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BUSINESS OVERVIEW

General

We are an independent oil and natural gas exploration and production company with operations in the Rocky Mountain, Mid-Continent and Gulf Coast regions of the United States. We were originally formed in 1967 to explore, develop and produce oil and natural gas properties. Through 1993, our activities and growth remained focused primarily in Oklahoma. In 1993, we expanded our activity into the Rocky Mountain and Gulf Coast regions. Approximately 82% of our estimated proved reserves as of December 31, 2007 are located in the Rocky Mountain region. We completed an initial public offering of our common stock on May 14, 2007, and began trading on the New York Stock Exchange on May 15, 2007 under the ticker symbol “CLR”.

We focus our exploration activities in large new or developing plays that provide us the opportunity to acquire undeveloped acreage positions for future drilling operations. We have been successful in targeting large repeatable resource plays where horizontal drilling, advanced fracture stimulation and enhanced recovery technologies provide the means to economically develop and produce oil and natural gas reserves from unconventional formations. As a result of these efforts, we have grown substantially through the drillbit, adding 89.0 MMBoe of proved oil and natural gas reserves through extensions and discoveries from January 1, 2003 through December 31, 2007 compared to 0.9 MMBoe added through proved reserve purchases during that same period.

As of December 31, 2007, our estimated proved reserves were 134.6 MMBoe, with estimated proved developed reserves of 101.2 MMBoe, or 75% of our total estimated proved reserves. Crude oil comprised 77% of our total estimated proved reserves. For the year ended December 31, 2007, we generated revenues of $582.2 million, and operating cash flows of $390.6 million. For the year and quarter ended December 31, 2007, daily production averaged 29,099 and 30,369 Boe per day, respectively. This represents growth of 18% and 15% as compared to the year and quarter ended December 31, 2006, when daily production averaged 24,706 and 26,503, respectively.

The following table summarizes our total estimated proved reserves, PV-10 and net producing wells as of December 31, 2007, average daily production for the three months ended December 31, 2007 and the reserve-to-production index in our principal regions. Our reserve estimates as of December 31, 2007 are based primarily on a reserve report prepared by Ryder Scott Company, L.P., our independent reserve engineers. In preparing its report, Ryder Scott Company, L.P. evaluated properties representing approximately 85% of our PV-10. Our technical staff evaluated properties representing the remaining 15% of our PV-10.

Our Business Strategy

Our goal is to increase shareholder value by finding and developing crude oil and natural gas reserves at costs that provide an attractive rate of return on our investment. The principal elements of our business strategy are:

Focus on Oil. During the late 1980’s we began to believe that the valuation potential for crude oil exceeded that of natural gas. Accordingly, we began to shift our reserve and production profiles towards crude oil. As of December 31, 2007, crude oil comprises 77% of our total proved reserves and 82% of our 2007 annual production. Although we do pursue natural gas opportunities, we continue to believe that crude oil valuations will remain superior to natural gas valuations on a relative Btu basis.

Growth Through Low-Cost Drilling . Substantially all of our annual capital expenditures are invested in drilling projects and acreage and seismic acquisitions. From January 1, 2003 through December 31, 2007, proved oil and natural gas reserve additions through extensions and discoveries were 89.0 MMBoe compared to 0.9 MMBoe of proved reserve purchases.

Internally Generate Prospects . Our technical staff has internally generated substantially all of the opportunities for the investment of our capital. As an early entrant in new or emerging plays, we expect to acquire undeveloped acreage at a lower cost than those of later entrants into a developing play.

Focus on Unconventional Oil and Natural Gas Resource Plays . Our experience with horizontal drilling, advanced fracture stimulation and enhanced recovery technologies allows us to commercially develop unconventional oil and natural gas resource plays, such as the Red River B dolomite, Bakken Shale and Arkoma Woodford formations. Production rates in the Red River units also have been increased through the use of enhanced recovery technology. Our production from the Red River units, the Bakken field, and the Arkoma Woodford comprised approximately 8,310 MBoe, or 78% of our total oil and natural gas production during the year ended December 31, 2007.

Acquire Significant Acreage Positions in New or Developing Plays . In addition to the 465,207 net undeveloped acres held in the Montana and North Dakota Bakken shale and Arkoma Woodford fields, we held 171,475 net undeveloped acres in other oil and natural gas shale plays as of December 31, 2007. Our technical staff is focused on identifying and testing new unconventional oil and natural gas resource plays where significant reserves could be developed if commercial production rates can be achieved through advanced drilling, fracture stimulation and enhanced recovery techniques.

Our Business Strengths

We have a number of strengths that we believe will help us successfully execute our strategies:

Large Acreage Inventory . We own 733,132 net undeveloped and 372,329 net developed acres as of December 31, 2007. Approximately 72% of the undeveloped acres are found within unconventional shale resource plays including the Bakken shale in North Dakota and Montana and the Woodford shale in southeast Oklahoma. The balance of the locations and undeveloped acreage is found in other emerging unconventional resource plays including the Woodford and Atoka of western Oklahoma and the Red River of South Dakota as well as more conventional plays including 3D defined locations for the Trenton-Black River of Michigan, Red River of Montana, and Frio in South Texas.

Horizontal Drilling and Enhanced Recovery Experience . In 1992, we drilled our initial horizontal well, and we have drilled over 460 horizontal wells since that time. We also have substantial experience with enhanced recovery methods and currently serve as the operator of 48 waterflood units. Additionally, we operate eight high pressure air injection (“HPAI”) floods in the United States.

Control Operations Over a Substantial Portion of Our Assets and Investments . As of December 31, 2007, we operated properties comprising 93% of our PV-10. By controlling operations, we are able to more effectively manage the cost and timing of exploration and development of our properties, including the drilling and fracture stimulation methods used.

Experienced Management Team . Our senior management team has extensive expertise in the oil and gas industry. Our Chief Executive Officer, Harold G. Hamm, began his career in the oil and gas industry in 1967. Our seven senior officers have an average of 27 years of oil and gas industry experience. Additionally, our technical staff, which includes 21 petroleum engineers, 16 geoscientists and 10 landmen, has an average of 19 years experience in the industry.

Strong Financial Position . As of February 29, 2008, we had outstanding borrowings under our credit facility of approximately $222.0 million and available capacity under our selected commitment level of $178.0 million. We have elected to set the commitment level at $400 million, which is below the established borrowing base of $600 million, in order to minimize commitment fees. We believe that our planned exploration and development activities will be funded substantially from our operating cash flows and borrowings under our credit facility.

Oil and Gas Operations

Proved Reserves

The following tables set forth our estimated proved oil and natural gas reserves, percent of total proved reserves that are proved developed, the PV-10 and standardized measure of discounted future net cash flows as of December 31, 2007 by reserve category and region. Ryder Scott Company, L.P., our independent petroleum engineers, evaluated properties representing approximately 85% of our PV-10, and our technical staff evaluated the remaining properties. The year-end weighted average oil and natural gas prices used in the computation of future net cash flows at December 31, 2007 were $82.86 per barrel and $6.14 per Mcf, respectively.

As of December 31, 2007, there were 26 gross (12.7 net) development wells and 42 gross (19.9 net) exploratory wells in the process of drilling.

As of February 29, 2008, we operated 15 rigs on our properties and have plans to add additional rigs during the year. There can be no assurance, however, that additional rigs will be available to us at an attractive cost. See “Risk Factors—The unavailability or high cost of additional drilling rigs, equipment, supplies, personnel and oilfield services could adversely affect our ability to execute our exploration and development plans within our budget and on a timely basis.”

Summary of Oil and Natural Gas Properties and Projects

Rocky Mountain Region

Our properties in the Rocky Mountain region represented 87% of our PV-10 as of December 31, 2007. During the three months ended December 31, 2007, our average daily production from such properties was 22,365 net Bbls of oil and 13,409 net Mcf of natural gas. Our principal producing properties in this region are in the Red River units, the Bakken field and the Big Horn Basin.

Red River Units

Our Red River units represented 56% of our PV-10 in the Rocky Mountain region as of December 31, 2007 and 58% of our average daily Rocky Mountain region equivalent production for the three months ended December 31, 2007. The eight units comprising the Red River units are located along the Cedar Hills Anticline in North Dakota, South Dakota and Montana and produce oil and natural gas from the Red River “B” formation, a thin, continuous, dolomite formation at depths of 8,000 to 9,500 feet. Our Red River units comprise a portion of the Cedar Hills field, listed by the Energy Information Administration in 2006 as the 13 th largest onshore, lower 48 field in the United States ranked by liquid proved reserves.

Cedar Hills Units . The Cedar Hills North unit (CHNU) is located in Bowman and Slope Counties, North Dakota. We drilled the initial horizontal well in the CHNU, the Ponderosa 1-15, in April 1995. As of December 31, 2007, we had drilled 185 horizontal wells within this 49,700-acre unit, with 113 producing wellbores and the remainder serving as injection wellbores. We operate and own a 98% working interest in the CHNU.

The Cedar Hills West unit (CHWU), in Fallon County, Montana, is contiguous to the northern portion of CHNU. As of December 31, 2007, this 7,800-acre unit contained ten horizontal producing wells and five horizontal injection wells. We operate and own a 100% working interest in the CHWU.

In January 2003, we commenced enhanced recovery in the two Cedar Hills units, with HPAI used throughout most of the area and water injected generally along the boundary of the CHNU. Under HPAI, compressed air injected into a reservoir oxidizes residual oil and produces flue gases (primarily carbon dioxide and nitrogen) that mobilize and sweep the crude oil into producing wellbores. In response to the HPAI, water injection and increased density drilling operations, production from the Cedar Hills units increased to 10,869 net Boe per day in December 2007 from 2,185 net Boe per day in November 2003. As of December 31, 2007, the average density in the Cedar Hill units was approximately one producing wellbore per 467 acres. We currently plan to drill 56 new horizontal wellbores and 5 horizontal extensions of existing wellbores in the Cedar Hills units during the next two years, increasing the density of both the producing and injection wellbores. The reduced distance between wells will allow part of the field to be converted from air injection to water injection. This conversion will begin in 2008 and is forecast to lower operating expenses, as water is less costly to inject than air. In 2008, we plan to invest approximately $113 million drilling in the Cedar Hills units.

On August 22, 2007 the Hiland Partners, LP (“Hiland”) Badlands gas plant became operational for the processing and treatment of gas produced from the CHNU and CHWU and Medicine Pole Hills Unit. Under the terms of the November 8, 2005 contract we agree to deliver low pressure gas to Hiland for compression, treatment and processing. Nitrogen and carbon dioxide must be removed from the gas production associated with oil production from the units for the gas production to be marketable. Under the terms of the contract, we pay $0.60 per Mcf in gathering and treating fees, and 50% of the electrical costs attributable to compression and plant operation and receive 50% of the proceeds from residue gas and plant product sales. After we deliver 36 Bcf of gas, the $0.60 per Mcf gathering and treating fee is eliminated. During December 2007, we sold 5,322 net Mcf of natural gas per day.

Medicine Pole Hills Units . The Medicine Pole Hills units (MPHU) are approximately five miles east of the southern portion of the CHNU. We acquired the Medicine Pole Hills unit in 1995. At that time, the 9,600- acre unit consisted of 18 vertical producing wellbores and four injection wellbores under HPAI producing 525 net Bbls of oil per day. We have since drilled 40 horizontal wellbores extending production to the west with the formation of the 15,000-acre Medicine Pole Hills West unit and to the south, with the 11,500-acre Medicine Pole Hills South unit. All three units are under HPAI. We operate and own an average 77% working interest in the three units. Production from the units averaged 1,234 net Bbls of oil and 409 net Mcf of natural gas per day during December 2007. We are currently operating one rig and plan to drill 12 new horizontal wellbores and four horizontal extensions of existing wellbores during the next 18 months, increasing the density of both producing and injection wellbores. We believe these operations will increase production and sweep efficiency. In 2008, we plan to invest approximately $29.0 million for drilling in MPHU.

Buffalo Red River Units . Three contiguous Buffalo Red River units (Buffalo, West Buffalo and South Buffalo) are located in Harding County, South Dakota, approximately 21 miles south of the MPHU. When we purchased the units in 1995, there were 73 vertical producing wellbores and 38 injection wellbores under HPAI producing approximately 1,906 net Bbls of oil per day. We operate and own an average working interest of 95% in the 32,900 acres comprising the three units. From 2005 to 2008, we re-entered 42 existing vertical wells and drilled horizontal laterals to increase production and sweep efficiency from the three units. Production for the month of December 2007 was 1,945 net Bbls of oil per day compared to an average of 1,162 net Bbls of oil per day for the first half of 2005. We currently plan to drill 5 horizontal extensions of existing wellbores and 25 new horizontal wellbores in the Buffalo Red River units over the next two years. We believe these operations will increase production and sweep efficiency. In 2008, we plan to invest $23 million for drilling in the Buffalo Red River units.

Bakken Field

Our properties within the Bakken field in Montana and North Dakota represented 28% of our PV-10 in the Rocky Mountain region as of December 31, 2007 and 35% of our average daily Rocky Mountain region equivalent production for the three months ended December 31, 2007. The Bakken formation or “ Bakken shale” as it is often called has become one of the most actively drilled unconventional oil resource plays in the United States with approximately 54 rigs drilling in the play as of February 29, 2008, including 48 in North Dakota and 6 in Montana. The Bakken formation is a Devonian-age shale found within the Williston Basin underlying portions of North Dakota and Montana that contains three lithologic members including the upper shale, middle member and lower shale that combined range up to 130 feet thick. The upper and lower shales are highly organic, thermally mature and over pressured and act as both a source and reservoir for the oil. The middle member, which varies in composition from a silty dolomite, to shalely limestone or sand, also serves as a reservoir and locally is thought to be a critical component for commercial production. Recently, the Three Forks-Sanish formation found immediately under the Lower Bakken Shale has emerged as another potential reservoir that could add significant incremental reserves to the play. These reservoir rocks have inherently low porosity and permeability and depend on natural fracturing and artificial fracture stimulation to produce economically. Horizontal drilling and advanced fracture stimulation technologies have enabled commercial production from this historically non-commercial reservoir. Generally, the Bakken formation is found at vertical depths of 9,000 to 10,500 feet and drilled horizontally on 640 or 1,280-acre spacing with single, dual or triple leg horizontal laterals extending 4,500 to 9,000 feet into the formation. These wells are fracture stimulated to maximize recovery and economic returns. The fracture stimulation techniques vary but are evolving to a more common practice of mechanically diverted stimulations using un-cemented liners and packers which appears to improve rates and recoveries.

Montana Bakken . The Montana Bakken field is listed by the Energy Information Administration as the 15 th largest onshore, lower 48 field in the United States ranked by liquid proved reserves. Since drilling our first well in August 2003, we have completed a total of 134 gross (84 net) wells in the field as of December 31, 2007. Our daily average production from these wells was approximately 6,334 net Bbls of oil and 4,814 net Mcf of natural gas during the month of December 2007. The field has been developed exclusively with horizontal drilling and has been substantially drilled on 640-acre spacing. During 2007 we completed 35 gross (25.9 net) wells as we continued to develop and expand the field. Two of these wells successfully demonstrated that development of the field on 320-acre spacing is warranted. These 2 gross (1.3 net) wells were assigned average estimated recoverable reserves of 468 gross MBoe, which exceeded our economic model of 300 MBoe per well. We also successfully demonstrated that 640-acre tri-lateral drilling was an effective technique to expand the economic limits of the field with the completion of 8 gross (6.2 net) tri-lateral wells which were assigned average estimated reserves consistent with our economic model of 250 MBoe per well.

As of December 31, 2007, we held 86,488 gross (64,536 net) undeveloped acres in the Richland County, Montana portion of the Bakken field. We currently have three operated rigs drilling in the field and plan to invest $48.0 million in the drilling of 17 gross (13 net) horizontal Bakken wells in the field during 2008.

North Dakota Bakken. Since drilling our first well in October, 2004, we have completed a total of 54 gross (21 net) horizontal wells in the North Dakota Bakken field as of December 31, 2007. Our daily average production from these 54 wells was approximately 1,351 net Bbls of oil and 820 net Mcf of natural gas during the month of December 2007. Our drilling to date has been primarily exploratory and step-out in nature to evaluate and define areas of economic production for further development on our acreage. As of December 31, 2007, we owned approximately 296,000 net acres preferentially located along the prolific Nesson anticline where fracturing in the Bakken is expected to be enhanced. We accelerated our drilling activity in the field during 2007, completing 38 gross (14.7 net) wells during the year. Twenty seven of these completed wells were located in the central and northern portions of our acreage and were assigned average estimated recoverable reserves of 335 gross MBoe per well, which is in line with our economic model of 315 MBoe per well. During the year, we modified our horizontal drilling and completion design and now drill primarily 1,280-acre spaced, single leg laterals utilizing uncemented liners and packers to mechanically divert the fracture stimulation.

As of December 31, 2007, we held 553,516 gross (271,667 net) undeveloped acres in the North Dakota Bakken field. We currently have six drilling rigs in the field, three of which are operated by Conoco-Phillips through a joint venture. We plan to add three to five operated rigs to the play and invest approximately $105 million in the drilling of 74 gross (20 net) horizontal wells in the North Dakota Bakken field during 2008.

Haley Red River.

Our Haley Red River project is located approximately 12 miles northeast of our Buffalo Red River units located in Harding County, South Dakota. The producing reservoir is the same Red River B dolomite that produces in our Red River units. Here the dolomite occurs at a depth of approximately 9,000 feet and averages 4 to 6 feet thick. The dolomite is widely present and oil saturated and, as in our Red River units, must be drilled horizontally to produce at economic rates. Horizontal wells are typically drilled on 640-acre spacing as single leg laterals and completed open hole without stimulation. As of December 31, 2007 we have completed 4 gross (4 net) horizontal wells with initial rates of up to 419 Boe per well per day. Based on our economic model, we expect to recover approximately 250 MBoe per well. We owned approximately 58,000 net acres as of December 31, 2007 and continue to build acreage in the project. We plan to invest approximately $18 million drilling 9 gross (7.7 net) wells during 2008 in the Haley Red River project.

Big Horn Basin and Other Rockies

Our wells within the Big Horn Basin in northern Wyoming and other areas within the Rocky Mountain region represented 4% of our PV-10 in the Rocky Mountain Region as of December 31, 2007 and 4% of our average daily Rocky Mountain Region equivalent production for the three months ended December 31, 2007. During the three months ended December 31, 2007, we produced an average of 767 net Bbls of oil and 1,060 net Mcf of natural gas per day from our wells in the Big Horn Basin and other areas within the Rocky Mountain region. Our principal property in the Big Horn Basin, the Worland field, produces primarily from the Phosphoria formation. We also have several other projects ongoing in the Rockies including conventional 3D defined Red River and Lodgepole structures in North Dakota and Montana, horizontal Winnipegosis and Fryburg opportunities in North Dakota and the Lewis Shale and Fort Union in Wyoming. We plan to invest $9 million drilling 11 gross (5.1 net) wells in 2008.

Mid-Continent and Gulf Coast Region

Our properties in the Mid-Continent region represented 13% of our PV-10 as of December 31, 2007. During the three months ended December 31, 2007, our average daily production from such properties was 1,613 net Bbls of oil and 20,949 net Mcf of natural gas. Our principal producing properties in this region are located in the Anadarko and Arkoma Basins of Oklahoma, the Michigan Basin and the Illinois Basin.

Anadarko Basin

Our properties within the Anadarko Basin represent 40% of our PV-10 in the Mid-Continent Region as of December 31, 2007 and 52% of our average daily Mid-Continent Region equivalent production for the three months ended December 31, 2007. Our wells within the Anadarko Basin produce from a variety of sands and carbonates in both stratigraphic and structural traps. In 2008, we plan to invest approximately $18 million in the drilling of 14 gross (10.5 net) wells in the Anadarko Basin.

Illinois Basin

Our properties within the Illinois Basin represent 30% of the PV-10 in the Mid-Continent Region as of December 31, 2007 and 21% of our average daily Mid-Continent Region equivalent production for the three months ended December 31, 2007. Our wells within the Illinois Basin produce primarily crude oil from units comprised of shallow sand formations under water injection. In 2008, we plan to invest approximately $3 million in the drilling of 21 gross (20.6 net) wells in the Illinois Basin.

Arkoma Woodford

The Arkoma Woodford play in Atoka, Coal, Hughes and Pittsburg Counties, Oklahoma has emerged into one of the most active unconventional gas resource plays in the country with 34 rigs drilling in the play as of February 29, 2008. We owned approximately 145,000 gross (44,000 net) acres in the Woodford play as of December 31, 2007. Since drilling our first well in February, 2006, we have completed a total of 132 gross (16.1 net) horizontal Woodford wells as of December 31, 2007. The majority of this drilling occurred in 2007 with 110 gross (14.8 net) horizontal wells completed during the year. These Arkoma Woodford wells represent 30% of the PV10 in the Mid-Continent Region as of December 31, 2007 and 26% of our average daily Mid-Continent Region equivalent production for the three months ended December 31, 2007. Our drilling has been primarily focused on exploration and step-out drilling to secure leases and delineate areas of economic production for development. This drilling has been conducted primarily on 640-acre spacing but is expected to be ultimately drilled more densely. Recent testing by other operators in the play indicated it may be economic to drill the Woodford on 80-acre and possibly 40-acre spacing.

We plan to invest approximately $93 million in the drilling of 139 gross (19.9 net) horizontal wells in the Arkoma Woodford during 2008. We currently have four operated rigs in the play and plan to add two more rigs by mid-year. Most of our operated drilling activity in 2008 will focus on development and step-out opportunities.

Michigan Trenton-Black River

Our Trenton-Black River project in and around Hillsdale County, Michigan continues to produce excellent results. Guided by innovative 3D seismic techniques, we have experienced 100% success completing 3 gross (2.5 net) operated wells in the project. Our initial discovery well, the McArthur 1-36 (83% WI) has been assigned gross proved reserves of 824,000 barrels of crude oil equivalent. Our second well, the Anspaugh 1-1 (83% WI) encountered similar type pay and was flow testing at a rate of approximately 200 Bopd on March 3, 2008. Our third well, the Wessel 1-6 (83% WI) was flow testing at a rate of approximately 200 Bopd on March 3, 2008. Testing will continue on the Anspaugh 1-1 and Wessel 1-6 to establish reservoir characteristics and estimated reserves. We have also participated in 2 gross (0.6 net) non-operated Trenton-Black River tests. The Clark 1-36 (21%WI) is testing very low volumes of oil. The Young 10-34 (42%WI) encountered encouraging shows while drilling and is currently waiting on completion. We own approximately 29,000 gross (23,000 net) acres in the play and have shot, processed and interpreted 11 square miles of 3D seismic on the acreage so far. We are currently permitting 5 additional wells and will begin acquisition of 20 square miles of new 3D data in March with plans to acquire additional data later this year.

Other Mid-Continent

During 2007 our geoscientists identified two new potential unconventional resource opportunities in the Mid-Continent region. Details of these opportunities have not been disclosed to minimize competition as we are in the process of acquiring leases. As of December 31, 2007 we had acquired 17,000 net acres. We plan to invest approximately $20 million drilling 19 gross (7.1 net) wells on these and other emerging opportunities in the Mid-Continent region in 2008.

CEO BACKGROUND

Harold G. Hamm has served as Chief Executive Officer (“CEO”) and a director since our inception in 1967 and currently serves as Chairman of the Board. He serves as Chairman of the board of directors of the general partner of Hiland Partners LP, one of our affiliates and a NASDAQ publicly traded midstream master limited partnership, and he serves as Chairman of the board of directors of the general partner of Hiland Holdings GP, LP (“Hiland Holdings”), also publicly traded on NASDAQ. Hiland Holdings owns the general partner interest and units in Hiland Partners LP. Mr. Hamm also serves as a director of Complete Production Services, Inc., an NYSE publicly traded oil and gas service company. Mr. Hamm served as Chairman of the Oklahoma Independent Petroleum Association from June 2005 to June 2007. He was President of the National Stripper Well Association, founder and Chairman of Save Domestic Oil, Inc., and served on the board of the Oklahoma Energy Explorers.

Mark E. Monroe became President and Chief Operating Officer in October 2005 and has served as a member of our Board since November 2001. He was Chief Executive Officer and President of Louis Dreyfus Natural Gas Corp. prior to its merger with Dominion Resources, Inc. in October 2001. After the merger, Mr. Monroe was a consultant and served as a member of the Board of Directors of Unit Corporation, a NYSE publicly traded onshore drilling and oil and gas exploration and production company from October 2003 through October 2005. Prior to the formation of Louis Dreyfus Natural Gas Corp. in 1990, he was Chief Financial Officer of Bogert Oil Company. He has served as Chairman of the Oklahoma Independent Petroleum Association, served on the Domestic Petroleum Council and the National Petroleum Council, and on the boards of the Independent Petroleum Association of America, the Oklahoma Energy Explorers, and the Petroleum Club of Oklahoma City. Mr. Monroe is a Certified Public Accountant and received his Bachelor of Business Administration degree from the University of Texas at Austin.

Jack H. Stark became Senior Vice President—Exploration and a director in May 1998. Prior to joining us as Vice President of Exploration in June 1992, he was the exploration manager for the Western Mid-Continent Region for Pacific Enterprises. From 1978 to 1988, he held various staff and middle management positions with Cities Service Co. and TXO Production Corp. He is a member of the American Association of Petroleum Geologists, Oklahoma Independent Petroleum Association, Rocky Mountain Association of Geologists, Houston Geological Society, and Oklahoma Geological Society. Mr. Stark holds a Masters degree in Geology from Colorado State University. Currently a director, Mr. Stark will not be standing for re-election when his term expires in 2008. Mr. Stark will remain employed as our Senior Vice President—Exploration.

Robert J. Grant has been a director since January 2006. He was an audit partner of Deloitte & Touche LLP and a predecessor firm from 1969 to 2000. He served as partner in charge of the Dallas, Texas office audit department for ten years and a member of the firm’s audit management group for twelve years. He has been a member of the Independent Petroleum Association of America, the American Petroleum Institute, and the Texas Independent Producers and Royalty Owners Association, and currently is a member of the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants. Mr. Grant graduated from the University of Detroit with an MBA and BA in accounting.

George S. Littell has been a director since November 2004. He is a partner in the firm of Groppe, Long & Littell, a petroleum consulting firm. Prior to joining the firm in 1975, he held various positions in the natural gas, refining, supply and distribution, and gas liquids departments of Mobil Oil Corporation. Mr. Littell received a Bronze Star for his service as an officer in the US Army, Vietnam in 1968-1969. He is a member of the International Association for Energy Economics, an Eagle Scout, and a director of the Sam Houston Area Council for the Boy Scouts of America. Mr. Littell graduated from Yale University in 1966, earned an MBA degree from New York University, and a law degree from La Salle Extension University.

Lon McCain has been a director since February 2006. He was Vice President, Treasurer, and Chief Financial Officer of Westport Resources Corporation, a publicly traded exploration and production company, from 2001 until the sale of Westport to Kerr McGee Corporation and his retirement in 2004. From 1992 until joining Westport in 2001, Mr. McCain was Senior Vice President and Principal of Petrie Parkman & Co., an investment banking firm specializing in the oil and gas industry. From 1978 until joining Petrie Parkman, Mr. McCain held senior financial management positions with Presidio Oil Company, Petro-Lewis Corporation, and Ceres Capital. He was an Adjunct Professor of Finance at the University of Denver from 1982 through 2005. Mr. McCain currently serves on the board of Crimson Exploration, Inc., a domestic exploration and production company traded on the OTC Bulletin Board, TransZap, Inc., a privately held provider of accounting software, and Cheniere Energy Partners, GP, LLC, the general partner of Cheniere Energy Partners, L.P., a publicly traded partnership. Mr. McCain received a Bachelor of Business Administration and a Masters of Business Administration/Finance from the University of Denver.

H.R. Sanders, Jr. has been a director since November 2001. He served as a board member of Devon Energy Corporation from 1981 through 2000. In addition, he held the position of Executive Vice President for Devon Energy from 1981 until his retirement in 1997. From 1970 to 1981, Mr. Sanders was a Senior Vice President for Republic Bank of Dallas, N.A. with direct responsibility for independent oil, gas, and mining loans. Mr. Sanders is a former member of the Independent Petroleum Association of America, Texas Independent Producers and Royalty Owners Association, and Oklahoma Independent Petroleum Association, and a former director of Triton Energy Corporation. He currently serves on the board of Toreador Resources Corporation, a NASDAQ publicly traded oil and gas company with principal operations in France, Romania, and Turkey.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Continental Resources, Inc. is an independent oil and natural gas exploration and production company with operations in the Rocky Mountain, Mid-Continent and Gulf Coast regions of the United States. We focus our exploration activities in large new or developing plays that provide us the opportunity to acquire undeveloped acreage positions for future drilling operations. We target large repeatable resource plays where horizontal drilling, advanced fracture stimulation and enhanced recovery technologies provide the means to economically develop and produce oil and natural gas reserves from unconventional formations.

We principally derive our operating income and cash flow from the sale of oil and natural gas. We expect that growth in our operating income and revenues will primarily depend on our ability to increase our oil and natural gas production and on product prices. In recent years, there has been significant volatility in oil and natural gas prices due to a variety of factors we can not control or predict. These factors, which include weather conditions, political and economic events, and competition from other energy sources, impact supply and demand for oil and natural gas, which affects prices. In addition, the prices we realize for our oil and natural gas production are affected by location differences in market prices.

For the first six months of 2008, our oil and gas production increased to 5,629 MBoe (30,930 Boe per day), up 10% from the first six months of 2007. The increase in 2008 production primarily resulted from an increase in production from our Red River units, Bakken field and Arkoma Woodford shale play. Oil and natural gas revenues for the first six months of 2008 increased by 104% to $523.0 million due to an 83% increase in price and a 12% increase in sales volumes. Our realized price per Boe increased $41.82 to $92.34 for the first six months of 2008 compared to the first six months of 2007. Production expense and production tax increased a combined $29.3 million, or 57%, and the combined per unit cost


increased $4.10 per Boe, or 41%, due to expanded operations, increased workover activity in 2008 and higher production taxes which are generally a function of oil and gas revenue. Oil sales volumes were 35 MBbls more than oil production for the first six months of 2008 and 47 MBbls less for the same period in 2007 due to fluctuations in pipeline linefill and temporarily stored barrels. Our cash flow from operating activities for the six months ended June 30, 2008, was $298.0 million, an increase of $134.5 million from the comparable 2007 period. The increase in operating cash flows was mainly due to increases in revenue reflecting increased production volumes and product prices partially offset by higher operating costs. During the six months ended June 30, 2008, we invested $327.0 million (inclusive of non-cash accruals of $48.0 million and exclusive of acquisition expenditures of $71.0 million) in our capital program primarily in the North Dakota Bakken field and the Cedar Hills fields in the Rocky Mountain area and the Arkoma Woodford shale play in the Mid-Continent region.

How We Evaluate Our Operations

We use a variety of financial and operational measures to assess our performance. Among these measures are (1) volumes of oil and natural gas produced, (2) oil and natural gas prices realized, (3) per unit operating and administrative costs and (4) EBITDAX. The following table contains unaudited financial and operational highlights for the periods indicated.

Three months ended June 30, 2008 compared to the three months ended June 30, 2007

Results of Operations

Oil production volumes increased 2% during the three months ended June 30, 2008 in comparison to the three months ended June 30, 2007. Production increases in the Rockies Other area contributed incremental volumes in excess of 2007 levels of 60 MBbls primarily as a result of acquisitions and the Mid-Continent area contributed 25 MBbls of incremental production. These increases and increases in the North Dakota Bakken area were largely offset by decreases in production in the Montana Bakken area as a result of natural declines. The Red River Units production was negatively affected by a late winter storm that struck South Dakota in the first week of May, cutting electrical power to significant parts of the Units for most of that month. Continental estimates that the power outage reduced production in the Units and in the “Other Rockies” segment by an aggregate of approximately 500 barrels per day for the quarter. Gas volumes increased 1,403 MMcf, or 52% during the three months ended June 30, 2008 compared to the same time period in 2007. The majority of the gas increase, 840 MMcf, was from the results of our exploration efforts and successful drilling in the Arkoma Woodford shale play. The Rocky Mountain region gas production was up 661 MMcf for the three months ended June 30, 2008 compared to the same time period in 2007 due to additional gas being sold through the Hiland Partners Badlands plant which became operational in late August 2007.

Revenues

Oil and Natural Gas Sales. Oil and natural gas sales for the three months ended June 30, 2008 were $297.6 million, a 113% increase from sales of $140.0 million for the comparable period in 2007. Our sales volumes increased 321 MBoe or 12% over the 2007 volumes due to the continuing success of our enhanced oil recovery and drilling programs and acquisitions. Our realized price per Boe increased 89%, or $48.42 to $102.86 for the three months ended June 30, 2008 from $54.44 for the three months ended June 30, 2007. During 2008, the differential between NYMEX calendar month average crude oil prices and our realized crude oil prices narrowed. The differential per barrel for the three months ended June 30, 2008 was $5.75 compared to $6.74 for the comparable period in 2007. Crude oil differentials are better during 2008 due to enhanced transportation capacity and efforts by us to move crude oil to more favorable markets.

Derivatives. In July 2007, we entered into fixed-price swap contracts covering 10,000 barrels of oil per day for the period from August 2007 through April 2008. During each month of the contract, we received a fixed-price of $72.90 per barrel and paid to the counterparties the average of the prompt NYMEX crude oil future contract settlement prices for such month. Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities requires recognition of all derivative instruments on the balance sheet as either assets or liabilities measured at fair value. We elected not to designate our derivatives as cash flow hedges under the provisions of SFAS No. 133. As a result, we marked our derivative instruments to fair value in accordance with the provisions of SFAS No. 133 and recognized the realized and unrealized change in fair value as a gain (loss) on derivative instruments in the statements of operations. These contracts expired April 2008 and during the three months ended June 30, 2008, we had recognized losses on derivatives of $3.4 million.

Oil and Natural Gas Service Operations. Our oil and natural gas service operations consist primarily of sales of high-pressure air and the treatment and sale of reclaimed oil. We sold high-pressure air from our Red River units to a third party and recorded revenues of $0.8 million for the three months ended June 30, 2008 and 2007. Prices for reclaimed oil sold from our central treating unit were $61.10 per barrel higher for the three months ended June 30, 2008 than the comparable 2007 period which increased reclaimed oil income by $3.6 million contributing to an overall increase in oil and gas service operations revenue of $3.9 million for the three months ended June 30, 2008. Associated oil and natural gas service operations expenses increased $3.3 million to $6.5 million during the three months ended June 30, 2008 due mainly to an increase of $57.38 per barrel in the costs of purchasing and treating oil for resale compared to the same period in 2007.

Operating Costs and Expenses

Production Expense and Tax . Production expense increased $5.3 million, or 24% during the three months ended June 30, 2008 to $27.0 million from $21.7 million during the three months ended June 30, 2007. Our costs increased as a result of new wells being drilled coupled with workovers and repairs on existing wells and acquisitions. Our workover activity is typically higher in the summer months as weather conditions in the northern Rockies moderate. Additionally, we have experienced increases in energy, chemical and service costs. During the three months ended June 30, 2008, we participated in the completion of 77 gross (32.7 net) wells. Production expense per Boe increased to $9.32 per Boe for the three months ended June 30, 2008 from $8.42 per Boe for the three months ended June 30, 2007.

Production taxes increased $10.3 million, or 138% during the three months ended June 30, 2008 compared to the three months ended June 30, 2007 as a result of higher revenues from increased sales prices and volumes and the expiration of various tax incentives. The majority of the production tax increase was in the Rocky Mountain region due to significantly higher oil and natural gas prices and an increase of 130 MBoe sold in the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Production tax as a percentage of oil and natural gas sales was 5.95% for the three months ended June 30, 2008 compared to 5.31% for the three months ended June 30, 2007. Production taxes are based on the wellhead values of production and vary by state. Additionally, some states offer exemptions or reduced production tax rates for wells that produce less than a certain quantity of oil or gas and to encourage certain activities, such as horizontal drilling and enhanced recovery projects. In Montana, North Dakota and Oklahoma new horizontal wells qualify for a tax incentive and are taxed at a lower rate during their initial months of production. After the incentive period expires, the tax rate increases to the statutory rates. Our overall rate is expected to increase as production tax incentives we currently receive for horizontal wells reach the end of their incentive period.

Exploration Expense . Exploration expenses consist primarily of dry hole costs and exploratory geological and geophysical costs that are expensed as incurred. Exploration expenses increased $4.1 million during the three months ended June 30, 2008 to $5.7 million due primarily to an increase in seismic expense of $3.1 million and an increase in dry hole expense of $0.9 million.

Depreciation, Depletion, Amortization and Accretion (DD&A.) DD&A increased $4.7 million in 2008 primarily due to an increase in oil and gas DD&A of $4.6 million as a result of increased production and additional properties being added through our drilling program and acquisitions. The following table shows the components of our DD&A rate for the three months ended June 30, 2008 and 2007.

The increase in the oil and gas DD&A rate reflects the additional costs incurred to develop proved undeveloped reserves and the higher costs of drilling and completing wells. Our DD&A rate may continue to increase due to drilling for higher cost reserves.

Property Impairments. Property impairments decreased during the three months ended June 30, 2008 by $2.8 million to $3.2 million during the three months ended June 30, 2007 primarily due to a reduction in impairment of developed properties. Impairment of non-producing properties decreased $0.4 million during the three months ended June 30, 2008 to $2.7 million. Non-producing properties consist of undeveloped leasehold costs and costs associated with the purchase of certain proved undeveloped reserves. Non-producing properties are amortized on a composite method based on our estimated experience of successful drilling and the average holding period.

General and Administrative Expense. General and administrative expense increased $1.9 million to $10.3 million during the three months ended June 30, 2008. General and administrative expense includes non-cash charges for stock-based compensation of $2.5 million and $3.1 million for the three months ended June 30, 2008 and 2007, respectively. Stock compensation expense was higher in 2007 due to the increase in value of the stock as we approached our initial public offering. Until our initial public offering in May 2007, the outstanding options and restricted stock were accounted for as liability awards and their value fluctuated with the value of the underlying stock. General and administrative expenses excluding equity compensation increased $2.4 million for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. In June 2008, the Company made a $1.0 million donation to take advantage of private and state matching funds that will result in a total donation of $4.0 million to support a petroleum engineering program at Oklahoma State University. The remaining increase was primarily related to personnel costs. On a volumetric basis, general and administrative expense was $3.55 per Boe for the three months ended June 30, 2008 compared to $3.28 per Boe for the three months ended June 30, 2007.

Gain on Sale of Assets. Gains on miscellaneous asset sales for the three months ended June 30, 2008 was approximately $133,000 compared to $338,000 for the three months ended June 30, 2007.

Interest Expense. Interest expense decreased 16%, or $0.6 million for the three months ended June 30, 2008 compared to the three months ended June 30, 2007, due to a lower weighted average interest rate on our credit facility of 4.40% for the three months ended June 30, 2008 compared to 6.50% for the three months ended June 30, 2007. Our weighted average interest rate has fallen in 2008 as LIBOR rates have declined. Our average outstanding debt balance on our credit facility increased to $241.3 million for the three months ended June 30, 2008 compared to $196.3 million for the three months ended June 30, 2007. At July 31, 2008, our outstanding balance was $214.0 million and our weighted average interest rate was 3.82%.

Income Taxes. Income taxes for the three months ended June 30, 2008 were $75.3 million for an effective tax rate of 37.2%. See Note 6. Income Taxes in Notes to Unaudited Condensed Consolidated Financial Statements for more information.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Three months ended June 30, 2008 compared to the three months ended June 30, 2007

Results of Operations

Oil production volumes increased 2% during the three months ended June 30, 2008 in comparison to the three months ended June 30, 2007. Production increases in the Rockies Other area contributed incremental volumes in excess of 2007 levels of 60 MBbls primarily as a result of acquisitions and the Mid-Continent area contributed 25 MBbls of incremental production. These increases and increases in the North Dakota Bakken area were largely offset by decreases in production in the Montana Bakken area as a result of natural declines. The Red River Units production was negatively affected by a late winter storm that struck South Dakota in the first week of May, cutting electrical power to significant parts of the Units for most of that month. Continental estimates that the power outage reduced production in the Units and in the “Other Rockies” segment by an aggregate of approximately 500 barrels per day for the quarter. Gas volumes increased 1,403 MMcf, or 52% during the three months ended June 30, 2008 compared to the same time period in 2007. The majority of the gas increase, 840 MMcf, was from the results of our exploration efforts and successful drilling in the Arkoma Woodford shale play. The Rocky Mountain region gas production was up 661 MMcf for the three months ended June 30, 2008 compared to the same time period in 2007 due to additional gas being sold through the Hiland Partners Badlands plant which became operational in late August 2007.

Revenues

Oil and Natural Gas Sales. Oil and natural gas sales for the three months ended June 30, 2008 were $297.6 million, a 113% increase from sales of $140.0 million for the comparable period in 2007. Our sales volumes increased 321 MBoe or 12% over the 2007 volumes due to the continuing success of our enhanced oil recovery and drilling programs and acquisitions. Our realized price per Boe increased 89%, or $48.42 to $102.86 for the three months ended June 30, 2008 from $54.44 for the three months ended June 30, 2007. During 2008, the differential between NYMEX calendar month average crude oil prices and our realized crude oil prices narrowed. The differential per barrel for the three months ended June 30, 2008 was $5.75 compared to $6.74 for the comparable period in 2007. Crude oil differentials are better during 2008 due to enhanced transportation capacity and efforts by us to move crude oil to more favorable markets.

Derivatives. In July 2007, we entered into fixed-price swap contracts covering 10,000 barrels of oil per day for the period from August 2007 through April 2008. During each month of the contract, we received a fixed-price of $72.90 per barrel and paid to the counterparties the average of the prompt NYMEX crude oil future contract settlement prices for such month. Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities requires recognition of all derivative instruments on the balance sheet as either assets or liabilities measured at fair value. We elected not to designate our derivatives as cash flow hedges under the provisions of SFAS No. 133. As a result, we marked our derivative instruments to fair value in accordance with the provisions of SFAS No. 133 and recognized the realized and unrealized change in fair value as a gain (loss) on derivative instruments in the statements of operations. These contracts expired April 2008 and during the three months ended June 30, 2008, we had recognized losses on derivatives of $3.4 million.

Oil and Natural Gas Service Operations. Our oil and natural gas service operations consist primarily of sales of high-pressure air and the treatment and sale of reclaimed oil. We sold high-pressure air from our Red River units to a third party and recorded revenues of $0.8 million for the three months ended June 30, 2008 and 2007. Prices for reclaimed oil sold from our central treating unit were $61.10 per barrel higher for the three months ended June 30, 2008 than the comparable 2007 period which increased reclaimed oil income by $3.6 million contributing to an overall increase in oil and gas service operations revenue of $3.9 million for the three months ended June 30, 2008. Associated oil and natural gas service operations expenses increased $3.3 million to $6.5 million during the three months ended June 30, 2008 due mainly to an increase of $57.38 per barrel in the costs of purchasing and treating oil for resale compared to the same period in 2007.

Operating Costs and Expenses

Production Expense and Tax . Production expense increased $5.3 million, or 24% during the three months ended June 30, 2008 to $27.0 million from $21.7 million during the three months ended June 30, 2007. Our costs increased as a result of new wells being drilled coupled with workovers and repairs on existing wells and acquisitions. Our workover activity is typically higher in the summer months as weather conditions in the northern Rockies moderate. Additionally, we have experienced increases in energy, chemical and service costs. During the three months ended June 30, 2008, we participated in the completion of 77 gross (32.7 net) wells. Production expense per Boe increased to $9.32 per Boe for the three months ended June 30, 2008 from $8.42 per Boe for the three months ended June 30, 2007.

Production taxes increased $10.3 million, or 138% during the three months ended June 30, 2008 compared to the three months ended June 30, 2007 as a result of higher revenues from increased sales prices and volumes and the expiration of various tax incentives. The majority of the production tax increase was in the Rocky Mountain region due to significantly higher oil and natural gas prices and an increase of 130 MBoe sold in the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Production tax as a percentage of oil and natural gas sales was 5.95% for the three months ended June 30, 2008 compared to 5.31% for the three months ended June 30, 2007. Production taxes are based on the wellhead values of production and vary by state. Additionally, some states offer exemptions or reduced production tax rates for wells that produce less than a certain quantity of oil or gas and to encourage certain activities, such as horizontal drilling and enhanced recovery projects. In Montana, North Dakota and Oklahoma new horizontal wells qualify for a tax incentive and are taxed at a lower rate during their initial months of production. After the incentive period expires, the tax rate increases to the statutory rates. Our overall rate is expected to increase as production tax incentives we currently receive for horizontal wells reach the end of their incentive period.

Exploration Expense . Exploration expenses consist primarily of dry hole costs and exploratory geological and geophysical costs that are expensed as incurred. Exploration expenses increased $4.1 million during the three months ended June 30, 2008 to $5.7 million due primarily to an increase in seismic expense of $3.1 million and an increase in dry hole expense of $0.9 million.

Depreciation, Depletion, Amortization and Accretion (DD&A.) DD&A increased $4.7 million in 2008 primarily due to an increase in oil and gas DD&A of $4.6 million as a result of increased production and additional properties being added through our drilling program and acquisitions. The following table shows the components of our DD&A rate for the three months ended June 30, 2008 and 2007.

The increase in the oil and gas DD&A rate reflects the additional costs incurred to develop proved undeveloped reserves and the higher costs of drilling and completing wells. Our DD&A rate may continue to increase due to drilling for higher cost reserves.

Property Impairments. Property impairments decreased during the three months ended June 30, 2008 by $2.8 million to $3.2 million during the three months ended June 30, 2007 primarily due to a reduction in impairment of developed properties. Impairment of non-producing properties decreased $0.4 million during the three months ended June 30, 2008 to $2.7 million. Non-producing properties consist of undeveloped leasehold costs and costs associated with the purchase of certain proved undeveloped reserves. Non-producing properties are amortized on a composite method based on our estimated experience of successful drilling and the average holding period.

General and Administrative Expense. General and administrative expense increased $1.9 million to $10.3 million during the three months ended June 30, 2008. General and administrative expense includes non-cash charges for stock-based compensation of $2.5 million and $3.1 million for the three months ended June 30, 2008 and 2007, respectively. Stock compensation expense was higher in 2007 due to the increase in value of the stock as we approached our initial public offering. Until our initial public offering in May 2007, the outstanding options and restricted stock were accounted for as liability awards and their value fluctuated with the value of the underlying stock. General and administrative expenses excluding equity compensation increased $2.4 million for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. In June 2008, the Company made a $1.0 million donation to take advantage of private and state matching funds that will result in a total donation of $4.0 million to support a petroleum engineering program at Oklahoma State University. The remaining increase was primarily related to personnel costs. On a volumetric basis, general and administrative expense was $3.55 per Boe for the three months ended June 30, 2008 compared to $3.28 per Boe for the three months ended June 30, 2007.

Gain on Sale of Assets. Gains on miscellaneous asset sales for the three months ended June 30, 2008 was approximately $133,000 compared to $338,000 for the three months ended June 30, 2007.

Interest Expense. Interest expense decreased 16%, or $0.6 million for the three months ended June 30, 2008 compared to the three months ended June 30, 2007, due to a lower weighted average interest rate on our credit facility of 4.40% for the three months ended June 30, 2008 compared to 6.50% for the three months ended June 30, 2007. Our weighted average interest rate has fallen in 2008 as LIBOR rates have declined. Our average outstanding debt balance on our credit facility increased to $241.3 million for the three months ended June 30, 2008 compared to $196.3 million for the three months ended June 30, 2007. At July 31, 2008, our outstanding balance was $214.0 million and our weighted average interest rate was 3.82%.

Income Taxes. Income taxes for the three months ended June 30, 2008 were $75.3 million for an effective tax rate of 37.2%. See Note 6. Income Taxes in Notes to Unaudited Condensed Consolidated Financial Statements for more information.

CONF CALL

J. Warren Henry - Vice President of Investor Relations

Good morning, everyone and welcome to our second quarter 2008 earnings conference call. Today's call will include forward-looking information that is subject to a number of risks and uncertainties, many of which are beyond the company's control. Other than historical facts all company statements included in this conference call, regarding the company's strategy, future operations, future production, estimated capital expenditures, projected costs and other plans and objectives of management are forward-looking information that speaks only as of today's date.

Although, we believe that the plans, intentions and expectations reflected herein as suggested by forward-looking statements are reasonable, there is no assurance that these will be achieved. Actual results may differ materially due to many factors, including changes in oil and natural gas prices, industry conditions, drilling results, uncertainties in estimating reserves, uncertainties in estimating future production, availability of drilling rigs and other services, availability of oil and natural gas transportation capacity, availability of capital resources and other factors. For a more complete statement of risks, please see the company's reports that have been filed or maybe filed with the Securities and Exchange Commission.

The format for this morning's call will be as follows: Chairman and CEO, Harold Hamm, will provide a brief overview of second quarter achievements and our opportunities for growth in the second half. Jack Stark, Senior Vice President of Exploration, will provide greater detail on recent developments, focusing on each of our key operating regions. At that point, we will be ready for Q&A.

Also available at that time will be Mark Monroe, President and COO; and John Hart, VP and Chief Financial Officer. Jeff Hume, our SVP of Operations; is not in his usual role on the call today, because he's traveling out of the country. With that, I would like to turn the call over to Harold.

Harold G. Hamm - Chairman and Chief Executive Officer

Good morning, everyone. Thanks for joining us on the call today. We are very pleased to announce record quarterly financial results for the second quarter of 2008. Total revenues of $303 million were more than double the second quarter of 2007. Crude oil and natural gas sales increased little bit more beating last year's second quarter by 113%. We also saw higher margins as EBITDAX increased 125% over the same period last year.

Net income was $127.3 million or $0.75 per diluted share, compared on pro forma basis to $44.2 million or $0.27 per share in the second quarter last year. The actual reported number of the last year's second quarter was a net loss of $142.5 million, reflecting a tax charge in connection with the conversion to a subchapter C corporation.

Average daily production was 31,623 barrels of oil equivalent per day during the second quarter of 2008, an increase of 5%over the first quarter of 2008 and an increase of 11% over the second quarter of last year. As we noted in the press release this morning, our June production rate was even higher just over 33,000 boepd, showing great acceleration during the quarter and a positive trend in line with our expectation for th]]>Fri, 10 Oct 2008 13:21:53 GMThttp://www.dailystocks.com/forum/showtopic.php?tid/1150/http://www.dailystocks.com/forum/showtopic.php?tid/1150/
BUSINESS OVERVIEW

The Company

Griffon Corporation ("Griffon" or the "Company") is a diversified manufacturing company with operations in four business segments: Garage Doors; Installation Services; Specialty Plastic Films; and Electronic Information and Communication Systems. The company's Garage Doors segment designs, manufactures and sells garage doors for use in the residential housing and commercial building markets. The Installation Services segment sells, installs and services garage doors, garage door openers, manufactured fireplaces, floor coverings, cabinetry and a range of related building products primarily for the new residential housing market. The company's Specialty Plastic Films segment develops, produces and sells plastic films and film laminates for use in infant diapers, adult incontinence products, feminine hygiene products and disposable surgical and patient care products. The company's Electronic Information and Communication Systems segment designs, manufactures, sells and provides logistical support for communications, radar, information, command and control systems and large-scale integrated circuits for defense and commercial markets.

The company relies upon both internal growth and strategic investments to develop its business. Over the past five years, the company has invested significant amounts to support growth. Equipment and plant expenditures in fiscal 2007 aggregated $30 million, approximately $16 million of which were for expansion of the Garage Doors' segment manufacturing capacity and $9 million was for Specialty Plastic Films. The company has also made strategic investments in each of its business segments to enhance its market position and expand into new markets, including:

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In 2005, the Specialty Plastics Films segment acquired for $82 million the minority interest in its largest European operation and increased its investment in its Brazilian operation.

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In 2005, the Electronic Information and Communication Systems segment acquired the Systems Engineering Group in Maryland to expand its capabilities for radar systems analysis, radar systems engineering and tactical missile defense studies and analysis. In addition, the segment also acquired its short range radio product line from SAAB.

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In 2007, the Installation Services segment acquired a kitchen cabinet installation business to expand its capabilities in Las Vegas.

The company was incorporated on May 18, 1959 under the laws of the State of New York. It was reincorporated in Delaware in 1970 and its name was changed to Griffon Corporation in 1995. The company makes available, free of charge through its website at www.griffoncorp.com , its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is filed with or furnished to the Securities and Exchange Commission. For information regarding revenue, profit and total assets of each segment see Note 7 of "Notes to Consolidated Financial Statements."

Garage Doors

The company believes that its wholly-owned subsidiary, Clopay Corporation, is the largest manufacturer and marketer of residential garage doors and among the largest manufacturers of commercial sectional doors in the United States. The company's building products are sold under Clopay®, Ideal Door® and Holmes® brand names through an extensive distribution network throughout the United States. The company estimates that the majority of Garage Doors' net sales are from sales of garage doors to the home remodeling segment of the residential housing market, with the balance from the new residential housing and commercial building markets. The segment employs approximately 1,600 employees. Sales into the home remodeling market are being driven by the continued aging of the housing stock and the trend of improving home appearance.

According to industry sources, the residential and commercial sectional garage door market for 2006 was estimated to be $2.2 billion. Over the past decade there have been several key trends driving the garage door industry, including the shift from wood to steel doors and the growth of the home center channel of distribution. The company estimates that over 90% of the total garage door market today is steel doors. Superior strength, reduced weight and low maintenance have favored the steel door. Other product innovations during this period include insulated double-sided steel doors, new springing systems, sophisticated window options, improved safety features, and product designs with increased aesthetic appeal.

Products and Services

The company manufactures a broad line of residential sectional garage doors with a variety of options at varying prices. The company offers garage doors made primarily from several materials, including steel and wood. The company also sells related products such as garage door openers manufactured by third parties.

The company also markets commercial sectional doors. Commercial sectional doors are similar to residential garage doors, but are designed to meet more demanding performance specifications.

Sales by Garage Doors have provided approximately 29% of the company's consolidated revenue in 2007, 32% in 2006 and 37% in 2005.

Sales and Marketing

The company distributes its building products through a wide range of distribution channels including installing dealers, retailers and wholesalers. The company owns and operates a national network of 49 distribution centers. The company's building products are sold to approximately 2,000 independent professional installing dealers and to major home center retail chains, including The Home Depot, Inc., Menards, Inc. and Lowe's Companies, Inc. The company maintains strong relationships with its installing dealers and believes it is the largest supplier of residential garage doors to the retail and professional installing channels.

Over the past decade, an increasing number of garage doors have been sold through home center retail chains such as The Home Depot, Inc. The company estimates that approximately 35% of its garage doors are sold through the home center channel of distribution. These home centers sell garage doors to the do-it-yourself consumer, the small residential and commercial contractor, as well as installed residential doors and operators for the rapidly growing do-it-for-me consumer segment. Distribution through the retail channel requires different capabilities and skills than those traditionally utilized by garage door manufacturers. Factors such as immediately available inventory, national distribution, national installation services, point-of-sale merchandising and special packaging are all important to the retailer.

The company is the principal supplier of residential garage doors throughout the United States and Canada to The Home Depot, Inc., with Clopay® brand doors being sold exclusively to this customer in the retail channel of distribution. Sales of the Clopay® brand outside the retail channel of distribution are not restricted. The segment's largest customers are The Home Depot, Inc. and Menards, Inc. The loss of either of these customers would have a material adverse effect on the company's business. The company distributes its garage doors directly to customers from its manufacturing facilities and through its network of 49 company-owned distribution centers located throughout the United States and in Canada. These distribution centers allow the company to maintain an inventory of garage doors near installing dealers and provide quick-ship service to retail and professional dealer customers.

Manufacturing and Raw Materials

The company currently operates four garage door manufacturing facilities, with the recent closing of the Tempe, Arizona facility. A key aspect of Garage Doors' research and development efforts has been the ability to continually improve and streamline its manufacturing processes. The company's engineering and technological expertise, combined with its capital investment in equipment, generally has enabled the company to efficiently manufacture products in large volume and meet changing customer needs. The company's facilities use proprietary manufacturing processes to produce the majority of its products. Certain of the company's equipment and machinery are internally modified to achieve its manufacturing objectives. These manufacturing facilities produce a broad line of high quality garage doors for distribution to professional installer, retail and wholesale channels.

The principal raw material used in the company's manufacturing operations is galvanized steel, the price of which trended upwards toward the end of 2006. Prices trended slightly downward in 2007, while remaining higher than most of 2006. The company also utilizes certain hardware components as well as wood and insulated foam. All of these raw materials are generally available from a number of sources.

Research and Development

The company operates a technical development center where its research engineers work to design, develop and implement new products and technologies and perform durability and performance testing of new and existing products, materials and finishes. Also at this facility, the company's process engineering team works to develop new manufacturing processes and production techniques aimed at improving manufacturing efficiencies.

Competition and market conditions

The garage door industry is characterized by several large national manufacturers and many smaller regional and local manufacturers. The company competes on the basis of service, quality, price, brand awareness and product design.

The company's brand names are widely recognized in the building products industry. The company believes that it has earned a reputation among installing dealers, retailers and wholesalers for producing a broad range of high-quality doors. The company's market position and brand recognition are key marketing tools for expanding its customer base, leveraging its distribution network and increasing its market share.

The garage door industry, including Clopay has been negatively impacted by poor market conditions in residential housing. Key statistics are poor and in some cases, getting worse. Current data compared to prior year show new home starts down 34%, new home sales down 25% and an 8.2 month supply of new homes. Existing home sales are down 15% and the inventory of existing homes is up 33% and now stands at a 10 month supply.

Installation Services

The company has developed a substantial network of specialty building products installation and service operations. Its network of locations cover many of the key new single family home markets in the United States and offer a variety of building products and services to the residential construction and remodeling industries. The segment employs approximately 1,200 employees.

The company provides installed specialty building products primarily to residential builders. Builders are increasingly acting as developers and marketers, sub-contracting a substantial portion of the actual construction of a home. Traditionally, the market for installation services has been very fragmented, characterized by small operations offering a single type of building product in a single market. In what has historically been an undercapitalized, fragmented industry, the company has sufficient capital and the scale to attract professional management, achieve operating economies, and serve the needs of even the largest national builders.

Installation Services has targeted geographic markets that have a sizeable population or significant growth demographics. The markets served account for approximately 17% of all new residential housing permits in the United States. Installation Services' multiple product offering is primarily targeted at new construction, wherein products are generally consumed at approximately the same time in the construction process. Products offered can be selected and upgraded by the end-customer in the company's design centers. The company believes that its multi-product offering provides strategic marketing advantages over traditional, single product competitors, and provides the company with operational efficiencies. The company seeks to increase the cross-selling of its multiple products to its existing customers. Additionally, the company plans further growth through the introduction of additional installed building products. The replacement and remodeling markets are additional markets for the company's products and professional installation services.

Products and Services

Installation Services sells and installs a variety of building products:

Garage Doors and Openers —garage doors are distributed, professionally installed and serviced in the new construction and replacement markets. Installation Services sources most of its garage doors from the Garage Doors segment.

Fireplaces —manufactured wood and gas fireplaces and related products such as stone or marble surrounds, wood mantels and gas logs are distributed, professionally installed and serviced, primarily to the new construction market.

Flooring —flooring products distributed and installed to the new construction market include carpeting, tile and stone, wood and vinyl.

Appliances —appliances distributed to the new construction market include refrigerators, stoves, cooktops, ovens and dishwashers.

Kitchen and Bath Cabinets —cabinetry, with options in wood varieties and door styles, are offered for distribution and installation to the new construction market.

Other —other products include closet systems, window coverings and bath enclosures. Tile and stone applications for shower and bath walls, counter tops and fireplace surrounds are also offered.

The company is able to leverage the offering of these products over a common customer base, providing efficiencies and convenience to the customer. The company operates well-appointed product design centers that facilitate selection of products by the consumer, enhancing customer service and providing an environment conducive to up-selling into higher margin products.

Sales by Installation Services have provided approximately 17% of the company's consolidated revenue in 2007 and 21% in both 2006 and 2005.

Competition and market conditions

The installation services industry remains fragmented, consisting primarily of smaller, single-market companies which have limited financial resources. However, the company has recently observed the emergence of several multi-market competitors in various regions. The company competes on the basis of service, price and product line diversity. The industry and the company have been severely impacted by the declining new home construction market.

Specialty Plastic Films

The company, through its wholly-owned subsidiary Clopay Plastics Products Company, develops and produces specialty plastic films and laminates for a variety of hygienic, health care and industrial uses in domestic and certain international markets. Specialty Plastic Films' products include thin gauge embossed and printed films, elastomeric films and laminates of film and non-woven fabrics. These products are used primarily as moisture barriers in disposable infant diapers, adult incontinence products and feminine hygiene products, as protective barriers in single-use surgical and industrial gowns, drapes and equipment covers, and as packaging for hygienic products. Specialty Plastic Films' products are sold through the company's direct sales force primarily to multinational consumer and medical products companies. The segment employs approximately 1,200 employees worldwide.

The segment's major customer is Procter & Gamble, with whom the company enjoys a long and successful relationship. Specialty Plastic Films supplies Procter & Gamble with a variety of products used primarily for its infant diapers, both domestically and internationally.

The segment of the specialty plastic films industry in which Clopay participates has been affected by several key trends over the past five years. These trends include the increased use of disposable products in developing countries and favorable demographics, including increasing immigration, in the major global economies. Other trends representing significant opportunities for manufacturers include the continued demand for new advanced products such as cloth-like, breathable, laminated, and printed products and the need of major customers for global supply partners. Notwithstanding the positive trends affecting the industry, design changes by Procter & Gamble for its infant diaper products have resulted in a change in products produced by the company from laminates to narrower and thinner gauged printed film. As a result, the volume of film products sold by the segment for this customer has declined. The company believes that its business development activities targeting major multinational and regional producers of hygiene, healthcare and related products and its investments in its technology development capability and capacity increases will lead to additional sales of new and related products, minimizing the impact of this reduction.

Products

Specialty Plastic Films manufactures a wide variety of embossed and printed specialty films and laminates for the hygienic, healthcare and other markets. Specialty Plastic Films' products are used as moisture barriers for disposable infant diapers, adult incontinence and feminine hygiene products and as protective barriers in surgical and industrial gowns and drapes, equipment covers, flexible packaging, house wrap and other products. A specialty plastic film is a thin-gauge film (typically 0.0005" to 0.003") that is manufactured from polymer resins and engineered to provide certain performance characteristics. A laminate is the combination of a plastic film and a woven or non-woven fabric. These products are produced using both cast and blown extrusion and laminating processes. High speed, multi-color custom printing of films and customized embossing patterns further differentiate the products. The company's specialty plastic film products typically provide a unique combination of performance characteristics that meet specific, proprietary customer needs. Examples of such characteristics include strength, breathability, barrier properties, elastic properties, processibility and aesthetic appeal.

Sales by Specialty Plastic Films have provided approximately 25% of the company's consolidated revenue in 2007, 23% in 2006 and 26% in 2005.

Sales and Marketing

The segment sells its products primarily in the United States and Europe with sales also in Canada, Central and South America and Asia Pacific. The segment primarily utilizes an internal direct sales force, organized by customer accounts. Senior management actively participates by developing and maintaining close contacts with customers.

The segment's largest customer is Procter & Gamble, which has accounted for a substantial portion of Specialty Plastic Films' sales over the last five years. The loss of this customer would have a material adverse effect on the company's business. Specialty plastic films also are sold to a diverse group of other leading consumer, health care and industrial companies.

The company seeks to expand its market presence for Specialty Plastic Films by capitalizing on its technological and manufacturing expertise and on its relationships with major international consumer products companies. Specifically, the company believes that it can continue to increase its North American sales and expand internationally through ongoing product development and enhancement and by marketing its technologically advanced films and laminates and printed film for use in all of its markets. The company believes that its operations in Germany and Brazil provide a strong platform for additional sales growth in certain international markets.

Research and Development

The company believes it is an industry leader in the research, design and development of specialty plastic films and laminate products. The company operates a technical center where polymer chemists, scientists and engineers work independently and in strategic partnerships with the company's customers to develop new technologies, products, processes and product applications. Currently, the company is engaged in several joint efforts with the research and development departments of its customers.

The company's research and development efforts have resulted in many inventions covering embossing patterns, improved processing methods, product formulations, product applications and other proprietary technology. Products developed by the company include microporous breathable films and cost-effective cloth-like films and laminates. Microporous breathability provides for moisture vapor transmission and airflow while maintaining barrier properties resulting in improved comfort and skin care. Cloth-like films and laminates provide consumers preferred aesthetics such as softness and visual appeal. The company recently began commercialization of patented elastic laminates for its baby diaper products. The company holds a number of patents for its current specialty film and laminate products and related manufacturing processes. The company believes its patents are a less significant factor in its success than its proprietary know-how and the knowledge, ability and experience of its employees.

International Operations

The segment has two operations in Germany from which it sells plastic films throughout Europe. One of its German operations, Finotech, was structured as a joint venture with Corovin GmbH, a manufacturer of non-woven fabrics headquartered in Germany that is a subsidiary of BBA Group PLC, a publicly owned diversified U.K. manufacturer. In July 2005, the company purchased the remaining 40% interest from BBA in a cash transaction.

In June 2002, the company acquired 60% ownership in Isofilme Ltda., a manufacturer of plastic hygienic and specialty films located in São Paulo, Brazil which operates under the name Clopay do Brasil. In October 2004, the company acquired an additional 30% of Isofilme. In October 2005, the company purchased the remaining 10% interest. In 2005 and 2006, the company constructed and relocated to a new facility near São Paulo. The installation of new manufacturing capacity and capabilities was completed in conjunction with the move. Clopay do Brasil provides a platform to broaden participation in South American markets and strengthen the company's position as a global supplier.

Manufacturing and Raw Materials

The company manufactures its specialty plastic film and laminate products on high-speed equipment designed to meet stringent tolerances. The manufacturing process consists of melting a mixture of polymer resins (primarily polyethylene) and additives, and forcing this mixture through a computer controlled die and rollers to produce embossed films. In addition, the lamination process involves extruding the melted plastic films directly onto a non-woven fabric and bonding these materials to form a laminate. The company also manufactures multi-color printed films and laminates. Through statistical process control methods, company personnel monitor and control the entire production process.

This segment launched a significant capital expansion program in fiscal 2003 to support new opportunities with its major customers and to increase capacity throughout its operations. The product initiative involving the production of high-quality, multi-color printing of films and laminates for the baby diaper market in North America and Europe is complete. The segment's most advanced production line went on-stream in 2005, and a new line in Brazil commenced production in 2006. In 2006 the segment installed North American capacity for the production of the latest technology in elastomeric materials for its key customers. Capital spending for Specialty Plastic Films was approximately $9 million in fiscal 2007 and $11 million in fiscal 2006. It is anticipated that spending in fiscal 2008 will approximate 2007 levels.

Plastic resins, such as polyethylene and polypropylene, and non-woven fabrics are the basic raw materials used in the manufacture of substantially all of Specialty Plastic Films' products, the price of which has increased dramatically since early 2002. The near-term outlook is for an increase in resin prices. The company currently purchases its plastic resins in pellet form from several suppliers. The purchases are made under supply agreements that do not specify fixed pricing terms. The company's sources for raw materials are believed to be adequate for its current and anticipated needs.

Competition

The market for the company's specialty plastic film and laminate products is highly competitive. The company has a number of competitors in the specialty plastic films and laminates market, some of which are larger and have greater resources than the company. The company believes that its technical expertise and product development capabilities enhance its market position and customer relationships. The company competes primarily on the basis of technical expertise, quality, service and price.

The company has developed strong, long-term relationships with leading consumer and health care products companies. The company believes that these relationships, combined with its technological expertise, product development and production capabilities, including global operations, have positioned it to meet changing customer needs, which the company expects will drive growth. In addition, the company believes its strong, long-term relationships provide it with increasing opportunities to expand and enter new international markets.

Electronic Information and Communication Systems

The company, through its wholly-owned subsidiary, Telephonics Corporation, specializes in advanced electronic information and communication systems for defense, aerospace, civil, industrial, and commercial applications domestically and in certain international markets. The company designs, manufactures, sells, and provides logistical support for aircraft communication systems, radar, air traffic management, information and command and control systems, identification friend or foe ("IFF") equipment, Integrated Homeland Security Systems and custom, mixed-signal, application specific integrated circuits. The company is a leading supplier of airborne maritime surveillance radar and aircraft intercommunication management systems, the segment's two largest product lines. In addition to its traditional defense products used predominantly by the United States Government, in recent years the company has adapted its core technologies to products used in international markets and has expanded its presence in both non-defense government and commercial markets. In fiscal 2007, approximately 79% of the segment's sales were to the United States defense industry, 17% to international customers and 4% to commercial customers. The segment employs approximately 1,200 employees.

The United States defense electronics procurement budget is expected to grow along with the overall defense budget. Growth in this budget area reflects the trend in recent years for the United States' Department of Defense to opt for the installation of new electronic systems and equipment in existing aircraft rather than develop new weapons systems. Conflicts involving the country's military have also tended in recent years to require deployment and significant coordination between air, sea and ground forces, often in distant parts of the world, underscoring the evolution and growing importance of electronic systems that provide surveillance, tracking, communication and command and control. The company believes that Telephonics' advanced systems and sub-systems are well positioned to address the needs of an electronic battlefield with emphasis on the generation and dissemination of timely data for use by highly mobile ground, air and naval forces. The company anticipates that the need for such systems will also increase in connection with the increasingly active role that the military is playing in the war on terrorism, both at home and abroad.

The company, under a contract with Syracuse Research Corporation has been manufacturing counter IED devices to support the Warlock Duke program. The program entailed the achievement of high rate production, in an accelerated timetable, of equipment designed to defeat the roadside bomb threats that our armed forces face throughout the world. The program resulted in sales of $190 million in 2007 and $143 million in 2006.

The company specializes in communication systems and products and is a leading manufacturer of aircraft intercommunication systems with products in digital and analog communication management, digital audio distribution and control, and communication systems integration. Additionally, the company also manufactures a variety of wireless products for use in ground and airborne operations. The company's communication products are on platforms such as the U.S. Navy's MH-60R multi-mission and MH-60S utility helicopters, the United Kingdom's NIMROD surveillance aircraft, the U.S. Air Force C-17A cargo transport, the U.S. Air Force's Joint Surveillance and Target Acquisition Radar System (Joint-STARS) aircraft, and AWACS aircraft.

The company's command and control systems include airborne maritime surveillance radar, ground surveillance radar, weather and search radar systems, air traffic management systems and tactical instrument landing systems. The company provides expertise and equipment for detecting and tracking targets in a maritime environment and flight path management systems for air traffic control applications. Its maritime radar systems, which are used in more than 20 countries, are fitted aboard helicopters, fixed-wing aircraft, and aerostats for use at sea. The company's radar products will be utilized on the U.S. Coast Guard's helicopters, fixed wing aircraft and unmanned aerial vehicles for its Deepwater upgrade program. The company also increased its market penetration through an award to develop, manufacture and deliver radar with imaging in both maritime and overland environments for the Canadian Forces' CP-140 Aurora aircraft program. The company's electronic systems include IFF systems used by the U.S. Air Force and NATO on the AWACS aircraft and for the U.S. Navy's Multi-Mission Maritime Aircraft Contract.

The company has directed more of its resources towards Homeland Security Systems and was recently selected by Boeing company to participate in the Secure Border Initiative net (SBInet) program.

The company is generally a first tier supplier to prime contractors in the defense industry such as Boeing, Lockheed Martin, Northrop Grumman and Sikorsky Aircraft. With the significant contraction and consolidation that has occurred in the U.S. and international defense industry, major prime contractors worldwide are relying on smaller, key suppliers to provide advances in technology and greater efficiencies to reduce the cost of major systems and platforms. The company believes that this situation creates an opportunity for established, first tier suppliers to capitalize on existing relationships with major prime contractors and play a larger role in the foreseeable future.

The company also manufactures custom and standard, mixed-signal, application-specific large-scale integrated circuits for customers in the security, military telecommunications and multi-media industries.

Sales by Electronic Information and Communication Systems have provided approximately 29% of the company's consolidated revenue in 2007, 24% in 2006 and 16% in 2005.

Backlog

The funded backlog for Electronic Information and Communication Systems was approximately $309 million at September 30, 2007, compared to $373 million at September 30, 2006. Approximately 70% of the current backlog is expected to be filled during fiscal 2008. The decline in backlog is primarily attributable to the wind down of the Syracuse Research Corporation contract.

Sales and Marketing

Telephonics has approximately 30 technical business development personnel who act as the focal point for its marketing activities and approximately 40 sales representatives who introduce its products and systems to customers worldwide.

CEO BACKGROUND
Dr. Bertrand M. Bell (78) has been a director since 1976. Dr. Bell has been Professor of Medicine at Yeshiva University Albert Einstein College of Medicine for more than the past five years and was appointed Distinguished Professor in September 1992.

Lieutenant General Gordon E. Fornell (USAF Ret.) (71) has been a director since November 2007. He served in the United States Air Force for more than thirty-five years. General Fornell served in senior acquisition leadership roles in the U.S. Air Force Systems Command and Air Force Material Command for more than ten years, and worked in research, development, and acquisition positions for nearly twenty years prior. He was commander of the Electronic Systems Center at Hanscom Air Force Base, Massachusetts from 1988 to 1993, and senior military assistant to the Secretary of Defense from 1987 to 1988. He also commanded the Armament Division at Eglin Air Force Base, Florida from 1985 to 1987. General Fornell is also a director for Saflink Corporation, a company engaged in the provision of software and hardware solutions for protecting critical business assets.

Rear Admiral Robert G. Harrison (USN Ret.) (71) has been a director since February 2004. He was an officer in the United States Navy for more than thirty-five years prior to his retirement in 1994. Since retirement, Rear Admiral Harrison has been a consultant for various defense systems companies in the areas of acquisition, support and program management. Rear Admiral Harrison is also a director for Indra Systems, a company engaged in the manufacture and support of training and simulation systems and automatic test equipment.

Mr. Ronald J. Kramer (49) has been a director since 1993 and Vice Chairman of the Board since November 2003. Since 2002, Mr. Kramer has served as President and as a director of Wynn Resorts, Ltd., a developer, owner and operator of hotel and casino resorts. From 1999 to 2001, he was a Managing Director at Dresdner Kleinwort Wasserstein, an investment banking firm, and at its predecessor Wasserstein Perella & Co. Mr. Kramer is also a member of the Board of Directors of Monster Worldwide, Inc., a global provider of career solutions. Mr. Kramer is the son-in-law of Mr. Harvey R. Blau.

Mr. James A. Mitarotonda (53) has been a director since November 2007. He is the Chairman of the Board, Chief Executive Officer and President of Barington Capital Group, L.P., an investment firm that he co-founded in November 1991. Mr. Mitarotonda is also the Chairman of the Board, President and Chief Executive Officer of Barington Companies Investors, LLC, the general partner of Barington Companies Equity Partners, L.P., a small and mid-capitalization value fund. In addition, he is the Chairman of the Board, President and Chief Executive Officer of Barington Offshore Advisors II, LLC, the investment advisor of Barington Companies Offshore Fund, Ltd., a small and mid-capitalization value fund. Mr. Mitarotonda served as the President and Chief Executive Officer of Dynabazaar, Inc. from May 2006 until April 2007 and January 2004 until December 2004. Mr. Mitarotonda also served as the Chairman of LQ Corporation, Inc. from September 2002 until October 2006, as its Co-Chief Executive Officer and Co-Chairman from April 2003 until May 2004 and as its sole Chief Executive Officer from May 2004 until October 2004. Mr. Mitarotonda serves as a director of A. Schulman, Inc., a company engaged in the sale of plastic resins, and The Pep Boys—Manny, Moe and Jack, an automotive retail and service chain.

Mr. Martin S. Sussman (70) has been a director since 1989. He has been a practicing attorney in the State of New York since 1961, and has been a member of the law firm of Seltzer, Sussman & Habermann LLP (as of September 1, 2007, Seltzer Sussman Habermann Heitner & Bayroff LLP) for more than the past five years.

Mr. Joseph J. Whalen (76) has been a director since 1999. He was a partner at Arthur Andersen LLP for more than five years prior to his retirement in 1994.

Mr. Henry A. Alpert (60) has been a director since 1995. Mr. Alpert has been President of Spartan Petroleum Corp., a real estate investment firm and a distributor of petroleum products, for more than the past five years. Mr. Alpert is also a director of Boyar Value Fund, a mutual fund.

Mr. Harvey R. Blau (72) has been Chairman of the Board and Chief Executive Officer since 1983. Mr. Blau was Chairman of the Board and Chief Executive Officer of Aeroflex Incorporated, a diversified manufacturer of electronic components and test equipment, for more than five years through August 2007 when such company was sold.

Mr. Blaine V. Fogg (67) has been a director since May 2005. Mr. Fogg is a corporate and securities lawyer concentrating in mergers and acquisitions and other business transactions. From 1972 to 2004, Mr. Fogg was a partner at the law firm of Skadden, Arps, Slate, Meagher & Flom LLP. Since 2004, Mr. Fogg is Of Counsel to the law firm.

Rear Admiral Clarence A. Hill, Jr. (USN Ret.) (87) has been a director since 1982. Rear Admiral Hill was an officer in the United States Navy for more than thirty-five years prior to his retirement in 1973. Since retirement, Rear Admiral Hill has been acting as an independent consultant with respect to the utilization of advanced concepts of system modeling and manpower survey techniques. For more than the past five years, Rear Admiral Hill has served in various executive positions, including as Vice President and Treasurer of the Naval Aviation Foundation which supports Naval Aviation plans and programs. In 2005, Rear Admiral Hill became President of the Naval Aviation Foundation.

General Donald J. Kutyna (USAF Ret.) (74) has been a director since August 2005. He was an officer in the United States Air Force for over thirty-five years prior to his retirement in 1992. General Kutyna had been commander in chief of the North American Aerospace Defense Command, commander in chief of the U.S. Space Command and commander of the U.S. Air Force Space Command. During his tenure in the U.S. Air Force, General Kutyna served as Chairperson of the Accident Panel of the Presidential Commission on the Space Shuttle Challenger Accident. General Kutyna was Vice President, Space Technology, of Loral Space & Communications Ltd., a leading satellite communications company, from 1993 to 1996, and again from 1999 to 2004. He also served as Vice President, Advanced Space Systems, for Lockheed Martin Corporation, a company principally engaged in the research, design, development, manufacture and integration of advanced technology systems, products and services, from 1996 to 1999. From September 2004 through the present, General Kutyna has served as a part-time consultant to Loral Space & Communications Ltd.

Lieutenant General James W. Stansberry (USAF Ret.) (80) has been a director since 1991. He was an officer in the United States Air Force for thirty-five years prior to his retirement in 1984. Since 1984, Lieutenant General Stansberry has been President of Stansberry Associates International, Inc., an independent consulting firm specializing in strategic planning for aerospace and defense firms.

Mr. William H. Waldorf (69) has been a director since 1963. He has been President of Landmark Capital, LLC, an investment firm, for more than the past five years.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

Net sales for the year ended September 30, 2007 decreased to $1.62 billion, down from $1.64 billion in 2006. Income before income taxes was $31.6 million compared to $78.7 million last year. Net income was $22.1 million compared to $51.8 million last year.

The electronic information and communications systems segment had another strong year in fiscal 2007. This segment achieved a 22% increase in net sales and a 16% increase in operating profit compared to last year primarily from contract work from the Warlock-Duke program with Syracuse Research Corporation (SRC). However, sales growth decreased as the year went on primarily due to the wind down of the SRC program. The segment did receive an additional $11 million contract with SRC and opportunities exist for additional related work in fiscal 2008, however the segment is not anticipating this program contributing to revenue and operating income in the same way it has for the past two years. If the company cannot replace this program with other business, sales and operating income in 2008 will be lower than 2007. The segment's other programs continue to expand and funded backlog is approximately $309 million at September 30, 2007. The MH-60 program is expected to ramp up to approximately $100 million per year run rate this year, with the opportunity to increase an additional 20%. Additional contracts for this program totaling $360 million were recently awarded.

The Company's building products operations—garage doors, declined from fiscal 2006 with sales and operating profits decreasing 13% and 83%, respectively. The decline has been primarily the result of poor market conditions in residential housing. The segment continues to be concerned about trends in market conditions and the outlook for 2008. Key statistics are poor and, in some cases, getting worse. Current data compared to prior year show new home starts down 34%, new home sales down 25% and an 8.2 month supply of new homes. Existing home sales are down 15% and the inventory of existing homes is up 33% and now stands at a 10 month supply. The segment is doing everything it can to retain its customer base and where possible to take market share, to offset the shrinking market. Consistent with the segment's forecast from a year ago, steel costs in fiscal 2007 were relatively stable compared to 2006. The segment is expecting similar stability for 2008. This stability could be negatively impacted if the relatively low demand level for steel were to strengthen. During the year excellent progress was made in bringing the new Troy, Ohio facility on line. Two of the most important product lines are now being produced in Troy. Also, the product offerings previously made in the closed facilities are being made in Troy. By the end of 2008, the segment expects to be producing two additional insulated door product lines there. The lines, in general, are designed with more automation and the segment anticipates they will achieve greater efficiencies.

The installation services segment results also declined from fiscal 2006. New home construction activity in the segments three major markets continues to deteriorate. Single family permits are projected for 2007 to be at levels equal to 35%–55% of the peak levels reached in 2004 and 2005. The segment continues to reduce costs with personnel cost cuts, the consolidation of showroom, warehouse and office facilities and the relocation of the segment's headquarters from Mason, Ohio to Phoenix, Arizona. The segment continues marketing and selling activities seeking to gain share, including establishing a national brand identity and national marketing materials and rebate programs. With the changes made in 2007, including cost cutting, fixing key operational issues and management changes, assuming no further deterioration of market conditions, the goal is for this segment to break even at the operating income line in 2008.

The specialty plastic films segment had increases in sales (7%) and operating income (12%) in fiscal 2007. This year the segment started shipping commercial quantities of a new product, elastic laminates for the hygiene products market. This product had not ramped up as anticipated in previous quarters. Recently, good progress has been made and the segment is optimistic that sales for these new products will ramp up significantly in fiscal 2008. Overall efficiency levels started to reach targeted levels later on in the year and the segment continues to study ways to achieve additional operational efficiencies. Resin price fluctuations had a favorable impact on operating income for the year, however, recently resin prices have been increasing and the segment is concerned about the impact it may have on 2008 results. Over the past several years, the segment has been successful in diversifying its customer portfolio. While the segment expects to be challenged with resin prices and new product roll-outs, it is optimistic that work on the cost structure and product mix will result in improved performance for 2008.

RESULTS OF OPERATIONS

See Note 7 of "Notes to Consolidated Financial Statements."

Fiscal 2007 Compared to Fiscal 2006

Garage Doors

Net sales of the garage door segment decreased by $70.2 million compared to 2006. The sales decrease was principally due to lower sales volumes to dealers and retailers ($89 million), partially offset by higher selling prices that passed on the effect of higher raw material costs to customers, favorable product mix and improved product quality that resulted in decreased customer deductions ($25 million in aggregate).

Operating profit of the garage door segment decreased $34.2 million compared to last year. Gross margin percentage was 28.1% in 2007 compared to 30.8% in 2006, reflecting lower sales volume which resulted in less overhead absorption and increased material costs. Selling, general and administrative expenses decreased approximately $1 million from 2006, as lower freight and distribution costs were partially offset by costs associated with the closure of a manufacturing facility in Tempe, Arizona and the movement of a production line from Tempe to Troy, Ohio. As a percentage of sales, selling, general and administrative expenses were 26.6% in 2007 compared to 23.4% in 2006.

Installation Services

Net sales of the installation services segment decreased $63.1 million compared to last year. The lower sales was primarily attributed to decreased revenue in the Las Vegas and Atlanta markets resulting from a decline in flooring, fireplace, garage door and appliance installations sales offset by cabinet sale gains attributable to the cabinet installation company acquisition.

Operating profit of the installation services segment decreased $19.9 million compared to last year, reflecting lower unit volumes. Gross margin percentage increased to 27.0% from 26.6% last year due to improved sales mix and higher margins from the cabinet installation company acquisition. Selling, general and administrative expenses increased approximately $4 million due primarily to expenses from the cabinet installation company acquisition and additional bad debt expense due to increased risk in accounts receivable related to the impact of the general market decline. As a percentage of sales, selling, general and administrative expenses were 30.9% in 2007 compared to 23.9% in 2006.

Specialty Plastic Films

Net sales of the specialty plastic films segment increased $25.2 million compared to last year. The increase reflects higher unit volumes ($33 million) principally related to strong European volume and sales of the new, elastic laminates product in North America, the effect ($5 million) of selling price adjustments to partially pass increased raw material costs to customers, and the impact of a weaker U.S. dollar on translated sales ($19 million), offset in part by lower selling prices to the segment's major customer, unfavorable product mix and the timing of development cost reimbursements ($32 million).

Gross margin percentage decreased to 15.5% from 17.2% last year primarily due to the lower selling prices to the segments major customer. The increase in operating profit was primarily attributable to higher unit sales volume, the impact of resin price and cost fluctuations, the weaker U.S. dollar and its impact on foreign sales, profit contribution of new products and lower operational expenses somewhat offset by lower selling prices to the segments major customer. Selling, general and administrative expenses decreased $4 million compared to last year principally due to the elimination of start-up costs related to the Brazilian facility and lower costs due to a reduction in force at the end of 2006. As a percentage of sales, selling, general and administrative expenses were 11.9% in 2007 compared to 13.7% last year.

Electronic Information and Communication Systems

Net sales of the electronic information and communication systems segment increased $85.1 million compared to last year primarily from an SRC contract revenue increase of $47 million and MH-60 program revenue of $31 million.

Operating profit of the electronic information and communication systems segment increased $6.3 million compared to last year. Gross margin percentage decreased to 18.7% from 19.4% last year, principally due to lower margins on the SRC contract. Selling, general and administrative expenses increased approximately $7 million over last year but, as a percentage of sales, was 9.1% compared to 9.4% last year due to the sales growth.

Interest Expense

Interest expense increased by $2 million compared to 2006 principally due to higher levels of outstanding borrowings throughout the year.

Income Tax Expense

The provision for income taxes for the fiscal year ended September 30, 2007 reflects a rate that is lower than the statutory United States and applicable foreign tax rates primarily due to a reversal of approximately $1.4 million of estimated income tax liabilities in connection with closed tax years and a statutory tax rate change in Germany that caused an adjustment in the valuation of net deferred tax liabilities of approximately $1 million.

Fiscal 2006 Compared to Fiscal 2005

Garage Doors

Net sales of the garage doors segment increased by $17.4 million compared to 2005. The sales growth was principally due to selling price increases ($12 million) that partially passed the effect of higher raw material costs to customers and favorable product mix ($9 million) partly offset by the effect of lower unit volume ($4 million).

Operating profit of the garage doors segment increased $3.5 million compared to 2005. Gross margin percentage was 30.8% in 2006 compared to 29.6% in 2005, reflecting the selling price increases and improved product mix. The positive effects of increased sales and margins were partly offset by higher selling, general and administrative expenses which increased $8 million over 2005 primarily due to higher distribution and freight costs and increased marketing and advertising. As a percentage of sales, selling, general and administrative expenses increased to 23.4% from 22.6% in 2005.

Installation Services

Net sales of the installation services segment increased by $38.7 million compared to 2005. The higher sales resulted from a strong construction environment in 2006 and market share gains in the segment's Phoenix market, tempered by the effect of increased competition including the loss of certain customer accounts in the Las Vegas market.

Operating profit of the installation services segment was approximately the same compared to 2005. Gross margin percentage decreased to 26.6% from 26.7% in 2005. The effect of the sales increase was somewhat moderated by the lower margin and was substantially offset by higher operating expenses. Selling, general and administrative expenses increased approximately $10 million due primarily to higher distribution and selling costs to support the sales increase, and as a percentage of sales, was 23.9% in 2006 compared to 23.8% in 2005.

Specialty Plastic Films

Net sales of the specialty plastic films segment increased $11.2 million compared to 2005. The increase was primarily due to higher unit volume ($23 million) principally related to new programs with private label manufacturers in Europe and the effect ($7 million) of selling price adjustments to partially pass increased raw material costs to customers, partly offset by the change in product mix ($19 million) compared to 2005.

Operating profit of the specialty plastic films segment decreased $16.1 million compared to 2005. Gross margin percentage decreased to 17.2% from 21.4% in 2005. The lower gross margin and operating profit reflect product mix changes, the effect ($7 million) of higher raw material costs, start-up costs for new customer programs and related manufacturing inefficiencies, and a charge of approximately $2 million for a reduction in force. Selling, general and administrative expenses increased by approximately $4 million principally due to expenses ($2 million) related to the new Brazil facility, higher distribution costs, and a full year of intangible asset amortization. As a percentage of sales, selling, general and administrative expenses were 13.7% in 2006 compared to 13.1% in 2005.

Electronic Information and Communication Systems

Net sales of the electronic information and communication systems segment increased $166.4 million compared to 2005. The SRC contract accounted for the significant growth in revenue, with the MH-60R program also contributing.

Operating profit of the electronic information and communication systems segment increased $21.5 million compared to 2005. Gross margin percentage decreased to 19.4% from 23.4% in 2005, principally due to lower margins on production programs and cost growth on certain development programs. The effect of lower margins was offset by the sales increase. Selling, general and administrative expenses increased approximately $2 million over 2005 but, as a percentage of sales, was 9.4% compared to 15.5% in 2005 due to the sales growth.

Interest Expense

Interest expense increased by $2.2 million compared to 2005 principally due to higher levels of outstanding borrowings throughout the year.

Income Tax Expense

The provision for income taxes for the fiscal year ended September 30, 2006 reflects a rate that is lower than the statutory United States and applicable foreign tax rates primarily due to the reversal of approximately $1.4 million of estimated income tax liabilities in connection with closed tax years.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow generated by operations for 2007 was $65.7 million compared to $16.3 million last year and working capital was $343 million at September 30, 2007. Operating cash flows increased compared to last year due primarily to lower inventory and accounts receivable levels, partly offset by decreases in current liabilities. The wind down of the Warlock-Duke program with SRC was a key contributor to the increase in operating cash flows.

Net cash used in investing activities during 2007 was $58.4 million. The company had capital expenditures of $30 million, the majority of it for the garage door and specialty plastic films segments. The installation services segment acquired a cabinet installation company in January 2007 for $17.4 million. The acquisition was a cash transaction plus performance based payments determined over a three year period.

Net cash provided by financing activities during 2007 was $14.3 million. In December 2006, the company and a subsidiary modified its existing senior secured multicurrency revolving credit facility in the amount of up to $175 million and extending its remaining term to five years. Commitments under the credit agreement may be increased by $50 million under certain circumstances upon request of the company. Borrowings under the credit agreement bear interest at rates based upon LIBOR or the prime rate, are collateralized by stock of a subsidiary of the Company, the net assets of which aggregated approximately $465,000,000 at September 30, 2007, and contain certain covenants including a consolidated leverage ratio, a consolidated fixed charges ratio and minimum consolidated net worth. The net proceeds of additional borrowings under the credit agreement have primarily been used to acquire the cabinet installation company. Approximately $4.4 million was used to acquire a total of 208,000 shares of common stock. Approximately 1.4 million shares of common stock are available for purchase pursuant to the company's stock buyback program and additional purchases, including any 10b5-1 plan purchases, will be made, depending upon market conditions, at prices deemed appropriate by management.

Contractual Obligations

The purchase obligations are generally for the purchase of goods and services in the ordinary course of business. The company uses blanket purchase orders to communicate expected requirements to certain of its vendors. Purchase obligations reflect those purchase orders where the commitment is considered to be firm. Purchase obligations that extend beyond 2008 are principally related to long-term contracts received from customers of the electronic information and communication systems segment.

A wholly owned subsidiary of the company has a lease agreement that limits dividends it may pay to the parent company. The agreement permits the payment of income taxes based on a tax sharing arrangement, and dividends based on a percentage of the subsidiary's net income. At September 30, 2007 the subsidiary had net assets of approximately $465 million. The company expects that cash flows from operations, together with existing cash, bank lines of credit and lease line availability, should be adequate to satisfy contractual