CLAYTON WILLIAMS ENERGY, INC.

Six Desta Drive, Suite 6500

Midland, Texas 79705

TABLE OF CONTENTS

CLAYTON WILLIAMS ENERGY, INC.

Six Desta Drive, Suite 6500

Midland, Texas 79705

materials and vote your shares on the Internet.  If you do not want to access the proxy materials by Internet, you may request a paper copy of the proxy materials at no cost to you by following the instructions included in the Notice of Internet Availability of Proxy Materials.

How to Vote

You may vote your shares prior to May 7, 2008 by one of the following methods:

·                   Via the Internet at www.proxyvote.com by following the instructions provided in the Notice of Internet Availability of Proxy Materials;

·                   By phone, after your receipt of paper copies of the proxy materials; or

·                   By requesting, completing and mailing in a paper proxy card, as outlined in the Notice of Internet Availability of Proxy Materials.

You may vote via the Internet or by phone until 11:59 p.m., Eastern Time, on Tuesday, May 6, 2008.  If you mail in a paper proxy card, our agent must receive your paper proxy card on or before Tuesday, May 6, 2008.  You may also vote in person at the annual meeting by completing a ballot; however, attending the annual meeting without completing a ballot will not count as a vote.

If your shares are registered directly in your name with our transfer agent, Wells Fargo Minnesota, N.A. Shareowner Services, you are considered a shareholder of record with respect to those shares and our agent, Broadridge Financial Solutions, Inc., will send directly to you the Notice of Internet Availability of Proxy Materials.  If your shares are held by a bank, broker or other nominee rather than in your own name, you are considered the beneficial owner of the shares, and the Notice of Internet Availability of Proxy Materials will be forwarded to you by or on behalf of your bank, broker or other nominee.  In either case, please carefully consider the information contained in the proxy statement and, regardless of whether you plan to attend the meeting, vote via the Internet, by phone or by mailing in a paper proxy card so that we can be assured of having a quorum present at the annual meeting and that your shares may be voted in accordance with your wishes even if you later decide not to attend the annual meeting.

If you submit a properly completed proxy via the Internet, by phone or by mailing in a paper proxy card, we will vote your shares as you direct.  However, if you submit a proxy and do not specify how to vote, we will vote your shares:

·                   “FOR” the election of the three nominees for director identified on page 9;

·                   “FOR” the selection of KPMG LLP as the Company’s independent auditors for 2008 (advisory vote), as explained on page 27; and

·                   In our discretion as to other business that is properly brought before the annual meeting or any adjournment or postponement of the annual meeting.

We encourage you to register your vote via the Internet.  If you attend the meeting, you may also submit your vote in person and any votes that you previously submitted, whether via the Internet, by phone or by mailing in a paper proxy card, will be superseded by the vote that you cast at the meeting.  If you are a beneficial owner, to vote at the meeting you will need to contact the bank, broker or nominee that holds shares on your behalf and obtain a “legal proxy” to bring to the meeting.

Changing Your Vote

You can revoke your proxy at any time before it is voted at the annual meeting by:

·                   Timely submitting a new proxy with a later date via the Internet, by phone or by mail;

·                   Attending the annual meeting and voting in person; or

·                   Sending written notice of revocation to our Secretary, Mel G. Riggs.

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Quorum

A quorum of shareholders is necessary to hold a valid meeting.  The presence in person or by proxy of the holders of at least a majority of the shares of our common stock entitled to vote at the meeting is a quorum.  Abstentions and broker “non-votes” will be counted as present for establishing a quorum.

A broker “non-vote” occurs on an item when shares held by a bank, broker or other nominee are present or represented at the meeting but such nominee is not permitted to vote on that item without instruction from the beneficial owner of the shares and no instruction is given.  If you have returned valid proxy instructions or vote in person, your shares will be counted for the purpose of determining whether there is a quorum, even if you abstain from any matter introduced at the meeting.

Votes Required

The nominees for election as directors at the annual meeting will be elected by a plurality of the votes of the shares present in person or represented by proxy at the annual meeting and entitled to vote.  The Company’s Certificate of Incorporation and Bylaws prohibit cumulative voting in the election of directors.  Neither abstentions nor broker non-votes will have an effect on the votes for or against the election of a director.

Advice on the selection of KPMG LLP as our independent auditors for 2008, and any other matters submitted to a vote of the shareholders at the annual meeting, will be determined by the affirmative vote of a majority of the shares present or represented by proxy at the annual meeting and entitled to vote on such matters.  Abstentions will count toward the number of shares present but will not count as an affirmative vote and, therefore, an abstention will have the effect of a vote against the selection of KPMG LLP as our independent auditors for 2008, and against any other matter submitted to a vote of the shareholders at the annual meeting.  Broker non-votes will not be considered present at the annual meeting with respect to this proposal, or any other matter submitted to a vote of the shareholders at the annual meeting, and so will have no effect on the approval of these proposals.

Proxy Solicitation

This proxy is being solicited by the Board of Directors.  In addition to the Internet availability of proxy materials or, upon your request, the mailing of these materials to you, our employees and agents may solicit proxies personally, electronically, telephonically or otherwise, and they will receive no extra compensation for making solicitations.  The extent to which these proxy soliciting efforts will be necessary depends upon how promptly proxies are submitted.  We encourage you to submit your proxy without delay.  We will pay our costs of soliciting proxies and will also reimburse brokers and other nominees for their expenses in sending these materials to you and getting your voting instructions.

Corporate Governance

Role of the Board

The business and affairs of the Company are managed under the direction of our Board of Directors.  The Board has responsibility for establishing broad corporate policies and for overall performance and direction of the Company.  Members of the Board stay informed of the Company’s business by participating in Board and committee meetings, by reviewing analyses and reports sent to them regularly, and through discussions with the Chief Executive Officer and other officers.

Board Structure

The Board is comprised of three classes of members.  One class of directors is elected each year to hold office for a three-year term and until successors of such class are duly elected and qualified.  The Board currently consists of seven directors.  The directors serving on the Board in 2007 were Clayton W. Williams, Jr., L. Paul Latham, Mel G. Riggs, Stanley S. Beard, Davis L. Ford, Robert L. Parker, and Jordan R. Smith.  The class in which each director serves and the nominees for directors at the annual meeting are described below under “Election of Three Directors.”

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Director Independence

A majority of the directors serving on our Board qualify as independent directors under regulations of the SEC, and under the corporate governance listing standards of Nasdaq Stock Market, Inc., referred to as Nasdaq, and also qualify as “outside directors” for purposes of Section 162(m) of the Internal Revenue Code, referred to as the Tax Code.  In determining independence, each year the Audit Committee affirmatively determines, among other items, whether the directors have any relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director pursuant to the Nasdaq corporate governance listing standards.  When determining if such a relationship exists, the Audit Committee considers all relevant facts and circumstances, not merely from the director’s standpoint, but from that of the persons or organizations with which the director has an affiliation, and the frequency or regularity of the services, whether the services are being carried out at arm’s length in the ordinary course of business, and whether the services are being provided substantially on the same terms to the Company as those prevailing at the time from unrelated parties for comparable transactions.  Such relationships can include commercial, banking, industrial, consulting, legal, accounting, charitable and familial relationships.  In 2007, no transactions, relationships or arrangements occurred or were present with respect to the independent directors except that the Company entered into drilling contracts with Parker Drilling Company.  Robert L. Parker is a director of the Company.  Until April 28, 2006, Mr. Parker was a director of Parker Drilling. Mr. Parker’s son, Robert L. Parker, Jr., is the president and chief executive officer of Parker Drilling.  During 2007, the Company paid Parker Drilling approximately $14 million for contract drilling services provided to the Company on an arm’s length basis at market rates.  The payments made by the Company to Parker Drilling in 2007 and in each of the past three fiscal years did not exceed 5% of Parker Drilling’s consolidated gross revenues for such years.  The Audit Committee determined that these relationships between Mr. Parker and his son with Parker Drilling would not interfere with Mr. Parker’s exercise of independent judgment in carrying out the responsibilities of a director of the Company.

Applying these independence standards, the Audit Committee has determined that Messrs. Beard, Ford, Parker and Smith are all independent directors.

Codes of Conduct and Ethics

The Company has adopted a Code of Conduct and Ethics, referred to as the Code of Conduct, which applies to all directors, executive officers and employees of the Company, including its subsidiaries.  The Code of Conduct assists employees in complying with the law, in resolving ethical issues that may arise, and in complying with the Company’s policies.  The Code of Conduct is also designed to promote, among other things, ethical handling of actual or apparent conflicts of interest; full, fair, accurate and timely disclosure in filings with the SEC and in other public disclosures; compliance with law; and prompt internal reporting of violations of the Code of Conduct.

The Code of Conduct is available on our website at www.claytonwilliams.com under “Investor Relations/Governance.”   We will provide the Code of Conduct in print, free of charge, to shareholders who request it.  Any waiver of the Code of Conduct with respect to executive officers or directors may be made only by the Board or a Board committee and will be promptly disclosed to shareholders on our website, as will any amendments to the Code of Conduct.

Communications with the Board

Communications by shareholders or by other parties may be sent to the Board by U.S. mail or overnight delivery and should be addressed to the Board c/o Secretary, Clayton Williams Energy, Inc., Six Desta Drive, Suite 6500, Midland, Texas  79705.  Communications directed to the Board, or one or more Board members, will be forwarded directly to the designated member or members and may be made anonymously.

Identification of Director Candidates

The Company’s Nominating and Governance Committee is responsible for identifying and reviewing director candidates to determine whether they qualify for and should be considered for membership on the Board.  If any vacancies on the Board arise, the Nominating and Governance Committee considers potential candidates that come to the attention of the Committee through current members of the Board, management of the Company,

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shareholders, or other persons.  Candidates for nomination to the Board, whether recommended to the Committee by other members of the Board, management, shareholders or otherwise, are evaluated with the intention of achieving a balance of knowledge, experience and capability on the Board and in light of the membership criteria established by the Nominating and Governance Committee which are as follows:

·                   High professional and personal ethics and values;

·                   Broad experience in management, policy-making and/or finance;

·                   Commitment to enhancing shareholder value and to representing the interests of shareholders;

·                   Sufficient time to carry out their duties; and

·                   Experience adequate to provide insight and practical wisdom.

In the event of a vacancy on the Board, the Nominating and Governance Committee, together with other members of the Board and senior management of the Company, will identify specific criteria for potential candidates to fill such vacancy, dependent upon the needs of the Company and the overall composition of the Board at the time.

Consideration of Director Nominees

The policy of the Nominating and Governance Committee is to consider properly submitted shareholder nominations for candidates for Board membership as described above.  Any shareholder nominations proposed for consideration by the Nominating and Governance Committee should include the nominee’s name and qualifications for Board membership and should be addressed to:  Secretary, Clayton Williams Energy, Inc., Six Desta Drive, Suite 6500, Midland, Texas 79705.

2007 Board Meetings and Annual Meeting

The Board met three times in 2007 and took action by unanimous written consent one time.  Messrs. Williams and Parker attended two of the three meetings of the Board in 2007, or 67%. Also in 2007, Mr. Parker attended three of four meetings of the Compensation Committee (75%), four of six meetings of the Audit Committee (67%), and did not attend the only meeting of the Nominating and Governance Committee.  Each of the other directors attended 100% of the meetings of the Board and each committee of the Board on which he served.  All directors other than Mr. Parker attended the 2007 annual meeting of shareholders.  The Company encourages all Board members to attend its annual meetings.

Board Committees

The Board has three standing committees:  Compensation, Audit, and Nominating and Governance.  The Audit Committee of the Board has determined that each member of these committees is independent consistent with SEC regulations and Nasdaq listing standards.

Compensation Committee

The Compensation Committee held four meetings during 2007 and took action by unanimous written consent four times.  Directors Beard (Chairman), Ford, Parker and Smith currently serve on the Compensation Committee.  The purposes of the Compensation Committee are:

·                   To review, evaluate, and approve the agreements, plans, policies and programs of the Company to compensate its officers;

·                   To review the Compensation Discussion and Analysis prepared by management and proposed for inclusion in the Company’s Proxy Statement for its annual meeting of shareholders and to determine whether to recommend to the Board that the Compensation Discussion and Analysis be included in such Proxy Statement;

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·                   To provide assistance to the Board in discharging its responsibilities relating to the compensation of the Chief Executive Officer and other executive officers of the Company; and

·                   To perform such other functions as the Board may assign to the Committee from time to time.

The specific responsibilities of the Compensation Committee are identified in the Committee’s charter, which is available on our website at www.claytonwilliams.com under “Investor Relations/Governance.”

Pursuant to its charter, the Compensation Committee may appoint subcommittees for any purpose that the Compensation Committee deems appropriate and delegate to these subcommittees any power and authority the Compensation Committee deems appropriate.  Historically the Compensation Committee has not delegated any of its powers and authority and, at this time, the Compensation Committee does not intend to delegate its powers and authority to any subcommittee in the foreseeable future.

Agendas for meetings of the Compensation Committee are generally prepared by the Company’s Chief Executive Officer and Chief Operating Officer, in consultation with the Chairman of the Compensation Committee.  Compensation Committee meetings are regularly attended by several of the Company’s officers, including the Chairman of the Board, President and Chief Executive Officer, the Executive Vice President and Chief Operating Officer, and the Senior Vice President and Chief Financial Officer.  The Compensation Committee has the authority to secure the services of independent advisors and the Company’s legal, accounting and human resources departments to support the Compensation Committee in fulfilling its responsibilities.  The Compensation Committee has authority under its Charter to retain, approve fees for, and terminate independent advisors as it deems necessary to assist in the fulfillment of its responsibilities.  A detailed description of the processes and procedures of the Compensation Committee for the consideration and determination of executive and director compensation can be found under “Executive Compensation — Compensation Discussion and Analysis.”

None of the individuals serving on the Compensation Committee has ever been an officer or employee of the Company.  The Audit Committee has determined that all of the members of the Compensation Committee satisfy the independence requirements of the Nasdaq corporate governance listing standards.  Additionally, all of the members of the Compensation Committee qualify as “non-employee directors” for purposes of SEC requirements, and as “outside directors” for purposes of Section 162(m) of the Tax Code.

Nominating and Governance Committee

The Nominating and Governance Committee met one time in 2007.  Directors Smith (Chairman), Beard, Ford and Parker currently serve on this Committee.  The purposes of the Committee are:

·                   To identify individuals qualified to become Board members, and to select the director nominees for election at the annual meetings of shareholders or for appointment to fill vacancies;

·                   To recommend to the Board director nominees for each committee of the Board;

·                   To advise the Board about appropriate composition of the Board and its committees;

·                   To advise the Board about and recommend to the Board appropriate corporate governance practices and to assist the Board in implementing those practices;

·                   To lead the Board in its annual review of the performance of the Board and its committees; and

·                   To perform such other functions as the Board may assign to the Committee from time to time.

The specific responsibilities of the Nominating and Governance Committee are identified in the Committee’s charter, which is available on our website at www.claytonwilliams.com under “Investor Relations/Governance.”

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Audit Committee

The Audit Committee held six meetings during 2007 and took action by unanimous written consent four times.  Directors Parker (Chairman), Beard Ford, and Smith currently serve on the Audit Committee.  The Board has determined that no member of the Audit Committee meets all of the criteria needed to qualify as an “audit committee financial expert” as defined by SEC regulations.  The Board believes that each of the current members of the Audit Committee has sufficient knowledge and experience in financial matters to perform his duties on the Audit Committee.  In addition, the Audit Committee has engaged, at the Company’s expense, Davis Kinard & Co., certified public accountants, as a financial accounting consultant to independently advise the Audit Committee in the area of technical accounting issues and to assist the Audit Committee in fully understanding any matters that may come before the Audit Committee, including matters related to:

·                   Generally accepted accounting principles and the application of such principles in connection with accounting for estimates, accruals and reserves;

·                   Internal controls and procedures for financial reporting; and

·                   Other Audit Committee functions.

The specific responsibilities of the Audit Committee are identified in the Audit Committee’s charter, which is available on our website at www.claytonwilliams.com under “Investor Relations/Governance.” The Audit Committee serves as an independent and objective party to oversee the accounting and financial reporting practices of the Company, and the audits of its financial statements.  The Audit Committee has the sole authority and responsibility with respect to the selection, engagement, compensation, oversight, evaluation and, where appropriate, dismissal of the independent auditors and any other public accounting firm engaged by the Company.  The independent auditors, and any other public accounting firm engaged by the Company, report directly to the Audit Committee.

Election of Three Directors

The Board of Directors is composed of three classes of members.  One class of directors is elected each year to hold office for a three-year term and until successors of such class are duly elected and qualified.  Except where the authority to do so has been withheld, it is the intention of the persons named in the proxy to vote to elect Davis L. Ford, Robert L. Parker, and Jordan R. Smith as directors for three-year terms.  Each of the nominees has consented to being named in the Proxy Statement and to serve, if elected, but if either of them should decline or be unable to serve for any reason, the proxies will be voted to fill any vacancy so arising in accordance with the discretionary authority of the persons named in the proxy.

Information is provided below for each of the nominees for election and each director continuing in office regarding their age, positions with the Company or other principal occupations for the past five years, other directorships and the year initially elected a director of the Company.  For information concerning the ownership of Company common stock by each director, see “Security Ownership of Certain Beneficial Owners and Management.”   There are no family relationships among the directors or officers of the Company, except that Mr. Williams is the father-in-law of Gregory S. Welborn, Vice President — Land.

Nominees for Election to the Board of Directors

For Three-Year Term Expiring in 2011

DAVIS L. FORD, age 70, is a director of the Company and a member of the Audit, Compensation and Nominating and Governance Committees of the Board.  Dr. Ford has served as a director of the Company since his appointment in February 2004.  Dr. Ford has been president of Davis L. Ford & Associates, an environmental engineering and consulting firm, for more than the past five years and is also an adjunct Professor at the University of Texas at Austin.

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ROBERT L. PARKER, age 84, is a director of the Company and a member of the Audit, Compensation and Nominating and Governance Committees of the Board.  Mr. Parker has served as a director of the Company since May 1993.  Mr. Parker is retired.  Until his retirement in April 2006, he was the Chairman of the Board of Parker Drilling Company, a publicly owned corporation providing contract drilling services, a position he held since 1991.

JORDAN R. SMITH, age 73, is a director of the Company and a member of the Audit, Compensation and Nominating and Governance Committees of the Board.  Mr. Smith has served as a director of the Company since July 2000.  Mr. Smith is President of Ramshorn Investments, Inc., a wholly owned subsidiary of Nabors Industries, having served in such capacity for more than the past five years.  Mr. Smith serves as a director of Delta Petroleum Corporation, a publicly owned corporation in the energy business, and has served on the Board of the University of Wyoming Foundation and the Board of the Domestic Petroleum Council.  Mr. Smith is also Founder and Chairman of the American Junior Golf Association.

The Board of Directors unanimously recommends a vote FOR the election of Messrs. Ford, Parker and Smith to the Board of Directors.

Members of the Board of Directors Continuing in Office

Term Expiring in 2009

STANLEY S. BEARD, age 67, is a director of the Company and a member of the Audit, Compensation and Nominating and Governance Committees.  Mr. Beard has served as a director of the Company since September 1991.  Mr. Beard has been engaged in private business related to the oil and gas industry for more than 20 years and has been involved in real estate development for more than 10 years.

MEL G. RIGGS, age 53, is Senior Vice President and Chief Financial Officer of the Company, having served in such capacities since September 1991.  Mr. Riggs has served as a director of the Company since May 1994.

Members of the Board of Directors Continuing in Office

Term Expiring in 2010

CLAYTON W. WILLIAMS, JR., age 76, is Chairman of the Board, President, Chief Executive Officer and a director of the Company, having served in such capacities since September 1991.  For more than the past five years, Mr. Williams has also been the chief executive officer and a director of certain entities, referred to as the Williams Entities, which are controlled directly or indirectly by Mr. Williams.  See “Certain Transactions and Relationships.”

L. PAUL LATHAM, age 56, is Executive Vice President, Chief Operating Officer and a director of the Company, having served in such capacities since September 1991.  Mr. Latham is the sole general partner of The Williams Children’s Partnership, Ltd., referred to as WCPL, a limited partnership in which the adult children of Clayton W. Williams, Jr. are the limited partners.  WCPL holds approximately 27% of the outstanding shares of the Company’s common stock.  As the sole general partner, Mr. Latham has the power to vote or direct the voting of the shares of the Company’s common stock held by WCPL.  See “Security Ownership of Certain Beneficial Owners and Management.”   Mr. Latham also serves as an officer and director of certain Williams Entities.

Throughout this proxy statement, the following individuals are referred to as the named executive officers:

·                   Clayton W. Williams, Jr., Chairman of the Board, President and Chief Executive Officer

·                   L. Paul Latham, Executive Vice President and Chief Operating Officer

·                   Mel G. Riggs,  Senior Vice President and Chief Financial Officer

·                   Patrick C. Reesby, Vice President  — New Ventures

·                   T. Mark Tisdale, Vice President and General Counsel

Compensation Philosophy and Principles

The Compensation Committee acknowledges that the oil and gas exploration and production industry is highly competitive and that experienced professionals have significant career mobility.  The Company competes for executive talent with a large number of exploration and production companies, some of which have significantly larger market capitalization than the Company.  Comparatively, the Company is a smaller company in a highly competitive industry, and its ability to attract, retain and reward its executive officers and other key employees is essential to maintaining an advantageous position in the oil and gas business.  The Company’s comparatively smaller size within its industry and its relatively small executive management team provide unique challenges in this industry, and therefore, are substantial factors in the design of the executive compensation program.  The Compensation Committee’s goal is to maintain compensation programs that are effective in attracting and retaining talented individuals within the independent oil and gas industry.  Each year, the Compensation Committee reviews the executive compensation program to assess whether the program remains comparable with those of similar companies, considers the program’s effectiveness in creating adequate incentives for executives to find, acquire, develop and produce oil and gas reserves in a cost-effective manner, and determines what changes, if any, are appropriate.

The Compensation Committee has adopted a compensation policy which it believes to be a balance between fair and reasonable cash compensation and incentives linked to the Company’s performance, taking into consideration compensation of individuals with similar duties who are employed by its peers in the industry.  The policy takes into account the cyclical nature of the oil and gas business, which may result in traditional performance standards being skewed due to erratic product prices.  An analysis of the Company’s goals has resulted in a policy which places emphasis on increasing the Company’s proved oil and gas reserves and production, coupled with maintaining an acceptable balance between its overhead and profit margin.  As described more fully below, the Compensation Committee may, in addition to base salaries, award bonuses, stock options and direct participation incentives based upon the performance of the Company and the efforts of individual executives and key employees.

In determining the form and amount of compensation payable to the Company’s executive officers, the Compensation Committee is guided by the following objectives and principles:

·                   Compensation levels should be sufficiently competitive to attract and retain key executives.   The Compensation Committee aims to ensure that the Company’s executive compensation program attracts, motivates and retains outstanding talent and rewards them for the Company achieving and maintaining a competitive position in its industry.  Total compensation ( i.e. , maximum achievable compensation) should increase with position and responsibility.

·                   Compensation should relate directly to performance, and incentive compensation should constitute a substantial portion of total compensation .  The Compensation Committee aims to foster a pay-for-performance culture, with a significant portion of total compensation being “at risk.”  Accordingly, a substantial portion of total compensation should be tied to and vary with the Company’s financial, operational and strategic performance, as well as individual performance.  Executives with greater roles in particular projects and the ability to directly impact the Company’s strategic goals and long-term results should bear a greater proportion of the risk if these goals and results are not achieved, and be rewarded if the Company’s goals and results are achieved or exceeded.

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·                   Long-term incentive compensation should align executives’ interests with the Company’s shareholders.   Awards of long-term incentive compensation encourage executives to focus on the Company’s long-term strategic growth and prospects and incentivize executives to manage the Company from the perspective of its shareholders.

·                   Retirement benefits should comprise an element of executive compensation.   The Company does not offer retirement benefits to its executive officers other than through its tax-qualified 401(k) plan.  Therefore, the Compensation Committee has designed the Company’s long-term incentive compensation to also provide a competitive level of replacement income upon retirement.

The Company’s executive compensation program is designed to reward the achievement of initiatives regarding Company growth and productivity, but it also takes into consideration the role and responsibilities of individual executive officers within the Company and internal pay equity.  Therefore, the Company’s executive compensation is designed:

·                   To encourage the Company’s executive officers to maintain a thorough and dynamic understanding of the competitive environment and to position the Company as a respected force within its industry;

·                   To incentivize the Company’s executive officers to develop strategic opportunities which benefit the Company and its shareholders;

·                   To sustain an internal culture focused on performance and the development of the Company’s assets into producing properties;

·                   To require the Company’s executive officers and other key employees to share the risks facing its shareholders, but to enable them to share in the rewards associated with the successful development of the Company’s assets into producing properties; and

·                   To implement a culture of compliance and unwavering commitment to operate the Company’s business with the highest standards of professional conduct and compliance.

Setting Executive Compensation

Management’s Role in Setting Executive Compensation

Mr. Williams evaluates all executive officers, including the named executive officers other than himself, and makes recommendations to the Compensation Committee regarding base salary levels, and the amounts of any incentive bonus payments and long-term incentive awards to be granted to all executive officers.  Messrs. Latham and Riggs assist Mr. Williams in his evaluation and the preparation of compensation recommendations, except with respect to their own compensation.  Additionally, Messrs. Williams, Latham and Riggs regularly attend Compensation Committee meetings and, upon the Compensation Committee’s request, provide compensation and other information to the Compensation Committee, including historical and prospective breakdowns of primary compensation components for each executive officer, internal pay equity analyses and information regarding the compensation paid to similarly situated executive officers within the Company’s peer group of industry competitors, as described in greater detail below.  These recommendations are given significant weight by the Compensation Committee but are not necessarily determinative of the compensation decisions made by the Compensation Committee; these recommendations are used as points of reference, not as a replacement for the Compensation Committee’s own judgment of the internal pay equity or individual performance that the Compensation Committee also considers when making compensation decisions.

Use of Independent Consultants

The Compensation Committee Charter provides the Compensation Committee with the authority to retain and terminate any compensation consulting firm or other adviser it deems appropriate.  Historically, the Compensation Committee has not utilized independent advisors and compensation consultants in determining the appropriate level of the compensation for the Company’s executive officers; however, the Compensation Committee has relied, and anticipates it will continue to rely, on the Company’s legal, accounting and human resources departments in compiling public information to be utilized in determining the appropriate compensation package for the Company’s executive officers.  For 2007, the Compensation Committee relied upon publicly available

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information compiled under the supervision of Mr. Latham with respect to the peer group of competitor companies described below.

Market Compensation Analysis

To provide a frame of reference in evaluating the reasonableness and competitiveness of executive compensation, senior management selects similarly situated companies who are competitors of the Company in attracting and retaining management and obtains market pay levels for such companies from public filings.  While the Compensation Committee reviews market pay for all of the named executive officers within the Company’s peer group of industry competitors, prior to 2007, the Compensation Committee has only explicitly considered peer data in analyzing and setting compensation for its Chief Executive Officer and its directors.  In 2007, the Compensation Committee reviewed a comparative analysis of the compensation paid to the directors, chief executive officer and other executive officers by a peer group of independent exploration and production companies.  The analysis for directors consisted of compensation for 2005, and the analysis for officers consisted of 2003 through 2005 compensation.  The Compensation Committee generally performs this analysis during the first quarter of the year at which time current public information is not available with respect to the Company’s peer group.  Therefore, the information reviewed by the Compensation Committee relates to a period ending the second year preceding the current year.  However, as compensation tends to increase over time, the Compensation Committee is comfortable utilizing less current information given its focus on incentive compensation over base salary and discretionary bonuses.  The peer group was determined by senior management, and the comparative data was compiled by Company personnel under the supervision of Mr. Latham.  The Compensation Committee concluded that the group of companies selected was an appropriate peer group for the comparison of salary and other compensation payable to the Company’s Chief Executive Officer and directors.  The peer companies represented a wide range of independent exploration and production companies, including both small and larger companies that operate in the same area of operations as the Company.  The group of peer companies included in the compensation analysis reviewed by the Compensation Committee in 2007 was comprised of Abraxas Petroleum, Brigham Exploration, Comstock Resources, Delta Petroleum, Denbury Resources, Edge Petroleum, Goodrich Petroleum, Meridian Resource, Parallel Petroleum, Petroquest Energy, Plains Exploration and Production, Range Resources and Swift Energy.  The objective of the Compensation Committee in reviewing market pay levels is to ensure that compensation payable to its executive officers is not out of market.  As noted, however, market pay levels are only one factor considered, with pay decisions ultimately reflecting an evaluation of individual contributions of an executive officer and the executive’s value to the Company.

The Compensation Committee does not believe that it is appropriate to establish compensation levels based exclusively or primarily on benchmarking to the Company’s peers.  The Compensation Committee looks to external market data only as a reference point in reviewing and establishing individual pay components and total compensation and ensuring that the Company’s executive compensation is competitive in the marketplace.  The Compensation Committee does not attempt to set total compensation or any component of compensation within a specific percentile of the Company’s peer group.

Determining Compensation Levels

The Compensation Committee annually determines the individual pay components of the Company’s executive officers.  In making such determinations, the Compensation Committee reviews and considers (1) the compensation analysis referred to above prepared by Company personnel, (2) recommendations of the Company’s Chief Executive Officer, based on individual responsibilities and performance, (3) historical compensation levels for each executive officer, (4) industry conditions and the Company’s future objectives and challenges, and (5) the overall effectiveness of the executive compensation program.

Historically, the base compensation of the Company’s executive officers has been less than 50% of the total compensation of the executive officers, with the bulk of the remainder of compensation consisting of discretionary bonuses and long-term incentives, and with other annual compensation consisting of less than 10% of the total compensation.  This is not due to any specific policy, practice or formula regarding the proper allocation between different elements of total compensation but does reflect the desire of the Compensation Committee to emphasize variable components of compensation to foster a pay-for-performance culture.

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The components of compensation paid to executive officers in 2007 were:

·                   Base salary;

·                   Discretionary bonus;

·                   Long-term incentive awards; and

·                   Other annual compensation.

Compensation of executive officers has generally consisted of these elements since 2001.

The Compensation Committee has reviewed all components of the compensation of the Chief Executive Officer and the executive officers, including salary, bonus, equity and long-term compensation, accumulated realized and unrealized stock option gains, the dollar value to the executive and the cost to the Company of all perquisites and other personal benefits, and the projected future payouts under non-equity awards described below.  In addition, the Compensation Committee has reviewed components of compensation of executive officers of the other peer companies in the industry with such components including salary, bonus, stock options, restricted stock awards, life insurance, vehicle allowances and other compensation.  The Compensation Committee has reviewed the compensation policies of the Company and discussed the increased competition encountered by the Company in attracting and retaining qualified employees.

Based upon recommendations of Messrs. Williams and Latham, and upon its own judgment, the Compensation Committee approved the base salary, discretionary bonus, long-term incentive awards and other annual compensation of each of the Company’s executive officers in 2007.  The Compensation Committee believes these approved forms and levels of compensation are reasonable, appropriate and consistent with the Company’s compensation philosophy and principles.  Further, the Compensation Committee believes the Company’s executive compensation program is effective because (1) the Company has retained its executive team in a competitive industry, and (2) the Company has demonstrated its ability to find, acquire, develop and produce oil and gas reserves in a cost-effective manner.

Base Salary

Base salary is set by the Compensation Committee at a level based on each executive officer’s position, level of responsibility, and individual performance.  As indicated above, base salary is typically less than 50% of each executive officer’s total compensation.  Although this result cannot occur explicitly by design, due to the nature of the Company’s long-term incentive compensation program discussed in greater detail below, it is the general intent of the Compensation Committee that a significant portion of the total compensation paid to the executive officers be attributable to variable compensation, either in the form of discretionary bonuses or long-term incentive awards.  The Compensation Committee believes that this mix of total compensation fosters a pay-for-performance culture by tailoring annual compensation to the success of projects in which an executive officer is involved, while ensuring that the executive will continue to receive a consistent base amount of compensation.  Historically, the Compensation Committee has annually increased the base salary of its executive officers other than Mr. Williams, whose base salary has remained unchanged since 2001.

For 2007, after reviewing the compensation programs of the Company’s peers and at the recommendation of Mr. Williams, the Compensation Committee determined current salaries were adequate and appropriate and, therefore, the annual base salaries of the named executive officers were left mostly unchanged with only a modest increase for Mr. Tisdale.

Bonus

Bonuses are discretionary and are paid if and when the Compensation Committee determines they are necessary to reward exceptional individual performance and to encourage loyalty to the Company and the interests of its shareholders.  The Compensation Committee believes that such bonuses serve both as a reward for performance and an incentive for future extraordinary performance in anticipation of such recognition.  The Company has historically paid Christmas bonuses to all employees, including executive officers, in amounts ranging from one-third to one-half of a month’s base salary.

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Executive officers of the Company, including Messrs. Williams, Latham and Riggs, may recommend bonuses to the Compensation Committee for their approval to reward individual performance.  Annual bonuses may also be used to compensate particular executives and key employees who the Compensation Committee determines are less than fully compensated at a particular point in time due to the failure of the long-term incentive awards granted to the employee to result in payment.  As is described in greater detail below, the nature of the Company’s long-term incentive award program is such that an award could fail to ever result in payment through no lack of effort by the executive and in circumstances where the performance of the Company as a whole is very good.  Although as a general policy, the Compensation Committee believes that executives should share the risks and rewards of the Company’s shareholders, if over a period of time an executive is undercompensated due to the nature of the Company’s long-term incentive program, the Compensation Committee will consider paying additional cash bonuses to the executive.

Long-Term Incentive Compensation

Long-term incentive compensation available to the Company’s executive officers consists of both equity-based awards and non-equity awards.  Following is a discussion of each long-term incentive award used by the Company.

Equity Awards

All equity awards to the Company’s executive officers have been in the form of stock options granted under the Company’s 1993 Stock Compensation Plan which provides for the grant of non-qualified options to officers, directors (other than “outside directors”), employees and advisors of the Company or any of its subsidiaries.  A total of 1,798,200 shares of common stock are authorized and reserved for issuance under the plan subject to adjustments to reflect changes in the Company’s capitalization resulting from stock splits, stock dividends and similar events.  Presently, 101,766 shares remain available for grant under the plan.  The Compensation Committee has the sole authority to interpret the plan, to determine the persons to whom options will be granted, to determine the basis upon which the options will be granted, and to determine the exercise price, duration and other terms of options to be granted under the plan; provided that (i) the exercise price of each option granted under the plan may not be less than the fair market value of the common stock at the date of grant of such option, (ii) the exercise price must be paid in cash upon exercise of such option, (iii) no option may be exercisable more than ten years after the date of grant, and (iv) no option is transferable other than by will or the laws of descent and distribution.

No option is exercisable after an optionee terminates his relationship with the Company or a subsidiary of the Company, subject to the right of the Compensation Committee to extend the exercise period for not more than 90 days following the date of termination of an optionee’s employment.  If an optionee’s employment is terminated by reason of disability, the Compensation Committee has the authority to extend the exercise period for not more than one year following the date of termination of the optionee’s employment.  If an optionee dies and has not fully exercised options granted under the plan, such options may be exercised in whole or in part within 90 days of the optionee’s death by the executors or administrators of the optionee’s estate or by the optionee’s heirs.

The vesting period, if any, specified for each option will be accelerated upon the occurrence of a change of control or a threatened change of control of the Company.

Mr. Williams is the Company’s Chief Executive Officer and owns a significant portion of the Company’s outstanding common stock.  Historically, the Compensation Committee has determined that, due to his key involvement in the strategic long-term planning of the Company as a whole and as the Company’s principal shareholder, Mr. Williams should receive stock options as a form of long-term incentive compensation in order to more directly align his compensation package with the interests of the Company’s shareholders.  Since 2001, only Mr. Williams has been awarded stock options under this plan.  The Company did not grant any stock options to Mr. Williams in 2007.  In March 2008, the Compensation Committee elected to change the nature of long-term incentive compensation for Mr. Williams and, rather than continuing to award Mr. Williams stock option grants, took action to include Mr. Williams in the APO Incentive Plan beginning in 2008 as described in greater detail under “ — Actions Taken Subsequent to Year-End.”

Non-Equity Awards

APO Incentive Plan

The principal form of long-term incentive compensation for all executive officers (other than Mr. Williams), key employees and consultants of the Company is an after-Payout incentive plan, referred to as the

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APO Incentive Plan that was created to incentivize the Company’s executives to find, acquire, develop and produce oil and gas reserves in a cost-effective manner, and to reward those executives for the successful management of projects that produce value to the Company’s shareholders.  The APO Incentive Plan provides for the creation of a series of partnerships (either limited partnerships or tax partnerships) through which the Company contributes a portion of its working interests in wells drilled or acquired within certain geographical areas.  Under the APO Incentive Plan, the Company pays all costs and receives all revenues relative to the contributed working interests until it achieves “Payout,” which is generally the return of its costs, plus interest.  After Payout, the officers, key employees and consultants who were granted the right to participate in the partnership, receive at least 99% of the partnership’s subsequent revenues and pay at least 99% of its subsequent expenses.  The Compensation Committee believes that aligning a portion of the executive officers’ long-term compensation to the performance of the Company’s exploration, development and acquisition programs is both a reward for the acquisition and development of such properties and an incentive to manage the properties in a manner that will maximize the long-term success for both the Company and themselves.

From 2002 through 2005, APO Incentive Plan awards were structured as limited partner interests in Texas limited partnerships.  Since 2006, the APO Incentive Plan awards have been structured as participation agreements that are intended by the participants to be treated as partnerships solely for federal and state income tax purposes.  Although the economics of the APO Incentive Plan awards in the Texas limited partnership structure and the participation agreement structure have remained unchanged, the current practice of utilizing participation agreements is preferable to, and is less burdensome for the Company to administer than, the limited partnership structure.

Although the percentage of the Company’s contributed working interests varies from partnership to partnership, contributions under the APO Incentive Plan have ranged from 3.5% to 7.5% of the Company’s working interests in the applicable wells, depending on the nature of the underlying project.  The percentage of working interests contributed is determined in the discretion of the Compensation Committee after considering recommendations made by Mr. Williams.  At the time APO Incentive Plan awards are granted, the ultimate amount payable to the participants under the award is not determinable.  Each APO Incentive Plan award represents a potential working interest in one or more wells in a limited geographic area.  Potentially, the award may never become payable, or it may become payable at an indeterminable future date.  The participants who receive specific APO Incentive Plan awards, and the size of the APO Incentive Plan award granted to each participant, is determined in the discretion of the Compensation Committee after considering recommendations made by Mr. Williams.  Generally, each particular working interest in a geographic area is awarded to the executive officers and key employees primarily responsible for that project.  The size of the APO Incentive Plan award granted to each participant out of that particular working interest is generally determined based upon his or her potential individual impact on the success of the project.

Once granted, an APO Incentive Plan award is fully vested and is not forfeitable, except in circumstances of fraud against the Company by a participant.  However, the Company retains the right to grant new APO Incentive Plan awards in the same geographic area.  This effectively limits a participant’s award to the then-existing wells, without preserving a participant’s future interest in further drilling activity in that same geographic area.

The Compensation Committee believes that the APO Incentive Plan satisfies several important compensatory objectives.

·                   It aligns the interests of the Company’s executive officers and key employees with those of its shareholders by conditioning payment under the APO Incentive Plan awards upon Payout and positive cash flows into the Company.

·                   It encourages the Company’s executive officers and key employees to find, acquire, develop and produce oil and gas reserves for the Company in a cost-effective manner.

·                   Previously granted APO Incentive Plan awards provide current income to the Company’s executive officers and key employees.

·                   APO Incentive Plan awards potentially provide future income to the Company’s executive officers and key employees that will be available to them in their retirement.  Hence, the APO Incentive Plan provides both current incentives and potential retirement income to the Company’s executive officers.

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A detailed description of the awards previously made under the APO Incentive Plan and amounts paid to the named executive officers in 2007 pursuant to APO Incentive Plan awards can be found under “  — Summary Compensation Table — Supplemental Information about the APO Incentive Plan .”

APO Working Interest Trusts

In 2001, prior to adopting the current structure of the APO Incentive Plan, the Compensation Committee approved the creation of six trusts through which the Company’s executive officers and key employees, excluding Mr. Williams, received after-Payout working interests in wells drilled by the Company.  These trusts were structured so that the participants were beneficiaries of the assigned working interest once Payout was achieved.  Two of the trusts achieved Payout status and have been dissolved.  Upon dissolution, each trust distributed to the beneficiaries a fractional direct ownership in the working interests held by the trust.  Four of the trusts did not achieve Payout status and have been dissolved, with the working interests being reassigned to the Company.  Messrs. Latham, Riggs and Tisdale received payments in 2007 from the APO Working Interest Trusts as described in the footnotes under “ — Summary Compensation Table .”

After-Payout Working Interest Grant

In May 2003, the Compensation Committee approved the grant of 5% of the Company’s after-Payout working interests in certain acreage in New Mexico to key employees, other than Mr. Williams, who contributed to the success of that project.  In connection with the grant, the participants received a cash payment equal to the net revenues attributable to the distributed interests from the date Payout status was achieved (May 2002) through June 2003, and received an assignment of their proportionate share of the working interests in the acreage effective July 1, 2003.  All net revenues, consisting of oil and gas sales, net of production taxes and other expenses, attributable to the distributed interests are paid to the participants in proportion to each participant’s ownership interest in the grant.  Messrs. Latham, Riggs and Tisdale received payments in 2007 from the After-Payout Working Interest Grants as described in the footnotes under “ — Summary Compensation Table .”

SWR Reward Plan

In October 2006, the Compensation Committee authorized the establishment of the Southwest Royalties Reward Plan, which we refer to as the SWR Reward Plan, a one-time incentive plan designed to reward eligible employees and other service providers for continued quality service to the Company, and to encourage retention of those employees and service providers by providing them the opportunity to receive bonus payments that are based on certain profits derived from a portion of the Company’s working interest in the RS Windham C3 well in Upton County, Texas.  Eligible participants in the SWR Reward Plan include those officers, key employees and consultants, excluding Mr. Williams, who made significant contributions to the acquisition and development of Southwest Royalties, Inc.  The Company granted 100% of the awards available under the SWR Reward Plan in January 2007.  Messrs. Latham, Riggs and Tisdale received awards under the SWR Reward Plan.

The SWR Reward Plan provides for quarterly cash bonuses to the participants, as a group, equal to the after-Payout cash flow from a 22.5% working interest in the RS Windham C3 well.  Only two-thirds of the quarterly bonus amount is payable to the participants until the full vesting date. The remaining one-third is deferred.  The full vesting date is October 25, 2011, or sooner in the event of a change of control or sale transaction, as defined in the SWR Reward Plan.    After the full vesting date, the deferred portion of the quarterly bonus amount, with interest at 4.83% per year, as well as 100% of all subsequent quarterly bonus amounts, are payable to participants.  The quarterly bonus amounts are allocated among the participants based on each participant’s bonus percentage.

To continue as a participant in the SWR Reward Plan, participants must remain in the employment or service of the Company through the full vesting date.  Participants who remain in the employment or service of the Company through the full vesting date will continue as participants for the duration of the SWR Reward plan, subject to certain restrictions.  Awards with respect to the SWR Reward Plan are further described in the footnotes under “ — Summary Compensation Table ” and under “ — Nonqualified Deferred Compensation. ”

Other Compensation

The Company’s executive officers also participate in the employee benefit programs that are provided to its full-time employees generally, including its group health plan, group life insurance program, and its 401(k) Plan & Trust which provides for matching contributions equal to 100% of participant deferrals up to 4% of compensation for purposes of the plan.  Beginning in 2008, matching contributions were increased to 100% of participant deferrals up to 6% of compensation. In addition, certain of the Company’s executive officers receive a monthly automobile allowance, and the Company pays various club membership dues and personal expenses on behalf of certain executive officers.

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None of the named executive officers are entitled to severance benefits.  However, as further described under “ — Potential Payments Upon Termination or Change in Control ”, awards granted pursuant to the SWR Reward Plan and stock options granted under the Company’s 1993 Stock Compensation Plan vest upon certain change in control events.

Actions Taken Subsequent to Year-End

As discussed under the caption “ — Long-Term Incentive Compensation — Equity Awards” , Mr. Williams is the Company’s Chief Executive Officer and owns a significant portion of the Company’s outstanding common stock.  Prior to 2008, the Compensation Committee determined that, due to his key involvement in the strategic long-term planning of the Company as a whole, Mr. Williams should receive stock options as a form of long-term incentive compensation in order to more directly align his compensation package with the interests of the Company’s shareholders.  In March 2008, the Compensation Committee considered changing the form of long-term incentive compensation to Mr. Williams from equity awards in the form of stock options to non-equity awards under the APO Incentive Plan.  The Compensation Committee discussed and considered the following matters related to the proposed change:

·                   Mr. Williams beneficially owns or controls approximately 20% of the Company’s outstanding common stock and holds options to purchase 750,000 shares of common stock that, if exercised, would increase this percentage to approximately 25%.  In addition, WCPL, a limited partnership in which Mr. Williams’ adult children are the limited partners, owns an additional 27% of the Company’s outstanding common stock.

·                   Mr. Williams views his equity ownership in the Company as a long-term investment for the accumulation of family wealth.  Except for one occasion in 2000, Mr. Williams has never disposed of any shares of the Company’s common stock except by gift or other transfer to family or household employees.  Since Mr. Williams has not routinely disposed of his equity holdings in the Company for cash, the acquisition of common stock through the exercise of stock options is not a viable source of liquidity for Mr. Williams.

·                   Because Mr. Williams and WCPL own, on a combined basis, almost 50% of the Company’s outstanding common stock, Mr. Williams’ incentive to create shareholder value is already closely aligned with that of the other shareholders of the Company.  Therefore, as an incentive, additional stock option grants may no longer be as effective as a form of compensation that could generate cash flow and allow him to either acquire additional shares of common stock in the open market or diversify his personal investments without selling common stock or diluting his equity ownership in the Company.

·                   The Company currently utilizes the APO Incentive Plan to incentivize and compensate all other executive officers, key employees and consultants.  In the past, Mr. Williams has been excluded from participating in this plan since he was receiving equity awards instead.  Permitting Mr. Williams to participate in the APO Incentive Plan would likely be an effective way to provide incentive to Mr. Williams, just as the Compensation Committee believes it has been effective for other executive officers.

After considering these factors, the Compensation Committee took action to include Mr. Williams in the APO Incentive Plan beginning in 2008.  The Compensation Committee established the following parameters in connection with Mr. Williams’ participation in the APO Incentive Plan:

·                   Mr. Williams will continue to recommend to the Compensation Committee the percentage of the Company’s working interest that will be assigned to each partnership, as well as the unit allocation of that working interest among the participants, other than Mr. Williams.

·                   In each partnership authorized by the Compensation Committee, Mr. Williams will be granted an interest equal to 40% of the working interest being allocated among all other participants, except that Mr. Williams’ interest will be reduced as needed to limit the total working interest being assigned to any partnership to 10% of the Company’s working interest.

·                   All other provisions of the APO Incentive Plan will be uniformly applied to all participants, including Mr. Williams.

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The Compensation Committee believes that allowing Mr. Williams to participate in the APO Incentive Plan will be an effective component of the overall compensation package for Mr. Williams.  This plan will create additional incentives for Mr. Williams to find, acquire, develop and produce oil and gas reserves in a cost-effective manner by restricting payments to him under the APO Incentive Plan to a portion of the after-Payout cash flow of specified exploration, development and acquisition projects of the Company.  The Compensation Committee further believes that his participation in the APO Incentive Plan will provide Mr. Williams with current cash flow and will be a potential source of post-retirement income.

Summary Compensation Table

The following table summarizes, with respect to the Chairman of the Board, President and Chief Executive Officer, the Senior Vice President and Chief Financial Officer, and each of the Company’s other named executive officers, information relating to the compensation earned for services rendered in all capacities during fiscal years 2006 and 2007.  Columns (e) and (h) have been deleted from the SEC-prescribed tabular format because the Company does not grant stock awards or sponsor pension plans and because awards under the SWR Reward Plan do not currently provided for above market interest.

The Company has not entered into any employment agreements with its named executive officers.

For the year ended December 31, 2007, Mr. Williams’ base salary accounted for approximately 83% of the total compensation, while his incentive compensation (including discretionary bonuses) accounted for approximately 5% and all other compensation comprised an additional 12% of his total compensation.  Most of Mr. Williams’ incentive compensation has historically been paid in stock options; however, no stock options were

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granted to Mr. Williams in 2007 or 2006.  For information about Mr. Williams’ stock option holdings, see “  — Outstanding Equity Awards at Fiscal Year-End” and “  — Option Exercises and Stock Vested.”  For Messrs. Latham, Riggs, Reesby and Tisdale, base salary ranged from 32% to 47% of total compensation, while incentive compensation (including discretionary bonuses) ranged from 48% to 64% and all other compensation ranged from approximately 5% to 6%.

(1)         Ownership interests in participation agreements (PA’s), which are usually stated in percentages, have been converted to equivalent units on the basis of 1% equals 1 unit.

(2)         Each partnership indicated has achieved Payout status, which is generally the return of its costs, plus interest.

(3)         Each partnership indicated did not achieve Payout status and has been dissolved.  Accordingly, no payments will be made to participants in each of these partnerships.

(4)         This Partnership achieved Payout status in connection with the sale of all partnership assets, and was subsequently dissolved.

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The following table sets forth the number of units in each partnership formed under the APO Incentive Plan that have been awarded to each named executive officer (other than Mr. Williams) in 2007 and in prior years.

(1)     Under the terms of the APO Incentive Plan, units are fully vested when awarded.

The following table sets forth estimated future payouts to named executive officers (other than Mr. Williams) from partnerships formed under the APO Incentive Plan which have achieved Payout status.

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All Other Compensation from Summary Compensation Table

The following table contains a breakdown of the compensation and benefits included under the “All Other Compensation” column in the Summary Compensation Table.

Grants of Plan-Based Awards

The following table provides information concerning each grant of an award made to each named executive officer in the last completed fiscal year under the Company’s long-term incentive compensation plans.  For a detailed description of these plans, see “ — Compensation Discussion and Analysis — Long-Term Incentive Compensation.”

There are no thresholds, targets or maximums associated with the Company’s APO Incentive Plan awards.  Therefore, the table below sets forth the number of units granted to the named executive officers pursuant to the APO Incentive Plan in 2007.  Only columns related to Non-Equity Incentive Plan Awards have been retained from the SEC-prescribed tabular format because the Company does not grant stock awards or equity incentive plan awards and did not grant any option awards in 2007.

Outstanding Equity Awards at Fiscal Year-End

The following table provides information concerning unexercised options for each of the Company’s named executive officers as of December 31, 2007.  Columns (d) and (g) through (j) have been deleted from the SEC-prescribed tabular format because the Company does not grant equity incentive plan awards or stock awards.