, 2007.

Asof June 30, 2007, the liquidation preference of the 7.0% Preferred Stock andHybrid Preferred Stock was $391.2 million and $1.6 billion, respectively.

Wepaid dividends totaling $43.7 million on June 15, 2007 and dividends of $8.5million have accrued at June 30, 2007. EXCO is holding its annual meeting ofshareholders on August 30, 2007.  Duringthis meeting, shareholders will be voting on allowing the Hybrid PreferredStock to transform to terms identical to the certificates of designation of the7.0% Preferred Stock. If EXCO’s shareholders approve this proposal, the annualdividend requirement on the Hybrid Preferred Stock will be reduced from $177.1million to $112.7 million, a reduction of $64.4 million per annum.

***Derivative financial instruments***

We use derivativefinancial instruments to manage exposure to commodity prices and interest raterisks. Our objectives for holding derivatives are to minimize risks using themost effective methods to eliminate or reduce the impacts of these exposures.

Our production isgenerally sold at prevailing market prices. However, we periodically enter intoderivative financial instrument contracts for a portion of our production whenmarket conditions are deemed favorable and oil and natural gas prices exceedour minimum internal price targets.

Our objective inentering into derivative financial instruments is to manage price fluctuationsand achieve a more predictable cash flow associated with our acquisitionactivities and borrowings under our credit agreements. These transactions limitexposure to declines in prices, but also limit the benefits we would realize ifprices increase.

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As of August 1,2007, we had contracts in place for the volumes and prices shown in the tablebelow.
| (in thousands, except prices) | ** ** | **NYMEX gas  volume -  Mmbtus/Bbls** | ** ** | **Weighted  average contract  price per Mmbtu** | ** ** | **NYMEX oil   volume - Bbls** | ** ** | **Weighted  average contract  price per Bbl** | ** ** |
|----------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Swaps NYMEX:                                 |       |                                           |       |                                                           |       |                                              |       |                                                         |       |
| Remainder of Q3  2007                        |       | 20,174                                         |       | $                                                              | 7.83       |                                              | 245        |                                                         | $          | 63.43 |   |
| Q4 2007                                      |       | 30,388                                         |       | 8.06                                                           |       | 369                                               |       | 63.83                                                        |       |
| 2008                                         |       | 99,870                                         |       | 8.36                                                           |       | 1,059                                             |       | 60.55                                                        |       |
| 2009                                         |       | 73,155                                         |       | 7.90                                                           |       | 850                                               |       | 60.09                                                        |       |
| 2010                                         |       | 6,985                                          |       | 6.63                                                           |       | 108                                               |       | 59.85                                                        |       |
| 2011                                         |       | 1,825                                          |       | 4.51                                                           |       | —                                            |       | —                                                       |       |
| 2012                                         |       | 1,830                                          |       | 4.51                                                           |       | —                                            |       | —                                                       |       |
| 2013                                         |       | 1,825                                          |       | 4.51                                                           |       | —                                            |       | —                                                       |       |
|                                              |            |                                                |            |                                                                |            |                                                   |            |                                                              |            |  |  |

 

We occasionallyenter into fixed-price physical delivery contracts as well as commodity priceswap derivatives to manage price risk with regard to a portion of our oil andnatural gas production.

***Off-balance sheet arrangements***

None.

***Contractual obligations and commercial commitments***

The followingtable presents a summary of our contractual obligations at June 30, 2007:
| (in thousands)                                        | ** ** | **Less than one  year** | ** ** | **One to three  years** | ** ** | **Three to five  years** | ** ** | **More than five  years** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|-------------------------------------|------------|------------|------------|
| **Contractual  obligations:**                              | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** **                         | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Long-term debt -  senior notes (1)                    |       | $                                 | —     |                              | $          | —                             |       | $                                   | 444,720    |       | $          | — |   | $ | 444,720 |   |
| Long-term debt -  EXCO Resources Credit Agreement (2) |       | —                            |       | —                            |       | 444,000                            |       | —                              |       | 444,000    |       |
| Long-term debt -  EPOP Credit Agreement (3)                |       | —                            |       | —                            |       | 1,090,000                          |       | —                              |       | 1,090,000  |       |
| Operating leases                                           |       | 12,957                            |       | 24,127                            |       | 14,111                             |       | 1,085                               |       | 52,280     |       |
| Deferred  compensation (4)                                 |       | —                            |       | 1,200                             |       | 1,200                              |       | —                              |       | 2,400      |       |
| Hybrid Preferred  Stock (5)                                |       | —                            |       | —                            |       | —                             |       | 1,609,920                           |       | 1,609,920  |       |
| Drilling/work  commitments                                 |       | 39,981                            |       | 26,615                            |       | —                             |       | —                              |       | 66,596     |       |
| Total contractual  obligations                             |       | $                                 | 52,938     |                              | $          | 51,942                             |       | $                                   | 1,994,031  |       | $          | 1,611,005 |   | $ | 3,709,916 |   |

 

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(1)   Our senior notes are due on January 15,2011.  The annual 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)   Deferred compensation represents a Rabbi Trustfor an officer of one of our subsidiaries. This obligation vests 20% each year and will fully vest on December 31,2011.

(5)   After September 26, 2007 and prior to the datethat NYSE Shareholder Approval is obtained, the Hybrid Preferred Stock isredeemable at our option at any time, and must be redeemed on April 18, 2011,for cash at 125.0% of the liquidation preference.  The above schedule presents the HybridPreferred Stock at face value.  Dividendsand any redemption premiums are not included.

***Item 3****. **Quantitativeand Qualitative Disclosures About Market Risk***

Some of theinformation below contains forward-looking statements. The primary objective ofthe following information is to provide forward-looking quantitative andqualitative information about our potential exposure to market risks. The term “marketrisk” refers to the risk of loss arising from adverse changes in oil andnatural gas prices, interest rates charged on borrowings and earned on cashequivalent investments, and adverse changes in the market value of marketablesecurities. The disclosure is not meant to be a precise indicator of expectedfuture losses, but rather an indicator of reasonably possible losses. Thisforward-looking information provides an indicator of how we view and manage ourongoing market risk exposures. Our market risk sensitive instruments wereentered into for hedging and investment purposes, not for trading purposes.

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***Commodity pricerisk***

Our major marketrisk exposure is in the pricing applicable to our oil and natural gasproduction. Realized pricing is primarily driven by the prevailing worldwideprice for crude oil and spot market prices for natural gas. Pricing for oil andnatural gas production is volatile.

The following table sets forth our derivative financial instrumentsmanagement activities as of June 30, 2007.
| (in thousands, except prices) | ** ** | **Volume -  Mmbtus/Bbls** | ** ** | **Weighted  average strike  price** | ** ** | **Fair value at  June 30, 2007** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|
|                                         |       |                           |       |                                     |       |                                                 |       |
| **Natural  Gas:**                            | ** ** | ** **                     | ** ** | ** **                               | ** ** | ** **                                           | ** ** |
| Swaps NYMEX:                                 |       |                           |       |                                     |       |                                                 |       |
| Remainder of  2007                           |       | 60,776                         |       | $                                        | 7.95       |                                                 | $          | 37,215 |   |
| 2008                                         |       | 99,870                         |       | 8.36                                     |       | (4,348                                               | )          |
| 2009                                         |       | 73,155                         |       | 7.89                                     |       | (43,324                                              | )          |
| 2010                                         |       | 6,985                          |       | 6.63                                     |       | (10,318                                              | )          |
| 2011                                         |       | 1,825                          |       | 4.51                                     |       | (5,270                                               | )          |
| 2012                                         |       | 1,830                          |       | 4.51                                     |       | (4,624                                               | )          |
| 2013                                         |       | 1,825                          |       | 4.51                                     |       | (4,141                                               | )          |
| **Total  Natural Gas**                       |       | 246,266                        |       |                                     |       | (34,810                                              | )          |
|                                         |       |                           |       |                                     |       |                                                 |       |
| **Oil:**                                     | ** ** | ** **                     | ** ** | ** **                               | ** ** | ** **                                           | ** ** |
| Swaps NYMEX:                                 |       |                           |       |                                     |       |                                                 |       |
| Remainder of  2007                           |       | 738                            |       | 63.65                                    |       | (5,507                                               | )          |
| 2008                                         |       | 1,059                          |       | 60.55                                    |       | (11,823                                              | )          |
| 2009                                         |       | 850                            |       | 60.09                                    |       | (9,371                                               | )          |
| 2010                                         |       | 108                            |       | 59.85                                    |       | (1,096                                               | )          |
| **Total  Oil**                               |       | 2,755                          |       |                                     |       | (27,797                                              | )          |
| **Total Oil and Natural Gas**                |       |                           |       |                                     |       | $                                                    | (62,607    | ) |
|                                              |            |                                |            |                                          |            |                                                      |            |  |  |

 

At June 30, 2007,the average forward NYMEX oil prices per Bbl for the remainder of 2007 were $71.23and $72.36 for 2008 and the average forward NYMEX natural gas prices per Mmbtufor the remainder of 2007 and for calendar 2008 were $7.33 and $8.41,respectively.

Realized gains orlosses from the settlement of derivative financial instruments are recorded inour financial statements as increases or decreases in derivative financialinstrument activities.  For example,using the oil swaps in place at June 30, 2007, for the remainder of 2007, ifthe settlement price exceeded the actual weighted average strike price of$63.65, then a reduction in derivative financial instrument activities revenuewould have been recorded for the difference between the settlement price and$63.65, multiplied by the hedged volume of 738 Mbbls.  Conversely, if the settlement price was lessthan $63.65, then an increase in derivative financial instrument activitiesrevenue would have been recorded for the difference between the settlementprice and $63.65, multiplied by the hedged volume of 738 Mbbls.  For example, for a hedged volume of 738Mbbls, if the settlement price was $64.65, then derivative financial instrumentactivities revenue would have decreased by $0.7 million.  Conversely, if the settlement price was$62.65, derivative financial instrument activities revenue would have increasedby $0.7 million.

***Interestrate risk***

At June 30, 2007, our exposure to interest rate changes relatedprimarily to borrowings under our credit agreements and interest earned on ourshort-term investments.  The interestrate is fixed at 71/4% on the $444.7 million in senior notes wehave outstanding.  As of June 30, 2007,we were not using any derivatives to manage interest rate risk.  Interest is payable on borrowings under ourcredit agreements based on a floating rate as more fully described in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Ourliquidity, capital resources and capital commitments.”  At June 30, 2007, we had $1.5 billion inoutstanding borrowings under our credit agreements. A 1% change ininterest rates based on the borrowings as of June 30, 2007 would result in anincrease or decrease in our interest costs of $15.0 million per year. Theinterest we pay on these borrowings is set periodically based upon marketrates.

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***Hybrid Preferred Stockdividend risk***

We agreed with thepreferred stock investors to seek the shareholder approval required by the NewYork Stock Exchange, or NYSE Shareholder Approval, to transform the terms ofthe Hybrid Preferred Stock into the same terms as the 7.0% PreferredStock.  TheHybrid Preferred Stock accrues dividends at a rate of 11.0% per annum, whichcomputes to an annual dividend obligation of $177.1 million.  The dividend rate increases by 0.5% per annumfor the first 90 day period after September 26, 2007 if EXCO does not obtain NYSEShareholder Approval at its annual meeting of shareholders on August 30, 2007.  Thedividend rate will continue to increase by 0.5% per each subsequent 90 dayperiod thereafter until such time that (i) NYSE Shareholder Approval has been obtained or (ii) the dividend ratereaches 18.0%.  Assuming that NYSEShareholder Approval is not received bySeptember 26, 2007, the dividend accrual will increase by approximately $2.0million per quarter until such approval is received.

***Preferred stock liquidated damages risk***

In connection withthe Private Placement, we entered into a registration rights agreement, or 7.0%Registration Rights Agreement, with the Preferred Stock investors. Pursuant tothe 7.0% Registration Rights Agreement, we agreed to file with the SEC, notlater than September 26, 2007, a registration statement to register the offerand sale of the common shares issuable upon conversion of the 7.0% PreferredStock and, if NYSE Shareholder Approval hasbeen obtained, the Hybrid Preferred Stock, and to use our best effortsto have the registration statement declared effective by March 24, 2008. If any shares of 7.0% Preferred Stock are outstanding on March 30, 2011, wealso agreed to file a registration statement with the SEC by June 28, 2011registering such shares for resale and to use our best efforts to have suchregistration statement declared effective by September 26, 2011. Inconnection with the Private Placement, we also entered into a registrationrights agreement, or Hybrid Registration Rights Agreement, with the HybridPreferred 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 is not obtained bySeptember 26, 2007, we agreed pursuant to the Hybrid Registration RightsAgreement to file a registration statement with the SEC by December 24, 2007,covering the resale prior to such shareholder approval of shares of HybridPreferred Stock and to use our best efforts to have the registration statementdeclared effective by March 24, 2008.

If we are unableto meet the registration deadlines described above, if a registration statementceases to remain effective or if we restrict sales under a registrationstatement under certain “blackout provisions” for longer than the contractuallypermitted period, we must pay liquidated damages at a rate of 0.5% per annum ofthe Preferred Stock liquidation preference for the first 90 days and thereafterfor each subsequent 90-day period at an additional rate of 0.25% up to amaximum of 2.0% per annum during any default period.  In the event thatNYSE Shareholder Approval is obtained and we become obligated to pay theaforementioned liquidated damages under the 7.0% Registration Rights Agreement,the initial 0.5% increase of liquidated damages would be approximately $2.5million for the first 90 days and an additional $1.3 million for eachsuccessive 90 day period.  The maximumamount of potential liquidated damages under the 7.0% Registration RightsAgreement would total $40.0 million per annum. In the event that NYSEShareholder Approval is not obtained and we become obligated to pay theaforementioned liquidated damages under the Hybrid Registration Rights Agreement,the initial 0.5% increase of liquidated damages would be approximately $2.0million for the first 90 days and an additional $1.0 million for eachsuccessive 90 day period. The maximum amount of potential liquidated damagesunder the Hybrid Registration Rights Agreement would total $32.2 million perannum.

***Item4.***   ***Controls and Procedures***

**Evaluation of disclosure controls and procedures**

We maintain “disclosure controls and procedures,” as suchterm is defined in Rule 13a-15(e) under the Securities Exchange Actof 1934, as amended, or the Exchange Act, that are designed to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized, and reported withinthe time periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer (CEO), Chief Financial Officer (CFO) and ChiefAccounting Officer (CAO), as appropriate, to allow timely decisions regardingrequired disclosure. In designing and evaluating our disclosure controls andprocedures, management recognizes that disclosure controls and procedures, nomatter how well conceived and operated, can provide only reasonable assuranceof achieving the desired control objectives, and we are required to apply ourjudgment in evaluating the cost-benefit relationship of possibledisclosure controls and procedures.

Ourmanagement evaluated, under the supervision and with the participation of ourCEO, CFO and CAO, the effectiveness of the design and operation of ourdisclosure controls and procedures as of June 30, 2007 and concluded ourcontrols were effective.

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**Changesin internal control over financial reporting**

There have been no changes during the quarter endedJune 30, 2007 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

The Vernon Acquisition and Southern Gas Acquisitionhave significantly increased our number of properties that we operate andassets that we manage.  Managementbelieves its controls are adequate to effectively integrate these assets intoour existing control environment.

At the end of 2007, Section 404 of theSarbanes-Oxley Act will require our management to provide an assessment of theeffectiveness of our internal control over financial reporting, and ourindependent registered public accountants will be required to auditmanagement’s assessment. We are in the process of performing the system andprocess documentation, evaluation and testing required for management to makethis assessment and for its independent registered public accountants toprovide their attestation report. We have not completed this process orassessment, and this process will require significant amounts of managementtime and resources. In the course of evaluation and testing, management mayidentify deficiencies that will need to be addressed and remediated.

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**PART II—OTHER INFORMATION**

**Item 1A. Risk Factors**

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 orliquidity and the trading price of our common stock are described under thecaption “Risk Factors” in Item 1A of our Annual Report on Form 10-K forthe year ended December 31, 2006, which was filed with the SEC on March19, 2007. This information should be considered carefully, together with otherinformation in this report and other reports and materials we file with theSEC.

**Risks relating to our preferred stock**

***The holders of7.0% Preferred Stock and Hybrid Preferred Stock have rights that couldadversely affect an investment in our 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 is convertible into shares of our common stock at an initialconversion price of $19.00 per share, subject to adjustment.  The Hybrid Preferred Stock is not convertibleinto shares of our common stock until NYSE Shareholder Approval is obtained.  If NYSE Shareholder Approval is obtained, thedesignations, preferences, limitations and relative voting rights of the HybridPreferred Stock will become identical to the designations, preferences,limitations and relative voting rights of the 7.0% Preferred Stock, includingthe right to dividends and the right to convert into shares of our commonstock.

The initial $19.00per share conversion price of the 7.0% Preferred Stock equates to each share of7.0% Preferred Stock being initially convertible into approximately 526.3shares of our common stock, subject to adjustment for fractional shares.  The Statement of Designation for each seriesof the 7.0% Preferred Stock contains weighted average anti-dilution provisionsthat provide for an adjustment to the conversion price of the 7.0% PreferredStock upon (i) the issuance of stock, convertible securities or options at aprice below the then-current conversion price, (ii) the issuance of options toholders of common stock at less than the current market price, (iii) a dividendor distribution to holders of common stock in excess of $0.06 per share in anyquarter or (iv) an equity tender offer or share repurchase by us at a price inexcess of the current market price. The exact number of shares of common stockinto which the 7.0% Preferred Stock and, if NYSE Shareholder Approval isobtained, the Hybrid Preferred Stock may ultimately be converted may vary overtime as a result of the effects of these anti-dilutive adjustments to theconversion price.  Assuming no adjustmentto the $19.00 conversion price, the 7.0% Preferred Stock is convertible into atotal of 20,530,487 shares of our common stock and, if NYSE ShareholderApproval is obtained, the Hybrid Preferred Stock will be convertible into atotal of 84,732,595 shares of our common stock.

The holders of 7.0%Preferred Stock also have the right to receive cash dividends at the rate of7.0% per annum prior to March 30, 2013 and at the rate of 9.0% per annumthereafter.  In lieu of paying cashdividends, we may, under certain circumstances prior to March 30, 2013, paysuch dividend at a rate of 9.0% per annum by adding the dividend to theliquidation preference of the shares of 7.0% Preferred Stock.  Upon the occurrence of a change of control,holders of 7.0% Preferred Stock may require us to repurchase their shares forcash at the liquidation preference plus accumulated dividends.  These anti-dilution, dividend and liquidationprovisions could substantially dilute our common shareholders’ interest and mayotherwise adversely affect an investment in our common 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;

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·                  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.

In addition, the terms of the Hybrid Preferred Stock contain various restrictive covenants that are similar to certain covenants contained in the indenture governing our senior notes.  These covenants generally restrict us from, among other things, the following:

·                  engaging in any business other than the oil and gas business;

·                  incurring or guaranteeing additional indebtedness;

·                  creating liens on our assets;

·                  transferring or issuing shares of stock of subsidiaries; and

·                  transferring or selling 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.

***If NYSE ShareholderApproval is not timely obtained,******thedesignations, preferences, limitations and relative rights of the HybridPreferred Stock will become increasingly burdensome, which will likely have amaterial adverse effect on our cash flows and our ability to pursue our growthstrategy.***

Cash dividends accrue on the Hybrid Preferred Stock ata rate of 11.0% per annum until September 26, 2007, at which time the annualdividend rate will increase by 0.5% per quarter (up to a maximum rate of 18.0%per annum) until NYSE Shareholder Approval has been obtained.  Prior to the earlier of September 26, 2007and the date NYSE Shareholder Approval is obtained, the Hybrid Preferred Stockmay be redeemed only with the consent of the holders of the Hybrid PreferredStock at a redemption price equal to 100.0% of the liquidation preference plusaccrued dividends.  After September 26,2007 and prior to obtaining NYSE Shareholder Approval, the Hybrid PreferredStock is redeemable at our option at any time and must be redeemed onApril 18, 2011, for cash at 125.0% of the liquidation preference plusaccrued dividends. Upon the occurrence of a change of control, holders ofHybrid Preferred Stock may require us to repurchase their shares for cash at101.0% of the liquidation preference plus accrued dividends. If NYSEShareholder Approval is not obtained, the covenants contained in the HybridPreferred Stock will continue to restrict our ability to, among other things,incur additional indebtedness and transfer or sell assets. These rights andrestrictions will likely have a material adverse effect on our cash flows andour ability to pursue our growth strategy.

***The 7.0%Registration Rights Agreement and the Hybrid Registration Rights Agreementcontain liquidated damages, indemnity and other provisions that could adverselyaffect our cash flows or otherwise cause our stock price to decline.***

In connection withthe Private Placement, we entered into the 7.0% Registration Rights Agreementwith the 7.0% Preferred Stock investors. The 7.0% Registration Rights Agreementcontemplates the registration of the resale of the shares of common stockunderlying the 7.0% Preferred Stock and, if NYSE Shareholder Approval isobtained, the Hybrid Preferred Stock. We agreed to file with the SEC, not laterthan September 26, 2007, a registration statement to register the offer andsale of the common shares issuable upon conversion of the 7.0% Preferred Stockand, if applicable, the Hybrid Preferred Stock and to use our best efforts tohave the registration statement declared effective by March 24, 2008.  Ifany shares of 7.0% Preferred Stock are outstanding on March 30,

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2011, we agreed to file aregistration 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 resaleregistration.

In connection withthe Private Placement, we also entered the Hybrid Registration Rights Agreementwith the Hybrid Preferred Stock investors. The Hybrid Registration RightsAgreement contemplates the registration of the resale of the shares of HybridPreferred Stock.  If NYSE Shareholder Approval is not obtained bySeptember 26, 2007, we agreed to file a registration statement with the SEC byDecember 24, 2007, covering the resale prior to such shareholder approval ofshares of Hybrid Preferred Stock and to use our best efforts to have theregistration statement declared effective by March 24, 2008.  The HybridRegistration Right Agreement contains liquidated damages payment provisions andindemnification obligations similar to those contained in the 7.0% RegistrationRights Agreement.

The sale of a significantamount of shares in the open market as a result of registering the resale ofshares under the 7.0% Registration Rights Agreement or the Hybrid RegistrationRights Agreement, or the perception that these sales may occur, could cause thetrading price of our common stock to decline or become highly volatile.

**Item 6. Exhibits**

See “Index to Exhibits”for a description of our exhibits.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                                  | **EXCO RESOURCES, INC.** |
|----------------------------------|-------------------------------|
| ** **                       | **(Registrant)**              |
| ** **                       | ** **                    | ** ** |
| Date:  August  9, 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 |

 

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**Index to Exhibits**
| 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.                                                                                                                                                                |

 

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| 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    |   | Amended and Restated Bylaws 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.                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.3    |   | 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.                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.4    |   | 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.                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.5    |   | 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.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.6    |   | 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.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.7    |   | 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.                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.8    |   | 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.                                                                                                                              |

 

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| 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. |

 

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| 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  |   | 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.*                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.18  |   | 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.*                                                                                                                                                                                                                                                                                                                                |

 

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| 10.19  |   | 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.*                                                                                                                                                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.20  |   | 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.                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.21  |   | 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.                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.22  |   | 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.                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.23  |   | 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.                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.24  |   | 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.                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.25  |   | 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.                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.26  |   | 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.                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.27  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.28  |   | 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.                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.29  |   | 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.*                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.30  |   | 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.                                                                                                                                                                                                                                |

 

55

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| 10.31  |   | 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.                                                                               |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.32  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.33  |   | 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.                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.34  |   | 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.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.35  |   | 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.                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.36  |   | 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.                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.37  |   | 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.*                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.38  |   | 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.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.39  |   | 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.     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.40  |   | 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.                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.41  |   | 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.                                                                                                                                                                  |

 

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| 10.42  |   | 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.                                                                     |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.43  |   | 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.             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.44  |   | 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.                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.45  |   | 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.                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.46  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.47  |   | 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.                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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.                                                                                                                                                                                                                                                                                                                                        |

 

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*  These exhibits are management contracts.

57

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