This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts included in this report, including statements regarding our financial position, adequacy of resources, estimated reserve quantities, business strategies, plans, objectives and expectations for future operations and covenant compliance, are forward-looking statements. We can give no assurances that the assumptions upon which such forward-looking statements are based will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”) are disclosed in the section entitled “Risk Factors” included in our Annual Report on Form 10-K for our most recent fiscal year, elsewhere in this report and from time to time in other filings made by us with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified by the Cautionary Statements.

Our revenues, profitability, future growth and the carrying value of our oil and gas properties are substantially dependent on prevailing prices of oil and gas, our ability to find, develop and acquire additional oil and gas reserves that are economically recoverable and our ability to develop existing proved undeveloped reserves. Our ability to maintain or increase our borrowing capacity and to obtain additional capital on attractive terms is also influenced by oil and gas prices. Prices for oil and gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors beyond our control. These factors include weather conditions in the United States, the condition of the United States economy, the actions of the Organization of Petroleum Exporting Countries, governmental regulations, political stability in the Middle East and elsewhere, the foreign supply of oil and gas, the price of foreign imports and the availability of alternate fuel sources. Any substantial and extended decline in the price of oil or gas would have an adverse effect on the carrying value of our proved reserves, borrowing capacity, revenues, profitability and cash flows from operations. We use derivative financial instruments for price protection purposes on a limited amount of our future production, but do not use derivative financial instruments for trading purposes.

The following discussion is intended to assist in an understanding of our historical financial position and results of operations. Our historical financial statements and notes thereto included elsewhere in this quarterly report contain detailed information that should be referred to in conjunction with the following discussion.

Our primary sources of capital are cash flows from operations, borrowings from financial institutions and the sale of debt and equity securities. On March 31,June 30, 2008, we had cash and cash equivalents of $42.3$42 million and $35 million of availability under our UBOC senior secured credit facility. Cash provided from operating activities during the three-monthsix-month period ended March 31,June 30, 2008 totaled $35$64 million, a 7% increase9% decrease when compared to the corresponding period in 2007.

On April 8, 2008, we completed the sale of a 50% working interest in the Entrada Field to CIECO Energy (US) Limited (“CIECO”), a subsidiary of Tokyo-based ITOCHU Corporation. At closing, CIECO paid $155 million and reimbursed us $12.6 million for 50% of Entrada capital development expenditures incurred prior to the closing date. In addition, CIECO agreed to fund half of a $40 million future contingent payment owed by us to BP Exploration and Production Company, the former majority interest owner of the field. We have retained a 50% working interest and will continue as operator of the field. We willdid not recognize a gain or loss on the transaction.

In addition, a wholly-owned subsidiary of Callon, Callon Entrada Company (“Callon Entrada”), entered into a credit agreement with CIECO Energy (Entrada) LLC, pursuant to which Callon Entrada may borrow up to $150 million plus interest expense incurred of up to $12 million to finance the development of the Entrada prospect.project. The Callon Entrada credit facility is fully collateralized by the Entrada Field. However, we have entered into a customary indemnification agreement pursuant to which we agree to indemnify the lenders under the Callon Entrada credit facility against Callon Entrada’s misappropriation of funds, non-performance of certain covenants and similar matters. In addition, we also guaranteed the obligations of Callon Entrada to fund its proportionate operating cost related to the Entrada project that Callon Entrada may, from time to time, expressly approve under the Entrada joint operating agreement. We also guaranteed all of Callon Entrada’s pluggingpayment of all amounts to plug and abandonment obligations,abandon wells and related facilities for a breach of law, rule or regulation (including environmental laws) and for any losses attributable to gross negligence of Callon Entrada.

The Callon Entrada credit facility bears interest at six-month LIBOR (as in effect on the first day of each interest period) plus 375 basis points and requires semi-annual payments of principal and interest derived from estimated cash flow from the Entrada project. These payments will begin six months after the date of initial production from the Entrada project. The Callon Entrada credit facility matures within five years of first production from the property, and is subject to customary representations, warranties, covenants and events of default. As of June 30, 2008, $35.4 million was outstanding under this facility.

Simultaneously with the closing of the CIECO transaction, wethe Company used the proceeds from the sale, cash on hand and a draw of $16 million from ourthe UBOC credit facility, to extinguish the $200 million senior secured revolving credit facility, which resulted in prepayment penalties of approximately $6.6 million. The revolving credit facility was secured by a lien on the Entrada properties. Due to the early extinguishment of the $200 million senior revolving credit facility on April 8, 2008, Callon incurred expenses of $11.9 million consisting of $6.3 million in cash pre-payment penalties plus a non-cash charge of $5.6 million related to the amortization expense associated with the deferred financing costs related to the credit facility.

For 2008, our projection for capital expenditure budgetexpenditures is comprised primarily of the development costs of our Entrada Field, which is our largest asset and the major operational focus for the year, plus a limited exploration and development program. Our approved budget for theThe Entrada development project is $300currently projected to require total expenditures in the range of $360 million to $380 million of which 50% will be our share. Of thisshare of the estimated gross amount, we expect to incur approximately 80%, or $240expenditures, between $290 million and $310 million of developmentthese costs duringwill be incurred in 2008. Our credit agreement with CIECO Energy (Entrada) LLC provides that they will finance our 50% share of the development costs.costs up to $150 million. The balance of our share of total costs in excess of the $150 million will be funded by our cash flow from operations.

Capital expenditures for the remainder of 2008 are projected to be approximately $146between $131 million and $141 million and include:

In addition, we are projecting to spend $11$7 million for the remainder of 2008 for asset retirement obligations.

We have a 10% ownership interest in Medusa Spar LLC (“LLC”), which is a limited liability company that owns a 75% undivided ownership interest in the deepwater Spar production facilities on our Medusa Field in the Gulf of Mexico. We contributed a 15% undivided ownership interest in the production facility to the LLC in return for approximately $25 million in cash and a 10% ownership interest in the LLC. The LLC earns a tariff based upon production volume throughput from the Medusa area. We are obligated to process our share of production from the Medusa Field and any future discoveries in the area through the Spar production facilities. This arrangement allows us to defer the cost of the Spar production facility over the life of the Medusa Field. Our cash proceeds were used to reduce the balance outstanding under our senior secured credit facility. The LLC used $83.7 million of cash proceeds from non-recourse financing and a cash contribution by one of the LLC owners to acquire its 75% interest in the Spar. During the second quarter of 2008, the non-recourse financing was retired. The balance of Medusa Spar LLC is owned by Oceaneering International, Inc. and Murphy Oil Corporation. We are accounting for our 10% ownership interest in the LLC under the equity method.

The following table sets forth certain unaudited operating information with respect to the Company’s oil and gas operations for the periods indicated:

Total oil and gas revenues were $45.0$48.0 million in the firstsecond quarter of 2008 compared to $45.5$43.5 million in the firstsecond quarter of 2007. Total production on an equivalent basis for the firstsecond quarter of 2008 decreased by 29%31% compared to the firstsecond quarter of 2007. However, oil and gas prices on a Mcfe basis increased 40%61% compared to 2007.

Gas production during the firstsecond quarter of 2008 totaled 2.11.7 billion cubic feet (Bcf) and generated $19.9$19.5 million in revenues compared to 3.73.3 Bcf and $29.5$27.3 million in revenues during the same period in 2007. The average gas price after hedging impact for the firstsecond quarter of 2008 was $9.50$11.67 per thousand cubic feet of natural gas (“Mcf”) compared to $7.97$8.17 per Mcf for the same period last year.in 2007. The 44%50% decrease in 2008 production was primarily attributable to the sale of our Mobile Bay 952,953,955 Field,Field; early water production from our High Island Block 165, North Padre Island Block 913 and Prairie Beach fieldsfields; an obstruction in the flowline at High Island Block A-540 causing the field to be shut-in in mid-April 2008; and expected declines in production from our remaining properties.

Oil production during the firstsecond quarter of 2008 totaled 290,000286,000 barrels and generated $25.1$28.6 million in revenues compared to 288,000263,000 barrels and $16.0$16.2 million in revenues for the same period in 2007. The average oil price received after hedging impact in the firstsecond quarter of 2008 was $86.66$99.99 per barrel compared to $55.53$61.47 per barrel in the firstsecond quarter of 2007.

Lease operating expenses were $5.2$4.9 million for the three-month period ended March 31,June 30, 2008, a 22%43% decrease when compared to the same period in 2007. The decrease was primarily due to the sale of the Mobile Bay 952, 953, 955 Field, the shut-in of our Prairie Beach Field, lower thru-put charges at High Island Block 165 and reduced insurance costs for the Medusa Spar.

Lease operating expenses were $10.0 million for the six-month period ended June 30, 2008, a 34% decrease when compared to the same period in 2007. The decrease was primarily due to the sale of the Mobile Bay 952,953,955 Field effective May 1, 2007, and the shut-in of our North Padre Island Block 913 and Prairie Beach Fields, which are scheduled to be pluggedlower thru-put charges at High Island 165 and abandoned.reduced insurance costs for the Medusa Spar.

Depreciation, depletion and amortization for the three-monthsix-month period ended March 31,June 30, 2008 and 2007 was $15.1$30.2 million and $21.8$40.7 million, respectively. The 31%26% decrease was primarily due to lower production volumes and a lowerhigher depletion rate.

Accretion expense for the three-month periodsix-month periods ended March 31,June 30, 2008 and 2007 of $1.0$2.0 and $1.1$2.1 million, respectively, represents accretion of our asset retirement obligations. See Note 6 to the Consolidated Financial Statements.

General and administrative expenses, net of amounts capitalized, were $2.7$5.6 million and $2.2$4.5 million for the three-month periodsix-month periods ended March 31,June 30, 2008 and 2007, respectively. The 19%25% increase was primarily the result of increased staffing costs.

The Company’s revenues are derived from the sale of its crude oil and natural gas production. The prices for oil and gas remain extremely volatile and sometimes experience large fluctuations as a result of relatively small changes in supply, weather conditions, economic conditions and government actions. From time to time, the Company enters into derivative financial instruments to manage oil and gas price risk.

The Company may utilize fixed price “swaps,” which reduce the Company’s exposure to decreases in commodity prices and limit the benefit the Company might otherwise have received from any increases in commodity prices.

The Company may utilize price “collars” to reduce the risk of changes in oil and gas prices. Under these arrangements, no payments are due by either party as long as the market price is above the floor price and below the ceiling price set in the collar. If the price falls below the floor, the counter-party to the collar pays the difference to the Company, and if the price rises above the ceiling, the counter-party receives the difference from the Company.

Callon may purchase “puts” which reduce the Company’s exposure to decreases in oil and gas prices while allowing realization of the full benefit from any increases in oil and gas prices. If the price falls below the floor, the counter-party pays the difference to the Company.

The Company enters into these various agreements from time to time to reduce the effects of volatile oil and gas prices and does not enter into derivative transactions for speculative purposes. However, certain of the Company’s derivative positions may not be designated as hedges for accounting purposes.

See Note 3 to the Consolidated Financial Statements for a description of the Company’s outstanding derivative contracts at March 31,June 30, 2008.

Evaluation of Disclosure Controls and Procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company’s principal executive and principal financial officers have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) were effective as of March 31,June 30, 2008.

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.