(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –

Basis of Presentation

In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of Comstock Resources, Inc. and subsidiaries ("Comstock" or the "Company") as of September 30, 2015, the related results of operations for the three months and nine months ended September 30, 2015 and 2014, and cash flows for the nine months ended September 30, 2015 and 2014. Net income (loss) and comprehensive income (loss) are the same in all periods presented. All adjustments are of a normal recurring nature unless otherwise disclosed.

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to those rules and regulations, although Comstock believes that the disclosures made are adequate to make the information presented not misleading. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in Comstock's Annual Report on Form 10-K for the year ended December 31, 2014.

The results of operations for the three months and nine months ended September 30, 2015 are not necessarily an indication of the results expected for the full year.

These unaudited consolidated financial statements include the accounts of Comstock and its wholly-owned and controlled subsidiaries.

Property and Equipment

The Company follows the successful efforts method of accounting for its oil and gas properties. Costs incurred to acquire oil and gas leasehold are capitalized.

Unproved oil and gas properties are periodically assessed and any impairment in value is charged to exploration expense. The costs of unproved properties which are determined to be productive are transferred to oil and gas properties and amortized on an equivalent unit-of-production basis. The Company recognized impairment charges in exploration expense of $5.1 million and $68.6 during the three and nine months ended September 30, 2015, respectively, related to certain leases that the Company currently does not plan to develop. There were no impairments of unproved property in the first nine months of 2014.

The Company also assesses the need for an impairment of the capitalized costs for its oil and gas properties on a property basis. During the three months ended September 30, 2015, reductions to management's oil and natural gas price outlook resulted in indications of impairment of the Company's oil properties in South Texas and certain natural gas properties in Texas and Louisiana. Accordingly, the Company recognized an impairment of $544.7 million and $547.1 million for the three months and nine months ended September 30, 2015, respectively, to reduce the carrying value of these properties to their estimated fair value.

The Company determines the fair values of its oil and gas properties using a discounted cash flow model and proved and risk adjusted probable reserves. Undrilled acreage can also be valued based on sales transactions in comparable areas. Significant Level 3 assumptions associated with the calculation of discounted future cash flows included in the cash flow model include management's outlook for oil and natural gas prices, production costs, capital expenditures, and future production as well as estimated proved reserves and risk-adjusted probable reserves. Management's oil and natural gas price outlook is developed based on third-party longer-term price forecasts as of each measurement date. The expected future net cash flows are discounted using an appropriate discount rate in determining a property's fair value.

The following table presents the fair value and impairments recorded by the Company during the three months ended September 30, 2015, as well as the average oil price per barrel and gas price per thousand cubic feet over the life of the properties and the applicable discount rates utilized in the Company's assessments:

	Fair Value		Impairment		Management's Price Outlook		Annual Discount Rate
	Fair Value		Impairment		Oil	Gas	Annual Discount Rate
	(In thousands)				(Per barrel)	(Per Mcf)
Oil properties	$	330,257	$	405,308	$73.70	$4.04	10%
Natural gas properties	$	61,625	$	139,406	$75.91	$3.91	10%

It is reasonably possible that the Company's estimates of undiscounted future net cash flows attributable to its oil and gas properties may change in the future. The primary factors that may affect estimates of future cash flows include future adjustments, both positive and negative, to proved and appropriate risk-adjusted probable and possible oil and gas reserves, results of future drilling activities, future prices for oil and natural gas, and increases or decreases in production and capital costs. As a result of these changes, or if in the future the Company does not have access to sufficient capital to develop all of its proved and risk-adjusted probable reserves used in its assessment, there may be further impairments in the carrying values of these or other properties.

During the three months ended September 30, 2015, the Company completed the sale of certain oil and gas properties located in and near Burleson County, Texas. The Company received net proceeds of $102.7 million and recognized a net loss on sale of $111.8 million. Results of operations for these properties were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(In thousands)
Total oil and gas sales	$	2,239		$	4,170		$	18,036		$	6,655
Total operating expenses⁽¹⁾		(337	)		(14,735	)		(66,251	)		(16,627	)
Operating income (loss)	$	1,902		$	(10,565	)	$	(48,215	)	$	(9,972	)

(1)

Includes direct operating expenses, depreciation, depletion and amortization and exploration expense. Excludes interest expense and general and administrative expenses.

In January 2015, the Company purchased a 20% interest in an airplane that previously had been owned 80% by the Company and 20% by two executive officers of the Company. The purchase price for the 20% interest of $1.7 million was based on the then fair market value of the airplane determined by a third party. This related party transaction was approved by the Company's audit committee and board of directors.

Accrued Liabilities

Accrued liabilities at September 30, 2015 and December 31, 2014 consist of the following:

	As of September 30, 2015		As of December 31, 2014
	(In thousands)
Accrued drilling costs	$	4,492	$	26,269
Accrued interest		23,796		9,011
Accrued ad valorem taxes		4,500		—
Current deferred income taxes payable		460		—
Accrued rig termination fees		—		2,600
Other accrued liabilities		6,516		6,962
	$	39,764	$	44,842

Reserve for Future Abandonment Costs

Comstock's asset retirement obligations relate to future plugging and abandonment expenses on its oil and gas properties and related facilities disposal. The following table summarizes the changes in Comstock's total estimated liability during the nine months ended September 30, 2015 and 2014:

	Nine Months Ended September 30,
	2015			2014
	(In thousands)
Future abandonment costs — beginning of period	$	14,900		$	14,534
Accretion expense		600			615
New wells placed on production		309			1,045
Liabilities settled and assets disposed of		(703	)		(76	)
Future abandonment costs — end of period	$	15,106		$	16,118

Derivative Financial Instruments and Hedging Activities

Comstock periodically uses swaps, floors and collars to hedge oil and natural gas prices and interest rates. Swaps are settled monthly based on differences between the prices specified in the instruments and the settlement prices of futures contracts. Generally, when the applicable settlement price is less than the price specified in the contract, Comstock receives a settlement from the counterparty based on the difference multiplied by the volume or amounts hedged. Similarly, when the applicable settlement price exceeds the price specified in the contract, Comstock pays the counterparty based on the difference.

Comstock generally receives a settlement from the counterparty for floors when the applicable settlement price is less than the price specified in the contract, which is based on the difference multiplied by the volumes hedged. For collars, generally Comstock receives a settlement from the counterparty when the settlement price is below the floor and pays a settlement to the counterparty when the settlement price exceeds the cap. No settlement occurs when the settlement price falls between the floor and cap. All of the Company's derivative financial instruments are used for risk management purposes and, by policy, none are held for trading or speculative purposes. Comstock minimizes credit risk to counterparties of its derivative financial instruments through formal credit policies, monitoring procedures, and diversification. All of Comstock's derivative financial instruments are with parties that are lenders under its bank credit facility. The Company is not required to provide any credit support to its counterparties other than cross collateralization with the assets securing its bank credit facility. None of the Company's derivative financial instruments involve payment or receipt of premiums.

As of September 30, 2015, the Company had the following outstanding commodity derivatives:

Commodity and Derivative Type

Weighted-Average
Contract Price

Contract Volume
(Mmcf)

Contract Period

Price Swap Agreements

$3.20 per Mcf

2,700

October 2015 –

June 2016

None of the Company's derivative contracts have been designated as cash flow hedges. The Company recognizes cash settlements and changes in the fair value of its derivative financial instruments as a single component of other income (expenses). The Company recognized a gain of $1.1 million and $1.7 million related to the change in fair value of its natural gas swap agreements during the three months and nine months ended September 30, 2015, respectively. Cash settlements on natural gas derivative financial instruments were receipts of $0.4 million for the three months and nine months ended September 30, 2015, respectively. The Company had gains of $12.0 million and losses of $2.8 million related to its oil swap agreements during the three months and nine months ended September 30, 2014, respectively. Cash settlements on oil derivative financial instruments were payments of $0.4 million and $5.7 million for the three months and nine months ended September 30, 2014, respectively. The estimated fair value and carrying value of the Company's derivative financial instruments was an asset of $1.3 million as of September 30, 2015, and was classified as a current asset. There were no derivative financial instruments outstanding on December 31, 2014.

Stock-Based Compensation

Comstock accounts for employee stock-based compensation under the fair value method. Compensation cost is measured at the grant date based on the fair value of the award and is recognized over the award vesting period. During the three months ended September 30, 2015 and 2014, the Company recognized $2.1 million and $2.8 million, respectively, of stock-based compensation expense within general and administrative expenses related to awards of restricted stock and performance stock units to its employees and directors. For the nine months ended September 30, 2015 and 2014, the Company recognized $6.1 million and $7.8 million, respectively, of stock-based compensation expense within general and administrative expenses.

During the nine months ended September 30, 2015, the Company granted 1,010,371 shares of restricted stock with a grant date fair value of $5.4 million or $5.34 per share to its employees. The fair value of each restricted share on the date of grant was equal to its market price. As of September 30, 2015, Comstock had 1,575,302 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $9.90 per share. Total unrecognized compensation cost related to unvested restricted stock grants of $6.6 million as of September 30, 2015 is expected to be recognized over a period of 1.5 years.

During the nine months ended September 30, 2015, the Company granted 471,249 performance share units ("PSUs") with a grant date fair value of $2.1 million, or $4.38 per unit, to its employees. As of September 30, 2015, Comstock had 669,604 PSUs outstanding at a weighted average grant date fair value of $9.13 per unit. The number of shares of common stock to be issued related to the PSUs is based on the Company's stock price performance as compared to its peers which could result in the issuance of anywhere from zero to 1,400,173 shares of common stock. Total unrecognized compensation cost related to these grants of $2.6 million as of September 30, 2015 is expected to be recognized over a period of 1.9 years.

As of September 30, 2015, Comstock had outstanding options to purchase 102,650 shares of common stock at a weighted average exercise price of $32.94 per share. All of the stock options were exercisable and there were no unrecognized compensation costs related to the stock options as of September 30, 2015. No stock options were exercised during the three months or nine months ended September 30, 2015 or 2014.

Income Taxes

In recording deferred income tax assets, the Company considers whether it is more likely than not that some portion or all of its deferred income tax assets will be realized in the future. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible. The Company believes that after considering all the available objective evidence, historical and prospective, with greater weight given to historical evidence, management is not able to determine that it is more likely than not that all of its deferred tax assets will be realized and, therefore, has established a valuation allowance of $178.6 million and $71.6 million against its net federal deferred tax assets and state deferred tax assets, respectively, at September 30, 2015. The Company will continue to assess the valuation allowance against deferred tax assets considering all available information obtained in future reporting periods.

The following is an analysis of consolidated income tax expense (benefit):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(In thousands)
Current provision	$	687		$	(73	)	$	1,170		$	(36	)
Deferred provision (benefit)		(31,333	)		(417	)		(146,118	)		1,487
Provision for (benefit from) income taxes	$	(30,646	)	$	(490	)	$	(144,948	)	$	1,451

Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. The difference between the Company's effective tax rate and the 35% federal statutory rate is caused by non-deductible stock compensation, state taxes and the establishing of a valuation allowance on deferred taxes. The impact of these items varies based upon the Company's projected full year loss and the jurisdictions that are expected to generate the projected losses.

The difference between the Company's customary rate of 35% and the effective tax rate on income (loss) before income taxes is due to the following:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Tax at statutory rate		35.0	%		35.0	%		35.0	%		35.0	%
Tax effect of:
State income taxes net of federal benefit		2.0			5.5			2.1			(5.5	)
Nondeductible stock-based compensation		—			(15.1	)		(0.1	)		20.1
Valuation allowance on deferred tax assets – Federal		(31.0	)		—			(19.8	)		—
Valuation allowance on deferred tax asset – State		(0.7	)		—			(1.2	)		—
Other		—			(4.9	)		—			6.0
Effective tax rate		5.3	%		20.5	%		16.0	%		55.6	%

The Company's federal income tax returns for the years subsequent to December 31, 2011, remain subject to examination. The Company's income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to December 31, 2009. A state tax return in one state jurisdiction is currently under review. The Company has evaluated the preliminary findings in this jurisdiction and believes it is more likely than not that the ultimate resolution of these matters will not have a material effect on the Company's financial statements. The Company currently believes that all other significant filing positions are highly certain and that all of its other significant income tax positions and deductions would be sustained under audit or the final resolution would not have a material effect on the consolidated financial statements. Therefore, the Company has not established any significant reserves for uncertain tax positions.

Future use of the Company's federal and state net operating loss carryforwards may be limited in the event that a cumulative change in the ownership of Comstock's common stock by more than 50% occurs within a three-year period. Such a change in ownership could result in a substantial portion of Comstock's net operating loss carryforwards being eliminated or becoming restricted, and the Company may need to recognize an additional valuation allowance reflecting the restricted use of these net operating loss carryforwards in the period when such an ownership change occurred. The Company established a rights plan on October 1, 2015 to deter ownership changes that would trigger this limitation (see Note 5).

Fair Value Measurements

The Company holds or has held certain items that are required to be measured at fair value. These include cash and cash equivalents held in bank accounts and derivative financial instruments in the form of oil and natural gas price swap agreements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level hierarchy is followed for disclosure to show the extent and level of judgment used to estimate fair value measurements:

Level 1 – Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date.

Level 2 – Inputs used to measure fair value, other than quoted prices included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

Level 3 – Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions.

The Company's valuation of cash and cash equivalents is a Level 1 measurement. The Company's natural gas price swap agreements are not traded on a public exchange. Their value is determined utilizing a discounted cash flow model based on inputs that are readily available in public markets and, accordingly, the valuation of these swap agreements is categorized as a Level 2 measurement.

The following table summarizes financial assets and liabilities accounted for at fair value as of September 30, 2015:

	Carrying Value Measured at Fair Value at September 30, 2015		Level 1		Level 2
	(In thousands)
Assets measured at fair value on a recurring basis:
Cash and cash equivalents held in bank accounts	$	163,840	$	163,840	$	—
Derivative financial instruments		1,314		—		1,314
Total assets	$	165,154	$	163,840	$	1,314

As of September 30, 2015, the Company's other financial instruments, comprised solely of its fixed rate debt, had a carrying value of $1.3 billion and a fair value of $645.6 million. The fair market value of the Company's fixed rate debt was based on quoted prices as of September 30, 2015, a Level 2 measurement.

Earnings Per Share

Basic earnings per share is determined without the effect of any outstanding potentially dilutive stock options or PSUs and diluted earnings per share is determined with the effect of outstanding stock options and PSUs that are potentially dilutive. Unvested share-based payment awards containing nonforfeitable rights to dividends are considered to be participatory securities and are included in the computation of basic and diluted earnings per share pursuant to the two-class method. PSUs represent the right to receive a number of shares of the Company's common stock that may range from zero to up to three times the number of PSUs granted on the award date based on the achievement of certain performance measures during a performance period. The number of potentially dilutive shares related to PSUs is based on the number of shares, if any, which would be issuable at the end of the respective period, assuming that date was the end of the contingency period. The treasury stock method is used to measure the dilutive effect of PSUs. Basic and diluted earnings (loss) per share for the three months and nine months ended September 30, 2015 and 2014 were determined as follows:

	Three Months Ended September 30,
	2015								2014
	Loss			Shares		Per Share			Loss			Shares		Per Share
	(In thousands, except per share amounts)
Net loss	$	(544,996	)						$	(1,903	)
Income allocable to unvested stock grants		—								(151	)
Basic net loss attributable to common stock	$	(544,996	)		46,150	$	(11.81	)	$	(2,054	)		46,651	$	(0.04	)
Effect of dilutive securities:
Stock options		—			—					—			—
Performance share units		—			—					—			—
Diluted net loss attributable to common stock	$	(544,996	)		46,150	$	(11.81	)	$	(2,054	)		46,651	$	(0.04	)

	Nine Months Ended September 30,
	2015								2014
	Loss			Shares		Per Share			Income (Loss)			Shares		Per Share
	(In thousands, except per share amounts)
Net income (loss)	$	(758,566	)						$	1,160
Income allocable to unvested stock grants		—								(444	)
Basic net income (loss) attributable to common stock	$	(758,566	)		46,100	$	(16.45	)	$	716			46,628	$	0.02
Effect of dilutive securities:
Stock options		—			—					—			—
Performance share units		—			—					—			320
Diluted net income (loss) attributable to common stock	$	(758,566	)		46,100	$	(16.45	)	$	716			46,948	$	0.02

At September 30, 2015 and December 31, 2014, 1,575,302 and 1,207,527 shares of restricted stock, respectively, are included in common stock outstanding as such shares have a nonforfeitable right to participate in any dividends that might be declared and have the right to vote on matters submitted to the Company's stockholders. Weighted average shares of unvested restricted stock outstanding during the three months and nine months ended September 30, 2015 and 2014 were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(In thousands)
Unvested restricted stock		1,576		1,210		1,430		1,184

Options to purchase common stock and PSUs that were outstanding and that were excluded as anti-dilutive from the determination of diluted earnings per share are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(In thousands except per share/unit data)
Weighted average stock options		103		115		106		115
Weighted average exercise price per share	$	32.94	$	32.90	$	32.98	$	32.90
Weighted average performance share units		670		257		631		—
Weighted average grant date fair value per unit	$	9.13	$	20.71	$	9.13	$	—

For the nine months ended September 30, 2014, the excluded options that were anti-dilutive were at exercise prices in excess of the average stock price. All stock options and unvested PSUs were anti-dilutive to earnings and excluded from weighted average shares used in the computation of earnings per share in the three months ended September 30, 2014 and the three months and nine months ended September 30, 2015 due to the net loss in the periods.

Supplementary Information With Respect to the Consolidated Statements of Cash Flows

For the purpose of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At September 30, 2015 and December 31, 2014, the Company's cash investments consisted of cash held in bank accounts.

The following is a summary of cash payments made for interest and income taxes:

	Nine Months Ended September 30,
	2015		2014
	(In thousands)
Interest payments	$	68,877	$	30,914
Income tax payments	$	77	$	1,467

The Company capitalizes interest on its unevaluated oil and gas property costs during periods when it is conducting exploration activity on this acreage. The Company capitalized interest of $2.7 million for the three months ended September 30, 2014 and $0.9 million and $7.5 million for the nine months ended September 30, 2015 and 2014, respectively, which reduced interest expense.

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under existing generally accepted accounting principles. This new standard is based upon the principal that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted beginning with periods after December 15, 2016 and entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements or decided upon the method of adoption.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU 2014-15"). ASU 2014-15 provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and sets rules for how this information should be disclosed in the financial statements. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early adoption is permitted. The Company has elected to not adopt ASU 2014-15 early and does not expect adoption of ASU 2014-15 to have any impact on its consolidated financial condition or results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for annual periods ending after December 15, 2015 and interim periods thereafter. Early adoption is permitted. The Company has elected to not adopt ASU 2015-03 early and does not expect adoption of ASU 2015-03 to have a material impact on its consolidated financial condition or results of operations.