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| Delaware                                       |   | 75-2374449               |
|------------------------------------------------|--------|--------------------------|
| (State      or other jurisdiction              |   | (I.R.S.      Employer    |
| of      incorporation or organization)         |   | Identification      No.) |
|                                           |   |                     |
| 6 Desta Drive, Suite 6500, Midland,      Texas |   | 79705                    |
| (Address      of principal executive office)   |   | (Zip      Code)          |

| Indicate      by check mark whether registrant (1) has filed all reports required to be      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during      the preceding 12 months (or for such shorter period that the registrant      was required to file such reports), and (2) has been subject to such      filing requirements for the past 90 days:YesxNo ̈ |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Indicate      by check mark whether the registrant is a large accelerated filer, an      accelerated filer, or a non-accelerated filer.  See definition      of “accelerated filer and large accelerated filer” in Rule 12b-2 of the      Exchange Act. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Large      accelerated filer  ̈                                                                                                                                                                                                                                           |   | Accelerated      filer  ̈ |   | Non-accelerated      filer x |   | Smaller      reporting company  ̈ |

| Indicate      by check mark whether the registrant is a shell company (as defined in      Rule 12b-2 of the Exchange Act). |
|----------------------------------------------------------------------------------------------------------------------------|
|  ̈    Yes                                                                                                              | x  No |

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|          | Table of Contents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Page   |
|          | Glossary                                                                                                                                                                                   | 3      |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|          | Part      I - FINANCIAL INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item 1.       | Financial      Statements                                                                                                                                                                  | 5      |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|          | Balance Sheets as of September 30, 2008 and December 31,      2007                                                                                                                         | 6      |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|          | Statements of Operations for the three months and nine months      ended September 30, 2008 and 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 7      |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|          | Statements of Cash flows for the nine months ended September      30, 2008 and 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 8      |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item      2.  | Management’s Discussion and Analysis of Financial Condition      and Results of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 10     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item      3.  | Quantitative and Qualitative Disclosures About Market      Risk                                                                                                                            | 15     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item      4.  | Controls and      Procedures                                                                                                                                                               | 15     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|          | Part      II – OTHER INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item      1.  | Legal      Proceedings                                                                                                                                                                     | 17     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item      1A. | Risk      Factors                                                                                                                                                                          | 17     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item      2.  | Unregistered Sales of Equity Securities and Use of      Proceeds                                                                                                                           | 17     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item      3.  | Defaults Upon Senior      Securities                                                                                                                                                       | 17     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item      4.  | Submission of Matter to a Vote of Security      Holders                                                                                                                                    | 17     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item      5.  | Other      Information                                                                                                                                                                     | 17     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| Item      6.  | Exhibits                                                                                                                                                                                   | 17     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|          | Signatures                                                                                                                                                                                 | 18     |

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Glossary

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Item

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Institutional 

|                                              |   | September      30, |      |   | December      31, |   |
|---------------------------------------------------|--------|--------------------|-----------|--------|-------------------|--------|
|                                              |   | 2008               |      |   | 2007              |   |
|                                              |   | (unaudited)        |      |   |              |   |
| Assets                                            |   |               |      |   |              |   |
|                                              |   |               |      |   |              |   |
| Current      assets:                              |   |               |      |   |              |   |
| Cash and cash      equivalents                    |   | $                  | 61,463    |   |              | $      | 42,900 |   |
| Receivable from Managing General      Partner     |   |               | 176,281   |   |              |   | 95,269 |   |
| New Mexico income tax      deposits               |   |               | 5,676     |   |              |   | 2,903 |   |
| Total current      assets                         |   |               | 243,420   |   |              |   | 141,072 |   |
|                                              |   |               |      |   |              |   |   |   |
| Oil      and gas properties - using the full-cost |   |               |      |   |              |   |   |   |
| method of    accounting                           |   |               | 2,485,381 |   |              |   | 2,668,028 |   |
| Less accumulated      depreciation,               |   |               |      |   |              |   |   |   |
| depletion and      amortization                   |   |               | 2,303,499 |   |              |   | 2,291,913 |   |
| Net oil and gas      properties                   |   |               | 181,882   |   |              |   | 376,115 |   |
|                                              |   |               |      |   |              |   |   |   |
|                                              |   | $                  | 425,302   |   |              | $      | 517,187 |   |
|                                              |   |               |      |   |              |   |   |   |
| Liabilities and Partners' Equity      (Deficit)   |   |               |      |   |              |   |   |   |
|                                              |   |               |      |   |              |   |   |   |
| Asset      retirement obligation                  |   | $                  | 890,140   |   |              | $      | 1,016,810 |   |
|                                              |   |               |      |   |              |   |   |   |
| Partners'      (deficit):                         |   |               |      |   |              |   |   |   |
| General partners                                  |   |               | (81,577   | )      |              |   | (86,166 | ) |
| Limited partners                                  |   |               | (383,261  | )      |              |   | (413,457 | ) |
| Total partners'      (deficit)                    |   |               | (464,838  | )      |              |   | (499,623 | ) |
|                                              |   |               |      |   |              |   |   |   |
|                                              |   | $                  | 425,302   |   |              | $      | 517,187 |   |

----

Royalties 

|                                          |   | Three      Months Ended |    |   | Nine      Months Ended |   |
|-----------------------------------------------|--------|-------------------------|---------|--------|------------------------|--------|
|                                          |   | September      30,      |    |   | September      30,     |   |
|                                          |   | 2008                    |    |   | 2007                   |   |   | 2008 |   |   | 2007 |   |
| Revenues                                      |   |                    |    |   |                   |   |   |   |   |   |   |   |
|                                          |   |                    |    |   |                   |   |   |   |   |   |   |   |
| Income      from net profits interests        |   | $                       | 269,872 |   |                   | $      | 40,065 |   |   | $ | 956,553 |   |   | $ | 212,064 |   |
| Interest                                      |   |                    | 202     |   |                   |   | 267 |   |   |   | 628 |   |   |   | 744 |   |
|                                          |   |                    | 270,074 |   |                   |   | 40,332 |   |   |   | 957,181 |   |   |   | 212,808 |   |
|                                          |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Expenses                                      |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
|                                          |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation,      depletion and amortization |   |                    | 2,608   |   |                   |   | 7,303 |   |   |   | 11,586 |   |   |   | 27,939 |   |
| Accretion      expense                        |   |                    | 19,856  |   |                   |   | 22,137 |   |   |   | 61,742 |   |   |   | 66,383 |   |
| General      and administrative               |   |                    | 13,345  |   |                   |   | 14,696 |   |   |   | 48,798 |   |   |   | 39,044 |   |
|                                          |   |                    | 35,809  |   |                   |   | 44,136 |   |   |   | 122,126 |   |   |   | 133,366 |   |
|                                          |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income (loss)                        |   | $                       | 234,265 |   |                   | $      | (3,804 | ) |   | $ | 835,055 |   |   | $ | 79,442 |   |
|                                          |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income (loss) allocated to:          |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
|                                          |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Managing General      Partner                 |   | $                       | 21,318  |   |                   | $      | 315 |   |   | $ | 76,198 |   |   | $ | 9,664 |   |
|                                          |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| General Partner                               |   | $                       | 2,369   |   |                   | $      | 35 |   |   | $ | 8,466 |   |   | $ | 1,074 |   |
|                                          |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Limited Partners                              |   | $                       | 210,578 |   |                   | $      | (4,154 | ) |   | $ | 750,391 |   |   | $ | 68,704 |   |
|                                          |   |                    |    |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Per limited partner      unit                 |   | $                       | 35.20   |   |                   | $      | (.69 | ) |   | $ | 125.42 |   |   | $ | 11.48 |   |

----

Royalties 

|                                                         |   | Nine      Months Ended |     |
|--------------------------------------------------------------|--------|------------------------|----------|
|                                                         |   | September      30,     |     |
|                                                         |   | 2008                   |     |   | 2007 |   |
| Cash      flows from operating activities:                   |   |                   |     |   |   |   |
|                                                         |   |                   |     |   |   |   |
| Cash received from income from      net profits interests    |   | $                      | 867,003  |   |   | $ | 144,076 |   |
| Cash paid to      suppliers                                  |   |                   | (48,798  | ) |   |   | (39,044 | ) |
| Interestreceived                                             |   |                   | 628      |   |   |   | 744 |   |
| Net cash provided by operating      activities               |   |                   | 818,833  |   |   |   | 105,776 |   |
|                                                         |   |                   |     |   |   |   |   |   |
| Cash      flows used in financing activities:                |   |                   |     |   |   |   |   |   |
|                                                         |   |                   |     |   |   |   |   |   |
| Distributions to      partners                               |   |                   | (800,270 | ) |   |   | (100,800 | ) |
|                                                         |   |                   |     |   |   |   |   |   |
| Net      increase in cash and cash equivalents               |   |                   | 18,563   |   |   |   | 4,976 |   |
|                                                         |   |                   |     |   |   |   |   |   |
| Beginning of    period                                       |   |                   | 42,900   |   |   |   | 29,985 |   |
|                                                         |   |                   |     |   |   |   |   |   |
| End of period                                                |   | $                      | 61,463   |   |   | $ | 34,961 |   |
|                                                         |   |                   |     |   |   |   |   |   |
| Reconciliation      of net income to net                     |   |                   |     |   |   |   |   |   |
| cash provided by operating      activities:                  |   |                   |     |   |   |   |   |   |
|                                                         |   |                   |     |   |   |   |   |   |
| Net      income                                              |   | $                      | 835,055  |   |   | $ | 79,442 |   |
|                                                         |   |                   |     |   |   |   |   |   |
| Adjustments      to reconcile net income to net              |   |                   |     |   |   |   |   |   |
| cash provided by operating      activities:                  |   |                   |     |   |   |   |   |   |
|                                                         |   |                   |     |   |   |   |   |   |
| Depreciation, depletion and      amortization                |   |                   | 11,586   |   |   |   | 27,939 |   |
| Accretion of asset retirement      obligation                |   |                   | 61,742   |   |   |   | 66,383 |   |
| Settlement of asset retirement      obligations              |   |                   |     |   |   |   |   |   |
| for plugged and abandoned      wells                         |   |                   | (5,765   | ) |   |   | (61,806 | ) |
| Increase in      receivables                                 |   |                   | (83,785  | ) |   |   | (6,182 | ) |
| Net      cash provided by operating activities               |   | $                      | 818,833  |   |   | $ | 105,776 |   |
|                                                         |   |                   |     |   |   |   |   |   |
| Noncash      investing and financing activities:             |   |                   |     |   |   |   |   |   |
|                                                         |   |                   |     |   |   |   |   |   |
| Decrease in oil and gas      properties – SFAS No. 143 |   | $                      | (182,647 | ) |   | $ | - |   |

----

|                                                                    |   | Limited  |   |   | General  |   |
|-------------------------------------------------------------------------|--------|----------|--------|--------|----------|--------|
|                                                                    |   | Partners |   |   | Partners |   |
| Interest      income on capital contributions                           |   |     | 100    | %      |     |   | - |   |
| Oil      and gas sales                                                  |   |     | 90     | %      |     |   | 10 | % |
| All      other revenues                                                 |   |     | 90     | %      |     |   | 10 | % |
| Organization      and offering costs (1)                                |   |     | 100    | %      |     |   | - |   |
| Syndication      costs                                                  |   |     | 100    | %      |     |   | - |   |
| Amortization      of organization costs                                 |   |     | 100    | %      |     |   | - |   |
| Property      acquisition costs                                         |   |     | 100    | %      |     |   | - |   |
| Gain/loss      on property disposition                                  |   |     | 90     | %      |     |   | 10 | % |
| Operating      and administrative costs (2)                             |   |     | 90     | %      |     |   | 10 | % |
| Depreciation,      depletion and amortization of oil and gas properties |   |     | 100    | %      |     |   | - |   |
| All      other costs                                                    |   |     | 90     | %      |     |   | 10 | % |

|   | (1) | All      organization costs in excess of 3% of initial capital contributions will      be paid by the Managing General Partner and will be treated as a capital      contribution.  The Partnership paid the Managing General Partner      an amount equal to 3% of initial capital contributions for such      organization costs. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Administrative      costs in any year, which exceed 2% of capital contributions shall be paid      by the Managing General Partner and will be treated as a capital      contribution. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                           |   | 2008   |      |   | 2007   |   |
|----------------------------------------------------------------|--------|--------|-----------|--------|--------|--------|
| Beginning      of period                                       |   | $      | 1,016,810 |   |   | $      | 991,790 |   |
| Accretion      expense                                         |   |   | 61,742    |   |   |   | 66,383 |   |
| Revisions      of estimates                                    |   |   | (182,647  | )      |   |   | - |   |
| Settlement      of obligations for plugged and abandoned wells |   |   | (5,765    | )      |   |   | (61,806 | ) |
| End      of period                                             |   | $      | 890,140   |   |   | $      | 996,367 |   |

----

| Item 2. | Management's      Discussion and Analysis of Financial Condition and Results of      Operations |
|---------|-------------------------------------------------------------------------------------------------|

----

----

|                                           |   | Three      Months Ended |    |
|------------------------------------------------|--------|-------------------------|---------|
|                                           |   | September      30,      |    |
|                                           |   | 2008                    |    |   | 2007 |   |
| Oil      production in barrels                 |   |                    | 4,353   |   |   |   | 3,980 |   |
| Gas      production in mcf                     |   |                    | 2,093   |   |   |   | 1,155 |   |
| Total      (BOE)                               |   |                    | 4,702   |   |   |   | 4,173 |   |
| Average      price per barrel of oil           |   | $                       | 116.12  |   |   | $ | 69.90 |   |
| Average      price per mcf of gas              |   | $                       | 10.51   |   |   | $ | 6.38 |   |
| Partnership      distributions                 |   | $                       | 370,000 |   |   | $ | 30,000 |   |
| Limited      partner distributions             |   | $                       | 333,000 |   |   | $ | 27,000 |   |
| Per      unit distribution to limited partners |   | $                       | 55.66   |   |   | $ | 4.51 |   |
| Number      of limited partner units           |   |                    | 5,983   |   |   |   | 5,983 |   |

----

|                                           |   | Nine      Months Ended |    |
|------------------------------------------------|--------|------------------------|---------|
|                                           |   | September      30,     |    |
|                                           |   | 2008                   |    |   | 2007 |   |
| Oil      production in barrels                 |   |                   | 13,281  |   |   |   | 13,454 |   |
| Gas      production in mcf                     |   |                   | 5,686   |   |   |   | 6,704 |   |
| Total      (BOE)                               |   |                   | 14,229  |   |   |   | 14,571 |   |
| Average      price per barrel of oil           |   | $                      | 109.54  |   |   | $ | 60.36 |   |
| Average      price per mcf of gas              |   | $                      | 10.71   |   |   | $ | 6.78 |   |
| Partnership      distributions                 |   | $                      | 800,270 |   |   | $ | 100,800 |   |
| Limited      partner distributions             |   | $                      | 720,195 |   |   | $ | 90,538 |   |
| Per      unit distribution to limited partners |   | $                      | 120.37  |   |   | $ | 15.13 |   |
| Number      of limited partner units           |   |                   | 5,983   |   |   |   | 5,983 |   |

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|   | (a) | Exhibits: |
|--------|-----|-----------|

|                         31.1 | Rule      13a-14(a)/15d-14(a) Certification                                                                                                                                                  |
|------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                         31.2 | Rule      13a-14(a)/15d-14(a) Certification                                                                                                                                                  |
|                         32.1 | Certification      of Chief Executive Officer and Chief Financial Officer Pursuant to 18      U.S.C. Section 1350, as adopted Pursuant to Section 906 of the      Sarbanes-Oxley Act of 2002 |

----

SIGNATURES

|   | Southwest      Royalties Institutional Income Fund |
|--------|----------------------------------------------------|
|   | X-C,      L.P., a Delaware limited partnership     |
|   |                                               |
| By:    | Southwest      Royalties, Inc., Managing           |
|   | General      Partner                               |
|   |                                               |
|   |                                               |
| By:    | /s/      L. Paul Latham                            |
|   | L.      Paul Latham                                |
|   | President      and Chief Executive Officer         |
|   |                                               |
| Date:  | November      12, 2008                             |