Tableof Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, 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, 2008**                                                         |
| ** ** | ** ** | ** **                                                                                                    |
| ** ** | ** ** | **OR**                                                                                                        |
| ** ** | ** ** | ** **                                                                                                    |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**Forthe transition periodfrom            to            **

 

**CommissionFile Number 0-9204**

 

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

 

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

 

**(214) 368-2084**

(Registrant’s telephone number,including area code)

 

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

 

YES x   NO o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 
| Large accelerated filer x | Accelerated filer o | Non-accelerated filer o(Do not check if a smaller reporting  company) | Smaller reporting companyo |
|--------------------------------|--------------------------|-----------------------------------------------------------------------|----------------------------|

 

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

 

YES o   NO x

 

The number of shares of commonstock, par value $0.001 per share, outstanding as of August 1, 2008 was 210,883,821.

 

 

 

----

Table of Contents

 

**EXCORESOURCES, INC.**

 

**INDEX**

 

| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                                         |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|
|              |       |                                                                                                                              |
| Item 1.           |       | Financial Statements                                                                                                              |
|              |       | Condensed Consolidated Balance Sheets at June 30, 2008 and  December 31, 2007                                           |
|              |       | Condensed Consolidated Statements of  Operations for the Three and Six Months Ended June 30, 2008 and  2007             |
|              |       | Condensed Consolidated Statements of Cash  Flows for the Six Months Ended June 30, 2008 and 2007                             |
|              |       | Condensed  Consolidated Statements of Changes in Shareholders’ Equity for the Six Months  Ended June 30, 2008  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 1.           |       | Legal Proceedings                                                                                                                 |
| Item 4.           |       | Submission of Matters to a Vote of Security  Holders                                                                              |
| Item 6.           |       | Exhibits                                                                                                                          |
|              |       | Signatures                                                                                                                        |
|              |       | Index to Exhibits                                                                                                                 |

 

----

Tableof Contents

 

**PART I—FINANCIALINFORMATION**

 

***Item 1. Financial Statements***

 

**EXCO RESOURCES, INC.**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands)**                                          | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                       | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                       |       |              |       |                  |       |
| Current assets:                                                  |       |              |       |                  |       |
| Cash and cash equivalents                                        |       | $                 | 34,142     |                  | $          | 55,510 |   |
| Accounts receivable:                                             |       |              |       |                  |       |
| Oil and natural gas                                              |       | 229,567           |       | 146,297               |       |
| Joint interest                                                   |       | 19,378            |       | 21,614                |       |
| Interest and other                                               |       | 4,811             |       | 2,151                 |       |
| Derivative financial instruments                                 |       | 2,808             |       | 66,632                |       |
| Deferred income taxes                                            |       | 209,601           |       | 6,764                 |       |
| Other                                                            |       | 27,077            |       | 12,332                |       |
| Total current assets                                             |       | 527,384           |       | 311,300               |       |
| Oil and natural gas properties (full cost  accounting method):   |       |              |       |                  |       |
| Unproved oil and natural gas properties                          |       | 453,680           |       | 334,803               |       |
| Proved developed and undeveloped oil and  natural gas properties |       | 5,667,619         |       | 4,926,053             |       |
| Accumulated depletion                                            |       | (709,572          | )          | (500,493              | )          |
| Oil and natural gas properties, net                              |       | 5,411,727         |       | 4,760,363             |       |
| Gas gathering assets                                             |       | 442,865           |       | 340,706               |       |
| Accumulated depreciation and amortization                        |       | (23,794           | )          | (16,142               | )          |
| Gas gathering assets, net                                        |       | 419,071           |       | 324,564               |       |
| Office and field equipment, net                                  |       | 23,456            |       | 20,844                |       |
| Advance on pending acquisition                                   |       | 25,206            |       | 39,500                |       |
| Derivative financial instruments                                 |       | 4,562             |       | 2,491                 |       |
| Deferred financing costs, net                                    |       | 18,705            |       | 20,406                |       |
| Other assets                                                     |       | 1,398             |       | 6,226                 |       |
| Goodwill                                                         |       | 470,077           |       | 470,077               |       |
| Total assets                                                     |       | $                 | 6,901,586  |                  | $          | 5,955,771 |   |

 

*See accompanying notes.*

 

3

----

Tableof Contents

 
| ** **                                                                                                                                                                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands, except per share and share data)**                                                                                                    | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                                | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **Liabilities and shareholders’ equity**                                                                                                                                             |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                                      |       |              |       |                  |       |
| Accounts payable and accrued liabilities                                                                                                                                                  |       | $                 | 153,570    |                  | $          | 106,305 |   |
| Accrued interest payable                                                                                                                                                                  |       | 22,094            |       | 21,835                |       |
| Revenues and royalties payable                                                                                                                                                            |       | 149,145           |       | 100,978               |       |
| Income taxes payable                                                                                                                                                                      |       | 80                |       | 87                    |       |
| Current portion of asset retirement  obligations                                                                                                                                          |       | 1,861             |       | 1,656                 |       |
| Derivative financial instruments.                                                                                                                                                         |       | 598,860           |       | 47,306                |       |
| Total current liabilities                                                                                                                                                                 |       | 925,610           |       | 278,167               |       |
| Long-term debt                                                                                                                                                                            |       | 2,618,013         |       | 2,099,171             |       |
| Asset retirement obligations and other  long-term liabilities                                                                                                                             |       | 105,699           |       | 89,810                |       |
| Deferred income taxes                                                                                                                                                                     |       | 213,991           |       | 271,398               |       |
| Derivative financial instruments                                                                                                                                                          |       | 405,011           |       | 109,205               |       |
| Commitments and contingencies                                                                                                                                                             |       | —            |       | —                |       |
|                                                                                                                                                                                      |       |              |       |                  |       |
| 7.0% Cumulative Convertible Perpetual  Preferred Stock, $0.001 par value, 39,008 shares outstanding at June 30,  2008 and December 31, 2007, liquidation preference of $391,218 |       | 388,574           |       | 388,574               |       |
| Hybrid Preferred Stock, $0.001 par value,  160,992 shares outstanding at June 30, 2008 and December 31, 2007,  liquidation preference of $1,614,616                             |       | 1,603,704         |       | 1,603,704             |       |
| Shareholders’ equity:                                                                                                                                                                |       |              |       |                  |       |
| Preferred stock, $0.001 par value;  authorized shares - 10,000,000; issued and outstanding shares - 200,000  presented above                                                              |       | —            |       | —                |       |
| Common stock, $0.001 par value; authorized  shares - 350,000,000; issued and outstanding shares - 105,556,370 at  June 30, 2008 and 104,578,941 at December 31, 2007            |       | 106               |       | 105                   |       |
| Additional paid-in capital                                                                                                                                                                |       | 1,064,639         |       | 1,043,645             |       |
| Retained earnings (deficit)                                                                                                                                                               |       | (423,761          | )          | 71,992                |       |
| Total shareholders’ equity                                                                                                                                                           |       | 640,984           |       | 1,115,742             |       |
| Total liabilities and shareholders’ equity                                                                                                                                           |       | $                 | 6,901,586  |                  | $          | 5,955,771 |   |

 

*See accompanying notes.*

 

4

----

Tableof Contents

 

**EXCORESOURCES, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                         | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(in thousands, except per share data)** | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenues and other income:**                                     |       |                             |       |                           |       |   |   |   |   |
| Oil and natural gas                                                |       | $                                | 428,651    |                           | $          | 261,552 |   | $ | 753,594 |   | $ | 381,911 |   |
| Midstream                                                          |       | 26,956                           |       | 5,211                          |       | 34,848 |   | 9,757 |   |
| Gain (loss) on derivative financial  instruments                   |       | (662,653                         | )          | 77,897                         |       | (1,003,847 | ) | (18,122 | ) |
| Other income                                                       |       | 2,249                            |       | 1,883                          |       | 3,676 |   | 5,162 |   |
| Total revenues and other income                                    |       | (204,797                         | )          | 346,543                        |       | (211,729 | ) | 378,708 |   |
| **Costs and expenses:**                                            |       |                             |       |                           |       |   |   |   |   |
| Oil and natural gas production                                     |       | 62,058                           |       | 47,046                         |       | 114,539 |   | 76,973 |   |
| Midstream operating expenses                                       |       | 22,824                           |       | 4,139                          |       | 30,851 |   | 7,103 |   |
| Gathering and transportation                                       |       | 3,700                            |       | 2,303                          |       | 6,831 |   | 3,275 |   |
| Depreciation, depletion and amortization.                          |       | 111,281                          |       | 105,148                        |       | 220,498 |   | 156,472 |   |
| Accretion of discount on asset retirement  obligations             |       | 1,473                            |       | 1,267                          |       | 2,789 |   | 2,210 |   |
| General and administrative                                         |       | 19,657                           |       | 14,990                         |       | 42,284 |   | 29,165 |   |
| Interest                                                           |       | 20,273                           |       | 33,543                         |       | 56,293 |   | 110,252 |   |
| Total costs and expenses                                           |       | 241,266                          |       | 208,436                        |       | 474,085 |   | 385,450 |   |
| Income (loss) before income taxes.                                 |       | (446,063                         | )          | 138,107                        |       | (685,814 | ) | (6,742 | ) |
| Income tax expense (benefit)                                       |       | (183,149                         | )          | 55,221                         |       | (260,061 | ) | (1,931 | ) |
| Net income (loss)                                                  |       | (262,914                         | )          | 82,886                         |       | (425,753 | ) | (4,811 | ) |
| Preferred stock dividends                                          |       | (35,000                          | )          | (51,099                        | )          | (70,000 | ) | (52,235 | ) |
| Net income (loss) available to common  shareholders                |       | $                                | (297,914   | )                              | $          | 31,787 |   | $ | (495,753 | ) | $ | (57,046 | ) |
| Net income (loss) per common share:                                |       |                             |       |                           |       |   |   |   |   |
| Net income (loss) per common share - basic                         |       | $                                | (2.83      | )                              | $          | 0.30 |   | $ | (4.72 | ) | $ | (0.55 | ) |
| Net income (loss) per common share -  diluted                      |       | $                                | (2.83      | )                              | $          | 0.30 |   | $ | (4.72 | ) | $ | (0.55 | ) |
| Weighted average shares:                                           |       |                             |       |                           |       |   |   |   |   |
| Basic                                                              |       | 105,253                          |       | 104,313                        |       | 104,968 |   | 104,258 |   |
| Diluted                                                            |       | 105,253                          |       | 106,909                        |       | 104,968 |   | 104,258 |   |

 

*See accompanying notes.*

 

5

----

Tableof Contents

 

**EXCORESOURCES, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                                            | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                            | ** ** | **June 30,**              | ** ** |
| **(in thousands)**                                                                                               | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| **Operating Activities:**                                                                                             |       |                           |       |   |   |
| Net loss                                                                                                              |       | $                              | (425,753   | ) | $ | (4,811 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities:                                      |       |                           |       |   |   |
| Depreciation, depletion and amortization                                                                              |       | 220,498                        |       | 156,472 |   |
| Stock option compensation expense.                                                                                    |       | 6,688                          |       | 4,465 |   |
| Accretion of discount on asset retirement  obligations                                                                |       | 2,789                          |       | 2,210 |   |
| Non-cash change in fair value of  derivatives                                                                         |       | 909,111                        |       | 56,824 |   |
| Cash settlements of assumed derivatives                                                                               |       | 62,099                         |       | 3,678 |   |
| Deferred income taxes                                                                                                 |       | (260,244                       | )          | (1,931 | ) |
| Amortization of deferred financing costs  and premium on 7 1/4% senior notes due 2011  and discount on long-term debt |       | 817                            |       | 9,916 |   |
| Effect of changes in:                                                                                                 |       |                           |       |   |   |
| Accounts receivable                                                                                                   |       | (83,688                        | )          | (91,091 | ) |
| Other current assets                                                                                                  |       | (13,829                        | )          | (755 | ) |
| Accounts payable and other current  liabilities                                                                       |       | 93,746                         |       | 34,149 |   |
| Net cash provided by operating activities.                                                                            |       | 512,234                        |       | 169,126 |   |
| **Investing Activities:**                                                                                             |       |                           |       |   |   |
| Additions to oil and natural gas  properties, gathering systems and equipment                                         |       | (910,485                       | )          | (2,353,707 | ) |
| Advance on pending acquisition                                                                                        |       | (25,205                        | )          | 5,000 |   |
| Proceeds from disposition of property and  equipment and other                                                        |       | 1,532                          |       | 376,041 |   |
| Net cash used in investing activities                                                                                 |       | (934,158                       | )          | (1,972,666 | ) |
| **Financing Activities:**                                                                                             |       |                           |       |   |   |
| Borrowings under credit agreements                                                                                    |       | 812,200                        |       | 1,928,000 |   |
| Repayments under credit agreements                                                                                    |       | (291,700                       | )          | (2,023,532 | ) |
| Settlements of derivative financial  instruments with a financing element                                             |       | (62,099                        | )          | (3,678 | ) |
| Proceeds from issuance of common stock                                                                                |       | 12,929                         |       | 2,228 |   |
| Proceeds from issuance of preferred stock                                                                             |       | —                         |       | 2,000,000 |   |
| Payment of preferred stock dividends                                                                                  |       | (70,000                        | )          | (43,717 | ) |
| Payments for preferred stock issuance costs                                                                           |       | —                         |       | (7,498 | ) |
| Deferred financing costs                                                                                              |       | (774                           | )          | (17,804 | ) |
| Net cash provided by financing activities                                                                             |       | 400,556                        |       | 1,833,999 |   |
| Net increase (decrease) in cash                                                                                       |       | (21,368                        | )          | 30,459 |   |
| Cash at beginning of period                                                                                           |       | 55,510                         |       | 22,822 |   |
| Cash at end of period                                                                                                 |       | $                              | 34,142     |   | $ | 53,281 |   |
|                                                                                                                  |       |                           |       |   |   |
| Supplemental Cash Flow Information:                                                                                   |       |                           |       |   |   |
| Interest paid                                                                                                         |       | $                              | 63,651     |   | $ | 108,662 |   |
| Derivative financial instruments assumed in  Vernon Acquisition                                                       |       | $                              | —     |   | $ | (60,015 | ) |
| Derivative financial instruments assumed in  Southern Gas Acquisition                                                 |       | $                              | —     |   | $ | (42,204 | ) |
| Supplemental non-cash investing and  financing activities:                                                            |       |                           |       |   |   |
| Capitalized stock compensation                                                                                        |       | $                              | 1,276      |   | $ | 882 |   |
| Capitalized interest                                                                                                  |       | $                              | 316        |   | $ | — |   |
| Issuance of common stock for director  services                                                                       |       | $                              | 102        |   | $ | — |   |
| Value of shares received for sale of properties                                                                       |       | $                              | —     |   | $ | 3,431 |   |

 

*See accompanying notes.*

 

6

----

Tableof Contents

 

**EXCORESOURCES, INC.**

 

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

**(Unaudited)**

 
| ** **                        | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Retained**           | ** ** | **Total**  | ** ** |
|-----------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|------------------------|------------|------------|------------|
| ** **                        | ** ** | **Common Stock** | ** ** | **paid-in** | ** ** | **earnings**   | ** ** | **shareholders’** | ** ** |
| **(in thousands)**           | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **capital**    | ** ** | **(deficit)**          | ** ** | **equity** | ** ** |
| Balance at December 31, 2007 |       | 104,579               |       | $           | 105        |           | $          | 1,043,645              |       | $          | 71,992     |   | $ | 1,115,742 |   |
| Issuance of common stock          |       | 977                   |       | 1           |       | 13,030         |       | —                 |       | 13,031     |       |
| Preferred stock dividends         |       | —                |       | —      |       | —         |       | (70,000                | )          | (70,000    | )          |
| Share-based compensation          |       | —                |       | —      |       | 7,964          |       | —                 |       | 7,964      |       |
| Net loss                          |       | —                |       | —      |       | —         |       | (425,753               | )          | (425,753   | )          |
| Balance at June 30, 2008     |       | 105,556               |       | $           | 106        |           | $          | 1,064,639              |       | $          | (423,761   | ) | $ | 640,984 |   |
|                              |       |                  |       |        |       |           |       |                   |       |       |       |
| Balance at December 31, 2006 |       | 104,162               |       | $           | 104        |           | $          | 1,024,442              |       | $          | 155,304    |   | $ | 1,179,850 |   |
| Issuance of common stock          |       | 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 |   |

 

*See accompanying notes.*

 

7

----

Table ofContents

 

**EXCO RESOURCES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**(Unaudited)**

 

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

 

*Unless the context requires otherwise, references inthis quarterly report on Form 10-Q to “EXCO,” “EXCO Resources,” “Company,”“we,” “us,” and “our” are to EXCO Resources, Inc. and  its consolidated subsidiaries.*

 

EXCO Resources, Inc., a Texas corporation, isan independent oil and natural gas company engaged in the acquisition,development and exploitation of onshore North American oil and natural gasproperties. Our principal operations are located in the East Texas/NorthLouisiana, Appalachia, Mid-Continent and Permian producing areas. Our assets inEast Texas/North Louisiana are owned by our subsidiary, EXCO Operating Company,LP (formerly EXCO Partners Operating Partnership, LP), and its subsidiaries andtogether they are collectively referred to as EXCO Operating. Organizationally,EXCO Operating is an indirect wholly-owned subsidiary of EXCO Resources. EXCOOperating’s debt is not guaranteed by EXCO Resources and EXCO Operating doesnot guarantee EXCO Resources’ debt.

 

The accompanying condensed consolidated balancesheets as of June 30, 2008 and December 31, 2007, the results ofoperations for the three and six months ended June 30, 2008 and 2007, thestatements of cash flows for the six months ended June 30, 2008 and 2007and the changes in shareholders’ equity for the six months ended June 30,2008 and 2007, are for EXCO and its subsidiaries. All intercompany transactionshave been eliminated.  Certain prior yearamounts have been reclassified to conform to current year presentation.

 

We have prepared the accompanying unaudited interimfinancial statements pursuant to the rules and regulations of theSecurities and Exchange Commission, or SEC, and in the opinion of management,such financial statements reflect all adjustments necessary to present fairlythe consolidated financial position of EXCO at June 30, 2008 and itsresults of operations and cash flows for the periods presented. We have omittedcertain information and disclosures normally included in annual financialstatements prepared in accordance with accounting principles generally acceptedin the United States pursuant to those rules and regulations, although webelieve that the disclosures we have made are adequate to make the informationpresented not misleading. These unaudited interim financial statements shouldbe read in conjunction with our audited financial statements and notes includedin our Annual Report on Form 10-K for the year ended December 31,2007.

 

In preparing the accompanying financial statements,management has made certain estimates and assumptions that affect reportedamounts in the financial statements and disclosures.  The results of operations for the interimperiods are not necessarily indicative of the results we expect for the fullyear.

 

**2.****                                     ****Significant****recent activities**

 

**Appalachian Acquisition**

 

On February 20, 2008, EXCO acquired shallownatural gas properties from EOG Resources, Inc. located primarily in EXCO’scentral Pennsylvania operating area, or the Appalachian Acquisition. Thepurchase price, after reduction for preliminary closing adjustments of$7.4 million, was $388.4 million and was financed with funds drawnunder the EXCO Resources credit agreement. Ourpreliminary purchase price allocation to the Appalachian Acquisition ispresented in the following table.  Weexpect to finalize the purchase price allocation in the third quarter of 2008.

 

8

----

Table ofContents

 
| **(in thousands)**                         | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| **Purchase price calculation:**                 |       |       |       |
| Preliminary purchase price                      |       | $          | 387,644    |   |
| Acquisition related expenses                    |       | 741        |       |
| Total purchase price                            |       | $          | 388,385    |   |
|                                            |       |       |       |
| **Allocation of purchase price:**               |       |       |       |
| Oil and natural gas properties - proved         |       | $          | 334,308    |   |
| Oil and natural gas properties - unproved       |       | 45,676     |       |
| Gas gathering, compression facilities and other |       | 19,876     |       |
| Other property and equipment                    |       | 2,617      |       |
| Asset retirement obligations                    |       | (12,647    | )          |
| Other liabilities assumed                       |       | (1,445     | )          |
| Total purchase price allocation                 |       | $          | 388,385    |   |

 

**Southern Gas Acquisition – finalpurchase price allocation**

 

On March 31, 2008, we finalized the purchase price of our May 2007acquisition of properties located in the Mid-Continent region from AnadarkoPetroleum Corporation, or the Southern Gas Acquisition.  Included in the Southern Gas Acquisition wereoil and natural gas properties which were sold to Crimson Exploration on May 8,2007, or the Gulf Coast Sale.  The finaladjusted purchase price allocation of $772.5 million is presented in thefollowing table:

 
| **(in thousands)**                                            | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|
| **Purchase price calculation:**                                    |       |       |       |
| Purchase price                                                     |       | $          | 770,498    |   |
| Acquisition related expenses                                       |       | 2,040      |       |
| Total purchase price                                               |       | $          | 772,538    |   |
|                                                               |       |       |       |
| **Allocation of purchase price:**                                  |       |       |       |
| Oil and natural gas properties - proved                            |       | $          | 586,407    |   |
| Oil and natural gas properties - unproved                          |       | 4,725      |       |
| Gulf Coast Sale, including the value of the Crimson stock          |       | 241,948    |       |
| Other, net                                                         |       | (5,771     | )          |
| Fair value (liability) of assumed derivative financial instruments |       | (42,204    | )          |
| Asset retirement obligations                                       |       | (12,567    | )          |
| Total purchase price allocation                                    |       | $          | 772,538    |   |

 

**Pro forma results ofoperations**

 

Thefollowing table reflects the unaudited pro forma results of operations asthough the Appalachian Acquisition, our March 30, 2007 private placementof preferred stock and the acquisitions and dispositions during 2007, includingproved and unproved oil and natural gas properties in North Louisiana, or theVernon Acquisition, the Southern Gas Acquisition and the Gulf Coast Sale, hadoccurred on January 1, 2007 (see our Annual Report on Form 10-K forthe year ended December 31, 2007 for a discussion of these acquisitionsand sales).

 
| ** **                                                         | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues and other income                                          |       | $                                                   | (204,797   | )                                                 | $          | 378,272 |   | $ | (205,375 | ) | $ | 550,062 |   |
| Net income (loss)                                                  |       | $                                                   | (262,914   | )                                                 | $          | 87,714 |   | $ | (423,386 | ) | $ | 51,287 |   |
| Preferred stock dividends                                          |       | (35,000                                             | )          | (35,000                                           | )          | (70,000 | ) | (70,000 | ) |
| Net income (loss) available to common shareholders                 |       | $                                                   | (297,914   | )                                                 | $          | 52,714 |   | $ | (493,386 | ) | $ | (18,713 | ) |
| Basic earnings (loss) per share                                    |       | $                                                   | (2.83      | )                                                 | $          | 0.51 |   | $ | (4.70 | ) | $ | (0.18 | ) |
| Diluted earnings (loss) per share                                  |       | $                                                   | (2.83      | )                                                 | $          | 0.41 |   | $ | (4.70 | ) | $ | (0.18 | ) |

 

9

----

Table ofContents

 

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

 

In September 2006,the Financial Accounting Standards Board, or FASB, issued Statement ofFinancial Accounting Standards, or 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 forfinancial instruments.  FASB FinancialStaff Position No. FAS 157-2 deferred implementation for othernon-financial assets and liabilities for one year.  Examples of non-financial assets andliabilities are asset retirement obligations and non-financial assets andliabilities initially measured at fair value in a business combination.  We adopted SFAS No. 157 on January 1,2008.  See “Note 9.  Derivative financial instruments and fairvalue measurements” for a discussion of the impacts of the adoption of SFAS No. 157.

 

In December 2007,the FASB issued SFAS No. 141(R), “BusinessCombinations,” or SFAS No. 141(R). SFAS No. 141(R) replacesSFAS No. 141.  SFAS No. 141(R) broadensthe scope of business combinations to include bargain purchases andcombinations of related companies, provides guidance on measuring goodwill andrequires acquisition costs to be separate from the value of assets andliabilities purchased.  SFAS No. 141(R) is effective for financial statements issued for fiscal years beginning after December 15,2008, and as such, will be adopted by us on January 1, 2009.  We are currently evaluating the effect ofadopting SFAS No. 141(R) on our financial statements.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements,” or SFAS No. 160. SFAS No. 160 amends Accounting Research Bulletin 51, or ARB51.  SFAS No. 160 requires therecognition of a noncontrolling interest (minority interest) as equity in theconsolidated financial statements separate from the parent’s equity.  The amount of net income attributable to the noncontrolling interest will be includedin consolidated net income on the face of the income statement.  It also amends certain of ARB No. 51’sconsolidation procedures for consistency with the requirements of SFAS No. 141(R).  SFAS No. 160 also includes expandeddisclosure requirements regarding the interests of the parent and itsnoncontrolling interest.  SFAS No. 160is effective for financial statements issued for fiscal years beginning after December 15,2008, and as such, will be adopted by us on January 1, 2009.  We are currently evaluating the effect ofadopting SFAS No. 160 on our financial statements.

 

InMarch 2008, the FASB issued SFAS, No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities,” or SFAS No. 161. SFAS No. 161requires enhanced disclosure about the fair value of derivative instruments andtheir gains or losses in tabular format and information about credit-risk-relatedcontingent features in derivative agreements, counterparty credit risk, and thecompany’s strategies and objectives for using derivative instruments. SFAS No. 161is effective for financial statements issued for fiscal years beginning after December 15,2008, and as such, will be adopted by us on January 1, 2009. We arecurrently evaluating the effect of adopting SFAS No. 161 on our financialstatements.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles,” or SFAS No. 162.  SFAS No. 162 identifies the sources ofaccounting principles and the framework for selecting the principles to be usedin the preparation of financial statements. We do not expect SFAS No. 162 to have an impact on our financialstatements.

 

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

 

We consideraccounting policies related to our estimates of assets and liabilities acquiredin acquisitions, 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. The policies include significantestimates made by management using information available at the time theestimates are made. However, these estimates could change materially ifdifferent information or assumptions were used. These policies are summarizedin our Annual Report on Form 10-K for the year ended December 31,2007.

 

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

 

The following is a reconciliation of our assetretirement obligations for the six months ended June 30, 2008:

 

10

----

Table of Contents

 
| **(in thousands)**                                  | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------|------------|
| Asset retirement obligations at January 1, 2008     |       | $          | 84,370     |   |
| Activity during the six months ended June 30, 2008: |       |       |       |
| Liabilities incurred during the period                   |       | 2,263      |       |
| Liabilities settled during the period                    |       | (2,420     | )          |
| Additions to retirement obligations due to acquisitions  |       | 14,099     |       |
| Accretion of discount                                    |       | 2,789      |       |
| Asset retirement obligations as of June 30, 2008    |       | 101,101    |       |
| Less current portion                                     |       | 1,861      |       |
| Long-term portion                                        |       | $          | 99,240     |   |

 

We have no assets that are legally restricted forpurposes of settling asset retirement obligations.

 

**6.****                                     ****Oil and natural gas properties**

 

We use the full cost method of accounting, whichinvolves capitalizing all acquisition, exploration, exploitation anddevelopment costs.  Once we incur costs,they are recorded in the depletable pool of proved properties or in unprovedproperties, collectively, the full cost pool. Unproved property costs, which totaled $453.7 million and $334.8 millionas of June 30, 2008 and December 31, 2007, respectively, are not subjectto depletion.  We review our unproved oiland natural gas property costs on a quarterly basis, and we expect these coststo be evaluated in one to seven years and transferred to the depletable portionof the full cost pool during that time. The full cost pool is comprised of intangible drilling costs, lease andwell equipment and exploration and development costs incurred plus acquiredproved and unproved leaseholds.

 

We calculate depletion using the unit-of-productionmethod.  Under this method, the sum ofthe full cost pool and all estimated future development costs are divided bythe total quantities of proved reserves. This rate is applied to our total production for the period, and theappropriate expense is recorded.  Wecapitalize the portion of general and administrative costs, includingshare-based compensation, that is attributable to our acquisition, exploration,exploitation and development activities.

 

Sales, dispositions and other oil and natural gasproperty retirements are accounted for as adjustments to the full cost pool,with no recognition of gain or loss unless the disposition would significantlyalter the amortization rate.

 

At the end of each quarterly period, the unamortized cost of oil andnatural gas properties, net of related deferred income taxes, is limited to thesum of the estimated future net revenues from our oil and natural gasproperties using current period-end prices discounted at 10%, adjusted forrelated income tax effects (ceiling test). When computing our ceiling test, we evaluate the limitation at the endof each reporting period date. In the event our capitalized costs exceed theceiling limitation at the end of the reporting date, we subsequently evaluatethe limitation for price changes that occur after the balance sheet date toassess impairment as permitted by Staff Accounting Bulletin Topic 12—Oil andGas Producing Activities.  At June 30,2008, there was no ceiling test impairment.

 

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

 

**7.****                                     ****Earnings(loss) per share**

 

We account forearnings per share in accordance with SFAS No. 128, “Earnings per share,”or SFAS No. 128. SFAS No. 128 requires companies to present twocalculations of earnings per share; basic and diluted. Basic earnings (loss)per share for the three and six months ended June 30, 2008 and 2007 equalsthe net income (loss) available to common shareholders divided by the weightedaverage common shares outstanding during the period. Diluted earnings (loss)per common share for the three and six months ended June 30, 2008 and 2007is computed in the same manner as basic earnings per share after assumingissuance of common stock for all potentially dilutive common stock equivalents,including our Series A-1, Series B and Series C 7.0% CumulativeConvertible Perpetual Preferred Stock, or the 7.0% Preferred Stock, and our Series A-1Hybrid Preferred Stock, or the Hybrid Preferred Stock, and together with the7.0% Preferred Stock, the Preferred Stock, whether exercisable or not.  Since we incurred net losses for the threeand six months ended June 30, 2008 and the six months ended June 30,2007, we have excluded the potential common stock equivalents from the assumedconversion of stock options of 5,774,000, 4,351,391 and 2,487,983,respectively.  We have also excluded105,263,074 shares of common stock equivalents 

 

11

----

Tableof Contents

 

from the assumedconversion of the 7.0% Convertible Preferred Stock and Hybrid Preferred Stockfrom the computation of earnings per share for all periods presented as theyare antidilutive.

 

The followingtable presents the basic and diluted loss per share computations:

 
| ** **                                                                     | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands, except per share amounts)**          | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Basic income (loss) per common share:                                          |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss)                                                              |       | $                                                   | (262,914   | )                                                 | $          | 82,886 |   | $ | (425,753 | ) | $ | (4,811 | ) |
| Preferred stock dividends                                                      |       | 35,000                                              |       | 51,099                                            |       | 70,000 |   | 52,235 |   |
| Net income (loss) available to common shareholders                             |       | $                                                   | (297,914   | )                                                 | $          | 31,787 |   | $ | (495,753 | ) | $ | (57,046 | ) |
|                                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Shares:                                                                        |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average number of common shares outstanding                           |       | 105,253                                             |       | 104,313                                           |       | 104,968 |   | 104,258 |   |
|                                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Basic income (loss) per common share:                                          |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss) available to common shareholders per common share            |       | $                                                   | (2.83      | )                                                 | $          | 0.30 |   | $ | (4.72 | ) | $ | (0.55 | ) |
|                                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Diluted income (loss) per share:                                               |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss) available to common shareholders                             |       | $                                                   | (297,914   | )                                                 | $          | 31,787 |   | $ | (495,753 | ) | $ | (57,046 | ) |
|                                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Shares:                                                                        |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average number of common shares outstanding                           |       | 105,253                                             |       | 104,313                                           |       | 104,968 |   | 104,258 |   |
| Dilutive effect of stock options                                               |       | —                                              |       | 2,596                                             |       | — |   | — |   |
| Weighted average common shares and common stock equivalent shares  outstanding |       | 105,253                                             |       | 106,909                                           |       | 104,968 |   | 104,258 |   |
|                                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Diluted income (loss) per share:                                               |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss) available to common shareholders per common share            |       | $                                                   | (2.83      | )                                                 | $          | 0.30 |   | $ | (4.72 | ) | $ | (0.55 | ) |

 

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

 

We account forstock options in accordance with SFAS No. 123(R), “Share-BasedCompensation,” or SFAS No. 123(R). As required by SFAS No. 123(R),the granting of options to our employees under our 2005 Long-Term IncentivePlan, or the 2005 Incentive Plan, are share-based payment transactions and areto be treated as compensation expense by us with a corresponding increase toadditional paid-in capital. Volatility is determined based on the combinationof the weighted average volatility of our common stock price and the dailyclosing prices from five comparable public companies during the period when wewere privately held. For the three and six months ended June 30, 2008,total share-based compensation was $4.3 million and $8.0 million, respectively,of which $3.7 million and $6.7 million, respectively, is included in generaland administrative and lease operating expense and $0.6 million and $1.3million, respectively, was capitalized as part of proved developed andundeveloped oil and natural gas properties. Total share-based compensation tobe recognized on unvested awards as of June 30, 2008 is $21.5 millionover a weighted average period of 1.1 years.

 

During the six months ended June 30, 2008,options to purchase 832,000 shares were granted under the 2005 Incentive Planat prices ranging from $15.15 to $27.00 per share with fair values ranging from$5.39 to $10.04 per share. The options expire ten years following the date ofgrant. Pursuant to the 2005 Incentive Plan, 25% of the options vest immediatelywith an additional 25% to vest on each of the next three anniversaries of thedate of the grant.  As of June 30,2008 and December 31, 2007, there were 6,346,725 and 7,022,375 sharesavailable to be granted under the 2005 Incentive Plan, respectively.

 

**9.****                                     ****Derivative financial instruments and fair value measurements**

 

Weuse oil and natural gas derivatives and financial risk management instrumentsto manage our exposures to commodity price and interest rate fluctuations.  We do not designate these instruments ashedging instruments for financial accounting purposes, and, as a result, werecognize the change in the respective instruments’ fair value currently inearnings, as gains or losses on oil and natural gas derivatives and interestexpense on interest rate swaps.

 

InSeptember 2006, the FASB issued SFAS No. 157.  SFAS No. 157 defines fair value,establishes a framework for measuring fair value in accordance with accountingprinciples generally accepted in the United States and provides for expandeddisclosure of information about fair value measurements.  We adopted the provisions of SFAS No. 157on January 1, 2008 for our derivative financial instruments’ assets andliabilities.

 

12

----

Table ofContents

 

SFASNo. 157 defines fair value as the exchange price that would be receivedfor an asset or paid to transfer a liability (exit price) in the principal ormost advantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date.  This fair value may be different than thesettlement value based on company-specific inputs, such as credit rating,futures markets and forward curves, and readily available buyers or sellers forsuch assets or liabilities. Prior to January 1, 2008, our derivativefinancial instruments were recorded at settlement value.

 

SFASNo. 157 also establishes a three-tier fair value hierarchy, whichprioritizes the inputs used in measuring fair value.  These tiers include:

 

*Level 1*– Observable inputs, such as quoted market prices inactive markets, for substantially identical assets and liabilities.

 

*Level 2*– Observable inputs other than quoted**prices within *Level 1* forsimilar assets and liabilities.  Theseinclude quoted prices in markets that are not active or other inputs that areobservable or can be corroborated by observable market data.  If the asset or liability has a specified orcontractual term, the input must be observable for substantially the full termof the asset or liability.

 

*Level 3*– Unobservable inputs that are supported by littleor no market activity, generally requiring development of fair valueassumptions by management.

 

Asof June 30, 2008, our oil and natural gas derivative financial instrumentsand interest rate swaps are required to be measured at their fair valuepursuant to SFAS No. 157. The following presents a summary of ourderivative financial instruments at June 30, 2008:

 
| **(in thousands)**                              | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Oil and natural gas derivative financial instruments |       | $                | —     |             | $          | (1,003,871       | )          | $         | —     |   | $ | (1,003,871 | ) |
| Interest rate swaps                                  |       | —           |       | 7,370            |       | —           |       | 7,370     |       |
|                                                 |       | $                | —     |             | $          | (996,501         | )          | $         | —     |   | $ | (996,501 | ) |

 

**Oil andnatural gas derivatives**

 

Thefollowing table presents our financial assets and liabilities for oil andnatural gas derivative financial instruments measured at fair value subject tothe disclosure requirements of SFAS No. 157 as of June 30, 2008:

 
| ** **                                       | ** ** | ** **    | ** ** | **Weighted**       | ** ** | ** **                  | ** ** |
|--------------------------------------------------|------------|---------------|------------|--------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **Volume**    | ** ** | **average strike** | ** ** | **Fair value at** | ** ** |
| **(in thousands, except prices)** | ** ** | **Mmbtu/Bbl** | ** ** | **price**          | ** ** | **June 30, 2008** | ** ** |
| **Natural Gas:**                                 |       |          |       |               |       |                        |       |
| Swaps (NYMEX):                                   |       |          |       |               |       |                        |       |
| Remainder of 2008                                |       | 53,810        |       | $                  | 8.34       |                        | $          | (277,110 | ) |
| 2009                                             |       | 100,530       |       | 8.18               |       | (411,736                    | )          |
| 2010                                             |       | 40,748        |       | 8.03               |       | (118,550                    | )          |
| 2011                                             |       | 9,125         |       | 7.97               |       | (21,820                     | )          |
| 2012                                             |       | 1,830         |       | 4.51               |       | (9,121                      | )          |
| 2013                                             |       | 1,825         |       | 4.51               |       | (8,726                      | )          |
| **Total Natural Gas**                            |       | 207,868       |       |               |       | (847,063                    | )          |
|                                             |       |          |       |               |       |                        |       |
| **Oil:**                                         |       |          |       |               |       |                        |       |
| Swaps (NYMEX):                                   |       |          |       |               |       |                        |       |
| Remainder of 2008                                |       | 716           |       | 68.18              |       | (51,474                     | )          |
| 2009                                             |       | 1,215         |       | 69.11              |       | (82,582                     | )          |
| 2010                                             |       | 473           |       | 84.85              |       | (22,752                     | )          |
| **Total Oil**                                    |       | 2,404         |       |               |       | (156,808                    | )          |
| **Total Oil and Natural Gas**                    |       |          |       |               |       | $                           | (1,003,871 | ) |
|                                                  |            |               |            |                    |            |                             |            |  |  |

 

Inmeasuring fair value of financial assets and liabilities pursuant to SFAS No. 157,we utilize quoted NYMEX futures for period prices applicable to our derivativesand other relevant information generated by market transactions. Our derivativefinancial instruments and their related fair value tier have been classified asLevel 2.   The significant observable 

 

13

----

Table ofContents

 

inputsfor our oil and natural gas derivatives are based principally on NYMEX stripprices, London Inter Bank Offered Rate, or LIBOR, and credit risk assessmentwhich affects the discount rate to be utilized to compute fair value.

 

At June 30, 2008, the average forward NYMEX oilprices per Bbl for the remainder of 2008 and for 2009 were $141.05 and $140.64,respectively, and the average forward NYMEX natural gas price per Mmbtu for theremainder of 2008 and for 2009 was $13.54 and $12.47, respectively.

 

**Interestrate swaps**

 

In January 2008, we entered into interest rate swaps to mitigateour exposure to fluctuations in interest rates on $700.0 million inprincipal through February 14, 2010 at LIBOR rates ranging from 2.45% to2.8%.  During the three and six monthsended June 30, 2008, we recognized $11.4 million and $8.1 million as areduction to interest expense on our interest rate swaps.  The impact of SFAS No. 157 was notmaterial to our interest rate swaps.  Asof June 30, 2008, the fair value of our interest rate swaps was an assetof $7.4 million.

 

**10.****                              ****Long-term debt**

 

Long-term debt issummarized as follows:

 
| ** **                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands)**                              | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| EXCO credit agreement                                |       | $                 | 994,000    |                  | $          | 560,500 |   |
| EXCO Operating credit agreement                      |       | 1,170,000         |       | 1,083,000             |       |
| 7 1/4% senior notes due 2011                         |       | 444,720           |       | 444,720               |       |
| Unamortized premium on 7 1/4 % senior notes due 2011 |       | 9,293             |       | 10,951                |       |
| Total                                                |       | $                 | 2,618,013  |                  | $          | 2,099,171 |   |

 

**Creditagreements**

 

*EXCO Resources Credit Agreement*

 

On February 20,2008, we entered into the first amendment to our Second Amended and RestatedCredit Agreement, or, as amended to date, the EXCO Resources CreditAgreement.  The primary change to theEXCO Resources Credit Agreement included an increase in the borrowing basefrom $0.9 billion to approximately $1.2 billion, principally to reflect theassets acquired in the Appalachian Acquisition.  On July 14, 2008, weentered into the second amendment to the EXCO Resources Credit Agreement.  This amendment, which was effective June 30,2008, permitted the payment of cash dividends in connection with the exerciseof any right to convert our preferred stock into common stock withoutcompliance with certain limitations on restricted payments.  In addition, the leverage ratio covenant, asdefined in the agreement, was changed to provide that EXCO will not permit suchratio (i) as of the end of any fiscal quarter ending on or after June 30,2008 and on or before December 31, 2008 to be greater than 4.00 to 1.00, (ii) asof the end of the fiscal quarter ending on March 31, 2009 to be greaterthan 3.75 to 1.00 and (iii) as the end of any fiscal quarter ending on orafter June 30, 2009 to be greater than 3.50 to 1.00.  Prior to the amendment, the leverage ratiowas not permitted to be greater than 3.50 to 1.00.  The other financial covenants and all otherterms, including maturity date and borrowing base, contained within the EXCOResources Credit Agreement remained unchanged. As of June 30, 2008, EXCO was in compliance with the financialcovenants contained in the EXCO Resources Credit Agreement.

 

At June 30,2008 and December 31, 2007, the six month LIBOR rates were 3.1% and 4.6%,respectively, which resulted in interest rates of approximately 4.6% and 5.8%,respectively.  At June 30, 2008 and December 31,2007, we had $994.0 million and $560.5 million, respectively, of outstandingindebtedness under the EXCO Resources Credit Agreement.  The next scheduled borrowing baseredetermination date is October 1, 2008.

 

*EXCO Operating credit agreement*

 

The EXCO Operating credit agreement has a borrowingbase of $1.3 billion.  On July 14,2008, EXCO Operating entered into a second amendment to the EXCO Operatingcredit agreement to (i) allow EXCO Operating to incur up to $500.0 millionof indebtedness under an unsecured term credit agreement and (ii) excludedrawings under such unsecured term credit agreement from the consolidatedcurrent ratio, as defined in the EXCO Operating credit agreement, through December 31,2008.  The other financial covenants andall other terms, including maturity date and borrowing base contained withinthe EXCO Operating credit agreement remained unchanged.  As of June 30, 2008, EXCO Operating wasin compliance with the financial covenants contained in the EXCO Operatingcredit agreement.

 

14

----

Table ofContents

 

At June 30, 2008 and December 31, 2007,the six month LIBOR rates were 3.1% and 4.6%, respectively, which resulted ininterest rates of approximately 4.9% and 6.1%, respectively.  At June 30, 2008 and December 31,2007, we had $1.2 billion and $1.1 billion, respectively, of outstandingindebtedness under the EXCO Operating credit agreement.  The next scheduled borrowing baseredetermination date is October 1, 2008.

 

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

 

As of June 30,2008 and December 31, 2007, $444.7 million and $444.7 million,respectively, in principal was outstanding on our 7 1/4% senior notes due January 15,2011, or Senior Notes. The unamortized premium on the Senior Notes at June 30,2008 and December 31, 2007 was $9.3 million and $11.0 million,respectively. The estimated fair value of the Senior Notes, based on quotedmarket prices for the Senior Notes, was $438.6 million on June 30, 2008.

 

**11.****                              ****Operatingsegments**

 

We follow SFAS No. 131, “Disclosures AboutSegments of an Enterprise and Related Information,” or SFAS No. 131.  Identification of operating segments is basedprincipally upon differences in the types and distribution channel ofproducts.  In prior periods, we only hadoperations in one industry segment, that being the oil and natural gasexploration and production industry. Beginning in the second quarter of 2008, we made a strategic shift inthe focus on and allocation of resources to our midstream division.  The decision to designate our midstreamdivision as a separate business segment was due primarily to recent pipelineacquisitions and increased third party throughput resulting from capitalprojects specifically designed to grow this segment of our business.  Our reportable segments now consist ofexploration and production and midstream. Our exploration and production operational segment and midstream segmentare managed separately because of the nature of their products and services.The exploration and production segment is responsible for acquisition,development and production of oil and natural gas. The midstream segment isresponsible for purchasing, gathering, transporting, processing and treatingnatural gas.  We evaluate the performanceof our operating segments based on segment profits, which includes segmentrevenues, excluding the gain (loss) on derivative financial instruments, fromexternal and internal customers and segment costs and expenses.

 

Summarized financialinformation concerning our reportable segments is shown in the following table:

 

| ** **                                      | ** ** | **Exploration and** | ** ** | ** **    | ** ** | **Intercompany** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|---------------|------------|------------------|------------|------------------|------------|
| **(in thousands)**                         | ** ** | **production**           | ** ** | **Midstream** | ** ** | **eliminations** | ** ** | **total**        | ** ** |
| For the three  months ended June 30, 2008: |       |                     |       |          |       |             |       |             |       |
| Total revenues                                  |       | $                        | 430,900    |          | $          | 39,574           |       | $                | (12,618    | ) | $ | 457,856 |   |
| Intersegment  revenues                          |       | —                   |       | (12,618       | )          | 12,618           |       | —           |       |
| Third party  revenues                           |       | $                        | 430,900    |          | $          | 26,956           |       | $                | —     |   | $ | 457,856 |   |
|                                            |       |                     |       |          |       |             |       |             |       |
| Segment profit                                  |       | $                        | 365,142    |          | $          | 11,951           |       | $                | (7,819     | ) | $ | 369,274 |   |
|                                            |       |                     |       |          |       |             |       |             |       |
| For the three  months ended June 30, 2007: |       |                     |       |          |       |             |       |             |       |
| Total revenues                                  |       | $                        | 263,435    |          | $          | 13,303           |       | $                | (8,092     | ) | $ | 268,646 |   |
| Intersegment  revenues                          |       | —                   |       | (8,092        | )          | 8,092            |       | —           |       |
| Third party  revenues                           |       | $                        | 263,435    |          | $          | 5,211            |       | $                | —     |   | $ | 268,646 |   |
|                                            |       |                     |       |          |       |             |       |             |       |
| Segment profit                                  |       | $                        | 214,086    |          | $          | 7,532            |       | $                | (6,460     | ) | $ | 215,158 |   |
|                                            |       |                     |       |          |       |             |       |             |       |
| For the six  months ended June 30, 2008:   |       |                     |       |          |       |             |       |             |       |
| Total revenues                                  |       | $                        | 757,270    |          | $          | 56,657           |       | $                | (21,809    | ) | $ | 792,118 |   |
| Intersegment  revenues                          |       | —                   |       | (21,809       | )          | 21,809           |       | —           |       |
| Third party  revenues                           |       | $                        | 757,270    |          | $          | 34,848           |       | $                | —     |   | $ | 792,118 |   |
|                                            |       |                     |       |          |       |             |       |             |       |
| Segment profit                                  |       | $                        | 635,900    |          | $          | 19,067           |       | $                | (15,070    | ) | $ | 639,897 |   |
|                                            |       |                     |       |          |       |             |       |             |       |
| For the six months  ended June 30, 2007:   |       |                     |       |          |       |             |       |             |       |
| Total revenues                                  |       | $                        | 387,073    |          | $          | 21,329           |       | $                | (11,572    | ) | $ | 396,830 |   |
| Intersegment  revenues                          |       | —                   |       | (11,572       | )          | 11,572           |       | —           |       |
| Third party  revenues                           |       | $                        | 387,073    |          | $          | 9,757            |       | $                | —     |   | $ | 396,830 |   |
|                                            |       |                     |       |          |       |             |       |             |       |
| Segment profit                                  |       | $                        | 306,825    |          | $          | 10,981           |       | $                | (8,327     | ) | $ | 309,479 |   |
|                                            |       |                     |       |          |       |             |       |             |       |
| As of  June 30, 2008:                      |       |                     |       |          |       |             |       |             |       |
| Total assets                                    |       | $                        | 6,504,801  |          | $          | 396,785          |       | $                | —     |   | $ | 6,901,586 |   |
|                                            |       |                     |       |          |       |             |       |             |       |
| As of  December 31, 2007:                  |       |                     |       |          |       |             |       |             |       |
| Total assets                                    |       | $                        | 5,640,034  |          | $          | 315,737          |       | $                | —     |   | $ | 5,955,771 |   |

 

15

----

Tableof Contents

 

The followingtable reconciles the segment profits reported above to income (loss) beforeincome taxes:

 
| ** **                                            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(in thousands)**                               | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Segment profits                                       |       | $                                | 369,274    |                           | $          | 215,158 |   | $ | 639,897 |   | $ | 309,479 |   |
| Gain (loss) on derivative financial instruments       |       | (662,653                         | )          | 77,897                         |       | (1,003,847 | ) | (18,122 | ) |
| Depreciation, depletion and amortization              |       | (111,281                         | )          | (105,148                       | )          | (220,498 | ) | (156,472 | ) |
| Accretion of discount on asset retirement obligations |       | (1,473                           | )          | (1,267                         | )          | (2,789 | ) | (2,210 | ) |
| General and administrative                            |       | (19,657                          | )          | (14,990                        | )          | (42,284 | ) | (29,165 | ) |
| Interest                                              |       | (20,273                          | )          | (33,543                        | )          | (56,293 | ) | (110,252 | ) |
| Income (loss) before income taxes                     |       | $                                | (446,063   | )                              | $          | 138,107 |   | $ | (685,814 | ) | $ | (6,742 | ) |

 

**12.****                              ****Subsequent events**

 

*Senior Unsecured Term CreditAgreement and related acquisition*

 

On July 15,2008, EXCO Operating entered into a senior unsecured term credit agreement, orthe Term Credit Agreement, and drew $300.0 million, resulting in net proceedsof $289.4 million after transaction fees and administrative expenses.  Proceeds from the Term Credit Agreement wereused to acquire producing oil and natural gas properties, acreage and otherassets in Gregg, Rusk and Upshur counties in Texas from private sellers forapproximately $218.6 million, net of a $25.0 million deposit paid early in thesecond quarter of 2008 and preliminary closing adjustments, provide workingcapital to EXCO Operating and reduce debt on the EXCO Operating creditagreement.

 

The Term Credit Agreementbalance of $300.0****million wasborrowed in a single draw on July 15, 2008.  Thereafter through October 15,2008, EXCO Operating may request additional term loans of up to $200.0 millionin the aggregate, which are available in up to four separate advances of atleast $50.0 million or increments of $5.0 million in excess thereof, but the lendershave no obligation to provide the requested additional funding.  The TermCredit Agreement is due and payable on December 15, 2008 and is guaranteedby all existing and future direct or indirect subsidiaries of EXCO Operating,including any guarantor of the EXCO Operating credit agreement.

 

Financial covenantsgoverning the Term Credit Agreement include a minimum current ratio of 1.00 to1.00, a maximum leverage ratio of 3.50 to 1.00 and a minimum interest coverageratio of 2.50 to 1.00.  At the borrower’s election, term loans under TermCredit Agreement may bear interest at a rate per annum equal to: (a) theAlternate Base Rate, or ABR (defined as the higher of (i) the rate ofinterest publicly announced by JPMorgan as its prime rate in effect at itsprincipal office in New York City and (ii) the federal funds effectiverate from time to time plus 0.50%), plus 4.75% or (b) the LIBO Rate(defined as the greater of (i) the rate at which eurodollar deposits inthe London interbank market for one, two or three months, as selected by theborrower, are quoted on the Telerate screen and (ii) 3.50%), as adjustedfor actual statutory reserve requirements for Eurocurrency liabilities, plus6.00%.  In the case of term loans bearing interest based upon ABR, interestis payable quarterly in arrears.  In the case of terms loans bearinginterest based upon the LIBO Rate, interest is payable on the last day of eachrelevant interest period and, in the case of any interest period longer thanthree months, on each successive date three months after the first day of suchinterest period.  The Term Credit Agreement contains representations,warranties, covenants, events of default and indemnities that are customary foragreements of this type and are substantially the same as the terms included inEXCO Operating credit agreement.

 

*Preferred Stock conversion*

 

On July 18, 2008, weconverted all outstanding shares of our Preferred Stock into a total ofapproximately 105.2 million shares of our common stock.  The conversion ofthe Preferred Stock has the effect of increasing the book value of shareholders’equity by approximately $2.0 billion. We also paid all accrued dividends incash totaling approximately $12.8 million to the holders of the convertedshares of Preferred Stock.  After July 18,2008, dividends ceased to accrue on the Preferred Stock and all rights of theholders with respect to the Preferred Stock terminated, except for the right toreceive the whole shares of common stock issuable upon conversion, accrueddividends through July 18, 2008 and cash in lieu of any fractional shares.The conversion of all outstanding shares of Preferred Stock into common stockeliminated our obligation to pay quarterly cash dividends of $35.0 million,resulting in annual dividend savings of $140.0 million.

 

**13.****                              ****Condensed********consolidating****financial statements**

 

Set forth below are condensed consolidatingfinancial statements of EXCO, the guarantor subsidiaries and the non-guarantorsubsidiaries. The Senior Notes are jointly and severally guaranteed by some ofour subsidiaries (referred to as 

 

16

----

Table ofContents

 

GuarantorSubsidiaries). Each of the Guarantor Subsidiaries are wholly-owned subsidiariesof EXCO Resources, or Resources, and the guarantees are unconditional as itrelates to the assets of the Guarantor Subsidiaries.  In 2007, certain subsidiaries, previouslyGuarantor Subsidiaries, were merged into and with Resources.

 

In connection with the 2007 mergers discussed above,the condensed consolidating balance sheet as of December 31, 2007 and thecondensed consolidating statements of operations for the three and six monthsended June 30, 2007 and condensed consolidating statements of cash flowsfor the six months ended June 30, 2007 have been restated to reflect theGuarantor Subsidiaries as if they had been part of Resources for all periodspresented.  In addition, we have adjustedthe 2007 consolidating financial information to reflect our designation of amidstream business segment in the second quarter of 2008 and certain prior yearamounts have been reclassified to conform to the current yearpresentation.  All of the entitiescomprising our midstream segment are subsidiaries of EXCO Operating, which is anon-guarantor subsidiary.  The columnsdesignated as “Non-guarantor subsidiaries” in the accompanying condensedconsolidating financial statements represent EXCO Operating and itssubsidiaries.  There are no othernon-guarantor subsidiaries.

 

The following financial information presentsconsolidating financial statements, which include:

 

·                  Resources;

 

·                  the guarantor subsidiaries on a combinedbasis;

 

·                  the non-guarantor subsidiaries;

 

·                  elimination entries necessary to consolidateResources, the guarantor subsidiaries and the non-guarantor subsidiaries; and

 

·                  EXCO on a consolidated basis.

 

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

 

17

----

Table ofContents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING BALANCESHEET**

**(Unaudited)**

 

**June 30, 2008**

 
| **(in thousands)**                                         | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                      |       |          |       |                        |       |                              |       |             |       |             |       |
| Current assets:                                                 |       |          |       |                        |       |                              |       |             |       |             |       |
| Cash and cash equivalents                                       |       | $             | 10,799     |                        | $          | 9,979                             |       | $                | 13,364     |             | $          | — |   | $ | 34,142 |   |
| Other current assets                                            |       | 281,921       |       | 41,172                      |       | 170,149                           |       | —           |       | 493,242          |       |
| Total current assets                                            |       | 292,720       |       | 51,151                      |       | 183,513                           |       | —           |       | 527,384          |       |
| Oil and natural gas properties (full cost accounting method):   |       |          |       |                        |       |                              |       |             |       |             |       |
| Unproved oil and natural gas properties                         |       | 97,702        |       | 106,205                     |       | 249,773                           |       | —           |       | 453,680          |       |
| Proved developed and undeveloped oil and natural gas properties |       | 1,316,122     |       | 1,275,576                   |       | 3,075,921                         |       | —           |       | 5,667,619        |       |
| Allowance for depreciation, depletion and amortization          |       | (162,901      | )          | (114,290                    | )          | (432,381                          | )          | —           |       | (709,572         | )          |
| Oil and natural gas properties, net                             |       | 1,250,923     |       | 1,267,491                   |       | 2,893,313                         |       | —           |       | 5,411,727        |       |
| Gas gathering, office and field equipment, net                  |       | 8,459         |       | 53,135                      |       | 380,933                           |       | —           |       | 442,527          |       |
| Advance on pending acquisition                                  |       | 25,206        |       | —                      |       | —                            |       | —           |       | 25,206           |       |
| Deferred financing costs                                        |       | 7,400         |       | —                      |       | 11,305                            |       | —           |       | 18,705           |       |
| Derivative financial instruments                                |       | 2,419         |       | —                      |       | 2,143                             |       | —           |       | 4,562            |       |
| Goodwill                                                        |       | 110,800       |       | 164,469                     |       | 194,808                           |       | —           |       | 470,077          |       |
| Investments in and advances to affiliates                       |       | 2,174,722     |       | —                      |       | —                            |       | (2,174,722       | )          | —           |       |
| Other assets, net                                               |       | (25,205       | )          | 729                         |       | 25,874                            |       | —           |       | 1,398            |       |
| Total assets                                                    |       | $             | 3,847,444  |                        | $          | 1,536,975                         |       | $                | 3,691,889  |             | $          | (2,174,722 | ) | $ | 6,901,586 |   |
|                                                            |       |          |       |                        |       |                              |       |             |       |             |       |
| **Liabilities and stockholders’ equity**                   |       |          |       |                        |       |                              |       |             |       |             |       |
| Current liabilities                                             |       | $             | 337,590    |                        | $          | 92,566                            |       | $                | 495,454    |             | $          | — |   | $ | 925,610 |   |
| Long-term debt                                                  |       | 1,448,013     |       | —                      |       | 1,170,000                         |       | —           |       | 2,618,013        |       |
| Deferred income taxes                                           |       | 57,096        |       | 156,895                     |       | —                            |       | —           |       | 213,991          |       |
| Other liabilities                                               |       | 225,601       |       | 95,533                      |       | 189,576                           |       | —           |       | 510,710          |       |
| Payable to parent                                               |       | (854,118      | )          | 875,047                     |       | (20,929                           | )          | —           |       | —           |       |
| Commitments and contingencies                                   |       | —        |       | —                      |       | —                            |       | —           |       | —           |       |
| Preferred stock                                                 |       | 1,992,278     |       | —                      |       | —                            |       | —           |       | 1,992,278        |       |
| Stockholders’ equity                                       |       | 640,984       |       | 316,934                     |       | 1,857,788                         |       | (2,174,722       | )          | 640,984          |       |
| Total liabilities and stockholders’ equity                 |       | $             | 3,847,444  |                        | $          | 1,536,975                         |       | $                | 3,691,889  |             | $          | (2,174,722 | ) | $ | 6,901,586 |   |
|                                                                 |            |               |            |                             |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |

 

18

----

Table ofContents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATINGBALANCE SHEET**

 

**December 31, 2007**

 
| **(in thousands)**                                         | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                      |       |          |       |                        |       |                              |       |             |       |             |       |
| Current assets:                                                 |       |          |       |                        |       |                              |       |             |       |             |       |
| Cash and cash equivalents                                       |       | $             | 23,069     |                        | $          | 7,250                             |       | $                | 25,191     |             | $          | — |   | $ | 55,510 |   |
| Other current assets                                            |       | 76,261        |       | 31,601                      |       | 147,928                           |       | —           |       | 255,790          |       |
| Total current assets                                            |       | 99,330        |       | 38,851                      |       | 173,119                           |       | —           |       | 311,300          |       |
| Oil and natural gas properties (full cost accounting method):   |       |          |       |                        |       |                              |       |             |       |             |       |
| Unproved oil and natural gas properties                         |       | 92,680        |       | 17,142                      |       | 224,981                           |       | —           |       | 334,803          |       |
| Proved developed and undeveloped oil and natural gas properties |       | 1,192,337     |       | 899,745                     |       | 2,833,971                         |       | —           |       | 4,926,053        |       |
| Allowance for depreciation, depletion and amortization          |       | (112,548      | )          | (84,288                     | )          | (303,657                          | )          | —           |       | (500,493         | )          |
| Oil and natural gas properties, net                             |       | 1,172,469     |       | 832,599                     |       | 2,755,295                         |       | —           |       | 4,760,363        |       |
| Gas gathering, office and field equipment, net                  |       | 7,449         |       | 32,665                      |       | 305,294                           |       | —           |       | 345,408          |       |
| Advance on pending acquisition                                  |       | 39,500        |       | —                      |       | —                            |       | —           |       | 39,500           |       |
| Deferred financing costs                                        |       | 7,619         |       | —                      |       | 12,787                            |       |             |       | 20,406           |       |
| Derivative financial instruments                                |       | 851           |       | —                      |       | 1,640                             |       | —           |       | 2,491            |       |
| Goodwill                                                        |       | 110,800       |       | 164,469                     |       | 194,808                           |       | —           |       | 470,077          |       |
| Investments in and advances to affiliates                       |       | 2,525,487     |       | —                      |       | —                            |       | (2,525,487       | )          | —           |       |
| Other assets, net                                               |       | —        |       | 668                         |       | 5,558                             |       | —           |       | 6,226            |       |
| Total assets                                                    |       | $             | 3,963,505  |                        | $          | 1,069,252                         |       | $                | 3,448,501  |             | $          | (2,525,487 | ) | $ | 5,955,771 |   |
|                                                            |       |          |       |                        |       |                              |       |             |       |             |       |
| **Liabilities and shareholders’ equity**                   |       |          |       |                        |       |                              |       |             |       |             |       |
| Current liabilities                                             |       | $             | 118,522    |                        | $          | 35,959                            |       | $                | 123,686    |             | $          | — |   | $ | 278,167 |   |
| Long-term debt                                                  |       | 1,016,171     |       | —                      |       | 1,083,000                         |       | —           |       | 2,099,171        |       |
| Deferred income taxes                                           |       | 105,531       |       | 165,867                     |       | —                            |       | —           |       | 271,398          |       |
| Other liabilities                                               |       | 77,189        |       | 67,197                      |       | 54,629                            |       | —           |       | 199,015          |       |
| Payable to parent                                               |       | (461,928      | )          | 468,607                     |       | (6,679                            | )          | —           |       | —           |       |
| Commitments and contingencies                                   |       | —        |       | —                      |       | —                            |       | —           |       | —           |       |
| Preferred stock                                                 |       | 1,992,278     |       | —                      |       | —                            |       | —           |       | 1,992,278        |       |
| Shareholders’ equity                                       |       | 1,115,742     |       | 331,622                     |       | 2,193,865                         |       | (2,525,487       | )          | 1,115,742        |       |
| Total liabilities and shareholders’ equity                 |       | $             | 3,963,505  |                        | $          | 1,069,252                         |       | $                | 3,448,501  |             | $          | (2,525,487 | ) | $ | 5,955,771 |   |

 

19

----

Table ofContents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS**

**(Unaudited)**

 

**For the three months ended June 30,2008**

** **
| ** **                                            | ** ** | ** **    | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | ** **    | ** ** | **Guarantor**    | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **(in  thousands)**                                   | ** ** | **Resources** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues and other income:**                        |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas                                   |       | $             | 120,175    |             | $          | 64,731           |       | $                | 243,745    |             | $          | — |   | $ | 428,651 |   |
| Midstream                                             |       | —        |       | —           |       | 26,956           |       | —           |       | 26,956           |       |
| Loss on derivative financial instruments              |       | (302,263      | )          | (33,362          | )          | (327,028         | )          | —           |       | (662,653         | )          |
| Other income (loss)                                   |       | 7,695         |       | (6,097           | )          | 651              |       | —           |       | 2,249            |       |
| Equity in earnings of subsidiaries                    |       | (198,395      | )          | —           |       | —           |       | 198,395          |       | —           |       |
| Total revenues and other income                       |       | (372,788      | )          | 25,272           |       | (55,676          | )          | 198,395          |       | (204,797         | )          |
|                                                  |       |          |       |             |       |             |       |             |       |             |       |
| **Costs and expenses:**                               |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas production                        |       | 19,868        |       | 9,367            |       | 32,823           |       | —           |       | 62,058           |       |
| Midstream operating expenses                          |       | —        |       | —           |       | 22,824           |       |             |       | 22,824           |       |
| Gathering and transportation                          |       | 58            |       | 808              |       | 2,834            |       | —           |       | 3,700            |       |
| Depreciation, depletion and amortization              |       | 26,451        |       | 16,926           |       | 67,904           |       | —           |       | 111,281          |       |
| Accretion of discount on asset retirement obligations |       | 419           |       | 712              |       | 342              |       | —           |       | 1,473            |       |
| General and administrative                            |       | 10,657        |       | 4,460            |       | 4,540            |       | —           |       | 19,657           |       |
| Interest                                              |       | 12,194        |       | —           |       | 8,079            |       | —           |       | 20,273           |       |
| Total costs and expenses                              |       | 69,647        |       | 32,273           |       | 139,346          |       | —           |       | 241,266          |       |
| Income (loss) before income taxes                     |       | (442,435      | )          | (7,001           | )          | (195,022         | )          | 198,395          |       | (446,063         | )          |
| Income tax expense                                    |       | (179,521      | )          | (3,628           | )          | —           |       | —           |       | (183,149         | )          |
| Net income (loss)                                     |       | (262,914      | )          | (3,373           | )          | (195,022         | )          | 198,395          |       | (262,914         | )          |
| Preferred stock dividends                             |       | (35,000       | )          | —           |       | —           |       | —           |       | (35,000          | )          |
| Net income (loss) available to common shareholders    |       | $             | (297,914   | )                | $          | (3,373           | )          | $                | (195,022   | )                | $          | 198,395 |   | $ | (297,914 | ) |

 

20

----

Table ofContents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS**

**(Unaudited)**

 

**For the six months ended June 30,2008**

** **
| ** **                                            | ** ** | ** **    | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | ** **    | ** ** | **Guarantor**    | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **(in thousands)**                               | ** ** | **Resources** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues and other income:**                        |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas                                   |       | $             | 219,964    |             | $          | 109,346          |       | $                | 424,284    |             | $          | — |   | $ | 753,594 |   |
| Midstream                                             |       | —        |       | —           |       | 34,848           |       | —           |       | 34,848           |       |
| Loss on derivative financial instruments              |       | (413,750      | )          | (59,934          | )          | (530,163         | )          | —           |       | (1,003,847       | )          |
| Other income (loss)                                   |       | 15,137        |       | (12,648          | )          | 1,187            |       | —           |       | 3,676            |       |
| Equity in earnings of subsidiaries                    |       | (350,765      | )          | —           |       | —           |       | 350,765          |       | —           |       |
| Total revenues and other income                       |       | (529,414      | )          | 36,764           |       | (69,844          | )          | 350,765          |       | (211,729         | )          |
|                                                  |       |          |       |             |       |             |       |             |       |             |       |
| **Costs and expenses:**                               |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas production                        |       | 38,109        |       | 17,180           |       | 59,250           |       | —           |       | 114,539          |       |
| Midstream operating expenses                          |       | —        |       | —           |       | 30,851           |       |             |       | 30,851           |       |
| Gathering and transportation                          |       | 117           |       | 1,414            |       | 5,300            |       | —           |       | 6,831            |       |
| Depreciation, depletion and amortization              |       | 51,537        |       | 32,110           |       | 136,851          |       | —           |       | 220,498          |       |
| Accretion of discount on asset retirement obligations |       | 815           |       | 1,291            |       | 683              |       | —           |       | 2,789            |       |
| General and administrative                            |       | 24,855        |       | 8,429            |       | 9,000            |       | —           |       | 42,284           |       |
| Interest                                              |       | 31,995        |       | —           |       | 24,298           |       | —           |       | 56,293           |       |
| Total costs and expenses                              |       | 147,428       |       | 60,424           |       | 266,233          |       | —           |       | 474,085          |       |
| Income (loss) before income taxes                     |       | (676,842      | )          | (23,660          | )          | (336,077         | )          | 350,765          |       | (685,814         | )          |
| Income tax expense                                    |       | (251,089      | )          | (8,972           | )          | —           |       | —           |       | (260,061         | )          |
| Net income (loss)                                     |       | (425,753      | )          | (14,688          | )          | (336,077         | )          | 350,765          |       | (425,753         | )          |
| Preferred stock dividends                             |       | (70,000       | )          | —           |       | —           |       | —           |       | (70,000          | )          |
| Net income (loss) available to common shareholders    |       | $             | (495,753   | )                | $          | (14,688          | )          | $                | (336,077   | )                | $          | 350,765 |   | $ | (495,753 | ) |

 

21

----

Table ofContents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS**

**(Unaudited)**

 

**For the three months ended June 30,2007**

 
| ** **                                            | ** ** | ** **    | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | ** **    | ** ** | **Guarantor**    | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **(in thousands)**                               | ** ** | **Resources** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues and other income:**                        |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas                                   |       | $             | 58,037     |             | $          | 32,756           |       | $                | 170,759    |             | $          | — |   | $ | 261,552 |   |
| Midstream                                             |       | —        |       | —           |       | 5,211            |       | —           |       | 5,211            |       |
| Loss on derivative financial instruments              |       | 14,795        |       | 8,165            |       | 54,937           |       | —           |       | 77,897           |       |
| Other income (loss)                                   |       | 8,475         |       | (7,251           | )          | 659              |       | —           |       | 1,883            |       |
| Equity in earnings of subsidiaries                    |       | 98,315        |       | —           |       | —           |       | (98,315          | )          | —           |       |
| Total revenues and other income                       |       | 179,622       |       | 33,670           |       | 231,566          |       | (98,315          | )          | 346,543          |       |
|                                                  |       |          |       |             |       |             |       |             |       |             |       |
| **Costs and expenses:**                               |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas production                        |       | 12,726        |       | 5,972            |       | 28,348           |       | —           |       | 47,046           |       |
| Midstream operating expenses                          |       | —        |       | —           |       | 4,139            |       | —           |       | 4,139            |       |
| Gathering and transportation                          |       | 159           |       | 434              |       | 1,710            |       | —           |       | 2,303            |       |
| 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                              |       | 48,187        |       | 19,652           |       | 140,597          |       | —           |       | 208,436          |       |
| Income (loss) before income taxes                     |       | 131,435       |       | 14,018           |       | 90,969           |       | (98,315          | )          | 138,107          |       |
| Income tax expense                                    |       | 48,549        |       | 6,672            |       | —           |       | —           |       | 55,221           |       |
| Net income (loss)                                     |       | 82,886        |       | 7,346            |       | 90,969           |       | (98,315          | )          | 82,886           |       |
| Preferred stock dividends                             |       | (51,099       | )          | —           |       | —           |       | —           |       | (51,099          | )          |
| Net income (loss) available to common shareholders    |       | $             | 31,787     |             | $          | 7,346            |       | $                | 90,969     |             | $          | (98,315 | ) | $ | 31,787 |   |

 

22

----

Table ofContents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS**

**(Unaudited)**

 

**For the six months ended June 30,2007**

 
| ** **                                            | ** ** | ** **    | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | ** **    | ** ** | **Guarantor**    | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **(in thousands)**                               | ** ** | **Resources** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues and other income:**                        |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas                                   |       | $             | 86,964     |             | $          | 62,056           |       | $                | 232,891    |             | $          | — |   | $ | 381,911 |   |
| Midstream                                             |       | —        |       | —           |       | 9,757            |       | —           |       | 9,757            |       |
| Gain (loss) on derivative financial instruments       |       | 1,207         |       | (14,505          | )          | (4,824           | )          | —           |       | (18,122          | )          |
| Other income (loss)                                   |       | 18,213        |       | (14,639          | )          | 1,588            |       | —           |       | 5,162            |       |
| Equity in earnings of subsidiaries                    |       | (19,629       | )          | —           |       | —           |       | 19,629           |       | —           |       |
| Total revenues and other income                       |       | 86,755        |       | 32,912           |       | 239,412          |       | 19,629           |       | 378,708          |       |
|                                                  |       |          |       |             |       |             |       |             |       |             |       |
| **Costs and expenses:**                               |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas production                        |       | 19,429        |       | 11,425           |       | 46,119           |       | —           |       | 76,973           |       |
| Midstream operating expenses                          |       | —        |       | —           |       | 7,103            |       |             |       | 7,103            |       |
| Gathering and transportation                          |       | 304           |       | 572              |       | 2,399            |       | —           |       | 3,275            |       |
| Depreciation, depletion and amortization              |       | 26,080        |       | 20,371           |       | 110,021          |       | —           |       | 156,472          |       |
| Accretion of discount on asset retirement obligations |       | 635           |       | 954              |       | 621              |       | —           |       | 2,210            |       |
| General and administrative                            |       | 15,163        |       | 5,333            |       | 8,669            |       | —           |       | 29,165           |       |
| Interest                                              |       | 29,549        |       | —           |       | 80,703           |       | —           |       | 110,252          |       |
| Total costs and expenses                              |       | 91,160        |       | 38,655           |       | 255,635          |       | —           |       | 385,450          |       |
| Income (loss) before income taxes                     |       | (4,405        | )          | (5,743           | )          | (16,223          | )          | 19,629           |       | (6,742           | )          |
| Income tax expense (benefit)                          |       | 406           |       | (2,337           | )          | —           |       | —           |       | (1,931           | )          |
| Net income (loss)                                     |       | (4,811        | )          | (3,406           | )          | (16,223          | )          | 19,629           |       | (4,811           | )          |
| Preferred stock dividends                             |       | (52,235       | )          | —           |       | —           |       | —           |       | (52,235          | )          |
| Net loss available to common shareholders             |       | $             | (57,046    | )                | $          | (3,406           | )          | $                | (16,223    | )                | $          | 19,629 |   | $ | (57,046 | ) |

 

23

----

Table ofContents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING STATEMENTOF CASH FLOWS**

**(Unaudited)**

 

**For the six months ended June 30,2008**

 
| **(in thousands)**                                                      | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Operating Activities:**                                                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Net cash provided by operating activities                                    |       | $             | 138,381    |                        | $          | 61,773                            |       | $                | 312,080    |             | $          | — |   | $ | 512,234 |   |
| **Investing Activities:**                                                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Additions to oil and natural gas properties, gathering systems and equipment |       | (494,608      | )          | (75,396                     | )          | (340,481                          | )          | —           |       | (910,485         | )          |
| Proceeds from dispositions of property and equipment                         |       | 1,287         |       | 95                          |       | 150                               |       | —           |       | 1,532            |       |
| Advance on pending acquisition                                               |       | —        |       | —                      |       | (25,205                           | )          | —           |       | (25,205          | )          |
| Advances/investments with affiliates                                         |       | (1,479        | )          | 16,258                      |       | (14,779                           | )          | —           |       | —           |       |
| Net cash used in investing activities                                        |       | (494,800      | )          | (59,043                     | )          | (380,315                          | )          | —           |       | (934,158         | )          |
| **Financing Activities:**                                                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Borrowings under credit agreements                                           |       | 635,000       |       | —                      |       | 177,200                           |       | —           |       | 812,200          |       |
| Repayments under credit agreements                                           |       | (201,500      | )          | —                      |       | (90,200                           | )          | —           |       | (291,700         | )          |
| Settlements of derivative financial instruments with a financing  element    |       | (31,532       | )          | —                      |       | (30,567                           | )          | —           |       | (62,099          | )          |
| Proceeds from issuance of common stock                                       |       | 12,929        |       | —                      |       | —                            |       | —           |       | 12,929           |       |
| Payment of preferred stock dividends                                         |       | (70,000       | )          | —                      |       | —                            |       | —           |       | (70,000          | )          |
| Deferred financing costs and other                                           |       | (749          | )          | —                      |       | (25                               | )          | —           |       | (774             | )          |
| Net cash provided by financing activities                                    |       | 344,148       |       | —                      |       | 56,408                            |       | —           |       | 400,556          |       |
| Net increase (decrease) in cash                                              |       | (12,271       | )          | 2,730                       |       | (11,827                           | )          | —           |       | (21,368          | )          |
| Cash at beginning of the period                                              |       | 23,069        |       | 7,250                       |       | 25,191                            |       | —           |       | 55,510           |       |
| Cash at end of period                                                        |       | $             | 10,798     |                        | $          | 9,980                             |       | $                | 13,364     |             | $          | — |   | $ | 34,142 |   |

 

24

----

Table ofContents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING STATEMENTOF 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 |       | (791,987      | )          | (21,123                     | )          | (1,540,597                        | )          | —           |       | (2,353,707       | )          |
| Proceeds from dispositions of property and equipment                          |       | 374,008       |       | —                      |       | 2,033                             |       | —           |       | 376,041          |       |
| Advance on pending 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:**                                                     |       |          |       |                        |       |                              |       |             |       |             |       |
| Borrowings under credit agreements                                            |       | 758,000       |       | —                      |       | 1,170,000                         |       | —           |       | 1,928,000        |       |
| Repayments under credit agreements                                            |       | (653,000      | )          | —                      |       | (1,370,532                        | )          | —           |       | (2,023,532       | )          |
| Settlement of derivative financial instrument with  a financing element       |       | (1,041        | )          | —                      |       | (2,637                            | )          | —           |       | (3,678           | )          |
| Proceeds from issuance of common stock                                        |       | 2,228         |       | —                      |       | —                            |       | —           |       | 2,228            |       |
| Proceeds from issuance of preferred stock                                     |       | 2,000,000     |       | —                      |       | —                            |       | —           |       | 2,000,000        |       |
| Payments for preferred stock issuance costs                                   |       | (7,498        | )          | —                      |       | —                            |       | —           |       | (7,498           | )          |
| Payment of preferred stock dividends                                          |       | (43,717       | )          | —                      |       | —                            |       | —           |       | (43,717          | )          |
| 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 in cash                                                          |       | 5,715         |       | 5,217                       |       | 19,527                            |       | —           |       | 30,459           |       |
| Cash at the beginning of the period                                           |       | 6,522         |       | 6,233                       |       | 10,067                            |       | —           |       | 22,822           |       |
| Cash at end of period                                                         |       | $             | 12,237     |                        | $          | 11,450                            |       | $                | 29,594     |             | $          | — |   | $ | 53,281 |   |

 

25

----

Table ofContents

 

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

 

**Forward-looking statements**

 

This quarterly report contains forward-lookingstatements, as defined in Section 27A of the Securities Act of 1933, asamended, or the Securities Act, and Section 21E of the Securities ExchangeAct of 1934, as amended, or the Exchange Act. These forward-looking statementsrelate to, among other things, the following:

 

·    our future financial andoperating performance and results;

 

·    our business strategy;

 

·    market prices;

 

·    our future derivativefinancial instrument activities; and

 

·    our plans and forecasts.

 

We have based these forward-looking statements onour current assumptions, expectations and projections about future events.

 

We use the words “may,” “expect,” “anticipate,” “estimate,”“believe,” “continue,” “intend,” “plan,” “budget” and other similar words toidentify forward-looking statements. You should read statements that containthese words carefully because they discuss future expectations, containprojections of results of operations or of our financial condition and/or stateother “forward-looking” information. We do not undertake any obligation toupdate or revise publicly any forward-looking statements, except as required bylaw. These statements also involve risks and uncertainties that could cause ouractual results or financial condition to materially differ from our expectationsin this quarterly report, including, but not limited to:

 

·                  fluctuations in prices ofoil and natural gas;

 

·                  imports offoreign oil and natural gas, including liquefied natural gas;

 

·                  future capitalrequirements and availability of financing;

 

·                  estimates ofreserves and economic assumptions used in connection with our acquisitions;

 

·                  geologicalconcentration of our reserves;

 

·                  risksassociated with drilling and operating wells;

 

·                  exploratoryrisks, including our Marcellus and Huron shale plays in Appalachia and theHaynesville/Bossier shale play in East Texas/North Louisiana;

 

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

 

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

 

·                  cash flow andliquidity;

 

·                  timing andamount of future production of oil and natural gas;

 

·                  availability ofdrilling and production equipment;

 

·                  marketing ofoil and natural gas;

 

·                  developments inoil-producing and natural gas-producing countries;

 

26

----

Table ofContents

 

·                  title to ourproperties;

 

·                  litigation;

 

·                  competition;

 

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

 

·                  governmentalregulations;

 

·                  receipt ofamounts owed to us by purchasers of our production and counterparties to ourderivative financial instruments;

 

·                  decidingwhether or not to enter into derivative financial instruments;

 

·                  events similarto those of September 11, 2001;

 

·                  actions ofthird party co-owners of interests in properties in which we also own aninterest;

 

·                  fluctuations ininterest rates; and

 

·                  our ability toeffectively integrate companies and properties that we acquire.

 

We believe that it is important to communicate ourexpectations of future performance to our investors. However, events may occurin the future that we are unable to accurately predict, or over which we haveno control. You are cautioned not to place undue reliance on a forward-lookingstatement. When considering our forward-looking statements, keep in mind therisk factors and other cautionary statements in this quarterly report, and therisk factors included in our Annual Report on Form 10-K for the year endedDecember 31, 2007.

 

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

 

**Overview**

 

We are an independent oil and natural gas companyengaged in the acquisition, development and exploitation of onshore NorthAmerican oil and natural gas properties. We expect to continue to grow byleveraging our management team’s experience, exploiting our multi-yearinventory of development drilling locations and exploitation projects, andselectively pursuing acquisitions that meet our strategic and financialobjectives. We employ the use of debt and equity along with a comprehensivederivative financial instrument program to support our acquisition strategy.This approach enhances our ability to execute our business plan over the entirecommodity price cycle, protect our return on investments, and manage ourcapital structure.

 

Oil and natural gas prices have been volatile.Significant factors that will impact near-term commodity prices includepolitical developments in Iraq, Iran and other oil producing countries, theextent to which members of the OPEC and other oil exporting nations are able tomanage oil supply through export quotas and variations in key North Americannatural gas and refined products supply and demand indicators. A substantialportion of our estimated production is currently covered by derivativefinancial instruments through 2009, and we have adopted a commodity price riskmanagement program under which we intend to enter into additional derivativefinancial instruments that will cover substantial percentages of our estimatedproduction to mitigate the impact of price volatility on our oil and naturalgas reserves.

 

The increases in commodity prices in recent yearshas resulted in increased drilling activity and demand for drilling, oilcountry tubular goods and operating services and equipment in our operatingareas. In addition, the costs of leasing acreage in our East Texas/NorthLouisiana and Appalachia operating areas have increased significantly duringthe past year.  

 

27

----

Table ofContents

 

Competitionfor this acreage is increasing and demands from land owners for higher royaltiesor other forms of compensation is also increasing.  Due to the expected continued favorablecommodity price environment and related demand pressures, we anticipatedrilling, service and labor costs, as well as costs of equipment and rawmaterials, to remain at or exceed the levels experienced in 2007.

 

Our 2008 capital expenditure budget totals $943.0million and includes $905.0 million for drilling, exploitation, leasing andproduction operations, $19.0 million for midstream projects and $19.0 millionfor corporate projects.  The increase inour exploration and production segment’s operations capital expenditure budgetreflects expected significant acreage acquisitions and drilling in theHaynesville/Bossier shales in East Texas and North Louisiana and the Marcellusand Huron shales in Appalachia.  Inaddition, we supplemented our development drilling budget for our February 2008acquisition of shallow producing and undeveloped oil and natural gas propertiesfrom EOG Resources, Inc., or the Appalachian Acquisition. We do not budgetfor acquisitions as these transactions are opportunistic in nature. Our futureearnings and cash flows are dependent upon our ability to manage our overallcost structure to a level that allows for profitable production.

 

Like all oil and natural gas production companies,we face the challenge of natural production declines. Oil and natural gasproduction from a given well naturally decreases over time. We attempt toovercome this natural decline by drilling to develop and identify additionalreserves and by acquisitions. Our future growth will depend upon our ability tocontinue to add oil and natural gas reserves in excess of production at areasonable cost. We will maintain our focus on the costs of adding reserves throughdrilling and acquisitions as well as the costs necessary to produce suchreserves.

 

On February 20,2008, we acquired oil and natural gas properties including approximately 2,500producing wells, 2,000 shallow undrilled locations and 16 Mmcfe/d of net productionin the Appalachian Acquisition. The purchase price, after preliminary closingadjustments of $7.4 million, was $388.4 million and was financed withthe EXCO Resources credit agreement.

 

On March 11, 2008, we acquired agathering system in East Texas, or the New Waskom Acquisition, forapproximately $55.6 million, net of preliminary purchase price adjustments.

 

OnJuly 15, 2008, we acquired producing oil and natural gas properties,acreage and other assets in Gregg, Rusk and Upshur counties of Texas forapproximately $243.6 million, net of preliminary closing adjustments.  Funding for this acquisition was provided bya senior unsecured term loan, which matures on December 15, 2008.  The assets include producing properties with approximately12 Mmcfe per day on stabilized net production from 83 producing wells andapproximately 11,000 gross acres.  Alsoincluded in the assets is a 50 mile gathering system with compressors, adehydration unit and a refrigeration plant. We estimate there are over 500 drilling locations in the Cotton Valleyand Travis Peak formations, of which 92 are proved.

 

We continue to face the challenge of financingfuture acquisitions. In connection with our 2007 and 2008 acquisitions, weamended our credit agreements in February 2008 to increase our borrowingcapacity to an aggregate of approximately $2.5 billion.  On July 14, 2008, we revised certaincovenant provisions and amended our credit agreements to allow for up to $500.0million of senior unsecured term loans. The credit agreement of our wholly-owned unrestricted subsidiary, EXCOOperating Company, LP, or EXCO Operating (formerly EXCO Partners OperatingPartnership, LP), which holds all of our assets located in East Texas/NorthLouisiana, or the EXCO Operating Credit Agreement, as amended on July 14,2008, provides for an aggregate borrowing base of $1.3 billion, of whichapproximately $1.2 billion and $1.1 billion was drawn as of June 30, 2008and August 1, 2008, respectively. The EXCO Resources credit agreement asamended on July 14, 2008, but effective on June 30, 2008 has aborrowing base of approximately $1.2 billion, of which approximately $994.0million and $1.1 billion was drawn as of June 30, 2008 and August 1,2008, respectively. With these credit agreements, we believe our unusedborrowing capacity as of August 1, 2008 of approximately $255.6 millionwill be sufficient to meet our commitments. Funding for future acquisitions mayrequire additional sources of financing, which may not be available.

 

**Critical accounting policies**

 

We consideraccounting policies related to our estimates of assets and liabilities acquiredin acquisitions, proved reserves, accounting for derivatives, businesscombinations, share-based payments, accounting for oil and natural gas properties,goodwill, asset retirement obligations and accounting for income taxes ascritical accounting policies. The policies include significant estimates madeby management 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, 2007.

 

28

----

Tableof Contents

 

We adopted FinancialAccounting Standards Board, or FASB, Statement of Financial Accounting Standards,or SFAS, No. 157, “Fair Value Measurements,” or SFAS No. 157 on January 1,2008.  SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value and provides forexpanded disclosure of information about fair value measurements.  Beginning with the first quarter of 2008, werevised our computations of the fair value of our derivative financialinstruments related to oil and natural gas sales to reflect the requirementsoutlined in SFAS No. 157.  As theimpact of SFAS No. 157 affects only our non-cash mark-to-marketactivities, we do not consider the adoption of the statement to be material toour results of operations or resources and liquidity.

 

**Recent accounting pronouncements**

 

In September 2006,FASB, issued 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 for financialinstruments.  FASB Financial StaffPosition No. FAS 157-2 deferred implementation for other non-financialassets and liabilities for one year. Examples of non-financial assets and liabilities are asset retirementobligations and non-financial assets and liabilities initially measured at fairvalue in a business combination.  Weadopted SFAS No. 157 on January 1, 2008.

 

In December 2007, the FASB issued SFAS No. 141(R),“Business Combinations,” or SFAS No. 141(R).SFAS No. 141(R) replaces SFAS No. 141.  SFAS No. 141(R) broadens the scopeof business combinations to include bargain purchases and combinations ofrelated companies, provides guidance on measuring goodwill and requiresacquisition costs to be separate from the value of assets and liabilitiespurchased.  SFAS No. 141(R) iseffective for financial statements issued for fiscal years beginning after December 15,2008, and as such, will be adopted by us on January 1, 2009.  We are currently evaluating the effect ofadopting SFAS No. 141(R) on our financial statements.

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements,” or SFAS No. 160.  SFAS No. 160 amends Accounting ResearchBulletin 51, or ARB 51.  SFAS No. 160requires the recognition of a noncontrolling interest (minority interest) asequity in the consolidated financial statements separate from the parent’sequity.  The amount of net incomeattributable to the noncontrolling interest will be included in consolidatednet income on the face of the income statement. It also amends certain of ARB No. 51’s consolidation procedures forconsistency with the requirements of SFAS No. 141(R).  SFAS No. 160 also includes expandeddisclosure requirements regarding the interests of the parent and itsnoncontrolling interest.  SFAS No. 160is effective for financial statements issued for fiscal years beginning after December 15,2008, and as such, will be adopted by us on January 1, 2009.  We are currently evaluating the effect ofadopting SFAS No. 160 on our financial statements.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities,” or SFAS No. 161. SFAS No. 161requires enhanced disclosure about the fair value of derivative instruments andtheir gains or losses in tabular format and information aboutcredit-risk-related contingent features in derivative agreements, counterpartycredit risk, and the company’s strategies and objectives for using derivativeinstruments. SFAS No. 161 is effective for financial statements issued forfiscal years beginning after December 15, 2008, and as such, will beadopted by us on January 1, 2009. We are currently evaluating the effectof adopting SFAS No. 161 on our financial statements.

 

In May 2008, the FASBissued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples,” or SFAS No. 162.  SFAS No. 162identifies the sources of accounting principles and the frame work forselecting the principles to be used in the preparation of financialstatements.  We do not expect SFAS No. 162to have an impact on our financial statements.

 

**Our results of operations**

 

A summary of key financial data for the three andsix months ended June 30, 2008 and 2007 related to our results ofoperations is presented below:

 

29

----

Table of Contents

 
| ** **                                                                                              | ** ** | **Three months  ended  June 30,** | ** ** | **Quarter change** | ** ** | **Six months  ended  June 30,** | ** ** | **Year change** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------|------------|--------------------------------------|------------|----------------------|------------|
| **(dollars in thousands, except prices and per unit expenses)** | ** ** | **2008**                               | ** ** | **2007**                | ** ** | **2008 - 2007**            | ** ** | **2008**             | ** ** | **2007** | ** ** | **2008 - 2007** | ** ** |
| **Production:**                                                                                         |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| Oil (Mbbls)                                                                                             |       | 545                                    |       | 426                     |       | 119                                  |       | 1,053                |       | 701 |   | 352 |   |
| Natural gas  (Mmcf)                                                                                     |       | 32,621                                 |       | 32,320                  |       | 301                                  |       | 64,670               |       | 47,983 |   | 16,687 |   |
| Total production  (Mmcfe)                                                                               |       | 35,891                                 |       | 34,876                  |       | 1,015                                |       | 70,988               |       | 52,189 |   | 18,799 |   |
|                                                                                                    |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| **Oil and  natural gas revenues before derivative financial instrument activities:**                    |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| Oil revenues                                                                                            |       | $                                      | 65,982     |                    | $          | 26,057                               |       | $                    | 39,925     |   | $ | 114,998 |   | $ | 41,162 |   | $ | 73,836 |   |
| Natural gas sales                                                                                       |       | 362,669                                |       | 235,495                 |       | 127,174                              |       | 638,596              |       | 340,749 |   | 297,847 |   |
| Total oil and  natural gas sales                                                                        |       | $                                      | 428,651    |                    | $          | 261,552                              |       | $                    | 167,099    |   | $ | 753,594 |   | $ | 381,911 |   | $ | 371,683 |   |
|                                                                                                    |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| **Midstream  operations:**                                                                              |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| Midstream  revenues (before intercompany eliminations)                                                  |       | $                                      | 39,574     |                    | $          | 13,303                               |       | $                    | 26,271     |   | $ | 56,657 |   | $ | 21,329 |   | $ | 35,328 |   |
| Midstream  operating expenses (before intercompany eliminations)                                        |       | 27,623                                 |       | 5,771                   |       | 21,852                               |       | 37,590               |       | 10,348 |   | 27,242 |   |
| Midstream  operating profit (before intercompany eliminations)                                          |       | 11,951                                 |       | 7,532                   |       | 4,419                                |       | 19,067               |       | 10,981 |   | 8,086 |   |
| Intercompany  eliminations                                                                              |       | (7,819                                 | )          | (6,460                  | )          | (1,359                               | )          | (15,070              | )          | (8,327 | ) | (6,743 | ) |
| Midstream  operating profit (after intercompany eliminations)                                           |       | $                                      | 4,132      |                    | $          | 1,072                                |       | $                    | 3,060      |   | $ | 3,997 |   | $ | 2,654 |   | $ | 1,343 |   |
|                                                                                                    |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| **Oil and  natural gas derivative financial instruments:**                                              |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| Cash settlements  on derivative financial instruments                                                   |       | $                                      | (90,380    | )                       | $          | 6,630                                |       | $                    | (97,010    | ) | $ | (87,364 | ) | $ | 38,702 |   | $ | (126,066 | ) |
| Non-cash change  in fair value of derivative financial instruments                                      |       | (572,273                               | )          | 71,267                  |       | (643,540                             | )          | (916,483             | )          | (56,824 | ) | (859,659 | ) |
| Total derivative  financial instrument activities                                                       |       | $                                      | (662,653   | )                       | $          | 77,897                               |       | $                    | (740,550   | ) | $ | (1,003,847 | ) | $ | (18,122 | ) | $ | (985,725 | ) |
|                                                                                                    |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| **Average  sales price (before cash settlements of derivative financial instruments):**                 |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| Oil (Bbl)                                                                                               |       | $                                      | 121.07     |                    | $          | 61.17                                |       | $                    | 59.90      |   | $ | 109.21 |   | $ | 58.72 |   | $ | 50.49 |   |
| Natural gas (per Mcf)                                                                                   |       | 11.12                                  |       | 7.29                    |       | 3.83                                 |       | 9.87                 |       | 7.10 |   | 2.77 |   |
| Natural gas  equivalent (per Mcfe)                                                                      |       | 11.94                                  |       | 7.50                    |       | 4.44                                 |       | 10.62                |       | 7.32 |   | 3.30 |   |
|                                                                                                    |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| **Oil and  natural gas production costs:**                                                              |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| Oil and natural  gas operating costs                                                                    |       | $                                      | 40,625     |                    | $          | 30,047                               |       | $                    | 10,578     |   | $ | 73,796 |   | $ | 51,598 |   | $ | 22,198 |   |
| Gathering and  transportation                                                                           |       | 3,700                                  |       | 2,303                   |       | 1,397                                |       | 6,831                |       | 3,275 |   | 3,556 |   |
| Production and ad  valorem taxes                                                                        |       | 21,433                                 |       | 16,999                  |       | 4,434                                |       | 40,743               |       | 25,375 |   | 15,368 |   |
| Depletion                                                                                               |       | 105,166                                |       | 100,788                 |       | 4,378                                |       | 209,079              |       | 149,204 |   | 59,875 |   |
| Depreciation and  amortization                                                                          |       | 6,115                                  |       | 4,360                   |       | 1,755                                |       | 11,419               |       | 7,268 |   | 4,151 |   |
| General and  administrative                                                                             |       | 19,657                                 |       | 14,990                  |       | 4,667                                |       | 42,284               |       | 29,165 |   | 13,119 |   |
| Interest expense,  including impacts of interest rate swaps                                             |       | 20,273                                 |       | 33,543                  |       | (13,270                              | )          | 56,293               |       | 110,252 |   | (53,959 | ) |
|                                                                                                    |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| **Oil and  natural gas production costs (per Mcfe):**                                                   |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| Oil and natural  gas operating costs                                                                    |       | $                                      | 1.13       |                    | $          | 0.86                                 |       | $                    | 0.27       |   | $ | 1.04 |   | $ | 0.99 |   | $ | 0.05 |   |
| Gathering and  transportation                                                                           |       | 0.10                                   |       | 0.07                    |       | 0.03                                 |       | 0.10                 |       | 0.06 |   | 0.04 |   |
| Production and ad  valorem taxes                                                                        |       | 0.60                                   |       | 0.49                    |       | 0.11                                 |       | 0.57                 |       | 0.49 |   | 0.08 |   |
| Depletion                                                                                               |       | 2.93                                   |       | 2.89                    |       | 0.04                                 |       | 2.95                 |       | 2.86 |   | 0.09 |   |
| Depreciation and  amortization                                                                          |       | 0.17                                   |       | 0.13                    |       | 0.04                                 |       | 0.16                 |       | 0.14 |   | 0.02 |   |
| General and  administrative                                                                             |       | 0.55                                   |       | 0.43                    |       | 0.12                                 |       | 0.60                 |       | 0.56 |   | 0.04 |   |
|                                                                                                    |       |                                   |       |                    |       |                                 |       |                 |       |   |   |   |   |
| **Net  income (loss)**                                                                                  |       | $                                      | (262,914   | )                       | $          | 82,886                               |       | $                    | (180,028   | ) | $ | (425,753 | ) | $ | (4,811 | ) | $ | (420,942 | ) |

 

The following is a discussion of our financialcondition and results of operations for the three and six months ended June 30,2008 and 2007.

 

The comparability of our results of operations fromperiod to period is impacted by:

 

·                  properties acquired in the Vernon Field ofLouisiana, or the Vernon Acquisition, on March 30, 2007, propertiesacquired in the Mid-Continent region in May 2007, or the Southern GasAcquisition, the additional 45% interest acquired in the Canyon Sand field inWest Texas on October 9, 2007, or the Canyon Sand Acquisition, and theAppalachian Acquisition in February 2008;

 

·                  dispositions of oil and natural gas properties,primarily the sale of our non-operating interests in the Cement Field inOklahoma in July 2007;

 

·                  significant changes in the amount of our long-termdebt and the issuance of $2.0 billion of preferred stock related to ouracquisition efforts;

 

·                  changes in proved reserves and their impact ondepletion; and

 

·                  fluctuations in oil and natural gas prices whichimpact our oil and natural gas reserves, revenues, net income or loss andceiling test results and the mark-to-market accounting used for our derivativefinancial instruments gains or losses.

 

***General***

 

The availability of a ready market for oil andnatural gas and the prices of oil and natural gas are dependent upon a numberof factors that are beyond our control. These factors include, among otherthings:

 

30

----

Table ofContents

 

·                  the level of domestic production and economicactivity;

 

·                  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 uncertaintiesaffecting the supply and demand for oil, natural gas and refined petroleum products,we cannot accurately predict the prices or marketability of oil and natural gasfrom any producing well in which we have or may acquire an interest.

 

***Marketing arrangements***

 

We produce oil and natural gas. We do not refine orprocess the oil we produce.

 

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

 

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

 

We may not be able to market all of the oil andnatural gas we produce. If our oil and natural gas can be marketed, we may notbe able to negotiate favorable price and contractual terms. Changes in oil ornatural gas prices may significantly affect our revenues, cash flows, the valueof our oil and natural gas properties and the estimates of recoverable oil andnatural gas contained in our properties. Further, significant declines in theprices of oil or natural gas may have a material adverse effect on our businessand on our financial condition.

 

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

 

**Summary**

 

For the three months ended June 30, 2008, wereported a net loss available to common shareholders of $297.9 million,compared to a net income available to common shareholders of $31.8 million forthe quarter ended June 30, 2007. For the six months ended June 30, 2008, we reported a net lossavailable to common shareholder of $495.8 million, compared to a net lossavailable to common shareholders of $57.0 million for the six months ended June 30,2007.

 

The impact of our Appalachian Acquisition in 2008and the Vernon Acquisition, the Southern Gas Acquisition and other acquisitionsin 2007 increased our production, revenues, operating expenses and also generaland administrative expenses when compared to the prior year.  Derivative financial instruments have asignificant impact both on our revenues 

 

31

----

Table ofContents

 

andon our results of operations, since we do not designate our derivativefinancial instruments as hedges and are required to mark the non-cash changesin the fair value of our derivatives to market at the end of each reportingperiod.  As further discussed below, thiscan cause our reported oil and natural gas revenues, total revenue and netincome to decline, as was the case in the first half of 2008, or increasesignificantly when oil and natural gas prices experience significant decreases.

 

**Total revenues**

 

Our revenues are comprised of sales of oil andnatural gas, revenues from our midstream operations, cash settlements andchanges in the fair value of our derivative financial instruments and otherincome. Our total revenues for the six months ended June 30, 2008 and 2007were a negative $211.7 million and a positive $378.7 million,respectively.  Excluding the impact ofderivative financial instruments, our total revenues for the six month-periodswould have been $792.1 million and $396.8 million, respectively.  The significant increases in the prices ofoil and natural gas during the first two quarters of 2008 compared with 2007and changes in the fair value of our derivative financial instruments resultedin negative revenue adjustments of $1.0 billion and $18.1 million for the six monthsended June 30, 2008 and 2007, respectively.

 

Total revenues for the threemonths ended June 30, 2008 and 2007 were negative $204.8 million andpositive $346.5 million, respectively. Excluding the impact on revenues from derivative financial instruments,total revenues for such three-month periods would have been $457.9 million and$268.6 million.  The negative revenueadjustment due to changes in the fair value of the derivative financialinstruments was $662.7 million for the three months ended June 30, 2008and a positive $77.9 million for the comparable period for 2007.

 

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

 

For the three months ended June 30, 2008, totaloil and natural gas revenues, excluding the impact of derivative financialinstruments, were $428.7 million, a 63.9% increase over the three months ended June 30,2007 total oil and natural gas revenues of $261.6 million. Total equivalentproduction volumes were 35.9 Bcfe for the three months ended June 30,2008, a 2.9% increase over the prior year’s comparable period production of34.9 Bcfe. Increased volumes attributable to the Southern Gas Acquisition in May 2007,the Canyon Sand Acquisition in November 2007 and the AppalachianAcquisition in February 2008 were partially offset by normal productiondeclines, particularly in the Vernon field where production declined byapproximately 3.0 Bcfe from the prior year’s comparable quarter, and reducedvolumes of approximately 0.8 Bcfe arising from the sale of our Cement Field inOklahoma in July 2007.  While thedecline of 3.0 Bcfe from our Vernon field for the three months ended June 30,2008 compared to the prior year’s period is offsetting other productionincreases, we have been successful in mitigating production decline which hasresulted in our current production rate from the Vernon field exceeding ouroriginal expectations.

 

For the six months ended June 30, 2008, totaloil and natural gas revenues, excluding the impact of derivative financialinstruments, were $753.6 million, a 97.3% increase over the six months ended June 30,2007 total oil and natural gas revenues of $381.9 million. Total equivalentproduction volumes were 71.0 Bcfe for the six months ended June 30, 2008,a 36.0% increase over the prior year’s comparable period production of 52.2Bcfe. The increased volumes are primarily attributable to the VernonAcquisition and the Southern Gas Acquisition, with a smaller contribution fromthe Canyon Sand Acquisition and the Appalachian Acquisition. The increasedvolumes from development drilling activities and acquisitions were partiallyoffset by property sales of our Cement field and other divestitures.  The increase in production volumes for thesix months ended June 30, 2008 compared to the same period in 2007 ispresented below:

 

·                  the Vernon Acquisition which closed on March 30,2007, produced 22.6 Bcfe for the six months ended June 30, 2008 comparedwith 14.2 Bcfe in the prior year period, an increase of 8.4 Bcfe;

 

·                   the Southern Gas Acquisition which closed on May 2,2007, contributed an increase of 5.7 Bcfe for the six months ended June 30,2008;

 

·                   increased volumes of 2.5 Bcfe from our Canyon SandAcquisition;

 

·                  the Appalachian Acquisition on February 20,2008, which increased production by 1.9 Bcfe in our Appalachian region.

 

These increases were partially offset by reduced volumes relating tonormal declines and sales of producing properties during 2007, particularlyfrom the Cement Field in Oklahoma, which had net production of 1.4 Bcfe duringthe six months ended June 30, 2007.

 

The average sales price per Bbl, excluding theimpact of derivative financial instruments, increased for oil during the sixmonths ended June 30, 2008 compared to the six months ended June 30,2007 from $58.72 per Bbl to $109.21 per Bbl, or 

 

32

----

Table ofContents

 

86.0%.The average natural gas sales price, excluding the impact of derivativefinancial instruments, was $9.87 per Mcf, an increase of 39.0% for the sixmonths ended June 30, 2008 compared with $7.10 per Mcf for the six monthsended June 30, 2007.

 

***Midstream revenues***

 

OurMidstream assets are principally comprised of gathering systems and anintrastate pipeline system.  Theprinciple assets are discussed below:

 

·                  TGG Pipeline, or TGG, is a 53-mile intrastate pipeline. TGG has accessto 12 markets for natural gas and transports natural gas for third-partyproducers.  The current transportedvolumes are approximately 130 Mmcf per day, of which approximately 20% isnatural gas delivered from our exploration and production operatingsegment.  Currently, we are expanding ourTGG Pipeline in East Texas, adding 57 miles of pipeline to the original TGGsystem at a cost of approximately $37.6 million.  As of June 30, 2008, approximately 20miles of the 57 miles of this expansion is available for service.  Upon completion of this expansion, which weexpect to become fully operational in the second half of 2008, TGG will have 110miles of pipeline and add an incremental throughput of 100 Mmcf per day withoutcompression.  With compression,incremental throughput volumes could exceed 200 Mmcf per day.

 

·                  our Talco midstream gathering system, or Talco, is a network of sixnatural gas gathering systems comprised of approximately 300 miles of pipeline,gathers natural gas produced from the Holly/Caspiana, Longwood/Waskom fieldsand other fields in East Texas and North Louisiana. The assets of Talco includethe New Waskom Acquisition.  Averagethroughput in Talco, including the New Waskom Acquisition volumes isapproximately 200 Mmcf per day, of which approximately 57% is natural gasproduced by our exploration and production operating segment.

 

·                  a gathering system and treating facility in the area of our Vernonfield operations, or Vernon Gathering. This system gathers and transports gas from our Vernon field and, to alesser extent, gas from third-party producers. The gathering system transports natural gas to our Caney Lake treatingfacility where the natural gas is sweetened and delivered to interstatepipeline systems.  Average throughput inVernon Gathering is approximately 170 Mmcf per day, of which 98% was naturalgas produced by our exploration and production operating segment.

 

We evaluate our midstream operations as if they were astand alone operation.  Accordingly, theresults of operations discussed below are prior to intercompany eliminations.

 

Forthe three months ended June 30, 2008, midstream revenues, were $39.6million, a 198% increase over the three months ended June 30, 2007midstream revenues of $13.3 million. Increases in the sales of natural gas purchased from third-partyproducers and then resold account for 83.5% of the increase in the midstreamrevenues and are primarily attributable to the New Waskom Acquisition.  This asset, which was not in our portfolio in2007, has several contracts whereby we purchase and resell natural gas producedby third-parties.  The remaining increasein revenues was attributable to increases in drip sales and gathering feesassociated with the New Waskom Acquisition, as well as increased throughput onour midstream assets.

 

Forthe six months ended June 30, 2008, midstream revenues were $56.7 million,a 166% increase over the six months ended June 30, 2007 midstream revenuesof $21.3 million.  Increases in the salesof natural gas purchased from third-party producers and then resold account for67.8% of the increase in midstream revenues and are primarily attributable tothe New Waskom Acquisition as discussed above. The remaining 32.2% of the increase in revenues is attributable toincreases in drip sales and gathering fees associated with the New WaskomAcquisition, as well as increased throughput on our midstream assets.

 

***Derivative financial instruments***

 

We use oil and natural gas derivatives and financialrisk management instruments to manage our exposures to commodity price andinterest rate fluctuations.  We do notdesignate these instruments as hedging instruments for financial accountingpurposes and, as a result, we recognize the change in the respective instrument’sfair value currently in earnings, as a gain or loss on oil and natural gasderivatives and as interest expense on financial risk managementinstruments.  When oil and natural gasprices increase significantly, as they did during the first six months of 2008,the impact of such increases result in decreases in reported revenues andresults of operations.  Conversely, whenoil and natural gas prices decrease, our 

 

33

----

Table ofContents

 

revenuesand results of operations can increase significantly.

 

A significant portion of the revenue and netearnings impact of our derivative financial instruments relates to non-cashmark-to-market adjustments, which do not affect our cash flows, capitalresources or liquidity.  The non-cashportion of the impact on revenues and results of operations of derivativefinancial instruments was negative $572.3 million and negative $916.5 million,respectively, for the three and six months ended June 30, 2008.  For the three and six months ended June 30,2007, the non-cash impact of derivatives was a positive $71.3 million andnegative $56.8 million, respectively.

 

We expect that our revenues will continue to besignificantly 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.  In addition, pricesfor oil and natural gas have been increasing during 2008 and in the upcomingmonths we expect our cash settlements on our derivatives to decrease revenuesas a result of increases in oil and natural gas prices that have occurredduring the second quarter of 2008.  Forthe remainder of 2008, approximately 78.0% of our expected production volumesare subject to oil and natural gas derivative contracts.  In addition to our oil and natural gasderivative financial instruments, we entered into interest rate swaps in February 2008.  The impact of these derivative financialinstruments are presented on the following table:

 

| ** **                                                          | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(in thousands)**                                             | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Oil and  natural gas derivative financial instruments:**          |       |                             |       |                           |       |   |   |   |   |
| Cash settlements  on derivative financial instruments               |       | $                                | (90,380    | )                              | $          | 6,630 |   | $ | (87,364 | ) | $ | 38,702 |   |
| Non-cash change  in fair value of derivative financial instruments  |       | (572,273                         | )          | 71,267                         |       | (916,483 | ) | (56,824 | ) |
| Total oil and  natural gas derivative loss on financial instruments |       | $                                | (662,653   | )                              | $          | 77,897 |   | $ | (1,003,847 | ) | $ | (18,122 | ) |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| **Interest  rate swaps:**                                           |       |                             |       |                           |       |   |   |   |   |
| Interest rate  swaps settlement receipts                            |       | $                                | 383        |                           | $          | — |   | $ | 761 |   | $ | — |   |
| Fair market  value adjustment on interest rate swaps                |       | 11,001                           |       | —                         |       | 7,370 |   | — |   |
| Total interest  rate swaps                                          |       | $                                | 11,384     |                           | $          | — |   | $ | 8,131 |   | $ | — |   |

 

***Other income***

 

Other income consists of interest earned on our cashbalances, miscellaneous gathering income which is not designated as a componentof our midstream segment and income or losses resulting from periodicre-evaluation from natural gas imbalances. Our other income increased to $2.2 million for the three months ended June 30,2008 from $1.9 million for the same period in the prior year.  For the six months ended June 30, 2008,our other income decreased to $3.7 million compared with $5.2 million in thesame period in 2007.  The decrease inother income for the six months ended June 30, 2008 compared to the sameperiod in 2007 is related to slightly lower than average cash balances andlower interest rates on our invested cash.

 

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

 

Our oil and natural gas operating costs for thethree and six months ended June 30, 2008 were $40.6 million and $73.8million, respectively, and represent increases of $10.6 million and $22.2million, respectively, or 35.2% and 43%, from the same periods in 2007. Theincrease in oil and natural gas operating costs for the six months ended June 30,2008, was primarily attributable to:

 

·                  the Vernon Acquisition, which closed on March 30,2007 and added direct production expenses of $7.6 million for the six monthsended June 30, 2008 when compared to the same period in 2007;

 

·                  the Southern Gas Acquisition, which closed on May 2,2007 and added $6.5 million of production expenses for the six months ended June 30,2008;

 

·                  the Appalachian Acquisition on February 20,2008, added $2.1 million of production expenses for the six months ended June 30,2008;

 

·                  increased direct production expenses ofapproximately $2.1 million in our Sugg Ranch area primarily due to theacquisition of incremental working interests in that area and incrementaloperating costs resulting from our development of this field;

 

·                  increases of $1.4 million of non-cash stock-basedcompensation expenses;

 

34

----

Table of Contents

 

·                  a general increase in the cost of goods and services usedin our oil and natural gas operations, most notably motor fuel and utilitycosts during the second quarter of 2008; and

 

·                  increases from new well additions through our developmentand exploitation capital program.

 

The oil and natural gas operating costs per unitincreased to $1.04 per Mcfe for the six months ended June 30, 2008 from$0.99 per Mcfe, or 5.1%, for the six months ended June 30, 2007.  This increase is attributable to theaforementioned increases in motor fuel, utilities, the general increase in thecosts of goods and services used in our operations and an increase in workoveractivities.

 

***Midstream operating expenses***

 

Our midstream operating expenses for the three andsix months ended June 30, 2008 increased $21.9 million and $27.2 million,respectively, or 378.7% and 263.2%, respectively, from the same periods in2007. The increase in midstream operating expenses for the six months ended June 30,2008 were primarily attributable to:

 

·                  increased cost of purchased gas of approximately$21.6 million due primarily to purchased natural gas for resale from our March 2008New Waskom Acquisition; and

 

·                  increased operating expenses of approximately $4.9million related to the March 2008 New Waskom Acquisition and increasedVernon Gathering operating expenses due to 2008 containing six months ofoperating costs and 2007 containing only three months of operating costs.

 

***Gathering and transportation***

 

We generally sell oil and natural gas under twotypes of agreements which are common in our industry.  Both types of agreements include atransportation charge.  One is a netbackarrangement, under which we sell oil or natural gas at the wellhead and collecta price, net of the transportation incurred by the purchaser.  In this case, we record sales at the pricereceived from the purchaser, net of the transportation costs.  Under the other arrangement, we sell oil ornatural gas at a specific delivery point, pay transportation to a third partyand receive proceeds from the purchaser with no transportation deduction.  In this case, we record the transportationcost as gathering and transportation expense. Due to these two distinct selling arrangements, our computed realizedprices, before the impact of derivative financial instruments, contain revenueswhich are reported under two separate bases. Gathering and transportation expenses totaled $3.7 million and $6.8million for the three and six months ended June 30, 2008, respectively,compared to $2.3 million and $3.3 million for the three and six months ended June 30,2007, respectively.  As our marketingefforts expand, we expect our gathering and transportation expenses will alsoincrease.

 

***Production and ad valorem taxes***

 

Production and ad valorem taxes for the three monthsended June 30, 2008 increased by $4.4 million, or 26.1%, over the sameperiod in 2007. Production and ad valorem taxes for the six months ended June 30,2008 increased by $15.4 million, or 60.6%, over the same period in 2007.  These increases are primarily attributable tohigher oil and natural gas volumes and prices resulting from acquisitions andour development drilling. On a percentage of revenue basis, before the impactof derivative financial instruments, production and ad valorem taxes were 5.0%and 5.4% of gross oil and natural gas sales for the three and six months ended June 30,2008, compared with 6.5% and 6.6 % during the same periods in the prior year.The decrease in the overall tax rate is primarily the result of a statutoryseverance tax rate reduction in the state of Louisiana, which lowered the ratefrom $0.37 per Mcf for 2007 to $0.27 per Mcf for 2008.  The lower severance tax rate in Louisianacontributed to our consolidated decreased severance tax rate in 2008 whenmeasured as a percentage of revenue due to a significant increase in Louisianaproduction volume resulting from the Vernon Acquisition and developmentdrilling in North Louisiana.  Productiontaxes are set by state and local governments and vary as to the tax rate andthe value 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 since the beginning of 2007 due toacquisitions. These taxes are generally based upon the price received forproduction.

 

***Depletion***

 

Our depletion expense for the three and six monthsended June 30, 2008 increased by $4.4 million and $59.9 million, or 4.3%and 40.1%, from the same periods in 2007. The primary reason for the increaseswere from increases in equivalent oil and natural gas sales volumes for thethree months and six months ended June 30, 2008 of 2.9% and 36.0%,respectively.  This 

 

35

----

Table ofContents

 

increasein equivalent sales volumes for the six months ended June 30, 2008compared with the six months ended June 30, 2007 is largely due to theVernon Acquisition, the Southern Gas Acquisition, the Appalachian Acquisitionand the Canyon Sand Acquisition.  Theseacquisitions also increased our per unit depletion rate from $2.89 and $2.86per Mcfe for the three and six months ended June 30, 2007 to $2.93 and$2.95 per Mcfe for the three and six months ended June 30, 2008.

 

***Depreciation and amortization***

 

Our depreciation and amortization costs for thethree and six months ended June 30, 2008 increased by $1.8 million and$4.2 million, or 40.3% and 57.1%, from the same periods in 2007. The primaryreasons for the increases were from the increases in our depreciable asset basefor the three and six months ended June 30, 2008, which was directlyrelated to our 2007 acquisition of Vernon gathering assets and the March 2008New Waskom Acquisition gathering assets.

 

***General and administrative***

 

Our general and administrative costs for the threemonths ended June 30, 2008 were $19.6 million, or $0.55 per Mcfe comparedto $15.0 million, or $0.43 per Mmcfe for the same period in 2007. Our generaland administrative costs for the six months ended June 30, 2008 were $42.3million, or $0.60 per Mcfe, compared to $29.2 million, or $0.56 per Mcfe, forthe same period in 2007, an increase of $13.1 million, or 45.0%. Significantcomponents of the increase for the six months ended June 30, 2008, includethe following items:

 

·                  increased personnel costs of $11.1 million due toadditional headcount of 176 employees related primarily to our acquisitions andexpanding our technical and managerial staff to fully exploit our asset base;

 

·                  an increase in share-based compensation costs of $0.9 million dueprimarily to additional headcount;

 

·                  increased consulting and contract labor costs of$1.2 million due primarily to acquisitions and information technology-relatedsupport;

 

·                  increased information technology related costs of$1.3 million primarily due to the information technology requirementsattributable to our increased headcount;

 

·                  increased legal fees of $2.5 million including $3.7million attributable to a write-off of our proposed master limited partnershipoffering, which was withdrawn in January 2008.  The increase associated with this write-offwas partially offset by lower external legal fees of approximately $1.0 millionduring the six months ended June 30, 2008 when compared with the prioryear;

 

·                  increased occupancy costs of $0.4 million resultingfrom expansion of corporate facilities;

 

·                  increased franchise tax of $1.1 million due tochanges in the jurisdictional make-up of our properties; and

 

·                    other expenses related to the overall growth of ourbusiness.

 

Partially offsetting the above increases in general and administrativecosts were increased operator overhead recoveries of $11.7 million for the sixmonths ended June 30, 2008, a $4.2 million increase from the same periodin the prior year.  Additionally, we capitalizedapproximately $4.6 million in salary costs to our full cost pool, which was$2.3 million higher than the amount capitalized in the same period in2007.  These increases from the sameperiod in the prior year are the result of the increased personnel, primarilyattributable to the acquisitions in 2007 and 2008.

 

The following table presents the components of our general andadministrative expenses:

 
| ** **                                       | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **June 30,**                                  | ** ** | **June 30,**                                | ** ** |
| **(in thousands)**                          | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Gross general  and administrative expenses       |       | $                                                  | 28,045     |                                             | $          | 20,933 |   | $ | 58,566 |   | $ | 38,981 |   |
| Capitalized  general and administrative expenses |       | (2,362                                             | )          | (1,353                                           | )          | (4,581 | ) | (2,319 | ) |
| Reimbursed  general and administrative expenses  |       | (6,026                                             | )          | (4,590                                           | )          | (11,701 | ) | (7,497 | ) |
| Net general and  administrative expenses         |       | $                                                  | 19,657     |                                             | $          | 14,990 |   | $ | 42,284 |   | $ | 29,165 |   |

 

***Interestexpense***

 

Our interest expense for the three and six monthsended June 30, 2008 decreased $13.3 million and $54.0 million 

 

36

----

Table ofContents

 

fromthe same periods in 2007. The decrease is primarily due to $32.1 million ofinterest-related charges taken in the first quarter of 2007 associated with theamendment of the EXCO Operating Credit Agreement and costs attributable toearly paydown on the EXCO Operating term loan, a loan which was initiated in October 2006and paid in full in March 2007.  Thefollowing table presents the components of our interest expense:

 
| ** **                                                                          | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(in thousands)**                                                             | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Interest expense:**                                                               |       |                             |       |                           |       |   |   |   |   |
| 7 1/4% senior notes due 2011                                                        |       | $                                | 7,225      |                           | $          | 7,276 |   | $ | 14,463 |   | $ | 14,565 |   |
| EXCO Resources Credit Agreement                                                     |       | 11,140                           |       | 5,316                          |       | 20,662 |   | 11,675 |   |
| EXCO Operating Credit Agreement                                                     |       | 12,362                           |       | 19,505                         |       | 27,131 |   | 31,541 |   |
| EXCO Operating term loan                                                            |       | —                           |       | 91                             |       | — |   | 18,140 |   |
| Amortization of deferred financing costs on EXCO Resources Credit  Agreement        |       | 494                              |       | 249                            |       | 970 |   | 310 |   |
| Amortization and write-off of deferred financing costs on EXCO  Operating term loan |       | 753                              |       | 25                             |       | 1,506 |   | 32,100 |   |
| Amortization and write-off of deferred financing costs on EXCO  Operating loan      |       | —                           |       | 1,073                          |       | — |   | 1,906 |   |
| Interest rate swaps settlements                                                     |       | (383                             | )          | —                         |       | (761 | ) | — |   |
| Fair market value adjustment on interest rate swaps                                 |       | (11,001                          | )          | —                         |       | (7,370 | ) | — |   |
| Capitalized interest                                                                |       | (316                             | )          | —                         |       | (316 | ) | — |   |
| Other interest expense                                                              |       | (1                               | )          | 8                              |       | 8 |   | 15 |   |
| Total interest expense                                                              |       | $                                | 20,273     |                           | $          | 33,543 |   | $ | 56,293 |   | $ | 110,252 |   |

 

On July 15, 2008, weentered into a $500.0 million Senior Unsecured Term Credit Agreement, or TermCredit Agreement, and incurred financing costs of approximately $10.6million.  The loan matures on December 15,2008.  As a result, our amortization ofdeferred financing costs will increase by approximately $2.1 million per monthbeginning in July 2008.  Inaddition, interest on the loan will be approximately $2.5 million per month.

 

***Income taxes***

 

Our effective income tax rate for the six monthsended June 30, 2008 and 2007 was a benefit of 37.9% and 28.6%,respectively.  A substantial portion ofour stock-based compensation included in our results of operations for the sixmonths ended June 30, 2008 and 2007 are in the form of incentive stockoptions which are not deductible for tax purposes until a disqualifying eventoccurs. The increase in the tax rate from the prior year is a result of a staterate change last year in our state income taxes.

 

**Our liquidity, capital resources and capitalcommitments**

 

***General***

 

Most of our growth has resulted from acquisitionsand our development and exploitation program. Consistent with our strategy ofacquiring and developing reserves, we have an objective of maintainingfinancing flexibility. In the past, we have utilized a variety of sources ofcapital to fund our acquisition, development and exploitation programs and tofund our operations. Our general financial strategy is to use a combination ofcash flow from operations, bank financing, cash received from the sale of oiland natural gas properties and the sale or issuance of equity and debtsecurities to fund our operations, conduct development and exploitationactivities and to fund acquisitions. As of August 1, 2008, the aggregateborrowing base under our credit agreements totaled approximately $2.5 billion,of which $2.2 billion was outstanding. We do not establish a budget foracquisitions, as these tend to be opportunity driven.  On July 15, 2008, we entered into theTerm Credit Agreement, of which $300.0 million was drawn as of August 1,2008.  The funds drawn under the TermCredit Agreement were used to close a producing oil and natural gas propertyacquisition, provide capital for general operations of EXCO Operating andreduce debt under the EXCO Operating Credit Agreement.  Historically, we have used the proceeds fromthe issuance of equity and debt securities and borrowings under our creditagreements to raise cash to fund acquisitions. Our ability to borrow fromsources other than our credit agreements is subject to restrictions imposed byour lenders. In addition, our indenture governing our Senior Notes containsrestrictions on incurring indebtedness and pledging our assets.

 

Net cash provided by operating activities was $512.2million for the six months ended June 30, 2008 compared with $169.1million for the six months ended June 30, 2007. The increase isattributable primarily to net cash provided from the oil and natural gasproperties acquired. At June 30, 2008, our cash and cash equivalentsbalance was $34.1 million, a decrease of $21.4 million from December 31,2007 primarily as a result of payments 

 

37

----

Table ofContents

 

toreduce debt. On January 15, 2008, we made an interest payment on ourSenior Notes of $16.1 million. We made dividend payments to our preferredshareholders of $35.0 million on March 14, 2008 and $35.0 million on June 16,2008.

 

***Recent events affecting liquidity***

 

Duringthe first six months of 2008, we expanded our activities in two of our coreoperating areas, East Texas/North Louisiana and Appalachia, to exploit theHaynesville, Marcellus and Huron shales. In Appalachia, our existing production areas and newly acquiredleasehold interests hold deep rights in the Marcellus and Huron shales.  Similarly, in East Texas and North Louisiana,our existing production areas and newly acquired leasehold interests hold deeprights in the Haynesville/Bossier shale. We estimate that our net acreage holdings exceed 119,800 acres in theHaynesville/Bossier shale and approximately 395,000 acres in the Marcellus andHuron shales.

 

As a result of our leasingand drilling programs, we increased our capital expenditure budget for 2008 by$175.0 million in March 2008, of which $150.0 million was allocated toacreage acquisition and drilling in the Marcellus and Huron shales inAppalachia.  In May 2008, we againincreased our 2008 capital expenditures budget by $143.0 million, whichincluded approximately $90.0 million for acreage acquisition and exploitationof the Haynesville/Bossier shale in East Texas/North Louisiana.  We also reallocated certain capitalexpenditures in East Texas and North Louisiana and Appalachia, which decreasedthe number of wells originally planned to be drilled in the second half of 2008,to focus more time and capital on our shale assets.  Our 2008 capital expenditures budget is$943.0 million.

 

These capital expenditureincreases have had the following impacts on our liquidity and capitalresources:

 

·                  the acquisition of acreagediffers from our traditional acquisitions of producing oil and natural gas assetssince the acquisitions cause an increase in borrowings under our creditagreements, but do not provide immediate cash flows with which to service thedebt;

 

·                  the EXCO Resources CreditAgreement was used to fund approximately $41.3 million of Marcellus acreage purchasesduring the second quarter of 2008.   Wealso have acreage acquisition commitments totaling $40.0 million as of June 30,2008. As a result of the anticipated increase in indebtedness, without thecorresponding immediate cash flows, we requested and received from our lendersa temporary increase in the leverage ratio covenant (from not greater than 3.5to 1.0 to not greater than 4.0 to 1.0);

 

·                  the EXCO Operating CreditAgreement was similarly impacted by acreage acquisitions in theHaynesville/Bossier shale play, where we spent $36.4 million on acreageacquisitions during the second quarter of 2008. We also have acreage acquisition commitments totaling approximately $7.6million as of June 30, 2008;

 

·                  we incurred $300.0 millionof unsecured debt to fund the producing property acquisition on July 15,2008; and

 

·                  our decision to exploit theshale plays has resulted in increases to our drilling and leasehold acquisitionexpenditures.  Consequently, substantialcash flows from operations that were previously used to reduce debt or fundacquisitions have been redeployed to these capital projects.

 

Oil and natural gas prices increased significantly during the firsthalf of 2008 and we paid approximately $87.4 million to settle oil and naturalgas derivatives for the six months ended June 30, 2008.  While our revenues benefit from the increasedprices, we do not receive full benefit as approximately 80% of our sold volumesare subject to derivative financial instruments.  In addition, we are required to settle ourderivative financial contracts prior to receiving the payments for production,which is typically collected 30 to 60 days after our derivative settlements areclosed.  The rapid increase in oil andnatural gas prices, particularly in the second quarter of 2008, created a shortterm borrowing requirement of approximately $70.0 million.

 

Finally, on July 18, 2008, we forced the conversion of alloutstanding shares of our preferred stock into our common stock, which willresult in dividend savings of $35.0 million per quarter, or $140.0 millionannually.

 

We believe that our capitalresources from existing cash balances, cash flow from operating activities,including savings from dividends previously associated with our preferred stockand borrowing capacity under our credit agreements are adequate to meet thecash requirements to fund our operations and capital expenditure programs.However, future cash flows are subject to a number of variables includingproduction volumes and oil and natural gas prices. If cash flows decline we maybe required to reduce our capital expenditure budget, which in turn may affectour production in future periods. Our operations and other capital resourcesmay not provide cash in sufficient amounts to maintain or initiate plannedlevels of capital expenditures. We have experienced increased costs forpersonnel, tubular goods and other services during 2008. Further, we haveencountered increased demand for drilling rigs, tubular goods, fuel, utilitiesand other services. Currently, we do not 

 

38

----

Table ofContents

 

believe that these conditions have had a significantimpact upon our capital expenditure programs or our results of operations. Ifthe conditions continue, however, projects may be delayed due to lack ofservices or materials or we may have to delay projects to stay within ourcapital budget.

 

Our decision to exploit the recent shale opportunities in our coreoperating areas of East Texas/North Louisiana and Appalachia represents animportant corporate commitment.  Weexpect to manage these opportunities, and the related debt management includingrepayment or refinancing of our Term Credit Agreement, by pursuing, among otherthings, joint venture partners in our shale plays, evaluating the sale ofnon-strategic assets, pursuing consolidation of our two revolving creditfacilities to maximize our borrowing capacity, or seeking other financingalternatives.

 

***Acquisitions and capitalexpenditures***

 

The following table presents our capitalexpenditures for the three and six months ended June 30, 2008 and 2007.

 
| ** **                       | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(in thousands)**          | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Capital expenditures:**        |       |                             |       |                           |       |   |   |   |   |
| Property acquisitions            |       | $                                | 62,659     |                           | $          | 813,682 |   | $ | 477,178 |   | $ | 2,260,964 |   |
| Lease purchases                  |       | 92,369                           |       | 3,879                          |       | 102,657 |   | 11,498 |   |
| Development capital expenditures |       | 136,178                          |       | 104,139                        |       | 288,337 |   | 180,032 |   |
| Midstream acquisitions           |       | —                           |       | 455                            |       | 55,667 |   | 117,452 |   |
| Midstream capital additions      |       | 14,479                           |       | 2,863                          |       | 25,658 |   | 5,592 |   |
| Corporate and other              |       | 14,774                           |       | 9,073                          |       | 25,123 |   | 13,537 |   |
| Total capital expenditures       |       | $                                | 320,459    |                           | $          | 934,091 |   | $ | 974,620 |   | $ | 2,589,075 |   |

 

OnFebruary 20, 2008, we closed the Appalachian Acquisition for $388.4million in cash, net of preliminary purchase price adjustments. The assetsinclude producing oil and natural gas properties, undeveloped oil and naturalgas properties, undeveloped acreage and related facilities in the Appalachiaregion. The Appalachian Acquisition was financed by the EXCO Resources CreditAgreement.

 

In March 2008 we closedthe New Waskom Acquisition, which contained 230 miles of pipeline and agathering system at a cost of approximately $55.6 million.  The New Waskom system is located primarily inHarrison and Panola Counties in East Texas and Caddo Parish in North Louisiana.  The system has access to one plant and threeinterstate pipelines.

 

Currently, we are expandingTGG, adding 57 miles of predominantly 20-inch diameter pipe at a cost ofapproximately $37.6 million.  Upon completion of this expansion, whichwe expect to become fully operational in the second half of 2008, TGG will have110 miles of pipeline with an incremental throughput of 100 Mmcf per daywithout compression.  With compression,incremental throughput volumes could exceed 200 Mmcf per day.

 

Additionally, we arecontemplating other Midstream projects in East Texas and North Louisiana toexpand our transport capabilities for our own production as well as productionfrom unaffiliated producers.

 

Beginning with the second quarter of 2008, weinitiated aggressive acreage acquisition programs and spent approximately $36.4million in the Haynesville/Bossier shale plays in East Texas and NorthLouisiana and approximately $41.3 million in the Marcellus and Huron shaleplays in the Appalachia region of the United States.  These acreage acquisition programs havesignificantly increased our capital expenditures for leaseholds and resulted inincreases to our 2008 capital expenditures budget.  In addition to our acreage acquisitionprogram, we plan to drill three horizontal wells and 17 vertical wells in theHaynesville/Bossier shale area.  We planto drill four horizontal wells and seven vertical wells in the Marcellus shalearea and approximately eight horizontal wells in the Huron shale area during2008.

 

During 2008, we have increased our budgeted capitalexpenditures from approximately $625.0 million to approximately $943.0million for our development, exploitation, exploration, midstream and corporateactivities, of which $243.0 million and $427.0 million was spent during thethree and six months ended June 30, 2008, respectively, exclusive ofproperty acquisitions. As of June 30, 2008, we were contractuallyobligated to spend approximately $85.0 million for our development,exploitation and exploration activities for the remainder of 2008 andapproximately $47.6 million for additional Haynesville and Marcellus acreageacquisitions.  The increase in thecapital expenditures budget is largely the result of acreage acquisitions anddrilling in the Haynesville and Marcellus shale plays, additional drilling inour Vernon Field and capital expenditures associated with our AppalachianAcquisition and East Texas acquisition.

 

39

----

Table ofContents

 

OnJuly 15, 2008, we acquired producing oil and natural gas properties,acreage and other assets in Gregg, Rusk and Upshur counties of Texas forapproximately $243.6 million, including a $25.0 million deposit paid early inthe second quarter of 2008 and net of preliminary closing adjustments.  Funding for this acquisition was provided bya senior unsecured term loan, which matures on December 15, 2008.

 

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

 

As of June 30,2008, $444.7 million in principal was outstanding on our 7 1/4% senior notesdue January 15, 2011, or Senior Notes. The unamortized premium on theSenior Notes at June 30, 2008 was $9.3 million. The estimated fair valueof the Senior Notes, based on quoted market prices for the Senior Notes, was$438.6 million on June 30, 2008.

 

Interest ispayable on the Senior Notes semi-annually in arrears on January 15 and July 15of each year.  Effective January 15,2007, we may redeem some or all of the Senior Notes for the redemption priceset forth in the Senior Notes.  On July 15,2008, we paid $16.1 million of interest on the Senior Notes.

 

The indenturegoverning the Senior Notes contains covenants, which limit our ability and theability of our guarantor subsidiaries to:

 

·                  incur or guarantee additional debt and issuecertain types of preferred stock;

 

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

 

·                  make investments;

 

·                  create liens on our assets;

 

·                  enter into sale/leaseback transactions;

 

·                  create restrictions on the ability of ourrestricted subsidiaries to pay dividends or make other payments to us;

 

·                  engage in transactions with our affiliates;

 

·                  transfer or issue shares of stock ofsubsidiaries;

 

·                  transfer or sell assets; and

 

·                  consolidate, merge or transfer all orsubstantially all of our assets and the assets of our subsidiaries.

 

***Credit agreements***

 

*EXCO Resources Credit Agreement*

 

On February 20,2008, we entered into the first amendment to the EXCO Resources CreditAgreement.  The primary change to theEXCO Resources Credit Agreement was an increase in the borrowing base from$900.0 million to approximately $1.2 billion, principally to reflect the assetsacquired in the Appalachian Acquisition.  On July 14, 2008, weentered into the second amendment to the EXCO Resources Credit Agreement.  This amendment, which was effective June 30,2008, permitted the payment of cash dividends in connection with the exerciseof any right to convert our preferred stock into common stock withoutcompliance with certain limitations on restricted payments.  In addition, the leverage ratio covenant, asdefined in the agreement, was increased to provide that EXCO will not permitsuch ratio (i) as of the end of any fiscal quarter ending on or after June 30,2008 and on or before December 31, 2008 to be greater than 4.00 to 1.00, (ii) asof the end of the fiscal quarter ending on March 31, 2009 to be greaterthan 3.75 to 1.00 and (iii) as the end of any fiscal quarter ending on orafter June 30, 2009 to be greater than 3.50 to 1.00. The other financialcovenants and all other terms, including maturity date and borrowing base,contained within the EXCO Resources Credit Agreement remained unchanged.

 

The borrowing baseis redetermined semi-annually with EXCO and the lenders having the right tointerim unscheduled redeterminations in certain circumstances. Scheduledredeterminations are on or about April 1 and October 1 of each year.The interest rate ranges from LIBOR plus 100 basis points, or bps, to LIBORplus 175 bps depending upon borrowing base usage.  The facility alsoincludes an Alternate Base Rate, or ABR, pricing alternative ranging from ABRplus 

 

40

----

Tableof Contents

 

0 bps to ABR plus 75 bpsdepending upon borrowing base usage.  Borrowings under the EXCO ResourcesCredit Agreement are collateralized by a first lien mortgage providing asecurity interest in our oil and natural gas properties. EXCO has also agreedto have in place derivative financial instruments covering no more than 80% ofits forecasted production from total proved reserves (as defined) for 2008 and70% in 2009 through 2011.  EXCO will have in place mortgages covering 80%of the engineered value of its Borrowing Base Properties (as defined). The foregoing description is not complete and is qualified in its entirety bythe EXCO Resources Credit Agreement. As of June 30, 2008, EXCO was incompliance with the financial covenants contained in the EXCO Resources CreditAgreement which require that we:

 

·                  maintain a Consolidated Current Ratio (asdefined) of at least 1.0 to 1.0 as of the end of any fiscal quarter ending onor after September 30, 2007;

 

·                  not permit our ratio of Consolidated FundedIndebtedness (as defined) to Consolidated EBITDAX (as defined) to be greaterthan 4.0 to 1.0 at the end of any fiscal quarter ending on or after June 30,2008 and on or before December 31, 2008, 3.75 to 1.0 at the end of thefiscal quarter ending on March 31, 2009 and 3.5 to 1.0 beginning with thequarter ending June 30, 2009 and each quarter thereafter; and

 

·                  maintain a Consolidated EBITDAX toConsolidated Interest Expense (as defined) ratio of at least 2.5 to 1.0 at theend of any fiscal quarter ending on or after September 30, 2007.

 

At August 1,2008, the six month LIBOR rate was 3.1%, which would result in an interest rateof approximately 4.8% on any new indebtedness we may incur under the EXCOResources Credit Agreement. At August 1, 2008 we had $1.1 billion ofoutstanding indebtedness under the EXCO Resources Credit Agreement.

 

*EXCO Operating Credit Agreement*

 

The EXCO Operating Credit Agreement has a borrowingbase of $1.3 billion. The borrowing base is scheduled to be redetermined on asemi-annual basis, with EXCO Operating and the lenders having the right tointerim unscheduled redeterminations in certain circumstances. Scheduledredeterminations will be made on or about April 1 and October 1 ofeach year.  The EXCO Operating CreditAgreement is secured by a first priority lien on the assets of EXCO Operating,including 100% of the equity of EXCO Operating’s subsidiaries, and isguaranteed by all existing and future subsidiaries of EXCO Operating.  EXCO Operating has agreed to have in placederivative financial instruments covering no more than 80% of the “forecastedproduction from total proved reserves” (as defined) for 2008 and 70% of theforecasted production from total proved reserves for 2009 through 2011.  On July 14, 2008, EXCO Operating enteredinto a second amendment to the EXCO Operating Credit Agreement to (i) allowEXCO Operating to incur up to $500.0 million of indebtedness under the TermCredit Agreement and (ii) exclude drawings under the Term Credit Agreementfrom the consolidated current ratio, as defined in the EXCO Operating CreditAgreement through December 31, 2008. The foregoing description is not complete and is qualified in itsentirety by the EXCO Operating Credit Agreement. As of June 30, 2008, EXCOOperating was in compliance with the financial covenants contained in the EXCOOperating Credit Agreement, which require that EXCO Operating:

 

·                  maintain a consolidated current ratio (asdefined) of at least 1.0 to 1.0 at the end of any fiscal quarter, beginningwith the quarter ended June 30, 2007;

 

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

 

·                  not permit our interest coverage ratio (asdefined) to be less than 2.5 to 1.0 at the end of each fiscal quarter,beginning with the quarter ended June 30, 2007.

 

The EXCO Operating Credit Agreement containsrepresentations, warranties, covenants, events of default and indemnitiescustomary for agreements of this type. The EXCO Operating Credit Agreementmatures March 30, 2012. Interest under the EXCO Operating Credit Agreementranges from LIBOR plus 100 bps to 175 bps. The facility also includes an ABR pricing alternative ranging from ABRplus 0 bps to ABR plus 75 bps.

 

At August 1,2008, the six month LIBOR rate was 3.1%, which would result in an interest rateof approximately 4.6% on any new indebtedness we may incur under the EXCOOperating Credit Agreement. At August 1, 2008 we had $1.1 billion ofoutstanding indebtedness under the EXCO Operating Credit Agreement.

 

*Senior Unsecured Term CreditAgreement*

 

On July 15, 2008, EXCO Operating entered into asenior unsecured term credit agreement, or the Term Credit Agreement, and drew$300.0 million, resulting in net proceeds of $289.4 million after transactionfees and administrative 

 

41

----

Table of Contents

 

expenses.  Proceeds from the Term Credit Agreement wereused to fund an acquisition of developed and undeveloped oil and natural gasproperties and gathering and treating facilities located in East Texas fromprivate sellers for approximately $218.6 million, net of a $25.0 milliondeposit paid early in the second quarter of 2008 and preliminary purchase priceadjustments, provide working capital for general corporate purposes and toreduce indebtedness under the EXCO Operating Credit Agreement.

 

A term loan in the amountof $300.0****million was made in asingle draw on July 15, 2008.  Thereafter through October 15,2008, EXCO Operating may request additional term loans of up to $200.0 millionin the aggregate, which are available in up to four separate advances of atleast $50.0 million or increments of $5.0 million in excess thereof, but thelenders have no obligation to provide the requested additional funding. The Term Credit Agreement is due and payable on December 15, 2008 and isguaranteed by all existing and future direct or indirect subsidiaries of EXCOOperating, including any guarantor of the EXCO Operating Credit Agreement.

 

Financial covenantsgoverning the Term Credit Agreement include a minimum current ratio of 1.00 to1.00, a maximum leverage ratio of 3.50 to 1.00 and a minimum interest coverageratio of 2.50 to 1.00.  At the borrower’s election, term loans under TermCredit Agreement may bear interest at a rate per annum equal to: (a) theAlternate Base Rate, or ABR (defined as the higher of (i) the rate ofinterest publicly announced by JPMorgan as its prime rate in effect at itsprincipal office in New York City and (ii) the federal funds effectiverate from time to time plus 0.50%), plus 4.75% or (b) the LIBO Rate(defined as the greater of (i) the rate at which eurodollar deposits inthe London interbank market for one, two or three months, as selected by theborrower, are quoted on the Telerate screen and (ii) 3.50%), as adjustedfor actual statutory reserve requirements for Eurocurrency liabilities, plus6.00%.  In the case of term loans bearing interest based upon ABR,interest is payable quarterly in arrears.  In the case of terms loansbearing interest based upon the LIBO Rate, interest is payable on the last dayof each relevant interest period and, in the case of any interest period longerthan three months, on each successive date three months after the first day ofsuch interest period.  The Term Credit Agreement contains representations,warranties, covenants, events of default and indemnities that are customary foragreements of this type and are substantially the same as the terms included inEXCO Operating Credit Agreement.

 

***Preferred stock***

 

TheSeries A-1, Series B and Series C 7.0% Cumulative ConvertiblePerpetual Preferred Stock, or the 7.0% Preferred Stock and Series A-1Hybrid Preferred Stock, or the Hybrid Preferred Stock, and together with the7.0% Preferred Stock, the Preferred Stock, were issued in several series at apurchase price of $10,000 per share on March 30, 2007.  The Preferred Stock was convertible intocommon stock at any time by the holder at a price of $19.00 per share.  We were entitled to force the conversion of thePreferred Stock at any time if the common stock traded for 20 days withina period of 30 consecutive days at a price (i) above 175% of the theneffective conversion price ($33.25 per share at the final conversion price of $19.00per share) at any time during the 24 months after issuance, (ii) above150% of the then effective conversion price ($28.50 per share at the finalconversion price of $19.00 per share) thereafter through the 48th monthafter issuance and (iii) above 125% of the then effective conversion price($23.75 per share at the final conversion price of $19.00 per share) at anytime thereafter. Cash dividends accrued at the rate of 7.0% per annum prior to March 30,2013 and at the rate of 9.0% per annum thereafter. Upon the occurrence of achange of control, holders of our Preferred Stock were able to force us torepurchase their shares for cash at the liquidation preference plus accumulateddividends. Holders of our Preferred Stock had the right to vote with theholders of common stock as a single class on all matters submitted to ourshareholders (except the election of directors) on an as-converted basis.Holders of Preferred Stock had the right to separately elect up to fourdirectors, subject to the rights of the holders of Series B 7.0% PreferredStock and Series C 7.0% Preferred Stock to vote as separate classes toeach elect one of such preferred directors. In addition, upon the occurrence ofspecified defaults in the Statements of Designation for the Preferred Stock,the holders of the Preferred Stock, voting together as a class, had the rightto elect four additional directors, or default directors, until such defaultwas cured.  In connection with themandatory conversion of our Preferred Stock into common stock on July 18,2008, the right to designate Preferred Stock directors terminated.  However, pursuant to letter agreementsentered into with each of Ares Management, LLC and Oaktree Capital Management,L.P. each of those entities continue to have the right to nominate one directorfor election at any annual meeting of shareholders so long as each entitybeneficially owns at least 10,000,000 shares of common stock.  The remaining two Preferred Stock directorscurrently serving on our Board of Directors are entitled to serve until thenext annual meeting of shareholders.

 

As of June 30, 2008, the liquidation preference of the 7.0%Preferred Stock and the Hybrid Preferred Stock was $0.4 billion and $1.6billion, respectively.

 

We paid cash dividends totaling $35.0 million on June 16, 2008 tothe holders of our Preferred Stock. We had accrued dividends of $5.8 million asof June 30, 2008.

 

On July 18 2008, weconverted all outstanding shares of our Preferred Stock into a total ofapproximately 105.2 million shares of our common stock.  The conversion ofthe Preferred Stock has the effect of increasing the book value of 

 

42

----

Tableof Contents

 

shareholders’ equity by approximately $2.0 billion. Wealso paid all accrued but unpaid dividends in cash totaling approximately $12.8million to the holders of the converted shares of Preferred Stock as of July 18,2008.  After July 18, 2008, dividendsceased to accrue on the Preferred Stock and all rights of the holders withrespect to the Preferred Stock terminated, except for the right to receive thewhole shares of common stock issuable upon conversion, accrued dividendsthrough July 18, 2008 and cash in lieu of any fractional shares. Theconversion of all outstanding shares of Preferred Stock into common stockeliminated our obligation to pay quarterly cash dividends of $35.0 million,resulting in annual dividend savings of $140.0 million.

 

***Derivative financial instruments***

 

We use oil and natural gas derivatives and financialrisk management instruments to manage our exposure to commodity price andinterest rate fluctuations.  We do notdesignate these instruments as hedging instruments for financial accountingpurposes, and, as a result, we recognize the change in the respectiveinstruments’ fair value currently in earnings, as a gain or loss on oil andnatural gas derivatives and interest expense on financial risk managementinstruments.

 

***Oil and natural gas derivatives***

 

Our production is generally sold at prevailingmarket prices. However, we periodically enter into oil and natural gascontracts for a portion of our production when market conditions are deemedfavorable and oil and natural gas prices exceed our minimum internal pricetargets.

 

Our objective in entering into oil and natural gascontracts is to manage price fluctuations and achieve a more predictable cashflow associated with our acquisition activities and borrowings under our creditagreements. These transactions limit exposure to declines in prices, but alsolimit the benefits we would realize if prices increase. As of June 30,2008, we had contracts in place for the volumes and prices shown below:

 
| ** **                                       | ** ** | **Natural gas** | ** ** | **Weighted**                  | ** ** | ** **     | ** ** | **Weighted**                | ** ** |
|--------------------------------------------------|------------|----------------------|------------|-------------------------------|------------|----------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **volume/**          | ** ** | **average strike**       | ** ** | **Oil**        | ** ** | **average strike**     | ** ** |
| **(in thousands, except prices)** | ** ** | **Mmbtu**            | ** ** | **price per Mmbtu** | ** ** | **volume/Bbl** | ** ** | **price per Bbl** | ** ** |
| **Natural Gas:**                                 |       |                 |       |                          |       |           |       |                        |       |
| Swaps (NYMEX):                                   |       |                 |       |                          |       |           |       |                        |       |
| Q3 2008                                          |       | 26,900               |       | $                             | 8.29       |           | 358        |                        | $          | 68.20 |   |
| Q4 2008                                          |       | 26,910               |       | 8.39                          |       | 358            |       | 68.16                       |       |
| 2009                                             |       | 100,530              |       | 8.18                          |       | 1,215          |       | 69.11                       |       |
| 2010                                             |       | 40,748               |       | 8.03                          |       | 473            |       | 84.85                       |       |
| 2011                                             |       | 9,125                |       | 7.97                          |       | —         |       | —                      |       |
| 2012                                             |       | 1,830                |       | 4.51                          |       | —         |       | —                      |       |
| 2013                                             |       | 1,825                |       | 4.51                          |       | —         |       | —                      |       |
|                                                  |            |                      |            |                               |            |                |            |                             |            |  |  |

 

***Interest rateswaps***

 

In January 2008, we entered into interest rate swaps to mitigateour exposure to fluctuations in interest rates on $700.0 million inprincipal through February 14, 2010 at LIBOR rates ranging from 2.45% to2.8%.  For the six months ended June 30,2008, we had $7.4 million of non-cash unrealized gains attributable to ourinterest rate swaps.

 

***Off-balance sheet arrangements***

 

None.

 

***Contractual obligations andcommercial commitments***

 

The following table presents a summary of ourcontractual obligations at June 30, 2008:

 
| ** **                                              |   | **Less than one** |    | **One to three** |   | **Three to five** |   | **More than five** |      |      |   |
|---------------------------------------------------------|--------|-----------------------------|---------|----------------------------|--------|-----------------------------|--------|------------------------------|-----------|-----------|--------|
| **(in thousands)**                                 |   | **year**                    |    | **years**                  |   | **years**                   |   | **years**                    |      | **Total** |   |
| **Contractual  obligations:**                           |   |                        |    |                       |   |                        |   |                         |      |      |   |
| Long-term debt -  senior notes (1)                      |   | $                           | —  |                       | $      | 444,720                     |   | $                            | —    |      | $      | — |   | $ | 444,720 |   |
| Long-term debt -  EXCO Resources Credit Agreement (2)   |   | —                      |    | —                     |   | 994,000                     |   | —                       |      | 994,000   |   |
| Long-term debt -  EXCO Operating Credit Agreement (3)   |   | —                      |    | —                     |   | 1,170,000                   |   | —                       |      | 1,170,000 |   |
| Term Credit  Agreement (4)                              |   | —                      |    | —                     |   | —                      |   | —                       |      | —    |   |
| Operating leases  (5)                                   |   | 11,787                      |    | 10,630                     |   | 9,456                       |   | 4,029                        |      | 35,902    |   |
| Pending property  and lease acquisition commitments (6) |   | 226,850                     |    | —                     |   | —                      |   | —                       |      | 226,850   |   |
| Drilling/work  commitments                              |   | 44,292                      |    | 31,380                     |   | 12,723                      |   | —                       |      | 88,395    |   |
| Total  contractual cash obligations (7)                 |   | $                           | 282,929 |                       | $      | 486,730                     |   | $                            | 2,186,179 |      | $      | 4,029 |   | $ | 2,959,867 |   |

 

----

| (1) |   | Our Senior Notes are due on January 15, 2011. The annual interest  obligation is $32.2 million. |
|-----|--------|------------------------------------------------------------------------------------------------------|

 

43

----

Table of Contents

 
| (2) |   | The EXCO Resources Credit Agreement matures on March 30, 2012.                                                                                                                                                                  |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) |   | The EXCO Operating Credit Agreement matures on March 30, 2012.                                                                                                                                                                  |
| (4) |   | The Term Credit  Agreement for $300.0 million was entered into on July 15, 2008 and  matures on December 15, 2008.                                                                                                         |
| (5) |   | Excludes month-to-month rental expense on compressors.                                                                                                                                                                               |
| (6) |   | Represents an executed purchase and sale agreement, dated June 5,  2008, to purchase oil and natural gas properties and other undeveloped lease  acquisitions. The transaction closed on July 15, 2008.                    |
| (7) |   | Excludes annual dividends of $140.0 million on our Preferred Stock.  Such dividends no longer accrue due to the mandatory conversion of all  outstanding shares of our Preferred Stock into our common stock on  July 18, 2008. |

 

***Item 3****. **Quantitative and Qualitative Disclosures About Market Risk***

 

Some of the information below containsforward-looking statements. The primary objective of the following informationis to provide forward-looking quantitative and qualitative information aboutour potential exposure to market risks. The term “market risk” refers to therisk of loss arising from adverse changes in oil and natural gas prices,interest rates charged on borrowings and earned on cash equivalent investments,and adverse changes in the market value of marketable securities. Thedisclosure is not meant to be a precise indicator of expected future losses,but rather an indicator of reasonably possible losses. This forward-lookinginformation provides an indicator of how we view and manage our ongoing marketrisk exposures. Our market risk sensitive instruments were entered into forhedging and investment purposes, not for trading purposes.

 

***Commodity price risk***

 

Our major market risk exposure is in the pricingapplicable to our oil and natural gas production. Realized pricing is primarilydriven by the prevailing worldwide price for crude oil and spot market pricesfor natural gas. Pricing for oil and natural gas production is volatile.

 

The following table sets forth our oil and naturalgas derivatives management activities as of June 30, 2008.

 
| ** **                                       | ** ** | ** **    | ** ** | **Weighted**            | ** ** | ** **                  | ** ** |
|--------------------------------------------------|------------|---------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **Volume**    | ** ** | **average strike** | ** ** | **Fair value at** | ** ** |
| **(in thousands, except prices)** | ** ** | **Mmbtu/Bbl** | ** ** | **price**               | ** ** | **June 30, 2008** | ** ** |
| **Natural Gas:**                                 |       |          |       |                    |       |                        |       |
| Swaps (NYMEX):                                   |       |          |       |                    |       |                        |       |
| Remainder of 2008                                |       | 53,810        |       | $                       | 8.34       |                        | $          | (277,110 | ) |
| 2009                                             |       | 100,530       |       | 8.18                    |       | (411,736                    | )          |
| 2010                                             |       | 40,748        |       | 8.03                    |       | (118,550                    | )          |
| 2011                                             |       | 9,125         |       | 7.97                    |       | (21,820                     | )          |
| 2012                                             |       | 1,830         |       | 4.51                    |       | (9,121                      | )          |
| 2013                                             |       | 1,825         |       | 4.51                    |       | (8,726                      | )          |
| **Total Natural Gas**                            |       | 207,868       |       |                    |       | (847,063                    | )          |
|                                             |       |          |       |                    |       |                        |       |
| **Oil:**                                         |       |          |       |                    |       |                        |       |
| Swaps (NYMEX):                                   |       |          |       |                    |       |                        |       |
| Remainder of 2008                                |       | 716           |       | 68.18                   |       | (51,474                     | )          |
| 2009                                             |       | 1,215         |       | 69.11                   |       | (82,582                     | )          |
| 2010                                             |       | 473           |       | 84.85                   |       | (22,752                     | )          |
| **Total Oil**                                    |       | 2,404         |       |                    |       | (156,808                    | )          |
| **Total Oil and Natural Gas**                    |       |          |       |                    |       | $                           | (1,003,871 | ) |
|                                                  |            |               |            |                         |            |                             |            |  |  |

 

At June 30, 2008, the average forward NYMEX oilprices per Bbl for the remainder of 2008 and for calendar year 2009 were$141.05 and $140.64, respectively and the average forward NYMEX natural gasprices per Mmbtu for the remainder of 2008 and for calendar 2009 were $13.54and $12.47, respectively.

 

During July 2008, the averageforward NYMEX oil prices per barrel for the remainder of 2008 and calendar year2009 decreased by $16.10 per barrel and $15.95 per barrel, respectively.   The natural gas prices for the same periodsdecreased by $4.12 per Mcf and $2.71 per Mcf, respectively.  The impact on our mark-to-market liability,as of June 30, 2008, using these July 2008 NYMEX strip prices wouldresult in a net liability of $443.8 million, or a decrease of $560.1million.  Our reported earnings andassets or liabilities for derivative financial instruments will continue to besubject to significant 

 

44

----

Table of Contents

 

fluctuations in value due to pricevolatility.

 

Realized gains or losses from the settlement of ouroil and natural gas derivatives are recorded in our financial statements asincreases or decreases in oil and gas revenue. For example, using the oil swapsin place at June 30, 2008, for the remainder of 2008, if the settlementprice exceeds the actual weighted average strike price of $68.18 per Bbl, thena reduction in oil and natural gas revenue would be recorded for the differencebetween the settlement price and $68.18 per Bbl, multiplied by the hedgedvolume of 716 Mbbls. Conversely, if the settlement price is less than $68.18per Bbl, then an increase in oil and natural gas revenue would be recorded forthe difference between the settlement price and $68.18 per Bbl, multiplied bythe hedged volume of 716 Mbbls. For example, for a hedged volume of 716 Mbbls,if the settlement price is $67.18 per Bbl then oil and natural gas revenuewould decrease by $0.7 million. Conversely, if the settlement price is $69.18per Bbl, oil and natural gas revenue would increase by $0.7 million.

 

***Interest rate risk***

 

At June 30, 2008, our exposure to interest ratechanges related primarily to borrowings under our credit agreements andinterest earned on our short-term investments. The interest rate is fixed at 71/4% on the $444.7 million in Senior Notes we have outstanding. Interestis payable on borrowings under our credit agreements and the Term CreditAgreements is 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, 2008, we had $2.2 billion inoutstanding borrowings under our credit agreements. A 1% change in interestrates based on the variable borrowings as of June 30, 2008 would result inan increase or decrease in our interest costs of $22.0 million per year.The interest we pay on these borrowings is set periodically based upon marketrates.

 

In January 2008, we entered into financial riskmanagement instruments to mitigate our exposure to fluctuations in interestrates on $700.0 million in principal through February 14, 2010 atLIBOR rates ranging from 2.45% to 2.8%. As of June 30, 2008, we had $7.4 million of unrealized gains on ourinterest rate swaps.

 

***Item 4.  ******Controlsand Procedures***

 

**Evaluation of disclosure controls and procedures**

 

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

 

Our management evaluated, under the supervision andwith the participation of our CEO, CFO and CAO, the effectiveness of the designand operation of our disclosure controls and procedures as of June 30,2008 and concluded our controls were effective.

 

**Changes in internal control over financial reporting**

 

No changes in EXCO’sinternal control over financial reporting occurred during the current quarterthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

45

----

Table of Contents

** **

**PART II—OTHERINFORMATION**

 

**Item 1.   Legal proceedings**

 

Effective March 18,2008, we entered into an agreement to settle all claims arising under aputative royalty owner class action filed against our subsidiaries, North CoastEnergy, Inc. and North Coast Energy Eastern, Inc., styled *PRC Holdings, LLC, et al. v. North Coast Energy, Inc.*for $40,000*.* In connectionwith this settlement, all claims alleged by the plaintiffs were dismissed withprejudice by the federal district court on July 11, 2008.

 

**Item 4.   Submission of Matters to a Vote of SecurityHolders**

 

On May 15, 2008,EXCO held its annual meeting of shareholders.  At the annual meeting,shareholders acted upon the matters outlined in EXCO’s definitive ProxyStatement on Schedule 14A filed with the Securities and Exchange Commission on April 8,2008.  The matter voted upon and approved solely by the holders of ourcommon stock was the election of seven directors to the Board of Directors,each for a one-year term. The matter voted upon and approved by the holders ofour common stock and Preferred Stock, voting together as a single class, wasthe ratification of the appointment of KPMG LLP as our independent registeredpublic accounting firm.

 

Our common shareholdersapproved all of the common stock directors nominated for election at the annualmeeting pursuant to the following voting results:

 
| ** **          | ** ** | **Number of**           | ** ** | **Number of**      | ** ** |
|---------------------|------------|------------------------------|------------|-------------------------|------------|
| **Name**            | ** ** | **Votes Cast For** | ** ** | **Votes Withheld** | ** ** |
| Douglas H. Miller   |       | 96,659,275                   |       | 449,100                 |       |
| Stephen F. Smith    |       | 96,806,448                   |       | 301,927                 |       |
| Jeffrey D. Benjamin |       | 94,105,245                   |       | 3,003,120               |       |
| Earl E. Ellis       |       | 94,105,745                   |       | 3,002,630               |       |
| Robert H. Niehaus   |       | 94,105,945                   |       | 3,002,430               |       |
| Boone Pickens       |       | 96,786,468                   |       | 321,907                 |       |
| Robert L. Stillwell |       | 96,806,134                   |       | 302,241                 |       |

 

The holders of ourPreferred Stock did not have the right to vote with the holders of our commonstock to elect the common stock directors set forth above.  Instead, the holders of our Preferred Stockwere previously entitled to designate and elect the other four members of ourBoard of Directors, Vincent J. Cebula, B. James Ford, Jeffrey S. Serota andRajath Shourie, pursuant to the Statements of Designation governing thePreferred Stock.  In connection with themandatory conversion of our Preferred Stock into common stock on July 18,2008, the right to designate Preferred Stock directors terminated.  However, pursuant to letter agreementsentered into with Ares Management, LLC and Oaktree Capital Management, L.P. eachof those entities continue to have the right to nominate one director forelection at any annual meeting of shareholders so long as each entitybeneficially owns at least 10,000,000 shares of common stock.  The remaining two Preferred Stock directors currentlyserving on our Board of Directors are entitled to serve until the next annualmeeting of shareholders.

 

Our common shareholdersand the holders of our Preferred Stock, voting together as a single class,approved the ratification of KPMG LLP as our independent registered publicaccounting firm at the annual meeting pursuant to the following voting results:

 
| ** **           | ** ** | **Number of**           | ** ** | **Number of**               | ** ** | **Number of** | ** ** |
|----------------------|------------|------------------------------|------------|----------------------------------|------------|--------------------|------------|
| **Proposal**         | ** ** | **Votes Cast For** | ** ** | **Votes Cast Against** | ** ** | **Abstentions**    | ** ** |
| Ratification of KPMG |       | 162,150,201                  |       | 411,377                          |       | 8,902              |       |

 

**Item 6. ****Exhibits**

 

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

 

46

----

Table ofContents

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                                  | EXCO  RESOURCES, INC. |
|---------------------------------------|----------------------------|
|                                  | (Registrant)               |
|                                  |                       |   |
| Date:  August 6,  2008 | 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 |

 

47

----

Tableof Contents

 

**Index to Exhibits**

 
| **Exhibit   Number** | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                       |       | 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.                                                                                                                                                                 |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.2                       |       | 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.                                                                                                            |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.3                       |       | 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.                                                                                                                 |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.4                       |       | 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.                                                                                                                 |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.5                       |       | 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.                         |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.6                       |       | 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.                                                                                                 |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.7                       |       | 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.                                                                       |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.8                       |       | 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. |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.9                       |       | 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.                                                                                                                                                          |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.10                      |       | Asset Purchase  Agreement, dated December 7, 2007, between EXCO Appalachia, Inc.,  as purchaser, and EOG Resources, Inc., EOG Resources Appalachian LLC  and Energy Search, Incorporated, as sellers, filed as an Exhibit to  EXCO’s Current Report on Form 8-K dated February 20, 2008 and filed  on February 26, 2008 and incorporated by reference herein.                                                                                                                                    |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.11                      |       | First Amendment to  Asset Purchase Agreement, dated February 20, 2008, between EXCO  Appalachia, Inc., as purchaser, and EOG Resources, Inc., EOG  Resources Appalachian LLC, and Energy Search, Incorporated,                                                                                                                                                                                                                                                                                                            |

 

48

----

Table of Contents

 
|   |   | as sellers, filed as an  exhibit to EXCO’s Current Report on Form 8-K dated February 20,  2008 and filed on February 26, 2008 and incorporated by reference  herein.                                                                                                                                                                                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 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 November 14, 2007 and filed on  November 16, 2007 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.                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 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                                                                                                                            |

 

49

----

Table of Contents

 
|   |   | 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    |   | Sixth Supplemental  Indenture, dated as of February 12, 2008, by and among EXCO  Resources, Inc., EXCO Services, Inc. and Wilmington Trust Company,  as Trustee, filed as an Exhibit to EXCO’s Annual Report on  Form 10-K for 2007 filed February 29, 2008 and incorporated by  reference herein.                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.10   |   | 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.   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.11   |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.12   |   | 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   |   | Amended and Restated  2005 Long-Term Incentive Plan, filed as an Exhibit to EXCO’s Current  Report on Form 8-K, dated November 14, 2007 and filed on  November 16, 2007 and incorporated by reference herein.*                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.8   |   | Form of Incentive  Stock Option Agreement for the EXCO Resources, Inc. 2005 Long-Term  Incentive Plan, filed as an Exhibit to EXCO’s Current Report on  Form 8-K, dated November 14, 2007 and filed on November 16,  2007 and incorporated by reference herein.*                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.9   |   | Form of  Nonqualified Stock Option Agreement for the EXCO Resources, Inc. 2005  Long-Term Incentive                                                                                                                                                                                                                                                                                       |

 

50

----

Table of Contents

 
|   |   | Plan, filed as an  Exhibit to EXCO’s Current Report on Form 8-K, dated  November 14, 2007 and filed on November 16, 2007 and incorporated  by reference herein.*                                                                                                                                                                                                                                                                                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.10  |   | 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.*                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | 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.                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.12  |   | 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.                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.13  |   | 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.                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.14  |   | 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.                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.15  |   | 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.                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.16  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17  |   | 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.                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.18  |   | Third Amended and  Restated EXCO Resources, Inc. Severance Plan, filed as an  Exhibit to EXCO’s Current Report on Form 8-K, dated  November 14, 2007 and filed on November 16, 2007 and incorporated  by reference herein.*                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.19  |   | Amended and Restated  2007 Director Plan of EXCO Resources, Inc., filed as an Exhibit to  EXCO’s Current Report on Form 8-K, dated November 14, 2007 and  filed on November 16, 2007 and incorporated by reference herein.                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.20  |   | 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.                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.21  |   | 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,                                                                                                                                                         |

 

51

----

Table of Contents

 
|   |   | 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.                                                                                                                                                                                                                                                                                                                                |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.22  |   | 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.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.23  |   | 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.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.24  |   | 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.                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.25  |   | 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.                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.26  |   | 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.*                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.27  |   | 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.                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.28  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.29  |   | 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.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.30  |   | 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.                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.31  |   | 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.                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.32  |   | 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.                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.33  |   | 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                                                                                                                                                                                                                                                                          |

 

52

----

Table of Contents

 
|   |   | Form 8-K, dated May 2,  2007 and filed on May 8, 2007 and incorporated by reference herein.                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.34  |   | 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.                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.35  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.36  |   | Membership Interest  Purchase and Sale Agreement, dated May 8, 2007, by and among EXCO  Resources, Inc., Southern G Holdings, LLC, Crimson  Exploration Inc. and Crimson Exploration Operating, Inc., filed as  an Exhibit to EXCO’s Form 8-K dated May 2, 2007 and filed on  May 8, 2007 and incorporated by reference herein.                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.37  |   | Purchase Agreement,  effective August 15, 2007, between OCM GW Holdings, LLC and EXCO  Resources, Inc., filed as an Exhibit to EXCO’s Current Report on  Form 8-K, dated August 15, 2007 and filed on August 21, 2007  and incorporated by reference herein.                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.38  |   | Asset Purchase  Agreement, dated December 7, 2007, between EXCO Appalachia, Inc.,  as purchaser, and EOG Resources, Inc., EOG Resources  Appalachian LLC and Energy Search, Incorporated, as sellers, filed as an  Exhibit to EXCO’s Current Report on Form 8-K dated February 20,  2008 and filed on February 26, 2008 and incorporated by reference  herein.                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.39  |   | Sixth Supplemental  Indenture, dated as of February 12, 2008, by and among EXCO  Resources, Inc., EXCO Services, Inc. and Wilmington Trust Company,  as Trustee, filed as an Exhibit to EXCO’s Annual Report on  Form 10-K for 2007 filed February 29, 2008 and incorporated by  reference herein.                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.40  |   | Counterpart Agreement,  dated February 4, 2008, to that Certain Second Amended and Restated  Credit Agreement, dated May 2, 2007, among EXCO Resources, Inc., as  Borrower, and certain subsidiaries of Borrower and the lender parties  thereto, filed as an Exhibit to EXCO’s Annual Report on Form 10-K  for 2007 filed February 29, 2008 and incorporated by reference herein.                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.41  |   | First Amendment to  Second Amended and Restated Credit Agreement, dated as of February 20,  2008, by and among EXCO Resources, Inc., as Borrower, certain of its  subsidiaries, as Guarantors, the Lenders defined herein, and JP Morgan Chase  Bank, N.A., as Administrative Agent, filed as an Exhibit to EXCO’s  Current Report on Form 8-K, dated February 20, 2008 and filed on  February 26, 2008 and incorporated by reference herein.                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.42  |   | First Amendment to  Amended and Restated Credit Agreement, dated as of February 20, 2008, by  and among EXCO Partners Operating Partnership, LP, as Borrower, certain  of its subsidiaries, as Guarantors, the Lenders defined therein and JP Morgan  Chase Bank, N.A., as Administrative Agent, filed as an exhibit to EXCO’s  Current Report on Form 8-K, dated February 20, 2008  and filed on February 26, 2008 and incorporated by reference herein.                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.43  |   | First Amendment to  Asset Purchase Agreement, dated February 20, 2008, between EXCO  Appalachia, Inc., as purchaser, and EOG Resources, Inc., EOG  Resources Appalachian LLC, and Energy Search, Incorporated, as sellers,  filed as an exhibit to EXCO’s Current Report on Form 8-K dated  February 20, 2008 and filed on February 26, 2008 and incorporated  by reference herein.                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.44  |   | Seventh Supplemental  Indenture, dated as of June 30, 2008, by and among EXCO  Resources, Inc., EXCO-North Coast Energy, Inc. and Wilmington Trust  Company, as Trustee, filed herewith.                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.45  |   | Senior Unsecured Term  Credit Agreement, dated as of July 15, 2008, among EXCO Operating  Company, LP, as borrower, and certain of its subsidiaries, as guarantors, and  JP Morgan Chase Bank, N.A., as administrative agent, and the Lenders  signatories thereto, filed as an exhibit to EXCO’s Current Report on  Form 8-K dated                                                                                                                                                                                            |

 

53

----

Table of Contents

 
|   |   | July 14, 2008 and  filed on July 16, 2008 and incorporated by reference herein.                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.46  |   | Second Amendment to  Amended and Restated Credit Agreement, dated as of July 14, 2008, among  EXCO Operating Company, LP, as borrower, and certain of its subsidiaries as  guarantors, and JP Morgan Chase Bank, N.A., as administrative agent, and the  lenders signatories thereto, filed as an exhibit to EXCO’s Current Report on  Form 8-K dated July 14, 2008 and filed on July 16, 2008 and  incorporated by reference herein.                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.47  |   | Second Amendment to  Second Amended and Restated Credit Agreement, dated as of July 14, 2008  and effective as of June 30, 2008, among EXCO Resources, Inc., as  borrower, and certain of its subsidiaries, as guarantors, and JP Morgan Chase  Bank, N.A., as administrative agent, and the lenders signatories thereto,  filed as an exhibit to EXCO’s Current Report on Form 8-K dated  July 14, 2008 and filed on July 16, 2008 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 herewith.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

----

*These exhibits are management contracts.

 

54

----