Introduction

The following discussion and analysis presents management's perspective of our business, financial condition and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future and should be reviewed in conjunction with our "Selected Financial Data" and "Financial Statements and Supplementary Data." Our discussion and analysis relates to the following subjects:

• Overview of Business

• Overview of 2008 Results

• Business and Industry Outlook

• Results of Operations

• Capital Resources, Uses and Liquidity

• Contingencies and Legal Matters

• Critical Accounting Policies and Estimates

• Recently Issued Accounting Standards Not Yet Adopted

• Modernization of Oil and Gas Reporting

• Forward-Looking Estimates

Overview of Business

Devon is one of the world's leading independent oil and gas exploration and production companies. Our operations are focused primarily in the United States and Canada. However, we also explore for and produce oil and gas in select international areas, including Azerbaijan, Brazil and China. We also own natural gas pipelines and treatment facilities in many of our producing areas, making us one of North America's larger processors of natural gas liquids.

Our portfolio of oil and gas properties provides stable production and a platform for future growth. Over 90 percent of our production from continuing operations is from North America. Our production mix in 2008 was approximately 65% gas and 35% oil and NGLs such as propane, butane and ethane. We are currently producing 2.6 Bcf of gas each day, or about 3% of all the gas consumed in North America.

In managing our global operations, we have an operating strategy that is focused on creating and increasing value per share. Key elements of this strategy are building oil and gas reserves and production, exercising capital discipline and controlling operating costs. We also use our marketing and midstream operations to improve our overall performance. Finally, we must continually preserve our financial flexibility to achieve sustainable, long-term success.

• Reserves and production growth - Our financial condition and profitability are significantly affected by the amount of proved reserves we own. Oil and gas properties are our most significant assets, and the reserves that relate to such properties are key to our future success. To increase our proved reserves, we must replace quantities produced with additional reserves from successful exploration and development activities or property acquisitions. Additionally, our profitability and operating cash flows are largely dependent on the amount of oil, gas and NGLs we produce. Growing production from existing properties is difficult because the rate of production from oil and gas properties generally declines as reserves are depleted. As a result, we constantly drill for and develop reserves on properties that provide a balance of near-term and long-term production. In addition, we may acquire properties with proved reserves that we can develop and subsequently produce to help us meet our production goals.

• Capital investment discipline - Effectively deploying our resources into capital projects is key to maintaining and growing future production and oil and gas reserves. As a result, we have historically deployed virtually all our available cash flow into capital projects. Therefore, maintaining a disciplined approach to investing in capital projects is important to our profitability and financial condition. Our ability to control capital expenditures can be affected by changes in commodity prices. During times of high commodity prices, drilling and related costs often escalate due to the effects of supply versus demand economics. The inverse is also true.

Approximately two-thirds of our planned 2009 investment in capital projects is dedicated to a foundation of low-risk projects primarily in North America. The remainder of our capital has been identified for longer-term projects primarily in new unconventional natural gas plays in several United States onshore regions, as well as continued offshore activities in the Gulf of Mexico, Brazil and China. By deploying our capital in this manner, we are able to consistently deliver cost-efficient drill-bit growth and provide a strong source of cash flow while balancing short-term and long-term growth targets.

• Operating cost controls - To maintain our competitive position, we must control our lease operating costs and other production costs. As reservoirs are depleted and production rates decline, per unit production costs will generally increase and affect our profitability and operating cash flows. Similar to capital expenditures, our ability to control operating costs can be affected by significant changes in commodity prices. Our base North American production is focused in core areas of our operations where we can achieve economies of scale to help manage our operating costs.

• Marketing & midstream performance improvement - We enhance the value of our oil and gas operations with our marketing and midstream business. By efficiently gathering and processing oil, gas

and NGL production, our midstream operations contribute to our strategies to grow reserves and production and manage expenditures. Additionally, by effectively marketing our production, we maximize the prices received for our oil, gas and NGL production in relation to market prices. This is important because our profitability is highly dependent on market prices. These prices are determined primarily by market conditions. Market conditions for these products have been, and will continue to be, influenced by regional and worldwide economic activity, weather and other factors that are beyond our control. To manage this volatility, we sometimes utilize financial hedging arrangements and fixed-price physical delivery contracts. As of February 16, 2009, approximately 10% of our 2009 gas production is associated with financial price collars or fixed-price contracts.

• Financial flexibility preservation - As mentioned, commodity prices have been and will continue to be volatile and will continue to impact our profitability and cash flow. We understand this fact and manage our debt levels accordingly to preserve our liquidity and financial flexibility. We generally operate within the cash flow generated by our operations. However, during periods of low commodity prices, we may use our balance sheet strength to access debt or equity markets, allowing us to preserve our business and maintain momentum until markets recover. When prices improve, we can utilize excess operating cash flow to repay debt and invest in our activities that not only maintain but also increase value per share.

Overview of 2008 Results

2008 was a year of contrasts. By many measures, 2008 was the best year in our history. Throughout the year, we achieved key operational successes as we continued to execute on our operating strategy. We drilled a record amount of wells with a 98% success rate and delivered a record amount of operating cash flow. As a result of our operational success and rising commodity prices, in the third quarter of 2008, we reported the largest quarterly earnings in our history.

However, sharp declines in oil, gas and NGL prices during the fourth quarter caused us to record noncash impairments of our oil and gas properties totaling $7.1 billion, net of income taxes. Due to this impairment charge, our record earnings in the third quarter were immediately followed by a record quarterly loss in the fourth quarter.

We account for our oil and gas properties using the full cost accounting method. Full cost impairment calculations require the use of quarter-end prices. As a result, such calculations do not indicate the true fair value of the underlying reserves because of the volatile nature of commodity prices. In fact, the SEC recently recognized that impairment calculations based upon prices as of a single day of the year are not ideal and issued new rules that require the use of 12-month average prices for impairment calculations. These new rules will be effective for our 2009 year-end reporting. Had these new rules been in place as of December 31, 2008, we would not have recognized the noncash impairments.

Key measures of our performance for 2008, as well as certain operational developments, are summarized below:

• Production grew 6% over 2007, to 238 million Boe.

• The combined realized price for oil, gas and NGLs per Boe increased 28% to $54.97.

• Marketing and midstream operating profit climbed to a record $668 million.

• Production and operating costs increased 19% per Boe due to our large-scale projects at Jackfish in Canada and Polvo in Brazil, which are experiencing higher per-unit costs while they are in the early phases of production.

• Operating cash flow reached $9.4 billion, representing a 41% increase over 2008.

• Capitalized costs incurred in our oil and gas exploration and development activities were $9.8 billion in 2008.

Despite these positive results, we reported a net loss of $2.1 billion, or $4.85 per diluted share, for 2008. This represents a $5.8 billion decrease in earnings compared to 2007, which was primarily attributable to the $7.1 billion, net of income tax, property impairments recognized in the fourth quarter of 2008.

From an operational perspective, we completed another successful year with the drill-bit. We drilled a record 2,441 gross wells with an overall 98% rate of success. This success rate enabled us to increase proved reserves by 584 million Boe, which represented nearly 2 and one half times our 2008 production. Consistent with our two-pronged operating strategy, 93% of the wells we drilled were North American development wells.

Besides completing another successful year of drilling, we also had several other key operational achievements during 2008. In the Gulf of Mexico, we continued to build off prior years' successful drilling results with our deepwater exploration and development program. At Cascade, we commenced drilling the first of two initial producing wells and continued work on production facilities and subsea equipment. We also continued progressing toward commercial development of our other previous discoveries in the Lower Tertiary trend of the Gulf of Mexico. We also added some 800,000 net undeveloped acres to our lease inventory, positioning us with more than 1.4 million net acres in four emerging unconventional natural gas plays in the United States.

In 2008, we substantially completed our African divestiture program. We have now sold all our oil and gas producing properties in Africa, generating aggregate proceeds of $2.2 billion after income taxes.

Additionally, on October 31, 2008, we transferred our 14.2 million shares of Chevron common stock to Chevron. In exchange, we received Chevron's interest in the Drunkard's Wash coalbed natural gas field in east-central Utah and $280 million in cash. The field has approximately 51,000 net acres and had net production of about 40 million cubic feet of natural gas equivalent per day at the time of the exchange.

Even with the fourth quarter net loss, we strengthened our financial position during 2008. We used cash on hand, operating cash flow, divestiture proceeds and Chevron exchange proceeds to fund $9.4 billion of capital expenditures, reduce debt by $2.1 billion, repurchase $815 million of common and preferred stock and pay $289 million of dividends. At the end of 2008, we had $379 million of cash, and as of January 31, 2009, we had $3.1 billion of availability under our credit lines.

Business and Industry Outlook

As previously mentioned, our current and future earnings depend largely on our ability to replace and grow oil and gas reserves, increase production and exert cost discipline. We must also manage commodity pricing risks to achieve long-term success.

Oil and gas prices reached historical high levels in recent years and during the first half of 2008. We have utilized the record operating cash flows generated by high commodity prices, along with proceeds from our African divestitures, to, among other uses, repay outstanding debt. During 2008 and 2007, we repaid outstanding debt totaling $3.9 billion. During this same period, we also repurchased $1.0 billion of our common stock and redeemed $150 million of preferred stock. High commodity prices have also been a key factor driving cost increases in the oil and gas industry that have exceeded general inflation trends. We are no different from others in the industry in that we have been impacted by these cost increases.

As we exited the third quarter of 2008, oil and gas prices had declined sharply from their recent record levels and declined even further through the end of 2008. In addition, recent problems in the credit markets, steep stock market declines, financial institution failures and government bail-outs provide evidence of a weakening United States and global economy. As a result of the market turmoil and price decreases, oil and gas companies with high debt levels and lack of liquidity have been, and will continue to be, negatively impacted. However, we do not consider ourselves to be in this category based on our current debt level and credit availability.

The only constant in the oil and gas business is volatility, and 2008 presented us with some remarkable reminders. Our response to the current environment is to dramatically cut capital expenditures. We are

budgeting exploration and development capital at $3.5 billion to $4.1 billion for 2009. This is less than half of our 2008 investment in exploration and development. With the addition of non-oil and gas capital and other capitalized costs, we are forecasting total 2009 capital expenditures of $4.7 billion to $5.4 billion.

Assuming average benchmark prices of $45.00 per barrel of crude oil and $5.50 per Mcf of gas, our 2009 capital budget will require deficit spending of about $1 billion. Our philosophy has always been to live roughly within our cash flow, and we clearly will not continue to spend at this rate in future years without some improvement in oil and gas prices. However, in order to preserve our business and maintain a level of momentum that will allow us to take advantage of stronger prices when markets recover, we believe it is prudent to use our balance sheet strength to fund this additional $1 billion of spending in 2009. If we see further price weakness in 2009 or beyond, we are prepared to make further cuts.

We are dramatically decreasing our activity across most of our near-term development projects in North America. We will continue activity at a rate that will keep us competitive, but at a far lower level than in 2008. However, we are going to continue the momentum of some of our longer-term growth projects that will position us to bring on new production when oil and gas demand recovers. We are continuing to fund the second phase of our operations at Jackfish and the evaluation and development of our Lower Tertiary assets in the Gulf of Mexico. We will also move forward with the evaluation of our sizable acreage positions in several emerging natural gas plays in North America.

This decrease in development drilling will impact our oil and gas production. We are currently forecasting our 2009 production will be essentially flat with that of 2008.

We are fortunate that we are positioned to withstand the downturn in the global economy and the resulting weakness in oil and gas prices. The strength of our balance sheet and the quality of our oil and gas properties position us to emerge from the current environment and prosper in the future.

Results of Operations

Revenues

Changes in oil, gas and NGL production, prices and revenues from 2006 to 2008
are shown in the following tables. The amounts for all periods presented exclude
results from our Egyptian and West African operations which are presented as
discontinued operations. Unless otherwise stated, all dollar amounts are
expressed in U.S. dollars.


                                                              Total
                                                     Year Ended December 31,
                                                 2008 vs                   2007 vs
                                     2008        2007(2)       2007        2006(2)       2006

  Production
  Oil (MMBbls)                           53            -3 %        55           +29 %        42
  Gas (Bcf)                             940            +9 %       863            +7 %       808
  NGLs (MMBbls)                          28           +10 %        26           +10 %        23
  Total (MMBoe)(1)                      238            +6 %       224           +12 %       200
  Realized prices without hedges
  Oil (per Bbl)                    $  86.22           +35 %   $ 63.98           +11 %   $ 57.39
  Gas (per Mcf)                    $   7.73           +29 %   $  5.97            -1 %   $  6.03
  NGLs (per Bbl)                   $  44.08           +17 %   $ 37.76           +18 %   $ 32.10
  Combined (per Boe)(1)            $  54.97           +28 %   $ 42.90            +7 %   $ 40.19
  Revenues ($ in millions)
  Oil                              $  4,567           +31 %   $ 3,493           +44 %   $ 2,434
  Gas                                 7,263           +41 %     5,149            +6 %     4,874
  NGLs                                1,243           +28 %       970           +30 %       749

  Total                            $ 13,073           +36 %   $ 9,612           +19 %   $ 8,057

                                                             Domestic
                                                      Year Ended December 31,
                                                 2008 vs                   2007 vs
                                     2008        2007(2)       2007        2006(2)       2006

   Production
   Oil (MMBbls)                          17            -9 %        19            -3 %        19
   Gas (Bcf)                            726           +14 %       635           +12 %       566
   NGLs (MMBbls)                         24           +13 %        22           +15 %        19
   Total (MMBoe)(1)                     162           +11 %       146           +10 %       132
   Realized prices without hedges
   Oil (per Bbl)                    $ 98.83           +43 %   $ 69.23           +11 %   $ 62.23
   Gas (per Mcf)                    $  7.59           +29 %   $  5.87            -2 %   $  6.02
   NGLs (per Bbl)                   $ 41.21           +14 %   $ 36.11           +23 %   $ 29.42
   Combined (per Boe)(1)            $ 50.55           +27 %   $ 39.77            +2 %   $ 39.03
   Revenues ($ in millions)
   Oil                              $ 1,698           +29 %   $ 1,313            +8 %   $ 1,218
   Gas                                5,511           +48 %     3,728            +9 %     3,407
   NGLs                                 997           +29 %       773           +41 %       548

   Total                            $ 8,206           +41 %   $ 5,814           +12 %   $ 5,173

                                                              Canada
                                                      Year Ended December 31,
                                                 2008 vs                   2007 vs
                                     2008        2007(2)       2007        2006(2)       2006

   Production
   Oil (MMBbls)                          22           +34 %        16           +26 %        13
   Gas (Bcf)                            212            -6 %       227            -6 %       241
   NGLs (MMBbls)                          4            -6 %         4            -9 %         4
   Total (MMBoe)(1)                      61            +5 %        58            +1 %        58
   Realized prices without hedges
   Oil (per Bbl)                    $ 71.04           +43 %   $ 49.80            +6 %   $ 46.94
   Gas (per Mcf)                    $  8.17           +31 %   $  6.24            +3 %   $  6.05
   NGLs (per Bbl)                   $ 61.45           +33 %   $ 46.07            +8 %   $ 42.67
   Combined (per Boe)(1)            $ 57.65           +39 %   $ 41.51            +6 %   $ 39.21
   Revenues ($ in millions)
   Oil                              $ 1,535           +91 %   $   804           +33 %   $   603
   Gas                                1,733           +23 %     1,410            -3 %     1,456
   NGLs                                 246           +25 %       197            -2 %       201

   Total                            $ 3,514           +46 %   $ 2,411            +7 %   $ 2,260

                                                           International
                                                      Year Ended December 31,
                                                 2008 vs                   2007 vs
                                     2008        2007(2)       2007        2006(2)       2006

   Production
   Oil (MMBbls)                          14           -27 %        20           +95 %        10
   Gas (Bcf)                              2           +29 %         1            -6 %         1
   NGLs (MMBbls)                          -           N/M           -           N/M           -
   Total (MMBoe)(1)                      15           -26 %        20           +92 %        10
   Realized prices without hedges
   Oil (per Bbl)                    $ 94.05           +33 %   $ 70.60           +15 %   $ 61.35
   Gas (per Mcf)                    $  8.27           +33 %   $  6.22            +3 %   $  6.05
   NGLs (per Bbl)                   $     -           N/M     $     -           N/M     $     -
   Combined (per Boe)(1)            $ 92.91           +33 %   $ 70.11           +16 %   $ 60.60
   Revenues ($ in millions)
   Oil                              $ 1,334            -3 %   $ 1,376          +125 %   $   613
   Gas                                   19           +72 %        11            -3 %        11
   NGLs                                   -           N/M           -           N/M           -

   Total                            $ 1,353            -2 %   $ 1,387          +122 %   $   624

(1) Gas volumes are converted to Boe or MMBoe at the rate of six Mcf of gas per barrel of oil, based upon the approximate relative energy content of gas and oil, which rate is not necessarily indicative of the relationship of gas and oil prices. NGL volumes are converted to Boe on a one-to-one basis with oil.

(2) All percentage changes included in this table are based on actual figures and not the rounded figures included in this table.

N/M - Not meaningful.

The volume and price changes in the tables above caused the following changes to our oil, gas and NGL sales between 2006 and 2008.

                                       Oil         Gas         NGL        Total
                                                    (In millions)

            2006 sales               $ 2,434     $ 4,874     $   749     $  8,057
            Changes due to volumes       700         327          76        1,103
            Changes due to prices        359         (52 )       145          452

            2007 sales                 3,493       5,149         970        9,612
            Changes due to volumes      (104 )       462          95          453
            Changes due to prices      1,178       1,652         178        3,008

            2008 sales               $ 4,567     $ 7,263     $ 1,243     $ 13,073

Oil Sales

2008 vs. 2007 Oil sales increased $1.2 billion as a result of a 35% increase in our realized price without hedges. The average NYMEX West Texas Intermediate index price increased 38% during the same time period, accounting for the majority of the increase.

Oil sales decreased $104 million due to a two million barrel decrease in production. Our International production decreased approximately six million barrels due to reaching certain cost recovery thresholds of our carried interest in Azerbaijan. We also deferred 0.5 million barrels of oil production due to hurricanes. These

decreases were partially offset by additional production resulting from increased development activity at our Jackfish and Lloydminster areas in Canada and at our Polvo development in Brazil.

2007 vs. 2006 Oil sales increased $700 million due to a 13 million barrel increase in production. The increase in our 2007 oil production was primarily due to our properties in Azerbaijan where we achieved payout of certain carried interests in the last half of 2006. This led to a nine million barrel increase in 2007 as compared to 2006. Production also increased 3.5 million barrels due to increased development activity in our Lloydminster area in Canada. Also, oil sales from our Polvo field in Brazil began during the fourth quarter of 2007, which resulted in 0.5 million barrels of increased production.

Oil sales increased $359 million as a result of an 11% increase in our realized price without hedges. The average NYMEX West Texas Intermediate index price increased 9% during the same time period, accounting for the majority of the increase.

Gas Sales

2008 vs. 2007 Gas sales increased $1.7 billion as a result of a 29% increase in our realized price without hedges. This increase was largely due to increases in the regional index prices upon which our gas sales are based.

A 77 Bcf increase in production during 2008 caused gas sales to increase by $462 million. Our drilling and development program in the Barnett Shale field in north Texas contributed 83 Bcf to the gas production increase. This increase and the effect of new drilling and development in our other North American properties were partially offset by natural production declines and the deferral of seven Bcf of production in 2008 due to hurricanes.

2007 vs. 2006 A 55 Bcf increase in production caused gas sales to increase by $327 million. Our drilling and development program in the Barnett Shale field in north Texas contributed 53 Bcf to the gas production increase. The June 2006 Chief Holdings LLC ("Chief") acquisition also contributed 12 Bcf of increased production. During 2007, we also began first production from the Merganser field in the deepwater Gulf of Mexico, which resulted in seven Bcf of increased production. These increases and the effects of new drilling and development in our other North American properties were partially offset by natural production declines primarily in Canada.

A 1% decline in our average realized price without hedges caused gas sales to decrease $52 million in 2007.