Fellow Shareholders

We enjoyed another exceptional year of performance in 2007 and, as always, it was earned through conviction, determination and hard work. With record activity, our team delivered production growth of 19% and an increase in proved reserves of 32%. The Company achieved record operating cash flow of $3.7 billion, which enabled both a flourishing development campaign and record acquisitions. Along the way, we maintained our discipline in economic efficiency. Simply put, our profit margins remained high, with net income at 31% of revenues, and our costs stayed low, with the drill bit cost to find reserves at $1.64 per Mcfe. As a result, the investment community rewarded our accomplishments by increasing the stock price by 36%. Perhaps even more important to me, as a founder and long-term investor, is that these achievements for the year expanded our potential and added visibility for the future. By sticking to the elements of our core strategy, we did what I believe we do best — create value.

Our value creation process begins with owning the ”best rock.“ These are the most prolific and expansive hydrocarbon reservoirs in the United States. With high-quality, long-lived properties comes upsides in reserve potential, production stability and strong economic margins. This is the basis for our enduring success. For more than 20 years, we have acquired the right assets to build the foundation of XTO Energy; seizing the opportunities as they came available. In 2007, we extended that commitment by purchasing more than $4.0 billion in premier properties that expanded our operating footprint in multiple regions. The marquee acquisition, from Dominion Resources, added about 1 Tcfe of reserves to the Company for $2.5 billion. These properties substantially increased our holdings in the Rocky Mountains and interior South Texas and contain abundant upsides. By applying our tight-gas and coal bed methane expertise, our teams are planning long-term growth platforms from both areas. Also, we significantly increased our positions in the Barnett, Fayetteville and Woodford shale plays, along with securing ”bolt on“ properties in East Texas and our legacy fields of the San Juan and Permian basins. These resource-rich assets provide a fresh opportunity for our team to discover new production and reserves.

Given the hand-picked acquisitions and our development efforts, the Company‘s growth regions continue to expand at a fast pace. As depicted in the pie chart, proved reserves now total 11.29 Tcfe, but captured potential is twice as large. Of this potential, our engineers have nominated 11.3 Tcfe of upsides for visible future growth. The East Texas region, where XTO is the leading natural gas producer, will continue to lead the charge. After a decade of volume increases, the Freestone Trend still contains thousands of new well locations, representing 4.3 Tcfe of potential. Advanced drilling and completion techniques continue to unlock more resource. The burgeoning shale plays have now arrived as a powerful component of our future plans. In the Barnett Shale, where XTO has grown net daily production from about 100 MMcf to 500 MMcf in just two years, we recognize another 4.2 Tcfe of potential to exploit. In the Fayetteville and Woodford shale plays, our teams have expanded the leasehold positions to 240,000 and 120,000 net acres, respectively. Our drilling inventory in these plays reflects 3.6 Tcfe of potential. In total, the captured resource for the Company improved by more than 37% over the past year and represent more than five years of drilling inventory. By understanding the productive characteristics of this inventory and our overall production profile, we can schedule future growth with confidence.

Understanding the commodity price environment is critical to realizing the extraordinary value which is captured in XTO. From our perspective, the outlook for oil and natural gas appears to be entrenched in the ”stronger for longer“ cycle, which we correctly identified in 2003. In spite of a slowing global economy, the challenge to supply the world‘s growing appetite for crude remains difficult. New production sources are struggling to overcome the natural declines of the giant old fields. Thus, high oil prices are a necessity to moderate consumption. In the domestic natural gas arena, doubling the drilling rig count in the last five years has only modestly grown production. When combined with the trend of warmer winters, this clean-burning commodity has been priced at a discount relative to its inherent value. However, the ambition to grow natural gas production, with only minimal effect, has forced a steep underlying production decline that will become more difficult to overcome. At the same time, new power generation is driving additional demand. In our view, the pressure on natural gas prices is biased towards the upside. As a result, companies with increasing reserves and production, like XTO, should be well positioned for prosperity.

Moving ahead, our Company is poised for another record year in 2008. Plans already target 20% production growth. With about 65% of our production hedged, record cash flow should be available to fund our development growth and ”bolt on“ acquisitions. Even as we get bigger, we are maintaining the same discipline that has delivered growth and created value since inception. Our dedicated team is forging ahead, executing with passion and pursuing the best performance … that‘s our core culture at XTO Energy.