COTTON VALLEY RESOURCES CORP, SB-2/A, 1997-01-23

COTTON VALLEY RESOURCES CORP
SB-2/A, 1997-01-23
OIL & GAS FIELD EXPLORATION SERVICES

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As filed with the Securities and Exchange Commission on January 22, 1997
Registration No. 333-16893

- - - - -------------------------------------------------------------------------------
<TABLE>

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
FORM SB-2/A
AMENDMENT No. 1
Registration Statement
Under
The Securities Act of 1933
COTTON VALLEY RESOURCES CORPORATION
(Name of Small Business Issuer in Its Charter)

Ontario, Canada 1381 98-0164357
(I.R.S. Employer Identification Number)
(State or Other Jurisdiction of Incorporation (Primary Standard Industrial Classification
or Organization) Code Number)
8350 North Central Expressway 8350 North Central Expressway Peter Lucas
Suite M2030 Suite M2030 8350 North Central Expressway
Dallas, Texas 75206 Dallas, Texas 75206 Suite M2030
(214) 363-1968 Dallas, Texas 75206
(Address of Principal Place of Business or (214) 363-1968
(Address and Telephone Number of Principal Intended Principal Place of Business)
Executive Offices) (Name, Address and Telephone Number of
Agent for Service)
------------------------------

Norman R. Miller, Esq. Copies to: Maurice J. Bates, L.L.C.
Alexandra Christian, Esq. 8214 Westchester, Suite 500
Wolin, Fuller, Ridley & Miller LLP Dallas, Texas 75225
1717 Main Street, Suite 3100 Telephone: (214) 692-3566
Dallas, Texas 75201 Fax: (214) 987-2091
Telephone: (214) 939-4906
Fax: (214) 939-4949
------------------------------
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Approximate Date of Proposed Sale to the Public:
As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, please check the following box. |X|

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|

If this form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| If delivery of the prospectus is expected
to be made pursuant to Rule 434, please check the following box. |_|

CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered(1) Offering Price per Unit(1) Aggregate Offering Price(1) Registration Fee
- - - - -------------------------------- ----------------- --------------------------------------------------------- ------------------
Units for public sale(2) 1,437,000(3) $6.20(3) $ 8,912,500(3) $1,782.50(3)
- - - - -------------------------------- ----------------- --------------------------------------------------------- ------------------
Common Stock, no par value(4) 2,875,000 - - -
- - - - -------------------------------- ----------------- --------------------------------------------------------- ------------------
Redeemable Common Stock
Purchase Warrants(5) 3,125,000(6) $3.75(6) $11,718,750(6) $2,343.75(6)
- - - - -------------------------------- ----------------- --------------------------------------------------------- ------------------
Units subject to Underwriters'
Warrants(7) 125,000 $7.44 $ 930,000 $ 186.00
- - - - -------------------------------- ----------------- --------------------------------------------------------- ------------------
Common stock, no par value(8) 6,250,000 - - -
- - - - -------------------------------- ----------------- --------------------------------------------------------- ------------------
Total - - $21,561,250 $4,312.25
================================ ================= ========================================================= ==================
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee.

(2) Includes 1,250,000 Units proposed for sale to the public and 187,500 Units
underlying the Underwriters' over-allotment option.

(3) Includes the Common Stock and the Redeemable Common Stock Purchase Warrants
for which no additional consideration will be received.

(4) Represents 2,875,000 shares underlying Units proposed for sale to the
public and subject to the Underwriters' over-allotment option and 250,000
shares underlying Units subject to Underwriters' warrants.

(5) Includes 2,875,000 warrants underlying Units proposed for sale to the
public and subject to the Underwriters' over-allotment option and 250,000
warrants underlying Units subject to Underwriters' warrants.

(6) Pursuant to Rule 457(g), represents additional consideration to be received
upon exercise of, and includes common stock underlying, the Redeemable
Common Stock Purchase Warrants.

<PAGE>

(7) Represents 125,000 Units that the Underwriters have the right to acquire
upon exercise of Underwriters' Warrants.

(8) Includes 3,125,000 shares included in the Units for which no separate fee
is required pursuant to Rule 457(I); and 3,125,000 shares underlying the
Redeemable Common Stock Purchase Warrants, the fee for which is included
under Redeemable Common Stock Purchase Warrants.

- - - - -------------------------------------------------------------------------------

The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant files
a further amendment specifically stating that this registration statement will
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement becomes effective on such date
as the Securities and Exchange Commission, acting pursuant to Section 8(a), may
determine.

<PAGE>

CROSS REFERENCE SHEET
(Between Items of SB-2 and the Prospectus)

Item
No. Caption Location in Prospectus
1. Front of Registration Statement and Outside Front Cover of
Prospectus......................................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus.......... Inside Front and Outside Back Cover
Pages
3. Summary Information and Risk Factors............................. Prospectus Summary; Risk Factors
4. Use of Proceeds.................................................. Use of Proceeds
5. Determination of Offering Price.................................. Outside Front Cover Page;
Underwriting
6. Dilution......................................................... Dilution
7. Selling Security Holders......................................... Inapplicable
8. Plan of Distribution............................................. Outside Front Cover Page;
Underwriting
9. Legal Proceedings................................................ Business and Properties--Legal
Proceedings
10. Directors, Executive Officers, Promoters and Control Persons..... Management
11. Security Ownership of Certain Beneficial Owners and
Management......................................................... Principal Shareholders
12. Description of Securities........................................ Description of Securities; Shares
Eligible for Future Sale
13. Interest of Named Experts and Counsel............................ Inapplicable
14. Disclosure of SEC Position on Indemnification for Securities Act
Liabilities........................................................ Inapplicable
15. Organization Within Last 5 Years................................. Prospectus Summary; Business and
Properties
16. Description of Business.......................................... Business and Properties
17. Managements's Discussion and Analysis or Plan of Operation....... Management's Discussion and
Analysis or Plan of Operation
18. Description of Property.......................................... Business and Properties
19. Certain Relationships and Related Transactions................... Certain Relationships and Related
Transactions
20. Market for Common Equity and Related Shareholder Matters......... Description of Securities
21. Executive Compensation........................................... Management
22. Financial Statements............................................. Financial Statements
23. Changes in and Disagreements with Accountants on Accounting Inapplicable
and Financial Disclosure...........................................

</TABLE>

<PAGE>

[GRAPHIC OMITTED]

Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.

Subject to Completion, Dated ______________, 1997 COTTON VALLEY RESOURCES
CORPORATION 1,250,000 Units Consisting of 2,500,000 Shares of Common Stock,
Without Par Value, and 2,500,000 Redeemable Common Stock Purchase Warrants

--------------------------------------------

Cotton Valley Resources Corporation ("Cotton Valley") is offering
1,250,000 units ("Unit(s)") by this prospectus at an initial public offering
price estimated to be $6.20 per Unit. Each Unit consists of two shares of Common
Stock ("Common Stock") and two Redeemable Common Stock Purchase Warrants
("Warrants"). Cotton Valley intends to apply for listing of the Units, Common
Stock, and Warrants (collectively, the "Securities") on the ___________ Stock
Exchange under the symbols ___, ___, ___ and ___, respectively. The Common Stock
and the Warrants will be traded together in Units until the earlier of
_________, 1997, or the third day after Cotton Valley receives written notice
that they may be traded separately from National Securities Corporation, the
representative ("Representative") of the underwriters ("Underwriters"). See
"Underwriting."
Each Warrant represents the right to purchase one share of common stock
for $____ (subject to adjustment) at any time after the Common Stock and the
Warrants become tradable separately until ____________, 1998. After __________,
1997, Cotton Valley may redeem the Warrants at $.01 per Warrant upon certain
conditions. See "Description of Securities--Other Options and Warrants--
Canadian Financings."
Before this offering, no United States public market has existed for any
of the Securities, and no assurance can be given that an active market will
develop. Cotton Valley's common stock is traded through The Canadian Dealing
Network under the symbol "CVZC"and on NASD's bulletin board under the symbol
"CTVYF".

PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE INFORMATION INCLUDED
IN "RISK FACTORS" BEGINNING ON PAGE __ OF THIS PROSPECTUS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC") NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

Price to Public Underwriting Discount (1) Proceeds to Cotton Valley (2)
- - - - -------------------- ----------------------------------------- --------------------------------- -------------------------------

Per Unit $ $ $
- - - - -------------------- ----------------------------------------- --------------------------------- ------------------------------
Total (3) $ $ $
==================== ========================================= ================================= ==============================
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(1) Does not include additional compensation to be received by the
Representative in the form of (i) a 2.5% nonaccountable expense allowance,
(ii) warrants to purchase 125,000 Units at 120% of the public offering
price exercisable between the first and fifth anniversaries of the date of
this prospectus ("Underwriters' Warrants"), and (iii) consulting agreements
for the Representative to act as financial consultant to Cotton Valley for
two years for a fee of $________. In addition, Cotton Valley has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended ("Securities
Act"). See "Underwriting."

(2) Before deducting estimated offering expenses of $425,000, including the
Representative's 2.5% nonaccountable expense allowance.

(3) Cotton Valley has granted the Underwriters an option, exercisable within 45
days after the date of this prospectus, to purchase up to 187,500
additional Units to cover over-allotments, if any. If the Underwriters
exercise this option in full, then the total Price to Public, Underwriting
Discount and Proceeds to Cotton Valley will be $ , $ and $ , respectively.
See "Underwriting."

--------------------------------------------

The Units are being offered, subject to prior sale, when, as and if
delivered to and accepted by the Underwriters, subject to approval of certain
legal matters by counsel and other conditions. The Underwriters reserve the
right to withdraw, cancel or modify this offering without notice and to reject
any order, in whole or in part. Delivery of certificates representing Units is
expected to be made upon payment at _____________________________, on
____________, 1997.

National Securities Corporation

--------------------------------------------

The date of this prospectus is ______________, 1997.

<PAGE>

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. STABILIZING TRANSACTIONS MAY BE EFFECTED ON THE _____________ STOCK
EXCHANGE. STABILIZING ACTIVITIES, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

Certificates representing Units will be delivered against payment on or
about a date that is longer than the third business day following the date of
this prospectus ("T+3"). Prospective investors should note that the ability to
settle secondary market trades of Units will be affected by a settlement period
longer than T+3.

The enforcement by investors of civil liabilities under securities laws of
the United States may be affected adversely by the fact that Cotton Valley is
incorporated under the laws of the Province of Ontario, Canada, that some or all
of its officers and directors may be residents of Canada and that some or all of
the Underwriters or the experts named in the registration statement may be
residents of Canada.

ADDITIONAL INFORMATION

Cotton Valley has filed with the SEC a registration statement on Form SB-2
under the Securities Act with respect to the Securities. This prospectus, which
forms a part of the registration statement, does not contain all of the
information set forth in the registration statement as permitted by applicable
SEC rules and regulations. Statements in this prospectus about any contract,
agreement or other document are not necessarily complete. With respect to each
such contract, agreement or document filed as an exhibit to the registration
statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
this reference.

The registration statement may be inspected without charge and copies may
be obtained at prescribed rates at the SEC's public reference facilities at
Judiciary Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549, or on
the Internet at http://www.sec.gov. Copies of the registration statement may
also be inspected without charge at the SEC's regional offices at 7 World Trade
Center, Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. In addition, copies of the registration statement
may be obtained by mail, at prescribed rates, from the SEC's Public Reference
Branch at 450 Fifth Street, NW, Washington, DC 20549.

Cotton Valley files periodic reports, proxy statements and other
information with the SEC. The periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference facility and regional offices referred to above.

Cotton Valley will furnish to its shareholders annual reports containing
audited financial statements reported on by independent public accountants for
each fiscal year and make available quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.

Cotton Valley intends to submit an application to list its Securities on
the American Stock Exchange ("AMEX"). If Cotton Valley's application is
accepted, then reports, proxy statements and other information concerning Cotton
Valley will be available for inspection at AMEX's principal office at 86 Trinity
Place, New York, New York 10006-1881.

<PAGE>

SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes appearing elsewhere in this
prospectus. Unless the context indicates otherwise, (I) all information in this
prospectus assumes that the Underwriters' over-allotment option will not be
exercised, and (ii) "Cotton Valley" refers to Cotton Valley Resources
Corporation and all of its subsidiaries.

The Company

Cotton Valley is a development stage oil and gas exploration, development
and production company, with no operating history. It was incorporated in
Ontario, Canada, originally as Cotton Valley Energy Limited, on February 15,
1995. Through its wholly owned subsidiary Cotton Valley Energy Corporation, a
Nevada corporation, Cotton Valley owns (i) approximately 6,000 acres of
primarily non-producing oil and gas leases in the Cheneyboro Field of Navarro
County, Texas, (ii) a 25% working interest in 1,145 acres of oil and gas leases
in the Movico Field of Mobile County, Alabama, and (iii) an option to acquire a
51.8% working interest in the Sword Unit, offshore Santa Barbara, California.
Cotton Valley recently acquired an interest in the Alden Field of Oklahoma. At
June 30, 1996, Cotton Valley's proved oil reserves were approximately 4.8
million Bbl, and its proved gas reserves were approximately 13.5 million Mcf.

Cotton Valley intends to reincorporate in Canada's Yukon Territory during
1997. Under Yukon Territory law, Cotton Valley's board of directors need not be
comprised of a majority of Canadian residents as currently required under
Ontario law.

Cotton Valley's principal executive offices are located at 8350 North
Central Expressway, Suite M2030, Dallas, Texas 75206. Its telephone number is
(214) 363-1968.

Business Strategy

Cotton Valley intends to drill up to 10 horizontal wells on its Texas
acreage within 24 months after this offering. Cotton Valley intends to drill two
vertical wells on its Alabama property within 12 months after this offering. No
assurance can be given that any wells will be drilled or completed or produce
oil or gas in commercial quantities. Cotton Valley plans in the future to
exercise its option in the Sword Unit, to retain an 11.8% working interest and
to sell the remainder. See "Management's Discussion and Analysis or Plan of
Operation--12-Month Operating Plan", and "Business and Properties--Cheneyboro
Field--Horizontal Drilling", "--Movico Field", "--Sword Unit," and "--Alden
Field."

Cotton Valley's business strategy is to continue to increase reserves and
commence and increase production and cash flows by concentrating on:

o Acquiring properties, or companies with properties, with development and
exploration opportunities and/or significant cost reduction potential;

o Developing existing reserves through low-risk development drilling or
recompletion programs capitalizing on reserves left in existing wells by
major oil companies;

o Exploring for new reserves utilizing state-of-the-art technology to reduce
exploration risk;

o Concentrating on focused geographic areas to achieve operating and
technical efficiencies; and

o Maintaining financial flexibility to take advantage of additional
development and acquisition opportunities as they develop.

<PAGE>

The Offering
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Securities offered by Cotton Valley ........... 1,250,000 Units, each Unit consisting of two shares of
Common Stock and two Warrants. See "Description of
Securities."
Description of Warrants ....................... Each Warrant entitles the holder to purchase one share of
common stock for $____ per share until ___________, 1998.
The Warrants are not immediately exercisable. Cotton Valley
may redeem the Warrants at $0.01 per Warrant under certain
conditions. See "Description of Securities--Warrants."
Units to be outstanding after this offering ... 1,250,000 (1)
Warrants to be outstanding after this offering 2,500,000 Warrants (1)
Common stock to be outstanding after this
offering ...................................... 12,904,901 shares (2)
Use of Proceeds ............................... For development drilling, to acquire acreage, to reduce debt
and for working capital. See "Use of Proceeds."
__________ Stock Exchange Symbols(3):
Units ...................................... ______
Warrants ................................... ______
Common stock ............................... ______
- - - - ---------------------
</TABLE>

(1) Excludes Securities underlying the Underwriters' Warrants and the
Underwriters' over-allotment option. See "Underwriting."

(2) Excludes 2,500,000 shares issuable upon exercise of the Warrants underlying
Units offered by this prospectus, 750,000 shares underlying the
Underwriters' over-allotment option, 250,000 shares underlying the
Underwriters' Warrants, 980,000 shares subject to employee stock options,
1,999,220 shares subject to options and warrants issued in Canadian
financings, and 1,990,000 shares to be issued pursuant to a financial
consulting agreement. See "Principal Shareholders- Liviakis",
"Underwriting--Underwriters' Warrants" and "Description of
Securities--Other Options and Warrants."

(3) Cotton Valley intends to apply for listing of the Securities on the
_________ Stock Exchange. Such listing, if approved, does not imply that a
meaningful, sustained market for the Securities will develop.

Risk Factors

The Units offered by this prospectus are speculative and involve a high
degree of risk. They should not be purchased by investors who cannot afford to
lose their entire investment. See "Risk Factors."

<PAGE>

Summary Financial Data
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From February 15, 1995 (Unaudited)
For the year ended (inception) Six months ended
Statement of operations data: June 30,1996 to June 30, 1995 December 31, 1996
------------ ---------------- -----------------
Net loss $712,360 $49,917 $602,116
Net loss per common share $0.06 - $0.05
Weighted average shares outstanding 11,403,000 10,655,000 13,390,524

</TABLE>

(Unaudited)
(Unaudited) December 31, 1996
Balance sheet data: June 30,1996 December 31, 1996 Adjusted(1)
------------ ----------------- ------------
Total assets $11,979,330 $12,115,820 $17,694,771
Long-term obligations 757,758 171,709 171,709
Working capital 286,381 (1,078,321) 5,316,679
Shareholders' equity $9,116,883 $9,332,885 $15,727,885
- - - - ----------------------------

(1) Adjusted to reflect the sale of the Units offered by this prospectus.

Summary Oil and Gas Reserve Data (1)

Alabama Texas Total

Proved producing
Oil (Bbl)........ 0 93,327 93,327
Gas (Mcf)........ 0 279,979 279,979
Proved undeveloped
Oil (Bbl)........ 481,843 4,200,812 4,682,655
Gas (Mcf)........ 573,440 12,602,434 13,175,874
- - - - ----------------------------

(1) Estimated. See "Business and Properties--Oil and Gas Reserves."

TO CALIFORNIA RESIDENTS ONLY:

California residents can only purchase the Securities if they have a
minimum gross income of $65,000 during the last tax year and have (based on a
good faith estimate) a minimum gross income of $65,000 during the current tax
year and have a net worth (at fair market value but excluding home equity, home
furnishings and automobile) of $100,000, or have a net worth of $250,000.

<PAGE>

RISK FACTORS

INVESTING IN THE UNITS INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN ADDITION TO THE
OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.

Development Stage Company

Cotton Valley was incorporated in February 1995 and is still in its
development stage. Cotton Valley's operations are subject to all of the risks
inherent in establishing a new business enterprise. Cotton Valley's potential
for success must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with a new
business. No assurance can be given that Cotton Valley will be successful. See
"Business and Properties."

History of Losses

Cotton Valley incurred operating losses of $712,360 for the fiscal year
ended June 30, 1996, and $49,917 from inception to June 30, 1995. The
accumulated deficit as of June 30, 1996 was $762,277. The Company incurred an
operating loss of $602,116 (unaudited) for the six month period ended December
31, 1996. No assurance can be given that Cotton Valley will be profitable in the
future. See "Management's Discussion and Analysis or Plan of Operation."

Going Concern Risk

Cotton Valley's financial statements for the fiscal year ended June 30,
1996, and the period from inception to June 30, 1995, were audited by its
independent certified public accountants, whose report includes an explanatory
paragraph stating that the financial statements have been prepared assuming
Cotton Valley will continue as a going concern and that Cotton Valley has
incurred significant operating losses to date and has a working capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. See "Independent Auditor's Report" and "Financial Statements."

No Substantial Producing Properties

Almost all of Cotton Valley's proved reserves are classified as proved
undeveloped, meaning no production currently exists. No assurance can be given
that any wells will be drilled or completed or produce oil or gas in
commercially profitable quantities. See "Business and Properties."

Capital Expenditures for Undeveloped Properties

Recovery of Cotton Valley's proved undeveloped reserves will require
significant capital expenditures and successful drilling operations. Management
estimates that aggregate capital expenditures of approximately $13.5 million
will be required to develop these reserves, of which $3.5 million and $5.0
million are expected to be incurred during the remainder of the year ending June
30, 1997, and during the year ending June 30, 1998, respectively. Cotton Valley
intends to finance development with the proceeds from this offering and cash
from operations. No assurance can be given that Cotton Valley's estimates of
capital expenditures will prove accurate, that its financing sources will be
sufficient to fund its planned development activities fully or that development
activities will be either successful or in accordance with Cotton Valley's
schedule. Additionally, any significant decrease in oil and gas prices or any
significant increase in the costs of development could result in a significant
reduction in the number of wells drilled. See "Management's Discussion and
Analysis or Plan of Operation."

Limited Capital; Need for Significant Additional Financing

Cotton Valley anticipates that the net proceeds of this offering will
satisfy its operating cash requirements for at least 12 months after this
offering is consummated. However, no assurance can be given that Cotton Valley
will not require additional financing sooner than currently anticipated.

<PAGE>

The net proceeds of this offering will not be sufficient to develop fully
the properties. Development of the properties may require capital resources
substantially greater than the net proceeds of this offering or resources
otherwise currently available to Cotton Valley. Cotton Valley has no current
arrangements with respect to or sources of additional financing. No assurance
can be given that additional financing will be available to Cotton Valley on
acceptable terms or at all. The inability to obtain additional financing would
have a material adverse effect on Cotton Valley, including requiring Cotton
Valley to curtail significantly or farm-out development of the properties. Any
additional financing may involve substantial dilution to the interests of Cotton
Valley's shareholders at that time. See "Management's Discussion and Analysis or
Plan of Operation."

Operating Hazards and Other Uncertainties

The acquisition, development, exploration for and production,
transportation and storage of, crude oil, gas liquids and gas involves a high
degree of risk, which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. Cotton Valley's operations are subject
to all of the risks normally incident to drilling oil and gas wells, operating
and developing oil and gas properties, transporting, processing, and storing
gas, including encountering unexpected formations or pressures, premature
reservoir declines, blow-outs, equipment failures and other accidents,
craterings, sour gas releases, uncontrollable flows of oil, gas or well fluids,
adverse weather conditions, pollution, other environmental risks, fires and
spills. Oil production requires high levels of investment and has particular
economic risks, such as retaining well failure, fires, explosions, gaseous
leaks, spills and migration of harmful substances, any of which can cause
personal injury, damage to property, equipment and the environment and severely
interrupt operations. Cotton Valley is also subject to deliverability
uncertainties related to the proximity of its reserves to pipeline and
processing facilities and the inability to secure space on pipelines that
deliver oil and gas to commercial markets. Although Cotton Valley maintains
insurance in accordance with customary industry practice, it is not fully
insured against all of these risks, nor are all such risks insurable. Losses
resulting from the occurrence of these risks could have a material adverse
impact on Cotton Valley. See "Business and Properties."

Competition

The oil and gas business is highly competitive and has few barriers to entry.
Cotton Valley will be competing with other oil and gas companies and investment
partnerships for desirable prospects, contracts with third parties to develop
oil and gas properties and purchase equipment necessary to complete wells. Many
of Cotton Valley's competitors are larger than Cotton Valley and have
substantially greater access to capital and technical resources than does Cotton
Valley and may therefore have a significant competitive advantage. Many of
Cotton Valley's competitors are capable of making a greater investment in a
given area than is Cotton Valley, although large and small companies alike are
subject to the economics of cost effectiveness. See "Business and
Properties--Competition." California Option

The Company has an option to acquire a 51.8% working interest in an oil field
offshore California. In addition to geophysical, environmental, and regulatory
factors, management perceives that an anti-drilling sentiment exists in
California. This may make it difficult for the Company to sell part of its
option as it intends or to obtain financing to participate in the project. The
Company has recorded the option at $438,247, and it is possible that the Company
may have to record an impairment of this value at some time in the future. See
"Description of Property-Sword Unit"

Volatility of Oil and Gas Prices

Oil and gas prices fluctuated from $33.00 per Bbl of oil in January 1991 to
$13.52 per Bbl in December 1993 and $1.10 per Mcf of gas in February 1992 to
$3.72 per Mcf in February 1996. At the end of December 1996, prices were $23.37
per Bbl and $3.43 per Mcf. Prices for oil and gas probably will continue to
fluctuate, depending upon a number of conditions over which Cotton Valley has no
control. These conditions include, but are not limited to, actions taken by the
Organization of Petroleum Exporting Countries, turmoil in the Middle East, the
price of alternative fuels, weather and general economic conditions. A major
decline in oil or gas prices could have a material adverse effect on Cotton
Valley's operations, financial condition, proved reserves and the costs of
developing its oil and gas reserves.

<PAGE>

In addition, Cotton Valley assesses the carrying value of its assets annually in
accordance with generally accepted accounting principles under the full cost
method. If oil and gas prices decline, the carrying value of Cotton Valley's
assets could be subject to downward revision.

Uncertainty of Reserve Estimates

The reserve estimates included in this prospectus could be materially different
from the quantities and values ultimately realized. Reserve data set forth in
this prospectus are only estimates. In general, estimates of economically
recoverable oil and gas reserves and future net cash flows from them are based
upon a number of variable factors and assumptions, such as historical production
from the properties, the assumed effects of governmental regulation and future
operating costs, all of which may vary considerably from actual results. All
such estimates are to some degree speculative, and classifications of reserves
are only attempts to define the degree of speculation involved. For those
reasons, estimates of the economically recoverable oil and gas reserves
attributable to any particular group of properties, classification of such
reserves based on risk of recovery and estimates of future net revenues expected
from them, prepared by different engineers or by the same engineers at different
times, may vary substantially. Cotton Valley's actual production, revenues,
taxes and development and operating expenditures with respect to its reserves
will vary from such estimates, and such variances could be material. Numerous
uncertainties are inherent in estimating proved reserves, including many factors
beyond Cotton Valley's control.

Estimates with respect to proved reserves that may be developed and produced in
the future are often based upon volumetric calculations and upon analogy to
similar types of reserves rather than actual production history. Estimates based
on these methods are generally less reliable than those based on actual
production history. Subsequent evaluation of the same reserves based upon
production history will result in variation, which may be material, in the
estimated reserves.

Estimated discounted future net cash flows from estimated proved reserves are
based on prices and costs as of the date of the estimate unless prices or costs
are contractually determined at that date. Actual future prices and costs may be
materially higher or lower. Actual future net cash flows also will be affected
by factors such as actual production, supply and demand for oil and gas,
curtailments or increases in consumption by gas purchasers, changes in
governmental regulation or taxation and the impact of inflation on costs. See
"Business and Properties--Oil and Gas Reserves."

Need to Replace Reserves

Cotton Valley's future oil and gas reserves and production, and therefore its
cash flows, are highly dependent upon Cotton Valley's success in exploiting its
current reserve base and acquiring or discovering additional reserves. Without
the addition of reserves through exploration, acquisition or development
activities, Cotton Valley's reserves and production will decline over time as
reserves are exploited. The business of exploring for, developing or acquiring
reserves is capital intensive. To the extent cash flows from operations are
insufficient and external sources of capital become limited or unavailable,
Cotton Valley's ability to make the necessary capital investments to maintain
and expand its oil and gas reserves will be impaired. In addition, no assurance
can be given that Cotton Valley will be able to find and develop or acquire
additional reserves to replace production at acceptable costs.

Environmental Risks

All phases of the oil and gas business present environmental risks and hazards
and are subject to environmental regulation pursuant to a variety of
international conventions and United States and Canadian federal, provincial,
state and municipal laws and regulations. Environmental legislation provides
for, among other things, restrictions and prohibitions on spills, releases or
emissions of various substances produced in association with Cotton Valley's
past and current operations. The legislation also requires that refineries,
wells and facility sites be operated, maintained, abandoned and reclaimed to the
satisfaction of applicable regulatory authorities. Compliance with such
legislation can require significant expenditures and a breach may result in the
imposition of fines and penalties. Environmental legislation is evolving in a
manner expected to result in stricter standards and enforcement, larger fines
and liability and potentially increased capital expenditures and operating
costs. Although Cotton Valley believes that it is currently in

<PAGE>

substantial compliance with all existing material environmental regulations, no
assurance can be given that future environmental costs will not have a material
adverse effect on Cotton Valley's financial condition or results of operations.

Use of Proceeds

As of the date of this prospectus, management has not specifically determined
the use of a portion of the estimated net proceeds. Management will decide how
to apply this portion of the net proceeds in its discretion without shareholder
input. Accordingly, investors in this offering will be entrusting this portion
of their funds to management without any determination as to its use. See "Use
of Proceeds."

Dependence on Key Personnel

Cotton Valley depends to a large extent on the services of Messrs. Soltero,
Hogue and Burden. The loss of the services of any one of them could have a
material adverse effect on Cotton Valley's operations. Cotton Valley has not
entered into any employment contracts with any of its executive officers, nor
has it obtained key personnel life insurance. Cotton Valley believes that its
success is also dependent on its ability to continue to employ and retain
skilled technical personnel. See "Management."

Absence of Public Market and Possible Volatility of Securities

Prior to this offering, no public market for any of Cotton Valley's Securities
has existed in the United States. No assurance can be given that an active
public market will develop or be sustained after the offering. The initial
public offering price of the Units has been determined by negotiations between
Cotton Valley and the Underwriters. See "Underwriting." The trading price of the
Securities could be subject to wide fluctuations in response to quarter-to-
quarter variations in operating results, announcements of drilling results by
Cotton Valley and other events or factors. In addition, the stock market has
from time to time experienced extreme price and volume fluctuations which have
particularly affected the market price for many companies and which often have
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Securities.

The Company intends to apply to have its common stock and Warrants, listed on
the American Stock Exchange, effective upon the completion of the initial public
offering. The Company has not currently applied to have its securities listed.
The Company does not meet the general listing requirements for the American
Stock Exchange. Furthermore, the Company does not meet the following alternate
numerical criteria for listing on the American Exchange:

-the market value of public float is not $15,000,000 -the price per share
of common stock is less than $3.00, and -the Company does not have a three
year history of operations.

In addition to numerical criteria, the American Stock Exchange considers other
factors, such as the nature and scope of a company's operations, a company's
financial condition and accounting practices, the composition of a company's
assets including its reserves, the experience and reputation of a company and
its management, the nature and effect of governmental policies on a company's
properties, and the extent of competition and economic conditions within a
particular industry.

There is no assurance the Company will meet or receive an exemption from these
requirements. There is no assurance that inter-broker trading will occur in the
over-the-counter market in the United States.

Immediate Substantial Dilution

This offering involves immediate substantial dilution to investors in the net
tangible book value per share of common stock underlying each Unit from the
public offering price. See "Dilution."

<PAGE>

Securities Eligible for Future Sale

Upon completion of this offering, 1,250,000 Units, consisting of 2,500,000
shares of Common Stock and 2,500,000 Warrants, and 10,404,901 shares of common
stock will be outstanding. The Units will be eligible for sale without
restriction immediately after completion of the offering. 9,204,318 shares of
common stock were registered on Form 20-F and currently eligible for sale
without restriction. The sale of significant quantities of these shares could
have an adverse effect on the market price of Cotton Valley's Securities.
Furthermore, the 10,404,901 shares of common stock are eligible for sale
(subject to control block issues) under Canadian and Ontario rules. Cotton
Valley's common stock trades over the Canadian over-the-counter system known as
The Canadian Dealing Network. See "Securities Eligible for Future Sale."

Risk of Redemption of Warrants

Cotton Valley may redeem the Warrants for $0.01 per Warrant at any time after
___________, 19__, on 30 days prior written notice under certain circumstances.
Notice of redemption could force the holders to exercise their Warrants and pay
the exercise price at a time when it might be disadvantageous or difficult for
the holder to do so, sell the Warrants at the current market price when they
might otherwise wish to hold the Warrants, or accept the redemption price, which
is likely to be less than the market price of the Warrants at the time of
redemption. See "Description of Securities-- Warrants".

Underwriters' Warrants; Risk of Further Dilution

Cotton Valley has agreed to sell to the Underwriters, for nominal consideration,
warrants to purchase 125,000 Units at an exercise price of 120% of the price at
which the Units are initially offered to the public. Cotton Valley has granted
the Underwriters certain registration rights with respect to the Securities
issuable upon exercise of the Underwriters' Warrants. The Underwriters' Warrants
and any profits realized by the Underwriters on the sale of the Securities
underlying the Underwriters' Warrants could be considered additional
underwriting compensation. For the term of the Underwriters' Warrants, the
holders are given, at nominal cost, the opportunity to profit from the
difference, if any, between the exercise price of the Underwriters' Warrants and
the value of or market price, if any, for the Securities, with a resulting
dilution in the interest of existing shareholders. The Underwriters' Warrants
may be exercised at a time when, in all likelihood, Cotton Valley would be able
to obtain any needed capital by a new placement of Securities on terms more
favorable than those provided for or by the Underwriters' Warrants. See
"Underwriting."

Regulation

Cotton Valley's business is subject to federal, state and local regulation
relating to the development, production and transmission of oil and gas, as well
as environmental and safety matters. No assurance can be given that current or
future regulation will not adversely affect Cotton Valley's exploration for, and
production and transmission of, oil and gas or its financial condition and
results of operations. See "Business and Properties--Regulation."

No Dividends

Cotton Valley's board of directors presently intends to retain all of Cotton
Valley's earnings for the expansion of its business. Cotton Valley therefore
does not anticipate the distribution of cash dividends in the foreseeable
future. Any future decision of Cotton Valley's board of directors to pay cash
dividends will depend, among other factors, upon Cotton Valley's earnings,
financial position and cash requirements. See "Dividend Policy."

Availability of Preferred Stock

Cotton Valley's board of directors is authorized, without further shareholder
action, to issue preferred stock in one or more series and may designate the
dividend rate, voting rights and other rights, preferences and restrictions of
each series. No preferred stock currently is outstanding and Cotton Valley has
no plans to issue any preferred stock. Any future preferred stock issuances
could have the effect of, among other things, restricting common stock
dividends,

<PAGE>

diluting common stock voting power, impairing common stock liquidation rights
and delaying or preventing a change in control of Cotton Valley without further
action by the shareholders.

Exchange Rate Fluctuations

Cotton Valley is exposed to foreign exchange risks since it has granted stock
options, warrants and agent's options denominated in Canadian currency while the
majority of its expenditures will be in United States dollars. Any significant
reduction in the value of the Canadian dollar may decrease the value of funds in
United States dollars Cotton Valley receives upon exercise of warrants and
options.

Income Tax Considerations

The purchase of Securities by United States residents may have tax consequences
in both the United States and Canada. Prospective investors should consult their
own tax advisors regarding the particular tax consequences applicable to them.
See "Certain Income Tax Considerations."

USE OF PROCEEDS

The net proceeds to Cotton Valley from the sale of 1,250,000 Units pursuant to
this prospectus at an assumed public offering price of $6.20 per Unit are
estimated to be approximately $6,395,000 after deducting estimated underwriting
discounts and offering expenses ($7,412,000 if the Underwriters' over-allotment
option is exercised in full).

Cotton Valley intends to use approximately $5.0 million of the estimated net
proceeds of this offering for development drilling on its Texas and Alabama
properties. Seven wells are scheduled to be drilled within 12 months after this
offering. No assurance can be given that any wells will be drilled or completed
or produce oil or gas in commercial quantities. Cotton Valley may use a portion
of the $5.0 million to acquire additional acreage in these fields if Cotton
Valley determines this is advisable to facilitate its drilling program. As of
the date of this prospectus, management has no specific plans to acquire
additional acreage. See "Business--Properties--Cheneyboro Field" and "--Movico
Field."

Approximately $816,000 of the estimated net proceeds will be used to repay debt
that Cotton Valley incurred to acquire its Texas and Alabama properties. The
original principal amount of the debt on the Texas properties was $1,086,050, of
which approximately $586,000 was outstanding as of December 31, 1996. This debt
bears interest at 12.0% and matures on July 17, 1997. The remaining $230,000
does not bear interest and is payable upon transfer of title. See "Management's
Discussion and Analysis or Plan of Operation" and note 3 of Notes to
Consolidated Financial Statements.

The remaining $579,000 of the estimated net proceeds will be allocated to
working capital. Management intends to use this portion of the proceeds for
general corporate purposes and to acquire interests in unrelated drilling
prospects if appropriate opportunities arise. As of the date of this prospectus,
management has not specifically determined any of these uses or identified any
unrelated drilling prospects for acquisition. Management will decide how to
apply this portion of the net proceeds in its discretion without shareholder
input. Accordingly, investors in this offering will be entrusting this portion
of their funds to management without any determination as to its use. Management
does not currently intend to use proceeds from this offering to exercise its
option on the Sword Unit.

Cotton Valley intends to invest the net proceeds of this offering in short-term,
investment grade obligations or bank certificates of deposit until they are
used.

CAPITALIZATION

The following table sets forth Cotton Valley's total consolidated capitalization
as of June 30, 1996, as reflected in the audited financial statements, the
capitalization of Cotton Valley as of December 31, 1996 as reflected in the
unaudited financial statements the pro forma capitalization of Cotton Valley as
of December 31, 1996 giving effect to the sale of 1,250,000 Units at $6.20 per
Unit in this offering and application of the estimated net proceeds as described
in this

<PAGE>

prospectus. See "Use of Proceeds." The table should be read in conjunction with
the consolidated financial statements and notes and the other financial
information included elsewhere in this prospectus.

(Unaudited) (Unaudited)
June 30, 1996 December 31, 1996 December 31, 1996
Actual Actual As Adjusted

Total debt, including current maturities:
Accounts payable on oil and gas interests(1) $ 230,000 $230,000 $ -
Notes payable on oil and gas interests(2) $ 586,049 $586,049 $ -
Advances from related parties(3) $ 171,709 $171,709 $171,709
---------- ------- --------
$ 987,758 $987,758 $171,709
---------- ------- --------

Shareholders' equity:
Common stock without par value, unlimited shares
authorized, 9,191,596 shares outstanding on
June 30, 1996, 10,404,901 outstanding on December
31, 1996 and 12,904,901 on December 31, 1996 as
adjusted(4) $9,879,160 $10,697,279 $17,092,279
Accumulated deficit (762,277) (1,364,394) (1,364,394)
------------ ------------- -------------

Total shareholders' equity $9,116,883 $9,332,885 $15,727,885
------------ ------------- -----------
Total capitalization $10,104,641 $10,320,643 $16,674,594
===========
</TABLE>

- - - - ---------------------------

(1) See note 3 of Notes to Consolidated Financial Statements.

(2) See note 4 of Notes to Consolidated Financial Statements.

(3) See "Certain Relationships and Related Transactions" and note 6 of Notes to
Financial Statements.

(4) Excludes 2,500,000 shares issuable upon exercise of the Warrants underlying
Units offered by this prospectus, 750,000 shares underlying the
Underwriters' over-allotment option, 250,000 shares underlying the
Underwriters' Warrants, 980,000 shares subject to employee stock options,
1,999,220 shares subject to options and warrants issued in Canadian
financings, and 1,990,000 shares to be issued pursuant to a financial
consulting agreement. See "Principal Shareholders--Liviakis",
"Underwriting--Underwriters' Warrants" and "Description of
Securities--Other Options and Warrants."

DILUTION

As of December 31, 1996, Cotton Valley's unaudited net tangible book value
was $9,332,885 or $0.90 per share of common stock. Net tangible book value is
the aggregate amount of Cotton Valley's tangible assets less its total
liabilities. Net tangible book value per share represents Cotton Valley's total
tangible assets less its total liabilities, divided by the number of shares of
common stock outstanding. After giving effect to the sale of 1,250,000 Units
(consisting of 2,500,000 shares of Common Stock and 2,500,000 Warrants) at an
offering price per Unit of $6.20, or $3.10 per share of Common Stock (no value
assigned to Warrants, which are not immediately exercisable), application of the
estimated net sale proceeds (after deducting underwriting discounts and other
offering expenses) Cotton Valley's net tangible book value as of December 31,
1996 would increase from $9,332,885 to $15,727,885, and the net tangible book
value per share would increase from $0.90 to $1.22. This represents an immediate
increase in net tangible book value of $0.32 per share to current shareholders,
and immediate dilution of $1.88 per share to new investors or 61%, as
illustrated in the following table:

Public offering price per share of common stock $3.10
Net tangible book value per share before this offering... $0.90
Increase per share attributable to new investors......... $0.38
-----
Adjusted net tangible book value per share after this offering.. $1.22
-----
Dilution per share to new investors............................. $1.88
Percentage dilution............................................. 61%

<PAGE>

Shares Purchased Total Consideration
Number Percent Amount Percent Average per Share
Current Common Stockholders 10,404,901 80.6% $11,627,664 60.0% $1.12
New Investors 2,500,000 19.4% 7,750,000 40.0% $3.10
--------- ----- ---------- -----
12,904,901 100.0% $19,377,664 100.0%
========== ====== ============ ======
</TABLE>

DIVIDEND POLICY

Cotton Valley has never paid dividends on its common stock and does not
plan to pay dividends in the foreseeable future. Whether dividends will be paid
in the future will be in the discretion of Cotton Valley's board of directors
and will depend on various factors, including its earnings and financial
condition and such other factors as Cotton Valley's board of directors considers
relevant. Cotton Valley currently intends to retain earnings to develop and
expand Cotton Valley's business. See "Management's Discussion and Analysis or
Plan of Operation."

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

First Six Months Fiscal 1997 and First Six Months Fiscal 1996

During the six months ended December 31, 1996, Cotton Valley incurred a
net loss of $602,116. From February 15, 1995 (inception), to December 31, 1996,
Cotton Valley accumulated a deficit of $1,364,394.

The loss of $602,116 for the first six months of 1997 compares to a loss
of $426,203 during the first six months of 1996. There was greater business
activity during the first six months of fiscal 1997 and during this period
Cotton Valley issued 400,000 shares of common stock to Liviakis Financial
Communications, Inc. for services. The stock was valued at $.73 per share, based
on trading on the Canadian over-the-counter market, for a total expense of
$292,000.

During the first six months of fiscal 1996, Cotton Valley issued 300,000
shares for services which was recorded at $446,950. Other expenses during this
period were $209,253. The loss before income tax benefit of $230,000 was
$656,203.

Rehabilitation work on two wells in the Cheneyboro Field in the fourth
quarter of fiscal 1996 resulted in oil and gas sales of $41,365 during the first
six months of 1997.

Cotton Valley acquired its interest in the Alden Field in December 1996
for $390,000 of which $35,000 was paid and $355,000 is payable upon closing
which is expected to be in February or March 1997.

During the six months ended December 31, 1996, Cotton Valley issued 36,888
shares of common stock to individuals for services which was recorded at
$30,932, issued 73,750 shares of common stock to settle debts which was recorded
at $53,838, issued 400,000 shares of common stock to Liviakis Financial
Communications, Inc. (See "Principal Shareholders--Liviakis") which was recorded
at $292,000, issued 302,667 shares of common stock to former Arjon shareholders
on exercise of warrants for $145,524, issued 300,000 shares of common stock in
Canadian private placements for proceeds of $235,425 (before deducting costs of
$14,600), and issued 100,000 shares of common stock to Liviakis Financial
Services, Inc. for cash of $75,000.

Fiscal Year 1996 and Fiscal Period 1995

<PAGE>

From February 15, 1995 (inception), to June 30, 1996, Cotton Valley
accumulated a deficit of $762,277 after an income tax benefit of $412,000.
During this period, Cotton Valley acquired its properties, merged with Arjon
Enterprises, Inc., issued debentures and notes and sold stock for cash.

Legal, audit and accounting fees were $190,053, which represents 17% of
the net loss before tax through June 30, 1996.

Management fees of $82,840 and salaries of $163,309, for a total of
$246,149, represent 22% of the net loss before tax through June 30, 1996. Cotton
Valley paid management fees of $10,000 per month from incorporation to July 31,
1995, and $20,000 per month from August 1, 1995 to March 31, 1996, for the
full-time services of two of its officers. Effective April 1, 1996, each of
these officers received a salary of $10,000 per month. A third officer earned
$10,000 per month from August 1, 1995. A fourth officer earned $10,000 per month
from May 1, 1996.

Management fees and salaries totaling $194, 951 from inception through
June 30, 1996, were capitalized into oil and gas properties and are thus not
included in the accumulated deficit as of that date. These costs represent the
estimated portion of the compensation directly attributable to acquisition of
the properties in the Cheneyboro Field and related development activities.

Cotton Valley acquired its interest in the Cheneyboro Field from 18
different property owners in March 1995 in exchange for 3,252,533 shares of
common stock, 406,567 Class A Warrants, and $1,086,050, of which approximately
$500,000 has been paid. See "Description of Securities--Other Options and
Warrants--Canadian Financings."

Cotton Valley also acquired a one-quarter interest in 1,145 acres of oil
and gas leases in the Movico Field of Mobile County, Alabama. It issued 623,424
Common Shares, granted 77,928 Class A Warrants and agreed to pay $230,000 as
consideration.

Cotton Valley purchased an option to acquire a 51.8% working interest in
the Sword Unit, offshore Santa Barbara, California, through an interest in an
Option Agreement held by PetroGreen Company to purchase all of Conoco, Inc.'s
interest in the Sword Unit (the "Option Agreement"). All leases and the unit are
held under a current Minerals Management Service of the Department of Interior
("MMS") Suspension of Operations Order ("SOO") with no short-term drilling
obligations. The Option Agreement remains effective through the California
Offshore Oil and Gas Energy Resources ("COOGER") regional data collection study
or until 30 days after the SOO is terminated. COOGER is a joint venture
involving federal, state and local agencies and all of the Pacific outer
continental shelf and California State Tidelands lease owners organized to study
the environmental implications and methods of producing from the area. In
connection with its participation in the COOGER study, MMS has stated that its
SOO would not be terminated until after the COOGER study is completed.
Completion of the COOGER study is scheduled for the fourth quarter of 1997, but
it appears to be behind schedule. On November 5, 1996 the MMS extended its SOO
until December 31, 1998. Cotton Valley is responsible for paying Conoco's share
of the cost of the COOGER study, which portion is expected to be approximately
$60,000.

Cotton Valley intends to exercise its option, to retain an 11.8% working
interest in the Sword Unit and to sell the remainder of its interest to industry
participants. No assurance can be given, however, that Cotton Valley will be
successful in selling all or any part of the remainder of its interest on terms
and conditions satisfactory to Cotton Valley. Upon purchase of the Conoco
interest in the Sword Unit, the original option owner is entitled to an
overriding royalty interest of 31/3% proportionally reduced as to Conoco's
interest, on all the leasehold interests being acquired. The net revenue
interest remaining to Cotton Valley will be 80% of its working interest. Cotton
Valley cannot exercise its option under the Option Agreement unless it, and its
syndicate of co-owners, are acceptable to the MMS.

Cotton Valley intended to have its shares of Common Stock listed on the
Toronto Stock Exchange and therefore acquired Arjon Enterprises, Inc.,which was
a Canadian public company. In the future, the Company intends to re-apply for
listing on the Toronto Stock Exchange. There is however, no assurance that the
Company will be successful.

During the year ended June 30, 1996, the Company issued 1,272,500 shares
of Common Stock in Canadian private placements for cash of $2,089,872 and issued
288,529 shares of Common Stock upon conversion of debentures sold

<PAGE>

in Canada for $426,474. Share issuance costs associated with these transactions
amounted to $915,785; the net amount was $1,174,087.

The Company has not sold any working interests in its properties at this
time.

12-Month Operating Plan

As of December 31, 1996, Cotton Valley had a working capital deficiency of
$1,078,321, calculated by subtracting accounts payable of $732,177 and the
current portion of long-term debt of $586,049 from cash of $239,905. Management
estimates that aggregate capital expenditures of approximately $13.5 million
will be required to develop its reserves, of which $3.5 million and $5.0 million
are expected to be incurred during the remainder of the year ending June 30,
1997, and during the year ending June 30, 1998, respectively. Cotton Valley
intends to finance development with the proceeds from this offering and cash
from operations.

Cotton Valley does not intend to significantly increase the number of
employees during the 12 months following the offering.

Cotton Valley intends to drill and complete five horizontal wells with an
average depth of 9,500 feet laterally in the Cheneyboro Field within 12 months
after this offering. The estimated cost of each well is approximately
$1,000,000. Depending upon the results, Cotton Valley plans to drill and
complete ten more horizontal wells in two groups of five. Assuming commercially
profitable production, cash generated from the first five wells should be
sufficient to fund the drilling and completion of subsequent wells.

Cotton Valley intends to drill two vertical wells to a depth of
approximately 17,000 feet in the Movico Field within 12 months after this
offering.

Cotton Valley intends to exercise its option on the offshore California
property, retain an 11.8% working interest and sell the remainder of its
interest to industry participants. Management does not expect to exercise the
option until the end of 1998 at the earliest. See "Management's Discussion and
Analysis or Plan of Operation--Fiscal Year 1996 and Fiscal Period 1995."

Liquidity and Capital Resources

As of December 31, 1996, Cotton Valley had a working capital deficiency of
$1,078,321 calculated by subtracting accounts payable of $732,177 and the
current portion of long-term debt of $586,049 from cash of $239,905. Included in
accounts payable is $230,000 representing an unpaid part of the purchase price
of the Movico Filed which is not due until others who hold an interest in the
property decide to commence drilling. The current portion of long-term debt is
described in the following paragraph.

Cotton Valley has promissory notes payable totaling $586,049 for the
unpaid purchase price of the Cheneyboro oil and gas properties. The notes are
collateralized by the properties and are due July 17,1997. Interest is payable
quarterly at 12%. Management believes the notes will be extended if Cotton
Valley is unsuccessful in its initial public offering.

During the first six months of fiscal 1997, Cotton Valley purchased oil
and gas interests in the Alden Field, Caddo County, Oklahoma for $390,000.
Cotton Valley paid $35,000 and $355,000 is due on closing which is expected to
happen during the third quarter of fiscal 1997.

In the first part of 1995, Cotton Valley investigated raising
approximately $4,000,000 by way of equity financing. Advisors to Cotton Valley
suggested this amount was too small for US equity markets and further suggested
that the funds be raised in Canada.

Cotton Valley arranged with Majendie Securities Ltd., a Canadian
investment Banker, to raise approximately $4,000,000 in the Canadian market by
way of a private placement of Cotton Valley's securities. An agreement was

<PAGE>

made to merge Cotton Valley with Arjon Enterprises, Inc.,a Canadian public
company, so that after the merger Cotton Valley's securities could trade in
Canada, providing private placement investors with liquidity. Cotton Valley also
applied to have its shares listed on the Toronto Stock Exchange. Cotton Valley
intended to use the $4,000,000 to reduce debt on its properties and to provide
funds to drill wells in the Cheneyboro Field. Future drilling would have been
funded from operations.

The private placement, which occurred during April through June 1996,
raised only $2,089,872. This amount was insufficient to qualify for a Toronto
Stock Exchange listing or to commence exploitation of Cotton Valley's
properties.

Cotton Valley will require additional cash between the date this
Registration Statement is filed and the date net proceeds of its offering are
received. Management is currently taking the following steps:

- - - - - it has encouraged warrant holders to exercise warrants,

- - - - - it is actively seeking participation from other oil and gas companies to
fund part of the Cheneyboro Field development,

- - - - - it is in negotiation with three parties for debt financing, in the nature
of a "bridge loan" to be repaid with net proceeds of its intended U.S.
offering, and

- - - - - it has entered into an agreement with Liviakis Financial Communications,
Inc. Of Sacramento, California ("Liviakis") which includes a provision
whereby Liviakis has agreed to purchase 500,000 of the Company's shares for
$375,000.

Management believes a combination of the above steps will provide
liquidity until this offering is completed. There is no assurance management
will be successful.

Management expects to pay the outstanding amount of the Alden Field
purchase of $355,000 from proceeds of a loan it is negotiating. There is no
assurance management will be successful. In the event management cannot obtain
financing to complete the purchase and management cannot find acceptable
alternative financing, Cotton Valley may not be able to close on the Alden Field
purchase.

Cotton Valley currently anticipates that the net proceeds of this offering
will be sufficient to satisfy its operating cash requirements for at least 12
months following the consummation of this offering. No assurance can be given,
however, that Cotton Valley will not require additional financing sooner than
currently anticipated.

The net proceeds of this offering and the anticipated sale of an interest
in the offshore California property will not be sufficient to develop fully the
properties. If the cash flow generated from the first five wells is less than
expected, the development of properties may require capital resources greater
than the net proceeds of this offering or resources otherwise currently
available to Cotton Valley. Cotton Valley has no current arrangements with
respect to, or sources of, additional financing. No assurance can be given that
any additional financing will be available to Cotton Valley on acceptable terms
or at all. The inability to obtain additional financing would have a material
adverse effect on Cotton Valley, including requiring Cotton Valley to curtail
significantly its deployment of the properties. Any additional financing may
involve substantial dilution to the interests of Cotton Valley's then existing
shareholders.

Estimated Reserves

The carrying value of Cotton Valley's oil and gas properties is supported
almost entirely by proved undeveloped reserves. Cotton Valley emphasizes that
reserve estimates of new discoveries or undeveloped properties are more
imprecise than those of producing oil and gas properties. Accordingly, these
estimates are expected to change materially as future information becomes
available.

<PAGE>

THE COMPANY

Cotton Valley is a development stage, independent oil and gas exploration,
production and development company. It was incorporated in Ontario, Canada,
originally as Cotton Valley Energy Limited, on February 15, 1995. Cotton Valley
was formed, and its present name adopted, on June 14, 1996, as a result of the
merger of Cotton Valley Energy Limited and Arjon Enterprises, Inc., both Ontario
corporations. Arjon Enterprises, Inc. was a Canadian public company formed more
than 50 years ago to operate a gold mine. At the time of the merger, Arjon
Enterprises, Inc. had not engaged in business for more than 25 years, it had no
material liabilities, and its only asset was a Cotton Valley Energy Limited
debenture in the amount of $146,300. The shareholders of Arjon Enterprises, Inc.
received 686,551 shares of Cotton Valley common stock in the merger,
representing 7.5% of Cotton Valley's then outstanding common stock. Cotton
Valley accounted for the merger as a purchase. See "Certain Relationships and
Related Transactions."

Cotton Valley has three wholly owned subsidiaries, CV Energy, Cotton
Valley Operating Company ("CV Operating"), a Texas corporation, and CV Trading
Company ("CV Trading"), a Nevada corporation, all of which were recently
incorporated. CV Energy holds non-producing oil and gas properties in Texas and
agreements and options to acquire oil and gas properties in Texas, Alabama and
offshore California. Cotton Valley acquired all of the shares of CV Energy on
June 30, 1995, in a one-for-one share and warrant exchange. Because Cotton
Valley had no substantive activity before this transaction, the acquisition was
accounted for as a recapitalization of Cotton Valley with CV Energy's net
assets. CV Trading was formed to engage in gas trading and transportation
projects. CV Operating was formed to operate oil and gas wells. Neither CV
Operating nor CV Trading has commenced operations at this time.

BUSINESS AND PROPERTIES

Business Strategy

Cotton Valley's business strategy is to continue to increase reserves and
commence and increase production and cash flows by concentrating on:

o Acquiring properties, or companies with properties, with development and
exploration opportunities and/or significant cost reduction potential, none
of which has been identified as of the date of this prospectus;

o Developing existing reserves through low-risk developmental drilling or
recompletion programs capitalizing on reserves left behind pipe in existing
well bores by major oil companies;

o Exploring for new reserves utilizing state-of-the-art technology, including
horizontal drilling, to reduce exploration risk;

o Concentrating on focused geographic areas to achieve operating and
technical efficiencies; and

o Maintaining financial flexibility to take advantage of development and
acquisition opportunities as they develop.

Properties

Cheneyboro Field

Cotton Valley owns or has options to acquire approximately 6,000 net acres
of producing and non-producing oil and gas leases (with options and rights of
first refusal to acquire additional leases) in the Cheneyboro Field of Navarro
County, Texas. Cotton Valley has entered into an Area of Mutual Interest ("AMI")
Agreement with a number of unaffiliated parties covering approximately 33,000
acres in and around the Cheneyboro Field. Cotton Valley has the right to acquire
up to a 75% working interest in any new lease acquired by any of the other
parties to the AMI Agreement.

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The Company has acquired its interest in the Cheneyboro Field through the
issuance of 3,252,533 common shares and 460,567 Class A Warrants (hereinafter
described), and by agreement to pay $1,086,049, of which approximately $500,000
has been paid. The remaining $586,049 is collateralized by the properties, bears
interest at 12% per annum payable quarterly, and is due July 17, 1997.

The Cheneyboro Field is located 17 miles southeast of Corsicana, Texas, in
Navarro County. This field is productive in the Cotton Valley Limestone
formation (also called the "Cotton Valley Lime") at a vertical depth of
approximately 9,500 feet. Field development continued following the initial
discovery in 1978 into the early 1980s, eventually encompassing an area 12 miles
long and 5 miles wide (approximately 30,000 acres). Between 1978 and 1987, the
Cheneyboro Field produced approximately 3.0 million Bbl of oil from 69 vertical
wells, representing an average of approximately 45,000 Bbl per well. Some of the
vertical wells have produced over 100,000 Bbl, indicating better drainage where
the wells penetrated the fracture system. In 1987, the Tarrant County Water
Authority expropriated approximately 20,000 acres of this field. Producing wells
were plugged and abandoned to permit construction of the Richland/Chambers Creek
Reservoir, a water supply project for Tarrant County and the City of Fort Worth,
Texas.

The Cotton Valley Lime reservoir at Cheneyboro is highly fractured. The
primary objective reservoir rock is an oolitic carbonate grainstone of Jurassic
age that was deposited on a Paleozoic shelf break. Subsequent pullout of the
deeper Louann Salt caused extensive fracturing. The salt withdrawal left the
residual field structure as simple regional dip. Hydrocarbon trapping occurs as
a result of the high degree of fracture density bounded by areas of
non-permeability. Core and log analyses indicate the presence of 2.5 to 4.5% oil
saturated matrix porosity in the field.
Vertical wells in this reservoir produce 42(degree) API oil.

Cotton Valley believes that horizontal drilling techniques will lead to
higher initial rates and better recovery efficiencies than those experienced in
the original vertical well completions. Since the majority of the field is under
water, directional drilling from the shoreline is anticipated. Based on analogy
to horizontal drilling in fractured limestone reservoirs in other areas,
increased productive capacity and ultimate reserves are anticipated relative to
historical, vertical per well averages.

The Company is unaware of any regulatory restrictions on drilling near the
reservoir. The Company will build the normal retaining walls around its drilling
and storage sites to prevent oil spills from spreading. The Company intends
drilling to a depth of approximately 9,500 feet while the deepest point in the
Richland/Chambers Creek Reservoir is approximately 100 feet. Consequently, the
Company does not anticipate any special risks associated with drilling near a
reservoir.

When the field was first developed, several shallower zones tested
hydrocarbons at commercial rates. Due to the expropriation of the field, these
zones were not developed. The Cretaceous Rodessa, Glen Rose, Pettit and Travis
Peak intervals may also prove productive in the field area.

Gas from these wells is expected to be connected to one of several
pipelines in the area.

Horizontal Drilling. Horizontal drilling begins with drilling in the
normal manner (vertically) to a point above the objective formation. From that
point, the hole is directionally deviated until the bit is drilling generally
horizontally in the producing zone. Directional drilling technology has advanced
to the point that the drill-bit can be kept in one geological horizon for many
hundreds of feet away from the vertical well bore. It is no longer necessary to
strike a localized fracture zone accurately with a vertical well. Instead, a
well can be drilled horizontally through an area where fractured zones are known
to exist with a greater chance of encountering the vertical fractures. A single
horizontal well can encounter several localized fracture zones.

Horizontal drilling was first developed over 20 years ago, and has been
used successfully in oil and gas fields as diverse as those located in West
Virginia, the North Sea, Saskatchewan, Argentina, Prudhoe Bay and South Texas,
to extract oil and gas where vertical drilling is impossible or uneconomical.
Horizontal drilling has also increased production of oil and gas from fields
with thin pay zones, low permeability sands, vertical fractured reservoirs,
discontinuous formations and reservoirs with gas and water coning problems. High
angle directional drilling has been

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performed extensively onshore in California to reach bottom holes in congested
cities or harbors where vertical drilling would not be feasible. Horizontal
drilling has been used extensively offshore to drill many wells from one
platform.

Movico Field

Cotton Valley owns a 25% interest in 1,145 acres of oil and gas leases
(with an AMI covering an additional 6,000 acres of leases) in the Movico Field
of Mobile County, Alabama.

The Company acquired its interest in the Movico Field through the issuance
of 623,424 common shares and 77,928 Class A Warrants and by agreement to pay
$230,000. The cash is payable at a final closing date dependent upon when
unrelated third parties, who also hold an interest in the Movico Field decide to
commence drilling.

Movico Field was discovered in 1982 when The Superior Oil A.M. Hill Unit
39 #3 was completed at 16,909 feet. This well is productive from two zones in
the Smackover for a total of 4,488 Bbl per day of sweet crude and 3,200 Mcf per
day of gas. During its first 12 months, this well produced over 485,000 Bbl.
Commercial production from October 1983 through December 1992 was 1,584,514 Bbl
of oil and 1,500,000 Mcf of gas, and the well is still producing. Subsurface and
geophysical data suggest that the fault block that the discovery well occupies
has been largely unexploited and that two to four locations remain to be
drilled. Seismic data indicates that the productive wells are located downdip
and that 200-300 feet of structure can be gained to the discovery well by a
properly located offset well.

Movico Field is located on a salt anticline on the west side of the Mobile
Graben (Jackson-Mobile fault system). The structure at the Smackover level traps
on an upthrown fault closure against Haynesville, evaporates on regional west
dip and is bounded by a large down to the east regional fault that trends in a
north-south direction. This large fault and regional dip are documented by
subsurface, seismic and gravity data. Subsurface mapping demonstrates the fault
to have a displacement of more than 2,400 feet. The seismic data show this fault
on each of the dip lines and each dip line also shows strong west dip. Regional
gravity data also delineate this fault and the eastern boundary of the field.

Regionally, the Smackover is a dolomitic limestone facies and at Movico
Field has porosities and permeabilities that average 16% and 55 millidarcies,
respectively. Porosities as high as 25% and over 200 millidarcies permeability
have been found in a well located 700 feet downdip of the proposed location. All
wells surrounding the proposed location have reservoir grade porosity ranging
from 42 feet to over 70 feet thick.

More production can occur in the Smackover formation where the porosity
intervals found in the offsetting wells increase in quality and thickness updip
on the crest of the structure. Reservoir porosity within the Smackover is
generally best developed and enhanced on the crest of structures that have been
formed by swelling salt pillows. In Smackover fields that surround Movico Field,
namely Hatter's Pond (203,000 Mcf + 49 million Bbl), Chunchula (207,000 Mcf + 52
million Bbl), Chatom (135,000 Mcf + 15 million Bbl) and Jay Field (491,000 Mcf +
380 million Bbl), porosity and permeability reach maximum development at or near
their structural crests and typically decrease on the flanks. At Movico Field,
management expects the best developed reservoir rock to occur 200-300 feet updip
to the offsetting wells based on results in the neighboring fields. Development
of this porosity could create a Smackover net pay section of over 100 feet.
Thick pay sections of over 80 feet occur in Chunchula, Hatter's Pond and Chatom
Fields.

The primary force of hydrocarbon flow at Movico Field is water drive. The
water drive systems in the Smackover are slow-acting and are usually recognized
after several years of production. Water drive systems usually maintain near
original bottom hole pressures and show an increasing proportion of water and
consistent gas/oil ratios. The Movico Smackover reservoirs act differently due
to variations in porosity and permeability. Migrating fluids follow pathways
that are often indirect and tortuous, slowing down the migration process.
Porosity logs, micrologs and conventional cores from wells within Smackover
producing fields always show differences in Smackover reservoir porosity and
quality with some correlative zones of porosity and other inconsistent zones.

In the case of a newly-discovered Smackover oil reservoir, an initial
period of relatively high production occurs due to original reservoir pressure
and some gas coming out of solution. After several months, the flush production
begins a sloping decline as reservoir pressure around the well decreases. This
decline in pressure is caused because

<PAGE>

fluids cannot be replaced near the well as quickly as they are extracted (as a
result of the tortuous pathways) by migrating oil and water that lie at an
increasing distance from the well. After several years, production will decline
to a rate equal to the slow encroachment of the water drive. Reservoir pressure
and production will stabilize as the water drive takes effect. The well will
then produce at a fairly constant rate for 5-15 years. Bottom hole pressures at
the well bore (not in the entire reservoir) will drop to 20%-50% of their
original pressure and then level off. The proportion of water will increase and
the gas/oil ratio will remain slightly above or below its initial ratio.
Reservoir pressure at Movico was 8,900 pounds per square inch initially and
currently is calculated at 8,000 pounds per square inch.

Reservoir performance of this kind can only be understood after long
periods of production. The sloping decline in production and bottom hole
pressure can be mistaken for a solution gas or depletion drive in the early
stages of production. Reserve estimates commonly are made early in the life of
the well before decline curves flatten out. As a result, reserves may be
underestimated initially and revised frequently over time as the wells produce
more and last longer than predicted.

Porosity in the Movico Field averages 16% with an average water saturation
of 28% in the Unit 39 #3 well. Better reservoir rock is found at Movico Field
than at Hatter's Pond, and the rock in the Unit 39 #3 is capable of producing
substantially more fluid than a typical well at Hatter's Pond Field. This data
also allows a more accurate estimation of recoverable reserves at Movico based
on volumetrics.

Cotton Valley plans to drill the first well from the surface location used
for the Superior Oil Hill Unit #9 well. This well was plugged after producing
166,209 Bbl of oil from a bottom hole location very near the oil/water contact.
The location will be approximately 4,500 feet north of the Hill Unit 39 #3 well
that has produced more than 1.6 million Bbl of oil and is still producing. By
using the existing location and the nearby pipeline used for the plugged Hill
Unit #9 well, cost is expected to be substantially reduced and the pipeline will
feed the entire well production into the Movico processing plant 3,500 feet to
the north. Proximity to the existing pipeline and the processing plant minimizes
downtime loss and expense for constructing surface production facilities. The
plant can process 15,000 Bbls of oil per day and 20,000 Mcf of gas per day. It
currently handles less than 400 Bbls of oil per day.

Cotton Valley's second drilling target is the Norphlet Formation at 17,000
feet, which lies directly below the Smackover Formation. The highest Norphlet
penetration is in the Superior Unit 16 well (8,500 feet south) that encountered
the sands approximately 200 feet downdip of the crest. A mudlog show of oil was
recorded in this well from the Norphlet sands but production has not been
established from this interval in the field. Several Smackover-Norphlet fields
in Alabama and Mississippi have Norphlet pay located at the highest structural
crest of the field. In addition, Norphlet discoveries have been made years after
the initial Smackover discovery and full development of the field. Womack Hill,
Nancy and Goodwater are fields that have deeper pay in the Norphlet but were
discovered years later as deeper drilling on the crestal structure occurred
within these Smackover Fields. Many Norphlet field wells recover 1 million Bbl
per well. Norphlet production is found at Hatter's Pond Field and Chunchula
Field located south and southwest of Movico Field. Cotton Valley estimates that,
based upon such production, potential reserves for the Norphlet under its
acreage are 3.2 million Bbl of oil and 3,200 Mcf of gas.

Sword Unit

The Company has entered into option agreements to acquire a working
interest in the Sword Unit, Offshore Santa Barbara, California. The Company has
paid $400,00 as of June 30, 1996. To complete the option and acquire the working
interest, the Company must pay $8,000,000 in cash and $4,000,000 in marketable
securities ( which may consist of the Company's common shares) on closing
sometime in 1998 or later, and participate in a $4,000,000 letter of credit to
fund development. The option has been recorded at a cost of $400,000, plus the
Company's share of environmental studies and other costs of $38,247 for a total
of $38,247.

There is no assurance that the Company will have the financial resources
to acquire any part of the working interest.

The Company plans to sell part of its option to purchase 51.8% of the
Sword Unit working interest and retain 11.8%. The remaining 40% working interest
will be sold to industry participants. No assurance can be given that the

<PAGE>

Company will be successful in selling all or part of the 40% for satisfactory
terms or conditions. The Company will also evaluate equity trades and production
sharing agreements to reduce or eliminate direct development cost. Upon purchase
of the Conoco interest in the Sword Unit, the original option owner is entitled
to an overriding royalty interest of 3 1/3% proportionally reduced as to
Conoco's interest, on all leasehold interests being acquired. The net revenue
remaining to the Company will be 80% of its working interest. The Company cannot
exercise its option under the Option Agreement unless it, and its syndicate of
co-owners, are acceptable to the Minerals Management Service.

In addition to factors discussed below, the Company is aware of an
anti-drilling sentiment in California. This may make it difficult for the
Company to sell part of its option or to find the necessary financing to
participate in the project. It is possible that the Company may need to record
an impairment in value of its option at some time.

The Sword Unit is located 10 miles off Point Conception, Santa Barbara
County, California, 800 to 1,800 feet underwater, at the juncture of the Santa
Barbara Channel and the offshore Santa Maria Basin. It is on a large anticline
covering approximately 7,800 acres of area and lies immediately south of the
Point Arguello oil field operated by Texaco and Chevron.

Two successful wells have been drilled and tested on the structure. The
discovery well, the P-0322 #1, was drilled to a depth of 9,343 feet and tested
in 1983. The P-0320 #2, which was drilled to determine the size of field, was
drilled to a depth of 8,478 feet and tested in 1985. Both of these wells tested
Monterey zones at high rates. A 3-D seismic survey has been shot, delineating
the structure in great detail. The Upper Miocene fractured Monterey pay is 800
feet thick at the crest and 1,200 feet thick on the flanks and is encountered at
approximately 7,000 feet. Proved recoverable reserves in the Sword Unit are
estimated to be 314 million Bbl of oil and 397 million Mcf of gas.

The Sword Unit lies almost wholly within the Sword Field, which consists
of all or portions of each of four adjacent federal leases.

The Santa Barbara Channel and the offshore Santa Maria Basin are the
seaward portions of geologically well-known onshore basins with over 90 years of
production history. These offshore areas were first explored in the Santa
Barbara Channel along the nearshore 3-mile strip controlled by the state. New
field discoveries in Pliocene and Miocene age reservoir sands led to exploration
into the federally controlled waters of the outer continental shelf ("OCS").
Eight OCS lease sales conducted between 1966 and 1984 have resulted in the
discovery of an estimated two billion Bbl of oil and three trillion cubic feet
of gas. Of these totals, some 600 million Bbl of oil and 600 billion cubic feet
of gas have been produced and sold. OCS production is approximately 200,000 Bbl
of oil and 200 million cubic feet of gas per day.

Most of the early offshore production was from Pliocene age sandstone
reservoirs. The more recent developments are from the highly fractured zones of
the Miocene age Monterey Formation. The Monterey is productive in both the Santa
Barbara Channel and the offshore Santa Maria Basin. It is the principal
producing horizon in the Point Arguello and Hondo (Santa Ynez Unit) fields.
Because the Monterey is capable of relatively high productive rates, the Hondo
field, which has been on production since late 1981, has already surpassed 100
million Bbl.
California's active tectonic history over the last few million years has
formed the large linear anticlinal features which trap the oil and gas. Marine
seismic surveys have been used to locate and define these structures offshore.
Recent seismic surveying utilizing modern 3-D seismic technology, coupled with
exploratory well data, has greatly improved knowledge of the size of planned
reserves in development and in fields for which development is planned.

Currently, 17 platforms are producing from nine fields in the Santa
Barbara Channel and offshore Santa Maria Basin OCS. At least 10 additional
fields may be brought into production during this decade. The number of
platforms needed to develop these fields will be less than required in the past.
Implementation of extended high-angle to horizontal drilling methods will result
not only in the reduction of platforms, but also in the total number of wells
drilled. Use of these new drilling methods and seismic technologies will enhance
environmental protection and improve development economics. At present, four
major Sword area facilities are producing significant volumes of oil and gas
from seven platforms, making this area one of the more significant oil and gas
producing provinces in the United States.

<PAGE>

The northeast-southwest trend of the Sword structure lies at a right
angle to the general trend of the other structural features in the
Arguello-Conception area. Sword Field is on a large regional feature known as
the Amberjack Ridge. The Monterey formation is draped across this cretaceous
feature and is thicker on its flanks than on its crest. This draping, in
conjunction with the extremely strong tectonic activity of the California area,
have resulted in the very brittle Monterey formation being highly fractured.

Because the Sword anticline is structurally less complicated than many of
the nearby features, it can be mapped with greater confidence. The existing
conventional and 3-D seismic data sets provide an excellent base for definitive
mapping.

Most offshore California Monterey wells average 1,500-2,000 Bbl of oil per
day of sustained production for many years. This is unusual for fractured
reservoirs, which often have high initial rates that decline very rapidly. Some
Monterey wells at the offshore Hondo and South Ellwood fields have produced as
much as nine million Bbl of oil in less than ten years and are still producing
substantial daily volumes.

The Company is aware of publicly reported information that Chevron
Corporation recently announced its intention to end all offshore California
crude oil production between 1999 and 2001. The Company notes that Chevron
included information in its September 30, 1996 quarterly report that crude oil
production from the Point Arguello project, offshore California, had continued
to decline rapidly, and that Chevron was reviewing options for the project,
including unitization with an adjoining field and development of an overall
abandonment strategy.

Chevron's announcement may make it more difficult for the Company to find
industry participants willing to purchase part of the Company's option and may
make future financing of the project more difficult.

The Sword Unit lease owners as well as the other non-producing lease
owners in the area are presently under a voluntary suspension of operations
agreement with the Minerals Management Service. This agreement suspends any
leasing, exploratory drilling and/or new platform installation permits through
1998 while the California Offshore Oil and Gas Energy Resources ("COOGER") study
is being completed and evaluated. This study will evaluate the impact of
different levels of offshore oil and gas development on the adjacent onshore
communities. While the suspension of operations agreement is in effect, the
Minerals Management Service has waived rental payments on the affected leases.
When the suspension agreement expires, permitting will begin and normal offshore
exploration drilling and platform installation plans will be started. The COOGER
study will be used in the permitting process and has been designed as a common
"database" for use by the Minerals Management Service, Oil and Gas Operators and
County Governmental agencies. The COOGER study results may make permitting more
difficult, and compliance with COOGER study findings may make production more
expensive. The Company's option expires 30 days after either the termination of
the suspension of operation agreement (recently extended to December 31, 1998)
or the end of the COOGER study, whichever is later.

The regulatory framework within which the Company will develop the Sword
Field consists of: (a) Federal Offshore Lease and Administration, including
approvals of the development plan of the property; (b) a Federally- mandated
environmental impact statement; (c) State of California regulations with respect
of transport of oil and gas through state waters and the air emissions from
offshore and onshore facilities; (d) Santa Barbara County regulations with
respect to the construction and operation of onshore facilities. Permits and
approvals from all three government levels will be required to complete the
development of the field and bring it into operation.

The first three miles off the shore of the coastline are administered by
each state and are known as "State Waters". Within State Waters offshore Santa
Barbara County, the State of California regulates oil and gas leases, drilling,
and the installation of permanent and temporary production facilities. Because
the Sword Field is located outside and beyond the State Waters in the OCS, the
offshore area beyond the three-mile limit, leasing and drilling at Sword are not
regulated by the State of California. However, to the extent that the production
from Sword would be transported to a shore side facility from the field through
the State Waters, the Company's pipeline (or other transportation facilities)
would be subject to California State regulations. Construction and operation of
the pipeline would require permits from the State. State regulations also govern
the construction and operations of shore side facilities such as terminals,

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pumping stations, water separation facilities, and water disposal, all of which
require a comprehensive permitting process.

Santa Barbara County, through its Board of Supervisors, also has a
significant impact on the method and timing of any offshore field development
through its concurrent regulation of the construction and operation of shore
side facilities.

Leasing, lease administration, development, and production with the OCS
all fall under Federal regulation administered by the Minerals Management
Service of the Department of the Interior ("MMS"). Due to political opposition,
the Federal Government has not issued new OCS leases in the Santa Barbara area
within the past ten years and is unlikely to do so in the near future. This
means that any infrastructure for common use by the different operators of
existing leases in the Santa Barbara OCS will have to rely solely on what is
already in place and what would be built to accommodate a limited number of now
known, but undeveloped, properties and cannot take into account the future
growth of infrastructure from new discoveries and a high level of exploratory
activity. For these reasons, the development of any existing property in the
OCS, including Sword, would be much more expensive and take longer than similar
projects located in a mature and still growing offshore province such as the US
Gulf Coast.

Thus, the value of the proved undeveloped reserves, if acquired by the
Company upon exercise of the option, will be significantly lower than if the
same reserves were located onshore in a less environmentally sensitive area of
the United States that could be developed sooner. Although prices are not
currently regulated, they have been in the past and could be regulated in the
future. Also the rate of production could be affected by Minerals Management
Service regulations, which could also lower the value of the property.

Cotton Valley currently does not have the capital, manpower, or technical
resources to exploit the Sword leases successfully, assuming exercise of the
option. In order to effectively develop the Sword leases at the 51.8% working
interest level, the Company would require significant recapitalization and
reorganization or would have to seek a merger with, or become a subsidiary of, a
much larger oil and gas company having significantly larger resources. The
Company's current strategy for development of Sword is to retain only that
portion of the 51.8% it feels it will be able to financially and technically
support over the next five years (currently estimated at 11.8%) and seek joint
venture partners to participate in and operate the remainder. Due to the factors
discussed above relating to regulation and environmental compliance, the Santa
Barbara OCS is an area that many large independent oil and gas producers have
avoided, and the task of locating appropriate joint venture partners will be
difficult. If unsuccessful in financing the project or finding partners by the
time the option expires at the end of 1998, the Company may be forced to drop
its option and take a write-off of up to $500,000.

Alden Field

On December 10, 1996, Cotton Valley entered into agreements to purchase
all of the interests held by the Homestake Company and certain other parties in
the NE Alden Field, Caddo County, Oklahoma for an aggregate purchase price of
$390,000. The properties, consisting of approximately 550 net acres of oil and
leases, seven producing oil and gas wells, three injection wells and four shut
in wells, contain proved developed and undeveloped net reserves of approximately
300,000 Bbl of oil and 2,000 Mcf of gas, and significant probable reserves which
have not been quantified. Working interest in the wells ranges from 50% to 100%
and the net revenue interest is at least 75% of the working interest.

Located approximately 65 miles southwest of Oklahoma City, Oklahoma, the
field was discovered in 1956 and initially tested for 771 barrels of oil and 608
Mcf of gas per day from the Bromide formation at a depth of approximately 8,900
feet. Since the discovery, the Bromide has been developed and is now a unitized
water flood consisting of four producing wells and three water injection wells.
The remaining wells have been completed in other zones above and below the
Bromide. Gas from the field is transported through a one- mile gathering system,
an 82% interest in which is included in the purchase price. The gathering system
is connected to a pipeline, access to which is available to Cotton Valley

<PAGE>

Gross production for August 1996 from this property was 1,834 barrels of
oil and 13.7 million cubic feet of gas. Net production to the interest being
acquired was 1,408 barrels of oil and 7.01 million cubic feet of gas.

In addition to the current production, there are also potential zones
either behind existing wells, or reachable by deepening existing well bores.
During 1997, Cotton Valley expects to complete a number of workovers of the
existing wells to improve production from existing zones and to open new zones
for additional production and reserves. Closing of the acquisition is scheduled
to take place in stages during February and March 1997, subject to completion of
title documentation. Cotton Valley intends to complete the purchase with funds
derived from working capital on hand, proceeds from the exercise of existing
options on warrants, and/or project financing from commercial sources.

Title to Properties. Cotton Valley follows industry practice when
acquiring undeveloped properties on minimal title investigation. A title opinion
is obtained before drilling begins on the properties. Title opinions cover
approximately 36% of Cotton Valley's Texas properties. Cotton Valley's
properties are subject to royalty interests, liens incident to operating
agreements, liens for current taxes and other burdens that Cotton Valley
believes do not materially interfere with their use or value. Cotton Valley may
incur additional expenses in obtaining titles or doing remedial work on the
titles, but in the opinion of management these expenses would not be material.

Oil and Gas Reserves

Cotton Valley's reserves consist primarily of proved undeveloped reserves
located in Texas and Alabama. Reserve estimates were made using
industry-accepted methodology including extrapolation of performance trends,
volumetrics, material balance and statistical analysis of analogs. The
evaluator's professional judgment and experience were used to select the most
appropriate method and to determine the reasonableness of the results. The
estimates were made in accordance with oil and gas reserve definitions
promulgated by the SEC.

The following table summarizes Cotton Valley's estimated net proved oil and gas
reserves as of June 30, 1996. The Cheneyboro Field was evaluated by K&A Energy
Consultants, Inc. and the Movico Field was evaluated by Wendell & Associates.

Reserves by State

Item Texas(1) Alabama(2) Total
Reserves
Proved producing
Oil (Bbl) 93,327 0 93,327
Gas (Mcf) 279,979 0 279,979
Proved undeveloped
Oil (Bbl) 4,200,812 481,843 4,682,655
Gas (Mcf) 12,602,434 573,440 13,175,874
Estimated future net revenues
before income taxes
Proved producing $ 1,618,891 $ 0 $ 1,618,891
Proved undeveloped $88,924,623 $9,119,922 $98,044,615
-----------
Total $90,543,514 $9,119,922 $99,663,506
===========
Estimated future net revenues
before income taxes
discounted at 10%
Proved producing $ 1,129,799 $0 $ 1,129,799
Proved non-producing $60,149,064 $5,982,903 $66,131,967
-----------
Total $61,278,863 $5,982,903 $67,261,766
===========
---------------------

(1) Prices based on $21.21 per Bbl of oil and $2.09 per Mcf of gas.

(2) Prices based on $21.46 per Bbl of oil and $2.66 per Mcf of gas.

The reserve data set forth in this prospectus are only estimates. Numerous
uncertainties are inherent in estimating oil and gas reserves and their values,
including many factors beyond the control of the producer. Reserve engineering

<PAGE>

is a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact manner. The accuracy of any reserve estimate
is a function of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates of different engineers often
vary. In addition, estimates of reserves are subject to revision by the results
of later drilling, testing and production. Accordingly, reserve estimates often
differ from the quantities of oil and gas ultimately recovered. The
meaningfulness of estimates is highly dependent upon the accuracy of the
assumptions upon which they are based.

In general, oil and gas production declines as reserves are depleted.
Except to the extent that Cotton Valley acquires proven reserves or succeeds in
exploring and developing its own reserves, or both, Cotton Valley's proven
reserves will decline as they are produced. Cotton Valley's future oil and gas
production is, therefore, highly dependent upon its ability to in acquire or
develop additional reserves.

Acreage

The following table provides information regarding Cotton Valley's
undeveloped leasehold acreage as of June 30, 1996. Acreage in which Cotton
Valley's interest is limited to royalty, overriding royalty and similar
interests is excluded.

Developed Acreage Undeveloped Acreage
Gross Net Gross Net

Cheneyboro Field 820 820 4,660 4,180
Movico Field 0 0 1,145 286

In December 1996, Cotton Valley acquired proved developed and proved
undeveloped reserves in Alden Field in Caddo County, Oklahoma. These reserves
are not included in the above table.

Competition

Competition in the oil and gas industry is intense generally. Cotton
Valley believes that price is the determinative factor in competition for
drilling prospects, equipment and labor. Major and independent oil and gas
companies and syndicates actively bid for desirable oil and gas properties and
equipment and labor required to operate and develop them. Many of Cotton
Valley's competitors have substantially greater financial resources and
exploration and development budgets than those of Cotton Valley. Cotton Valley
expects difficulty in competing for future drilling prospects.

Markets

General. Oil and gas operating revenues are highly dependent upon prices
and demand for oil and production. Numerous factors beyond Cotton Valley's
control can impact the prices of its oil and gas. Decreases in oil and gas
prices would have an adverse effect on Cotton Valley's proved reserves,
revenues, profitability and cash flow.

Cotton Valley has not engaged in any crude oil and gas price swaps or
other hedging transactions to reduce its exposure to price fluctuations. It may,
however, engage in such transactions from time to time as management deems
advisable.

Gas Sales. Cotton Valley has not produced or sold any significant volume
of gas. It has arranged to sell gas produced in the Cheneyboro Field through an
existing gathering system and pipeline. Management believes that gas produced in
the Movico Field can be sold through an existing pipeline.

Oil Sales. Cotton Valley expects to sell its oil production under
short-term arrangements at prices no less than the purchaser's posted prices for
the respective areas less standard deductions. Numerous buyers are expected to
be available for Cotton Valley's oil.

<PAGE>

Regulation

Oil and gas exploration, production and related operations are heavily
regulated by federal and state authorities. Failure to comply with applicable
law can result in substantial penalties. The cost of regulatory authorities will
increase Cotton Valley's cost of doing business and affect its profitability.
Regulation of oil and gas activities has changed many times. Consequently,
Cotton Valley is unable to predict the future cost or impact of complying with
such laws. Texas and Alabama require drilling permits and bonds and operating
reports and impose other burdens relating to oil and gas exploration and
production. Both states also require conservation measures, including pooling of
oil and gas properties, establishing maximum production rates from oil and gas
wells, and spacing, plugging and abandoning wells. These laws limit the rate at
which oil and gas can be produced from Cotton Valley's properties.

The transportation and sale of gas in interstate commerce is regulated by
United States law and the Federal Energy Regulatory Commission.

Environmental

Cotton Valley's operations will be subject to extensive federal, state and
local environmental regulation. Permits are required for various operations to
be undertaken by Cotton Valley, and these permits are subject to revocation,
modification and renewal by issuing authorities. Increasingly strict
requirements may be imposed by environmental laws and enforcement policies.
Cotton Valley does not anticipate material capital expenditures to comply with
environmental laws.

Operating Hazards and Uninsured Risks

The acquisition, development, exploration for, and production,
transportation and storage of, crude oil, gas liquids and gas involves a high
degree of risk, which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. Cotton Valley's operations are subject
to all of the risks normally incident to drilling gas and oil wells, operating
and developing gas and oil properties, transporting, processing, and storing
gas, including encountering unexpected formations or pressures, premature
reservoir declines, blow-outs, equipment failures and other accidents,
craterings, sour gas releases, uncontrollable flows of oil, gas or well fluids,
adverse weather conditions, pollution, other environmental risks, fires and
spills. Oil production requires high levels of investment and has particular
economic risks, such as retaining well failure, fires, explosions, gaseous
leaks, spills and migration of harmful substances, any of which can cause
personal injury, damage to property, equipment and the environment, and result
in the interruption of operations. Cotton Valley is also subject to
deliverability uncertainties related to the proximity of its reserves to
pipeline and processing facilities and the inability to secure space on
pipelines that deliver oil and gas to commercial markets. Although Cotton Valley
maintains insurance in accordance with customary industry practice, it is not
fully insured against all of these risks, nor are all such risks insurable.
Losses resulting from the occurrence of these risks could have a material
adverse impact on Cotton Valley. See "Business and Properties."

Facilities

Cotton Valley leases approximately 1,900 square feet of office space at
8350 North Central Expressway, Suite M2030, Dallas, Texas 75206, at an annual
base rental of approximately $44,500. Management believes that Cotton Valley's
offices will satisfy its needs for the foreseeable future.

Employees

As of August 31, 1996, Cotton Valley had six employees. Four employees are
officers, one is administrative and one works in the field. Cotton Valley uses
contract services in its oil and gas field operations. Cotton Valley also uses
consultants to evaluate company projects, reserves and other oil and gas assets
for potential acquisitions.

Legal Proceedings

As of the date of this prospectus, Cotton Valley is not a party to any
legal proceedings.

<PAGE>

MANAGEMENT

Directors and Executive Officers

Cotton Valley's directors and executive officers are:

Name Age Position
Eugene A. Soltero 53 Chairman of the Board and Chief
Executive Officer

James E. Hogue 60 Director, President and Chief
Operating Officer
Peter Lucas 42 Senior Vice President and Chief
Financial Officer
C. Ronald Burden 54 Senior Vice President of Exploration
Wayne T. Egan(1) 32 Director
Michael Kamis 44 Director
Richard J. Lachcik(2) 38 Director
- - - - --------------------
(1) Member, Audit Committee
(2) Member, Compensation Committee

Eugene A. Soltero has served Cotton Valley as a director since February
1995. He was President from February 1995 to July 1996 and has been Chairman and
Chief Executive Officer since January 1996. He has been Chairman and Chief
Executive Officer of CV Trading since May 1995. From March 1994 to February
1995, Mr. Soltero was President and Chief Executive Officer of Cimarron
Resources, Inc., an independent gas production company. From August 1991 to
March 1994, he was Chairman of the Board, President and Chief Executive Officer
of Aztec Energy Corporation, a publicly-held independent oil and gas production
company. In June 1994, Aztec Energy Corporation entered into bankruptcy
proceedings. Mr. Soltero has served as Chief Operating Officer and/or Chief
Executive Officer for private and public oil and gas companies for more than 20
years, including directing the formation and growth of start-up companies. Early
in his career, he was trained at Sinclair Oil Corporation in exploration and
production management, served as Manager of Planning for Texas International
Petroleum Corporation, and Petroleum Economist for DeGolyer and MacNaughton,
petroleum exploration and production consultants. Mr. Soltero is a member of the
Society of Petroleum Engineers, a member and former director of the Independent
Petroleum Association of America and the Texas Independent Producers and Royalty
Owners. He has also served, on two separate terms, as a director of the
Independent Petroleum Refiners Association of America. He is a master's graduate
of the Massachusetts Institute of Technology in business (where he was awarded
the Sinclair Fellowship in Petroleum Economics) with an undergraduate
engineering degree from The Cooper Union. Mr. Soltero is a registered
professional engineer in the State of Texas.

James E. Hogue became President, Chief Operating Officer and a director of
Cotton Valley in July 1996 and he served as Chairman of CV Energy from February
1995 to January 1996 and Chairman of CV Trading from May 1995 to January 1996.
He became President of CV Energy and CV Operating in January 1996. Mr. Hogue
also has been director, President and major shareholder of Third Coast Capital,
Inc., a venture capital company, since 1988. Since 1991, Mr. Hogue has served as
President of Martex Oil and Gas, Inc. In 1983, Mr. Hogue formed Mayco Petroleum,
Inc., for which he served as President until 1988. Early in his career, Mr.
Hogue served as a driller for Leatherwood Company and as a core engineer for
Sargent Diamond Bit, Inc. Subsequently, Mr. Hogue became President and major
shareholder of a diamond bit manufacturing company. In the late 1970s, Mr. Hogue
served for four years as President of Union Crude Oil Company, an exploration
and drilling company, and for two years as Vice President of Independent
Producers Marketing Company, a crude oil supply and transportation company. Mr.
Hogue has participated in drilling or furnishing services for over 3,000 wells
in Texas, Oklahoma, New Mexico, Louisiana and Colorado.

Peter Lucas became Senior Vice President and Chief Financial Officer of
Cotton Valley and all of its subsidiaries in August 1995. From May 1992 to July
1995, Mr. Lucas served as Chief Financial Officer to Canmax, Inc., a publicly
traded company that developed software for oil and gas retailers. Mr. Lucas is a
member of the Canadian Institute of Chartered Accountants. Mr. Lucas received
his tax and accounting training at Coopers & Lybrand, which he left in

<PAGE>

1984 to form his own tax practice. Six years later, Mr. Lucas' practice was
merged into Coopers & Lybrand, with whom he was a partner until April 1992. He
holds a bachelor of commerce degree from the University of Alberta.

C. Ronald Burden joined Cotton Valley in April 1996. From July 1994 until
he joined Cotton Valley, Mr. Burden served as Petroleum Geologist for Texakoma
Oil and Gas in Dallas, Texas. He was an independent oil and gas consultant from
September 1993 to July 1994. From November 1990 to September 1993, Mr. Burden
was Exploration Manager for Enron Oil and Gas Corp. at Tyler, Texas. He has
spent the past 25 years developing and managing oil and gas exploration projects
in West Texas, Alaska, offshore Texas, offshore Louisiana, South Texas and
particularly specializing in recent years in the East Texas Basin. Mr. Burden is
a member of the American Association of Petroleum Geologists and the East Texas
Geological Society. He is a graduate of Texas Tech University with a master's
degree in Petroleum Geology.

Wayne T. Egan is a partner with Weir & Foulds in the securities law
section for more than the past five years. He holds an L.L.B. from Queen's
University and a Bachelor of Commerce from the University of Toronto, and is a
member of the Canadian Bar Association. Weir & Foulds serves as Cotton Valley's
corporate counsel. See "Legal Matters."

Michael Kamis has served Cotton Valley as a director since November 1996.
Mr. Kamis has a Bachelor of Science degree in Petroleum Engineering from the
University of Wyoming. He has held increasingly responsible positions throughout
the world with oil and gas producers and service companies. Currently and
continuously since 1985, Mr. Kamis serves as president of Apex Energy
Consultants, Inc., of Calgary, Alberta, which provides reserve and economic
evaluations to the petroleum industry and financial institutions. In this
capacity, Mr. Kamis has managed reservoir and production studies in Canada,
Southeast Asia, Europe, North Africa, Central America, Australia, and the U.S.

Richard J. Lachcik has practiced law with the Toronto law firm of Weir &
Foulds since 1988. He currently serves as the partner in charge of the
securities law section. Mr. Lachcik is a graduate of Queen's University with an
L.L.B., holds a B.A. from the University of Toronto, and is a member of the
Ontario Bar. Weir & Foulds serves as Cotton Valley's corporate counsel. See
"Legal Matters."

Audit Committee

Cotton Valley's board of directors has established an Audit Committee to
be comprised entirely of independent directors. The functions of the Audit
Committee are to make recommendations to the board of directors regarding the
engagement of Cotton Valley's independent accountants and to review with
management and the independent accountants Cotton Valley's financial statements,
basic accounting and financial policies and practices, audit scope and
competency of accounting personnel. Members of the Audit Committee are appointed
annually by the board of directors and serve at the discretion of the board of
directors until their successors are appointed or their earlier resignation or
removal.

Compensation Committee

Cotton Valley's board of directors has established a Compensation
Committee to be comprised entirely of independent directors. The functions of
the Compensation Committee are to review and recommend to the board of directors
the compensation, stock options and employment benefits of all officers of
Cotton Valley, to administer Cotton Valley's employee stock option plan, to fix
the terms of other employee benefit arrangements and to make awards under such
arrangements. Members of the Compensation Committee are appointed annually by
the board of directors and serve at the discretion of the board of directors
until their successors are appointed or their earlier resignation or removal.

Director Compensation

Directors who are not Cotton Valley employees receive $500 per meeting of
the board and $500 per committee meeting not held on the same date as a board
meeting. Directors are permitted to accept stock in lieu of cash. Employee
directors receive no extra compensation for service on the board.

<PAGE>

Executive Compensation

The following table sets forth the compensation paid or to be paid to
Cotton Valley's executive officers, directly or indirectly, for services
rendered in all capacities for the period from inception to June 30, 1995, and
fiscal 1996:

SUMMARY COMPENSATION TABLE

Annual Compensation(1)
Name and Principal Position Year Salary Other Annual
Compensation
Eugene A. Soltero, Chairman of the 1996 $115,000 $0
Board and Chief Executive Officer 1995 $25,000 $0

James E. Hogue, President and Chief 1996 $115,000 $0
Operating Officer 1995 $25,000 $0

Peter Lucas, Senior Vice President 1996 $101,500 $0
and Chief Financial Officer 1995 $0 $0

C. Ronald Burden, Senior Vice 1996 $22,000 $0
President of Exploration 1995 $0 $0
- - - - --------------------------
(1) Certain of Cotton Valley's executive officers receive personal benefits in
addition to salary. The aggregate amounts of these benefits, however, do
not exceed the lesser of $50,000 or 10% of the total annual salary reported
for the executives.

Cotton Valley does not have employment contracts with any of its executive
officers.

The following table sets forth information regarding options granted to
executive officers under Cotton Valley's employee stock option plan in fiscal
1996:

Option Grants in Last Fiscal Year
(Individual Grants)
<TABLE>
<S> <C> <C> <C> <C>

Number of Percent of Total
Name ecurities(1) Underlying Options Granted to Exercise or Expiration
S Options Granted Employees in Fiscal Year Base Price Date
Eugene A. Soltero 200,000 25.0% $1.83 July 1, 2000
James E. Hogue 200,000 25.0% $1.83 July 1, 2000
Peter Lucas 200,000 25.0% $1.83 July 1, 2000
C. Ronald Burden 200,000 25.0% $1.83 July 1, 2000
</TABLE>

----------------------
(1) Shares of common stock

The following table sets forth information regarding the value of
unexercised options held by executive officers as of June 30, 1996. No options
were exercised during fiscal 1996.

<PAGE>

Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values Value of
Number of Securities(1) Underlying Unexercised In-the-Money
Unexercised Options at FY-End Options at FY-End
Name Exercisable/Unexercisable Exercisable/Unexercisable
- - - - ---- ------------------------- -------------------------
Eugene A. Soltero 200,000/0 $0/$0
James E. Hogue 200,000/0 $0/$0
Peter Lucas 200,000/0 $0/$0
C. Ronald Burden 200,000/0 $0/$0

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In February 1995, Cotton Valley issued a total of 1,840,001 shares to
Eugene A. Soltero and James E. Hogue for pre-incorporation services to Cotton
Valley. In December 1995, Cotton Valley issued an additional 80,000 shares of
common stock each to Eugene A. Soltero and James E. Hogue for pre-incorporation
services. In December 1995, Cotton Valley issued 150,000 shares of common stock
each to Peter Lucas and C. Ronald Burden for post-incorporation services to
Cotton Valley.

During the year ended June 30, 1996, Cotton Valley granted to senior
employees options that enable the employees to purchase 800,000 common shares of
Cotton Valley for $1.83 per share until July 1, 2000.

During the years ended June 30, 1996 and 1995, Cotton Valley paid
management fees to two corporations controlled by senior officers of Cotton
Valley, aggregating $160,000 and $50,000, respectively. In addition, Cotton
Valley has received advances from these two companies which total $171,709 at
June 30, 1996. The advances are unsecured and without interest and are payable
after June 30, 1997.

The foregoing transactions were on no less favorable terms than could have
been obtained from unaffiliated third parties. Any future transactions between
Cotton Valley and its affiliates will be approved by a majority of disinterested
directors and will be on terms no less favorable to Cotton Valley than those
which could be obtained from unrelated third parties.

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding beneficial
ownership of Cotton Valley's common stock as of December 31, 1996, and as
adjusted to reflect the sale of Units in this offering, by (i) each person who
"beneficially" owns more than 5% of all outstanding shares of common stock, (ii)
each Cotton Valley director and executive officer, and (iii) all directors and
executive officers of Cotton Valley as a group. Except as otherwise indicated,
all persons listed below have (i) sole voting power and investment power with
respect to their common stock except to the extent that authority is shared by
spouses under applicable law, and (ii) record and beneficial ownership of their
shares. Percentages in the table "After This Offering" do not assume exercise of
Warrants.

<PAGE>

Amount and Nature of Percentage of Outstanding
Name Beneficial Ownership Common Stock
Currently After This Offering
Eugene A. Soltero (1) 2,955,199 (4) 27.8% 22.5%
James E. Hogue (1) 2,985,199 (5) 27.9% 22.6%
Peter Lucas (1) 350,000 (6) 3.3% 2.7%
C. Ronald Burden (1) 390,000 (7) 3.7% 3.0%
Wayne T. Egan (2) 50,000 (8) 0.5% 0.4%
Michael Kamis (3) 50,000 (8) 0.5% 0.4%
Richard J. Lachcik (2) 50,000 (8) 0.5% 0.4%
All directors and executive officers
as a group (seven persons) 6,830,398 (9) 69.1% 48.8%

Royal Trust Corporation (10) 1,600,000 (10) 14.7% 11.9%
Liviakis Financial Communications, 1,666,666 (11) 14.4% 11.8%
Inc.(11)
</TABLE>

- - - - ---------------------------

(1) The address of Messrs. Soltero, Hogue, Lucas and Burden is 8350 North
Central Expressway, Suite M2030, Dallas, Texas 75206.

(2) The address of Messrs. Egan and Lachcik is Suite 1600, 2 First Canadian
Place, Toronto, Ontario, Canada M5X 1J5

(3) The address of Mr. Kamis is Suite 700, 816-8 Avenue SW, Calgary, Alberta,
Canada T2P 3P2.

(4) Includes 200,000 shares of common stock subject to an employee stock option
and the following shares, beneficial ownership of which is disclaimed:
710,000 shares of common stock owned by the Soltero Family Limited
Partnership, 256,000 shares of common stock and 83,333 warrants owned by
Mr. Soltero's wife and 1,640,866 held as attorney under a voting trust
agreement. See "Principal Shareholders--Voting Trust Agreement."

(5) Includes 200,000 shares of common stock subject to an employee stock option
and the following shares, beneficial ownership of which is disclaimed:
740,000 shares of common stock owned by the Hogue Family Limited
Partnership, 241,000 shares of common stock and 83,333 warrants held by Mr.
Hogue's wife and 1,640,866 held as attorney under a voting trust agreement.
See "Principal Shareholders--Voting Trust Agreement."

(6) Includes 200,000 shares of common stock subject to an employee stock option
and 75,000 shares owned by Mr. Lucas' wife, beneficial ownership of which
is disclaimed.

(7) Includes 200,000 shares of common stock subject to an employee stock
option.

(8) Includes 50,000 shares of common stock subject to an employee stock option.

(9) Includes 1,116,666 shares subject to options or warrants and 3,281,732 held
as attorney under a voting trust agreement.

(10) Includes 500,000 shares subject to warrants. The address of Royal Trust
Corporation Inc. is Royal Bank Plaza, 200 Bay Street, Toronto, Ontario,
Canada M5J 2J5.

(11) Includes 900,000 shares to be issued for services, 200,000 shares subject
to a warrant, and the following shares, beneficial ownership of which is
disclaimed: 25,000 shares and 66,666 warrants owned by an officer of
Liviakis. The address of Liviakis Financial Communications, Inc. Is 2420
'K' Street, Sacramento, CA 95816.

Liviakis

Cotton Valley entered into an agreement with Liviakis Financial
Communications, Inc. of Sacramento, California ("Liviakis") to assist and
consult with Cotton Valley in matters concerning corporate finance and to
provide investor communications and public relations services. In consideration
of Liviakis' services, Cotton Valley will sell a total of 500,000 shares of its
common stock to Liviakis and an officer of Liviakis for $.75 per share and issue
1,490,000 shares of its common stock to Liviakis for services. Cotton Valley
also granted Liviakis and an officer of Liviakis warrants to purchase 500,000
shares of its common stock from January 2, 1998, until November 8, 2001, at $.80
per share.

<PAGE>

Voting Trust Agreement

Unaffiliated parties that transferred their interests in the Texas and
Alabama properties to Cotton Valley in exchange for securities provided a Power
of Attorney to Eugene A. Soltero and James E. Hogue to vote 3,281,732 shares of
common stock held by such property contributors in the attorneys' discretion
between January 1, 1996, and January 1, 2001. Each property contributor may
transfer to unrelated third parties its common stock of Cotton Valley, subject
to the Voting Trust Agreement, at any time. The Power of Attorney provided by
each of the property contributors to Messrs. Soltero and Hogue expires with
respect to the common stock transferred by any property contributor.

DESCRIPTION OF SECURITIES

General

Cotton Valley is authorized to issue an unlimited number of shares of
common stock, without par value, and an unlimited number of shares of preferred
stock, without par value, issuable in series. As of the date of this prospectus,
Cotton Valley's issued and outstanding capital securities consist of 10,404,901
shares of common stock and 4,969,220 options and warrants to acquire common
stock (including 1,990,000 shares of common stock to be issued to Liviakis
Financial Communications, Inc. for services). After giving effect to this
offering, the issued and outstanding capital stock of Cotton Valley will consist
of 10,404,901 shares of common stock, 1,250,000 Units, 2,500,000 shares of
Common Stock and 2,500,000 Warrants underlying the Units, 980,000 employee stock
options and 1,999,220 options and warrants issued in Canadian financings. Cotton
Valley has also agreed to issue 1,990,000 shares of common stock in connection
with a financial consulting contract. In addition, the Underwriters will be
issued warrants to purchase 125,000 Units at a price equal to 120% of the
initial public offering price per Unit. See "Principal Shareholders",
"Description of Securities--Other Options and Warrants," "Underwriting" and note
5 of Notes to Financial Statements.

No United States market currently exists for any of the Securities. Cotton
Valley intends to apply for listing of the Securities on the Stock Exchange.

Units

Each Unit consists of two shares of Common Stock and two Warrants. The
Common Stock and the Warrants may not be traded separately until ___________,
unless separated earlier upon three days' prior written notice to Cotton Valley
from the Representative.

Common Stock

Holders of common stock are entitled to one vote per share on all matters
submitted to a vote of shareholders. They are entitled to receive dividends when
and as declared by the board of directors out of legally available funds and to
share ratably in the assets of Cotton Valley legally available for distribution
upon liquidation, dissolution or winding up.

Holders of common stock do not have subscription, redemption or conversion
rights, nor do they have any preemptive rights. The common stock underlying the
Units offered by this prospectus will be, when issued and paid for, fully paid
and nonassessable.

Holders of common stock do not have cumulative voting rights, which means
that the holders of more than half of all voting rights with respect to common
stock and Preferred Stock can elect all of Cotton Valley's directors. The board
of directors is empowered to fill any vacancies on the board of directors
created by resignations, subject to quorum requirements.

All shareholder action is taken by vote of a majority of voting shares of
the capital stock of Cotton Valley present at a meeting of shareholders at which
a quorum (a majority of the issued and outstanding shares of the voting capital
stock) is present in person or by proxy. Directors are elected by a plurality
vote.

<PAGE>

For certain fundamental changes, the corporate legislation under which
Cotton Valley was formed may require each class of outstanding stock to vote
separately.

Cotton Valley's common stock began trading through The Canadian Dealing
Network on June 24, 1996, under the symbol "CVZC." From June 24, 1996, through
December 31, 1996, the following table sets forth the high and low bid
information for Cotton Valley's common stock in Canadian Dollars as reported on
The Canadian Dealing Network. The information in the table reflects inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.

1996 High Low

June 24-30 $2.80 $2.50
July 1-September 30 $2.60 $1.20
October 1-December 31 $1.90 $1.00

As of December 31, 1996, Cotton Valley had 1,114 record holders of its
common stock, 214 of whom have United States addresses.

Preferred Stock

Cotton Valley's articles of amalgamation authorize its board of directors
to issue an unlimited number of preferred shares in one or more series and to
fix the rights, priorities, preferences, qualifications, limitations and
restrictions, including the dividend rates, conversion rates, voting rights,
terms of redemption, liquidation preferences and the number of shares
constituting any terms of the designation of such series, without any further
vote or action by the shareholders. Issuing preferred shares could decrease the
amount of earnings and assets available for distribution to holders of common
stock or adversely affect the rights and powers, including voting rights, of the
holders of the common stock.

Cotton Valley has no present plans to issue any preferred stock. Pursuant
to Policy 5.2 issued by the Ontario Securities Commission, Cotton Valley may not
issue any preferred stock without the advance written consent of the Ontario
Securities Commission.

Warrants

Each Warrant entitles the holder to purchase one share of common stock for
$____ per share until ___________, 1998. The Warrants are not immediately
exercisable and are not transferable separately from the Common Stock until
________________.

The Warrants do not confer upon the holder any voting, dividend or other
rights of a stockholder of Cotton Valley.

The Warrants are subject to redemption by Cotton Valley after _______ from
the date hereof, upon 30 days written notice, at a price of $0.01 per Warrant
provided that the closing sale or bid price per share of Cotton Valley common
stock equals or exceeds $______ per share for 20 of 30 consecutive trading days
ending within 15 days of the date notice of redemption is given.

Cotton Valley must have a currently effective registration statement on
file with the Securities and Exchange Commission in order for a Warrant holder
to be able to exercise his Warrants. Cotton Valley will endeavor to maintain
such current effective registration. Necessarily there can be no assurance that
Cotton Valley will, at all times during the life of the Warrants, be able to
maintain such registration, and in the event it is unable to do so, the Warrants
will not then be exercisable. Additionally, the exercise of the warrants is
subject to the requirement that the Common Stock issuable upon exercise be
registered or qualified for sale under applicable state securities laws in the
states where Warrant holders reside. There can be no assurance that Cotton
Valley will be able to comply with applicable state laws where all Warrant
holders reside.

<PAGE>

Other Options and Warrants

Employee Stock Options. Cotton Valley is authorized to issue shares of
common stock under its employee stock option plan to employees, officers,
directors, consultants and other service providers, provided that insiders must
not in aggregate hold options exceeding 10% of the outstanding shares. As of the
date of this prospectus, options have been granted to acquire a total of 980,000
shares for $1.83 per share. These options expire in 1999 and 2000.

Canadian Financings. In connection with financing activities completed in
Canada and the acquisition of Arjon, Cotton Valley granted options and warrants
as reflected in the table below. At December 31, 1996, 1,999,220 options or
warrants were outstanding. Each option or warrant entitles the holder to
purchase one share of common stock at the prices set forth in the table.

Number Exercise Price Cdn $ Exercise Price US $ Expiration Date
------ -------------------- ------------------- ---------------
1,340,724 $2.75 $2.00 December 31, 1997
125,000 $2.25 $1.64 April 30, 1998
98,421 $2.25 $1.64 December 31, 1997
37,741 $2.02 $1.48 August 31, 1998
30,668 $0.66 $0.48 December 31, 1998
366,666 $1.00 $0.73 December 31, 1999

Liviakis

In connection with a financial consulting agreement, the Company granted
warrants to Liviakis Financial Communications, Inc. of Sacramento, California to
purchase 500,000 shares of common stock for $.80 per share from January 2, 1998
until November 7, 2001.

Transfer Agent and Registrar

The transfer agent and registrar for Cotton Valley's common stock is
Equity Transfer Services Inc., Toronto, Ontario, Canada. Cotton Valley intends
to appoint Continental Stock Transfer and Trust Company of Jersey City, New
Jersey, as United States transfer agent.

SECURITIES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, 10,404,901 shares of common stock will
be outstanding. All shares sold in this offering will be freely transferable
without restriction or further registration under the Securities Act, except
shares purchased by an affiliate (in general, a person who is in a control
relationship with Cotton Valley) which will be subject to the limitations of
Rule 144 promulgated under the Securities Act. 9,204,318 shares of common stock
are registered on Form 20-F and currently eligible for sale without restriction,
other than shares held by affiliates. Subject to the limitations of Rule 144,
restricted securities will be freely transferable upon expiration of the
applicable two-year holding period and other provisions. In addition, Cotton
Valley has granted 3,479,220 warrants or options to purchase common stock. See
"Capitalization," "Management" and "Principal Shareholders."

Under Rule 144 as currently in effect, a person (or persons whose shares
are aggregated with those of others) whose restricted shares have been fully
paid for and meet the rule's two-year holding provisions, including persons who
may be deemed affiliates of Cotton Valley, may sell restricted securities in
brokers' transactions or directly to market makers, provided the number of
shares sold in any three-month period is not more than the greater of 1% of the
total shares of common stock then outstanding (approximately 100,000 shares of
common stock immediately after this offering) or the average weekly trading
volume for the four calendar week period immediately prior to each such sale.

<PAGE>

After restricted securities have been fully paid for and held for three years,
restricted securities may be sold by persons who are not affiliates of Cotton
Valley without regard to volume limitations. Restricted securities held by
affiliates must continue, even after the three-year holding period, to be sold
in brokers' transactions or directly to market makers, subject to the volume
limitations described above.

Prior to this offering, no public market has existed for any of the
Securities in the United States. No predictions can be made as to the effect, if
any, that market sales of shares or the availability of shares for sale will
have on the market price prevailing from time to time. The sale, or availability
for sale, of substantial amounts of common stock in the public market could
adversely affect prevailing market prices.

Cotton Valley intends to file a registration statement under the
Securities Act covering shares of common stock available for issuance under the
employee stock option plan. See "Description of Securities--Other Options and
Warrants--Employee Stock Options." Such registration statement relating to the
employee stock option plan is expected to be filed soon after the date of this
prospectus and will automatically become effective upon filing. As of the date
of this prospectus, 980,000 shares are subject to outstanding options under the
employee stock option plan.

CERTAIN INCOME TAX CONSIDERATIONS

Canadian Federal Income Tax Considerations for United States Residents

The following is a summary of certain of the Canadian federal income tax
considerations which will generally be applicable to holders of common stock
("U.S. residents") who are residents of the United States for the purposes of
the Canada-United States Income Tax Convention (1980) ("the Convention") and are
not residents of Canada for the purposes of the Income Tax Act (Canada) ("the
Canadian Tax Act"), who deal at arm's length with Cotton Valley for the purposes
of the Canadian Tax Act and who do not use or hold and are not deemed to use or
hold such common stock in, or in the course of, carrying on a business in
Canada. This summary is based upon the current provisions of the Canadian Tax
Act and the regulations thereunder, proposed amendments thereto publicly
announced by the Minister of Finance, Canada, prior to the date hereof, and the
provisions of the Convention as in effect on the date hereof.

This summary is of general nature only and is not intended to be legal or
tax advice to any particular U.S. resident. Accordingly, U.S. residents should
consult with their own tax advisors for advice with respect to their own
particular circumstances.

A U.S. resident will not be subject to tax in Canada on any capital gain
realized on a disposition of the Securities unless the value of the Securities
constitutes "taxable Canadian property" of the U.S. resident and the value of
the Securities is derived principally from real property situated in Canada. The
value of these Securities is not derived principally from real property situated
in Canada.

Dividends paid or credited or deemed to be paid or credited to a U.S.
resident in respect of the common stock will generally be subject to Canadian
withholding tax. The Income Tax Act (Canada) requires 25% tax withholding from
any dividends paid or deemed to be paid to non-Canadian shareholders. However,
under the Convention, the rate of Canadian withholding tax which would apply on
dividends paid by Cotton Valley to a resident of the United States is (i) 6%
with respect to dividends paid in 1996 and 5% thereafter if the beneficial owner
of the dividends is a company which owns at least 10% of the voting stock of
Cotton Valley, and (ii) 15% in all other cases.

United States Federal Income Tax Considerations

The following is a general description of the material United States
federal income tax consequences applicable to U.S. holders of the Securities.
The following discussion deals only with Securities held as a capital asset by
U.S. holders. It does not deal with special situations, such as those of foreign
persons, dealers in securities, financial institutions, life insurance
companies, holders whose "functional currency" is not the United States dollar,
or certain "straddle" or hedging transactions. A "U.S. holder" is (i) a citizen
(not resident in Canada pursuant to the convention)

<PAGE>

or resident of the United States, (ii) a corporation created or organized under
the laws of the United States or any state thereof (including the District of
Columbia) or (iii) a person otherwise subject to United States federal income
tax on its worldwide income. Prospective purchasers are urged to consult their
tax advisors regarding the particular tax consequences arising under any state
or local law.

The gross amount of a distribution with respect to common stock will
include the amount of any Canadian federal income tax withheld and will be
includible in gross income as a taxable dividend to the extent of Cotton
Valley's current and accumulated earnings and profits (calculated under United
States tax principles), as a return of capital to the extent in excess of such
earnings and profits and not in excess of the holder's tax basis in the common
stock, and as capital gain to the extent of any balance. Dividends will not be
eligible for the dividends-received deduction. Holders generally will be
entitled, subject to certain limitations, to a credit against their United
States federal income tax for Canadian federal income taxes withheld from such
dividends. Holders may claim a deduction for such taxes if they do not elect to
claim such foreign tax credit.

If a dividend distribution is paid in Canadian dollars, the amount
includible in income will be the United States dollar value, on the date of
receipt, of the Canadian dollar amount distributed. Any subsequent gain or loss
in respect of such Canadian dollars arising from exchange rate fluctuations will
be ordinary income or loss.

The sale of common stock will generally result in the recognition of gain
or loss in an amount equal to the difference between the amount realized on the
sale and the holder's adjusted basis in such common stock. Gain or loss upon the
sale of the common stock will be long-term or short-term capital gain or loss,
depending on whether the common stock has been held for more than one year.

Special rules are applicable to United States persons holding stock in a
"passive foreign investment company" (PFIC), any foreign corporation of which at
least 75% of its gross income for the taxable year is passive income (the
"Income Test") or at least 50% by value of the assets it holds during the
taxable year produce or are held for the production of passive income (the
"Asset Test"). For that purpose, "passive income" includes the excess of gains
over losses from certain commodities transactions, including certain
transactions involving oil and gas. Gains from commodities transactions,
however, are generally excluded from the definition of passive income if
"substantially all" of a merchant's, producer's or handler's business is as an
active merchant, producer or handler of such commodities.

Cotton Valley believes it is not currently and will not become a PFIC.
However, the application of the PFIC provisions of the Internal Revenue Code of
1986, as amended (the "Code"), to oil and gas producers is somewhat unclear.
Therefore, no assurance can be made regarding the PFIC status of Cotton Valley.

If Cotton Valley were a PFIC, a U.S. holder of common stock would be
subject to a special tax regime with respect to certain dividends and with
respect to gain on a disposition of such shares (including a gift or pledge of
shares). Such income would be allocated ratably over the holder's holding period
for the shares, would be taxed, in the year of dividend or disposition, at
ordinary income tax rates (using the highest tax rate in effect for each period
to which the income is allocated), and would be subject to an interest charge
reflecting the deferral of tax from the year to which the income was allocated
to the year of dividend or disposition.

Purchasers of Units are urged to consult their tax advisors regarding the
potential application of the matters described above.

UNDERWRITING

Pursuant to the terms and subject to the conditions contained in the
Underwriting Agreement, Cotton Valley has agreed to sell to the Underwriters
named below (the "Underwriters"), and each of the Underwriters, for whom
National Securities Corporation is acting as Representative, have agreed to
purchase the number of Units set forth opposite their respective names in the
following table.

<PAGE>

Underwriters Number of
Units
National Securities Corporation...............
--------
Total....................................... 1,250,000
=========

The Representative has advised Cotton Valley that the Underwriters propose
to offer the Units to the public at the initial public offering price per Unit
set forth on the cover page of this prospectus and to certain dealers at such
price less a concession of not more than $___ per Unit, none of which will be
reallowed to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representative. No such reduction shall change the amount of proceeds to be
received by Cotton Valley as set forth on the cover page of this prospectus.

Cotton Valley has granted to the Underwriters an option, exercisable
during the 45-day period after the date of this prospectus, to purchase up to
187,500 additional Units to cover over-allotments, if any, at the same price per
Unit as Cotton Valley will receive for the 1,250,000 Units that the Underwriters
have agreed to purchase. To the extent that the Underwriters exercise such
option, the Underwriters will have a firm commitment to purchase approximately
the same percentage of such additional Units that the number of Units to be
purchased by it shown in the above table represents as a percentage of the
1,250,000 Units offered hereby. If purchased, such additional Units will be sold
by the Underwriters on the same terms as those on which the 1,250,000 Units are
being sold.

The holders of _____ shares of common stock have agreed with the
Representative that, for at least two years after the date of this prospectus,
subject to certain limited exceptions, they will not directly or indirectly
sell, offer to sell, contract to sell, pledge, make gifts of, grant an option
for the sale of or otherwise dispose of any shares of common stock, or other
securities convertible into, exercisable for or exchangeable for shares of
common stock, owned directly by such holders or with respect to which they have
the power of disposition, without the prior written consent of the
Representative. All of such shares will be eligible for immediate public sale
following expiration of the lock-up periods, subject to the provisions of Rule
144. See "Shares Eligible for Future Sale."

The Underwriters have the right to offer the Securities offered hereby
only through licensed securities dealers in the United States who are members of
the National Association of Securities Dealers, Inc.("NASD") and may allow such
dealers such portion of its ___ percent (__%) commission as each Underwriter may
determine.

The Underwriters will not confirm sales to any discretionary accounts.

Cotton Valley has agreed to pay the Representative a nonaccountable
expense allowance of 2.5% of the gross amount of the Units sold (_______ upon
the sale of the Units offered, _____ if the over-allotment option is exercised
in full) at the closing of the offering. The Underwriters' expenses in excess
thereof will be paid by the Representative. to the extent that the expenses of
the underwriting are less than that amount, such excess shall be deemed to be
additional compensation to the Underwriters. In the event the offering is
terminated before its successful completion, Cotton Valley may be obligated to
pay the Representative a maximum of $______ on an accountable basis for expenses
incurred by the Representative in connection with the offering.

Underwriters' Warrants

Upon the closing of this offering, Cotton Valley has agreed to sell to the
Underwriters, for nominal consideration, 125,000 warrants (the "Underwriters'
Warrants"). The Underwriters' Warrants are exercisable at 120% of the public
offering price per Unit for a four-year period commencing one year from the date
of this offering. The Underwriters' Warrants may not be sold, transferred,
assigned or hypothecated for a period of one year from the date of this offering

<PAGE>

except to the officers of the Underwriters and their successors and dealers
participating in the offering and/or their partners or officers. The
Underwriters' Warrants will contain antidilution provisions providing for
appropriate adjustment of the number of shares subject to the Warrants under
certain circumstances. The holders of the Underwriters' Warrants have no voting,
dividend or other rights as shareholders of Cotton Valley with respect to shares
underlying the Underwriters' Warrants until the Underwriters' Warrants have been
exercised.

For the term of the Underwriters' Warrants, the holders thereof will be
given the opportunity to profit from a rise in the market value of Cotton
Valley's shares, with a resulting dilution in the interest of other
shareholders. The holders of the Underwriters' Warrants can be expected to
exercise the Underwriters' Warrants at a time when Cotton Valley would, in all
likelihood, be able to obtain needed capital by an offering of its unissued
shares on terms more favorable to Cotton Valley than those provided by the
Underwriters' Warrants. Such facts may adversely affect the terms on which
Cotton Valley can obtain additional financing. Any profit realized by the
Underwriters on the sale of the Underwriters' Warrants or shares issuable upon
exercise of the Underwriters' Warrants may be deemed additional underwriting
compensation.

Indemnification

The Underwriting Agreement provides for indemnification between Cotton
Valley and the Underwriters against certain civil liabilities, including
liabilities under the Securities Act. In addition, the Underwriters' Warrants
provide for indemnification among Cotton Valley and the holders of the
Underwriters' Warrants and underlying shares against certain civil liabilities,
including liabilities under the Securities Act and the Securities Exchange Act
of 1934.

Determination of Offering Price

The initial public offering price was determined by negotiation between
Cotton Valley and the Representative. The factors considered in determining the
public offering price include Cotton Valley's business potential and earnings
prospects, the oil and gas industry and the general condition of the securities
markets at the time of the offering. The offering price does not bear any
relationship to Cotton Valley's assets, revenue, book value, net worth or other
recognized objective criteria of value. The number of shares of common stock
into which Preferred Stock may be converted, and the exercise price of the
Warrants, was determined by negotiation between Cotton Valley and the
Representative.

American Stock Exchange

Cotton Valley intends to apply to list the Securities on the American
Stock Exchange. No assurance can be given that the Securities will be listed,
that a market for the Securities will develop or, if it does develop, that it
will be maintained.

LIMITATIONS ON DIRECTOR LIABILITY

Under the securities law of the Province of Ontario, a right of action is
given for damages for a "misrepresentation" contained in a prospectus at the
time of purchase against every director of the issuer at the time the prospectus
or its later amendment was filed. A misrepresentation is defined to mean an
untrue statement of material fact or an omission to state a material fact that
is required to be stated or that is necessary to make a statement not misleading
in the light of the circumstances in which it was made. Every person who
purchases the security offered by the prospectus during the period of
distribution is deemed to have relied upon the misrepresentation if it was a
misrepresentation at the time of purchase.

The general defense available for directors to such an action is proof by
the director that the purchaser purchased the securities with knowledge of the
misrepresentation. In addition, specific defenses are available to directors
provided a director can demonstrate that the prospectus was filed without the
director's knowledge and consent and reasonable general notice was given on
becoming aware of the filing. In addition, a director may also avoid liability
for a misrepresentation in a prospectus if the director did not believe, as to
the non-expertised portion of the prospectus, that

<PAGE>

a representation is false or misleading, and if the director conducted a
reasonable investigation so as to provide reasonable grounds for belief that
there had been no misrepresentation (the due diligence defense).

A director of Cotton Valley is also subject to potential liability under
the Ontario Business Corporations Act ("OBCA"). The OBCA requires every director
of a corporation in exercising the director's power and discharging the
director's duties to act honestly and in good faith with a view to the best
interests of the corporation. In addition, every director of a corporation is
required in exercising his or her powers and discharging his or her duties to
exercise the care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances. Failure to meet these duties will result
in a director becoming liable for actions taken on behalf of the corporation. A
director may be indemnified by a corporation against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a judgment,
reasonably incurred by the director in respect of any civil, criminal or
administrative action or proceeding to which the director is made a party by
reason of being or having been a director of the corporation, if the director
acted honestly and in good faith with a view to the best interests of the
corporation.

LEGAL MATTERS

The validity of the issuance of the Securities offered hereby will be
passed upon for Cotton Valley by Weir & Foulds, 2 First Canadian Place, Toronto,
Ontario, Canada M5X 1J5. Certain legal matters will be passed upon for the
Underwriters by Maurice J. Bates, L.L.C.

EXPERTS

The financial statements of Cotton Valley at June 30, 1996, and for the
period then ended appearing in this prospectus have been audited by Hein +
Associates, LLP, independent certified public accountants, as set forth in their
report appearing elsewhere in this prospectus, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.

The reserve report of K&A Energy Consultants, Inc. of the proved reserves
and future net revenues attributable to Cotton Valley's properties in the
Cheneyboro Field and the reserve report of Wendell & Associates of the proved
reserves and projected estimated future production and revenue for the Movico
Field included in this Prospectus as Appendix A-1 and Appendix A-2,
respectively, have been so included in reliance upon the authority of such firms
as experts in petroleum engineering.

<PAGE>

GLOSSARY

In this prospectus, the following terms have the meanings indicated:

API - The density (weight per volume) of crude oil on a scale adopted by the
American Petroleum Institute. On the API scale, the higher the density the
lighter the oil.

3-D Seismic - The method by which a three-dimensional image of the earth's
subsurface is created through the interpretation of collected seismic data. 3-D
seismic surveys allow for a more detailed understanding of the subsurface than
do conventional seismic surveys and contribute significantly to field appraisal,
development and production.

Bbl - Barrels of oil.

Commercial Quantities Well - A well that will make a profit over the cost of
operating the well.

Completion - The casing, perforation, stimulation and installation of permanent
equipment for the production of oil and gas. Completion costs are the costs
incurred for the services, equipment and labor required therefor.

Development Well - A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.

Exploratory Well - A well drilled to find a new reservoir in a field previously
found to be productive of oil and gas in another reservoir, or to extend a known
reservoir. Generally, an exploratory well is any well that is not a development
well, a service well or a stratigraphic test well as defined below.

Gas Well - A well capable of producing gas as its primary product.

Gross Acres or Gross Wells - The total acres or well, as the case may be, in
which a working interest is owned.

Injection Well - A well used to inject a gas or liquid into a reservoir with a
view to enhance or replace the natural reservoir drive to increase or maintain
production from nearby productive wells.

Mcf - One thousand cubic feet of gas.

Net Acres - Calculated by multiplying the number of gross acres in which a party
has an interest by the fractional interest of the party in each such acre.

Net Revenue Interest - The share of revenues from oil an/or gas production net
of all other interest burdening the gross revenues such as landowner's royalty
and overriding royalties, etc.

Oil and Gas Lease - Contractual right to enter onto lands to explore for,
develop and produce oil and gas. An oil and gas lease is real property.

Oil Well - well capable of producing oil as its primary product.

Producer or Productive Well - A well that is producing oil or gas or that is
capable of production.

Proved Reserves - The estimated quantities of crude oil and gas, condensate and
gas liquids recoverable in future years from known reservoirs under existing
economic and operating conditions, i.e., prices and costs as of the date the
estimate is made. Prices include consideration of changes in existing prices
provided only by contractual arrangements, but not on escalations based upon
future conditions.

(I) Reservoirs are considered proved if economic produceability is
supported by either actual production or conclusive formation test.
The area of a reservoir considered proved includes (A) that portion
delineated

<PAGE>

by drilling and defined by gas-oil and/or oil-water contacts, if any;
and (B) the immediately adjoining portions not yet drilled, but which
can be reasonably judged as economically productive on the basis of
available geological and engineering data. In the absence of
information on fluid contacts, the lowest known structural occurrence
of hydrocarbons controls the lower proved limit of the reservoir.

(ii) Reserves which can be produced economically through application of
improved recovery techniques such as fluid injection are included in
the "proved" classification when successful testing by a pilot
project, or the operation of an installed program in the reservoir,
provides support for the engineering analysis on which the project or
program was based.

(iii) Estimates of proved reserves do not include (A) oil that may become
available from known reservoirs but is classified separately as
"indicated additional reserves", (B) crude oil, gas and gas liquids,
the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics or economic
factors, (C) crude oil, gas and gas liquids that may occur in
undrilled prospects or (D) crude oil, gas and gas liquids that may be
recovered from oil shales, coal, gilsonite and other such sources.

Proved Developed Reserves - Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the application of fluid injection
or other improved recovery techniques for supplementing the natural forces and
mechanisms of primary recovery are included as "proved developed reserves" only
after testing by a pilot project or after the operation of an installed program
has confirmed through production response that increased recovery will be
achieved.

Proved Undeveloped Reserves - Reserves that are expected to be recovered from
new wells on undrilled acreage or from existing wells where a relatively major
expenditure is required for recompletion. Reserves on undrilled acreage are
limited to those drilling units offsetting productive units that are reasonably
certain of production when drilled. Proved reserves for other undrilled units
are claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Estimates for
proved undeveloped reserves are not attributable to any acreage for which an
application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective by actual tests
in the area and in the same reservoir.

Undeveloped Acreage - Oil and gas acreage (including, in applicable instances,
rights in one or more horizons which may be penetrated by existing well bores,
but which have not been tested) to which Proved Reserves have not been assigned
by petroleum engineers.

Water Flood - A method of injecting water into a reservoir to enhance or replace
the natural reservoir drive.

Working Interest - The operating interest in an Oil and Gas Lease which gives
the owner the right to drill, produce and conduct operating activities on the
property and a share of production, subject to all royalties, overriding
royalties and other burdens and to all costs of exploration, development and
operations and all risks in connection therewith.

<PAGE>

INDEPENDENT AUDITOR'S REPORT

Board of Directors
Cotton Valley Resources Corporation
(Formerly Cotton Valley Energy Limited)
Dallas, Texas

We have audited the consolidated balance sheets of Cotton Valley Resources
Corporation (formerly Cotton Valley Energy Limited) (a development stage
company) as of June 30, 1996, and the consolidated statements of operations,
stockholders' equity and cash flows for the year ended June 30, 1996, the period
from February 15, 1995 (date of incorporation) to June 30, 1995 and the period
from February 15, 1995 to June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
June 30, 1996, and the results of its operations and cash flows for the year
ended June 30, 1996, the period from February 15, 1995 to June 30, 1995 and the
period from February 15, 1995 to June 30, 1996 in accordance with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is in the development stage and has had no
significant revenues from operations, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

HEIN + ASSOCIATES LLP

Dallas, Texas
November 1, 1996

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

CONSOLIDATED BALANCE SHEETS
(Expressed in U. S. Dollars)

June 30, 1996

ASSETS

CURRENT ASSET - Cash ............................... $ 803,070

PROVED OIL AND GAS PROPERTIES (full cost method) .. 11,140,724

OFFICE EQUIPMENT, net of accumulated depreciation of
$1,684 35,536
-------------

Total Assets $ 11,979,330
==============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITY - Accounts payable $ 516,689

LONG-TERM DEBT 586,049

ADVANCES FROM RELATED PARTIES 171,709

DEFERRED INCOME TAXES 1,588,000

STOCKHOLDERS' EQUITY:
Preferred stock, no par value, authorized-unlimited,
issued - none -
Common stock, no par value, authorized-unlimited,
issued - 9,191,596 shares 9,879,160
Deficit accumulated in development stage (762,277)
Total Stockholders' Equity 9,116,883

Total Liabilities and Stockholders' Equity $ 11,979,330
==============

See accompanying notes to these financial statements

-F2-

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U. S. Dollars)

PERIOD FROM PERIOD FROM
FEBRUARY 15, FEBRUARY 15,
YEAR ENDED 1995 TO 1995 TO
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996
------------- ------------- -----------

REVENUE - Interest income ......... $ 5,386 $ -- $ 5,386

EXPENSES:
General and administrative ..... 965,776 74,917 1,040,693
Interest ....................... 138,970 -- 138,970
----------- ----------- -----------
Total Expenses .......... 1,104,746 74,917 1,179,663
----------- ----------- -----------

LOSS BEFORE INCOME TAXES .......... (1,099,360) (74,917) (1,174,277)

INCOME TAX BENEFIT ................ 387,000 25,000 412,000
----------- ----------- -----------

NET LOSS .......................... $ (712,360) $ (49,917) $ (762,277)
=========== =========== ===========

NET LOSS PER SHARE $ (.06) $ -
========== ==========

WEIGHTED AVERAGE SHARES 11,403,000 10,655,000
============ ===========

See accompanying notes to these financial statements

-F3-

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1996
(Expressed in U. S. Dollars)
<TABLE>
<S> <C> <C> <C> <C> <C>

DEFICIT
ACCUMULATED
COMMON STOCK SPECIAL SHARES IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT STAGE TOTAL
Issued upon incorporation to officers
($.003 per share) ................................ 560,001 $ 1,401 2,100,000 $ 8 $-- $ 1,409
Issued March 10, 1995 for the potential
acquisition of subsequently
abandoned oil and gas properties
(621,600 shares issued and 310,800
shares canceled
- $.003 per share) (Note 5) ...................... 310,800 777 -- -- -- 777
Issued March 10, 1995 for the acquisition
of oil and gas properties ($1.82
per share) ...................................... 3,875,957 7,072,914 -- -- -- 7,072,914
Issued June 1, 1995 for cash ($1.00 per share) ........ 10,000 10,000 -- -- -- 10,000
Net loss .............................................. -- -- -- -- (49,917) (49,917)
------ --------- -----------
BALANCES, June 30, 1995 .............................. 4,756,758 7,085,092 2,100,000 8 (49,917) 7,035,183

Issued July - December 1995 in connection with notes
payable ($1.49 per share) ......................... 107,258 160,008 -- -- -- 160,008
Repayment and conversion to equity of notes payable,
net of amortized discount .......................... -- (72,000) -- -- -- (72,000)
Issued December 29, 1995 to officers upon conversion
of special shares ($.04 per share) ................. 1,440,000 5,840 (2,100,000) (8) -- 5,832
Issued December 29, 1995 as advance for stock offering
costs ($1.49 per share) ............................ 340,000 506,409 -- -- -- 506,409
Issued December 29, 1995 to officers for services
($1.49 per share) ................................. 300,000 446,950 -- -- -- 446,950
Sale of shares for cash during April - June 1996 ($1.64
per share) ......................................... 1,272,500 2,089,872 -- -- -- 2,089,872
Issued June 14, 1996 upon conversion of debentures
($1.48 per share) .................................. 288,529 426,474 -- -- -- 426,474
Issued June 14, 1996 to former Arjon shareholders
($.21 per share) ................................... 686,551 146,300 -- -- -- 146,300
Share issuance costs .................................. -- (915,785) -- -- -- (915,785)
Net loss .............................................. -- -- -- -- (712,360) (712,360)
------ --------- -----------
BALANCES, June 30, 1996 .............................. 9,191,596 $ 9,879,160 -- $ -- $(762,277) $ 9,116,883
=========== =========== =========== ====== ========= ===========
</TABLE>

See accompanying notes to these financial statements
-F4-

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U. S. Dollars)
<TABLE>
<S> <C> <C> <C>

PERIOD FROM PERIOD FROM
FEBRUARY 15, FEBRUARY 15,
YEAR ENDED 1995 TO 1995 TO
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (712,360) $ (49,917) $ (762,277)
Adjustments to reconcile net loss to net cash used by
operating activities:
Deferred income tax benefit (387,000) ( 25,000) (412,000)
Amortization of debt discount 88,000 - 88,000
Depreciation 1,683 - 1,683
Common stock issued for services 446,950 2,181 449,131

Change in accounts payable 286,689 - 286,689
Other 5,843 - 5,843
---------------- ------------------- ---------------
Net cash used by operating activities (270,195) (72,736) (342,931)

CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties 107,974 63,736 171,710
Sale of common stock 2,089,872 10,000 2,099,872
Issuance of convertible debentures 426,474 - 426,474
Issuance of note payable subsequently converted into
convertible debentures 146,300 - 146,300
Costs related to sale of stock and debentures (409,376) - (409,376)
Issuance of note payable 250,000 - 250,000
Repayment of note payable (250,000) - (250,000)
--------------- ------------------- -------------
Net cash provided by financing activities 2,361,244 73,736 2,434,980

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (751,759) - (751,759)
Payment of liability related to oil and gas property (500,000) - (500,000)
Acquisition of office equipment (37,220) - (37,220)
---------------- -------------------- ---------------
Net cash used by investing activities (1,288,979) - ( 1,288,979)
-------------- -------------------- -------------

INCREASE IN CASH 802,070 1,000 803,070

CASH - beginning of period 1,000 - -
------------------ ---------------------------------

CASH - end of year period $ 803,070 $ 1,000 $ 803,070
--------------- ---------------- -------------

SUPPLEMENTAL INFORMATION
Cash paid for interest $ 37,010 $ - $ 37,010
Liabilities incurred in acquisition of oil and gas properties 586,049 500,000 1,086,049
Conversion of debentures to common stock 426,474 - 426,474
Retirement of debenture upon merger with Arjon 146,300 - 146,300
Oil and gas property option acquired with payable - 230,000 230,000
Oil and gas properties acquired with common stock - 7,072,914 7,072,914
Issuance of common stock for stock offering costs 506,409 - 506,409
</TABLE>

See accompanying notes to these financial statements
-F5-

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)

1. NATURE OF OPERATIONS

The Company was incorporated under the laws of Ontario as Cotton Valley
Energy Limited (CVEL) on February 15, 1995. It acquired all of the
shares of Cotton Valley Energy Corporation (CVEC), a Nevada
corporation, on June 30, 1995 in a one-for-one share and warrant
exchange. CVEC was also incorporated in February 1995. CVEL had no
substantive activity, so the acquisition of CVEC was accounted for as a
recapitalization of CVEL with the net assets of CVEC. These
consolidated financial statements have been prepared as if the Company
had acquired CVEC at the Company's inception.

The Company also owns 100% of the outstanding shares of CV Trading Co.,
a Nevada corporation that was formed to conduct oil and gas trading
activities, and Cotton Valley Operating Company, a Texas corporation
formed to operate oil and gas wells. Neither of the subsidiaries
commenced operations prior to July 1, 1996.
Intercompany accounts and transactions are eliminated in consolidation.

On June 14, 1996, the Company merged with Arjon Enterprises, Inc.
(Arjon), an Ontario corporation and reporting issuer in Ontario. As a
result of that merger the company's name was changed to Cotton Valley
Resources Corporation and a new capital structure was established.
Transactions in the accompanying financial statements are reflected as
if the resulting capital structure was in existence since inception.
Arjon had no business activities and its only asset consisted of
convertible debentures of the Company in the principal amount of
$146,300. The Company accounted for the transaction as an issuance of
stock for the net monetary assets of Arjon accompanied by a
recapitalization. Former Arjon shareholders received 686,551 common
shares (representing approximately 7.5% of the then outstanding common
shares) of the Company.

The Company is in the development stage and had no revenues from
operations through June 30, 1996. The Company's planned principal
business activity is to acquire, explore, and develop oil and gas
properties. The Company also intends to develop natural gas
transportation and marketing projects.

The recoverability of amounts capitalized for oil and gas properties is
dependent upon the identification of economically recoverable reserves,
together with obtaining the necessary financing to exploit such
reserves and the achievement of profitable operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Oil and Gas Properties

The Company follows the full-cost method of accounting for oil and gas
properties. Accordingly, all costs associated with acquisition,
exploration and development of oil and gas reserves, including directly
related overhead costs, are capitalized into a "full-cost pool."

All capitalized costs of oil and gas properties, including the
estimated future costs to develop proved reserves, are amortized on the
unit-of-production method using estimates of proved reserves. Costs
directly associated with the acquisition and evaluation of unproved
properties are excluded from the amortization base until the related
properties are evaluated. Such unproved properties are assessed
periodically and a provision for impairment is made to the full-cost
amortization base when appropriate. Sales of oil and gas properties are
credited to the full-cost pool unless the sale would have a significant
effect on the amortization rate. Abandonments of properties are
accounted for as adjustments to capitalized costs with no loss
recognized.

-F6-

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)

The net capitalized costs are subject to a "ceiling test," which limits
such costs to the aggregate of the estimated preset value of future net
revenues from proved reserves discounted at ten percent based on
current economic and operating conditions.

Revenue Recognition

Revenue from oil and gas production is recognized in the month the oil
or gas is sold.

Office Equipment

Office equipment is recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets, which range from
three to five years.

Foreign Currency Translation

The company's assets and principal activities are in the U.S. and its
functional currency is the U.S. dollar. The effects of exchange rate
changes on transactions denominated in Canadian dollars or other
currencies are charged to operations. Foreign exchange gains or losses
were insignificant for all periods presented.

Income Taxes

The Company applies Statement of Accounting Standards No. 109 (SFAS
109). As required by SFAS 109, income taxes provided are for the tax
effects of transactions reported in the financial statements and
consist of taxes currently due, if any, plus net deferred taxes related
primarily to differences between the basis of assets and liabilities
for financial and income tax reporting. Deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred tax assets include
recognition of operating losses that are available to offset future
taxable income and tax credits that are available to offset future
income taxes. Valuation allowances are recognized to limit recognition
of deferred tax assets where appropriate. Such allowances may be
reversed when circumstances provide evidence that the deferred tax
assets will more likely than not be realized.

Deferred Site Restoration

A provision is established for estimated future costs of site
restoration of oil and gas production interests, including the removal
of production facilities at the end of their useful life. Costs are
based on management's estimates of the anticipated method and extent of
site restoration. The annual charge is determined on the same basis as
the depletion and amortization of the underlying asset.

Net Loss Per Share

Per share information is based on the weighted average number of common
stock and common stock equivalent shares outstanding. As required by
the Securities and Exchange Commission rules, all warrants, options,
and shares issued within a year prior to the initial filing of a
registration statement are assumed to be outstanding for each year
presented for purposes of the loss per share calculation.

-F7-

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)

Cash Flow Statement

For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 - Accounting for
Stock-Based Compensation (SFAS 123), which is effective for periods
beginning after December 15, 1995. SFAS 123 requires that companies
recognize compensation expense for grants of stock, stock options, and
other equity instruments based on fair value. If the grants are to
employees, companies may elect to disclose only the pro forma effect of
such grants on net income and earnings per share in the notes to
financial statements. The Company expects to adopt the provisions of
SFAS 123 in its 1997 fiscal year and to elect the disclosure
alternative for employee grants.

Continuation as a Going Concern

The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. However, the Company is
in the development stage and has had no significant revenues from
operations, which raises substantial doubt about its ability to
continue as a going concern. Management is seeking additional financing
as described in Note 9. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

Use of Estimates

The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the
Company to make estimates and assumptions that affect the amounts
reported in these financial statements and accompanying notes. Actual
results could differ from those estimates. Significant assumptions are
required in the valuation of proved oil and gas reserves, which as
described above may affect the amount at which oil and gas properties
are recorded. It is at least reasonably possible those estimates could
be revised in the near term and those revisions could be material.

3. OIL AND GAS PROPERTIES

Cheneyboro Field

The Company acquired approximately 5,000 acres of oil and gas leases in
the Cheneyboro Field of Navarro County, Texas during fiscal years 1995
and 1996. The Company issued 3,252,533 common shares, granted 406,567
Class A warrants (see Note 5), and paid $500,000 in cash and a
promissory note of $586,049 as consideration. The stock was recorded at
$5,935,281, based on the estimated fair value of the properties. The
Company determined fair value by reference to an independent
engineering firm's reserve report. During the year ended June 30, 1996,
the Company capitalized management fees and salaries of $195,476
directly related to the acquisition and proposed development of the
property, and incurred other development costs of $127,278.

-F8-

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)

Movico Field, Mobile County, Alabama

The Company acquired an option to acquire a one-quarter interest in
1,280 acres of oil and gas leases in the Movico Field of Mobile County,
Alabama in fiscal year 1995. The Company issued 623,424 common shares,
granted 77,928 Class A warrants (see Note 5), and agreed to pay
$230,000 as consideration. The stock was recorded at $1,137,635, based
on the estimated fair value of the properties. The Company determined
fair value by reference to an independent engineering firm's reserve
report. The interest in the leases is to be assigned to the Company
upon payment of the $230,000 which amount is included in accounts
payable in the accompanying balance sheet.

Sword Unit, Offshore Santa Barbara, California

The Company has entered into option agreements to acquire a working
interest in the Sword Unit, Offshore Santa Barbara, California. The
Company has paid $400,000 as of June 30, 1996. To complete the option
and acquire the working interest, the Company must pay $8,000,000 in
cash and $4,000,000 in marketable securities (which may consist of the
Company's common shares) on closing sometime in 1997, and participate
in a $4,000,000 letter of credit to fund development. The option has
been recorded at cost of $400,000, plus the Company's share of
environmental studies of $29,005, for a total of $429,005.

4. LONG-TERM DEBT

The Company has promissory notes payable totaling $586,049 at June 30,
1996 for the unpaid purchase price of the Cheneyboro oil and gas
properties (see Note 3). The notes are collateralized by the properties
and are due July 17, 1997. Interest is payable quarterly at 12%.

5. STOCKHOLDERS' EQUITY

The Company has an unlimited number of preferred shares authorized,
which may be issued in series and include such rights and preferences
as authorized by the board of directors. No shares were outstanding as
of June 30, 1996.

Shortly after incorporation, the Company issued 2,100,000 special
shares for total cash consideration of $2.00 to officers, which were
subsequently exchanged for 1,440,000 common shares of the Company. The
special shares were issued in exchange for preferred stock which had
been issued upon incorporation of CVEC and subsequently cancelled.

In March 1995, the Company entered into an agreement to acquire 1310
net acres of oil and gas leases in Leon County, Texas. The Company
issued 621,600 common shares (of which 310,800 were cancelable by the
Company if it did not complete the transaction) and agreed to pay
$100,000 cash upon the transfer of title to the leases. Due to concerns
that developed during due diligence procedures regarding
transferability of title, the Company did not complete the purchase,
canceled 310,800 common shares and did not pay the $100,000.

In connection with the acquisition of oil and gas properties, including
the abandoned property referred to above, the Company granted 518,345
Class A warrants. In connection with the issuance of notes payable and
debentures, the Company granted 112,390 Class A warrants. The Company
also issued 636,250 Class A

-F9-

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)

warrants in conjunction with a private placement of common shares. Each
Class A warrant is a right to purchase one common share for $2.00 until
December 31, 1997.

Effective January 31, 1996, each 2.5 outstanding shares of the
Company's common stock were consolidated into one share and the
previously authorized unlimited number of special shares were
cancelled. The financial statements reflect the consolidation of common
shares as if it occurred on inception of the Company.

In December 1995, the Company issued a total of 300,000 shares of
common stock to two officers in exchange for services performed from
June 1995 through December 1995. The shares were recorded at $446,950,
which represented the esimated value of the shares.

During the year ended June 30, 1996, the Company granted to senior
employees options that enable the employees to purchase 800,000 common
shares of the Company for $1.83 per share until July 1, 2000. The
Company has granted to the placement agent of the debenture and private
placement offerings three-year options to purchase up to 10% of the
common shares issued upon conversion of the debentures at a price equal
to the conversion price. As a result, the agent has the right to buy
37,741 common shares at $1.48 per share until August 31, 1998; 73,739
common shares at $2.00 per share until December 31, 1997; and 125,000
common shares at $1.64 per share until April 30, 1998.

In conjunction with the merger with Arjon, a total of 431,755 common
shares are issuable to former Arjon shareholders for Arjon warrants in
existence prior to the merger. These shares are issuable as follows:
333,334 common shares until December 31, 1998 at an exercise price of
$0.48 per share and 98,421 common shares at an exercise price of $1.64
per share until December 31, 1997.

6. RELATED PARTY TRANSACTIONS

During the years ended June 30, 1996 and 1995, the Company paid
management fees to two corporations controlled by senior officers of
the Company, aggregating $160,000 and $50,000, respectively. In
addition, the Company has received advances from these two companies
which total $171,709 at June 30, 1996. The advances are unsecured and
without interest and are payable after June 30, 1997.

7. INCOME TAXES

The Company's deferred tax assets (liabilities) consist of the
following:

JUNE 30,
1996 1995
Deferred tax liabilities:
Difference in bases of oil and gas properties acquired $ (2,000,000) $ (2,000,000)
Costs capitalized for books and deducted for tax (65,000) -
---------------- ---------------
Total deferred tax liabilities (2,065,000) (2,000,000)
-------------- --------------
Deferred tax asset (net operating loss carryforwards) 477,000 25,000
---------------- ----------------
Net deferred tax liability $ (1,588,000) $ (1,975,000)
============= =============
</TABLE>

At June 30, 1996, the Company has available net operating loss
carryforwards of approximately $1,366,000 to reduce future taxable
income. These carryforwards expire from 2002 to 2003.

-F10-

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)

8. CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS

At June 30, 1996, the Company had deposits in one financial institution
that were approximately $700,000 in excess of FDIC insurance limits.

The Company's financial instruments at June 30, 1996 are cash, accounts
payable, long-term debt, advances from related parties and stock
warrants and options. Management believes the fair market values of
cash and accounts payable approximate carrying values due to the
short-term nature of these instruments. Management has estimated the
fair values of long-term debt and advances from related parties based
on expected discounted cash flows and believes the fair values are not
materially different than carrying values. Management does not believe
it is practicable to estimate the fair values of options and warrants
due to the relatively limited trading activity that occurs in the
Company's stock.

9. SUBSEQUENT EVENTS

The Company and an underwriter have an engagement letter for a proposed
firm commitment underwritten public offering of approximately $7.5
million of securities of the Company. The underwriter would receive
compensation of 10% of the public offering price plus an approximate 3%
non-accountable expense allowance and a Securities Purchase Warrant,
equal to 10% of the number of securities purchased by the underwriters.
The engagement letter also provided the underwriter with an option to
purchase up to an additional 10% of the aggregate number of securities
offered in connection with the offering. The engagement letter is
subject to a comprehensive review of the Company's business and
prospects by the underwriter.

The Company issued a private placement memorandum on July 1, 1996 for
Units of Working Interest to participate in the drilling of a well on
the Cheneyboro property. In this offering the Company is attempting to
raise approximately $425,000 to $850,000.

10. SUPPLEMENTAL INFORMATION (UNAUDITED)

Costs incurred by the Company with respect to its oil and gas producing
activities were set forth below. No significant costs were incurred in
exploration activities or in the acquisition of unproved properties.

FOR THE PERIODS ENDED
JUNE 30,
1996 1995
Proved property acquisition cost $ 1,110,054 $ 7,802,914
Development costs 227,754 -
------------ ---------
Total $ 1,337,808 $ 7,802,914
=========== ===========

11. OIL AND GAS RESERVE INFORMATION (UNAUDITED)

Proved oil and gas reserves are the estimated quantities of crude oil,
condensate and natural gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions.
Proved developed oil and gas reserves are reserves that can be expected
to be recovered through existing wells with existing equipment and
operating

-F11-

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)

methods. The following estimated net interests in proved reserves are
based upon subjective engineering judgments and may be affected by the
limitations inherent in such estimation. The process of estimating
reserves is subject to continual revision as additional information
becomes available as a result of drilling, testing, reservoir studies
and production history. There can be no assurance that such estimates
will not be materially revised in subsequent periods.

The Company emphasizes that reserve estimates of new discoveries or
undeveloped properties are more imprecise than those of producing oil
and gas properties. The Company's reserves are substantially from
undeveloped properties. Accordingly, these estimates are expected to
change materially as future information becomes available. The
Company's reserves were estimated by independent petroleum engineers.
All of the Company's reserves are located onshore in the continental
United States.

The following unaudited table sets forth proved oil and gas reserves at
June 30, 1996 and 1995, together with changes therein:

OIL AND NATURAL
CONDENSATE GAS
(BBLS) (MCF)
Balance at February 15, 1995 - -
Purchase of minerals in place 4,294,000 12,882,000
----------- -----------
Balance at June 30, 1995 4,294,000 12,882,000
----------- -----------
Balance at June 30, 1996 4,294,000 (1) 12,882,000(1)
========== ============

Proved developed reserves at June 30:
1995 - -
============= ===========
1996 93,000 280,000
============= ==============

(1) Excludes proved reserve quantities of 482,000 barrels of oil
and 573,000 mcf of natural gas subject to an option agreement.
The property interests had not been assigned to the Company as
of June 30, 1996.

The standardized measure of discounted future net cash flows at June
30, 1996 and 1995 relating to proved oil and gas reserves is set forth
below. The assumptions used to compute the standardized measure are
those prescribed by the Financial Accounting Standards Board and as
such, do not necessarily reflect the Company's expectations of actual
revenues to be derived from those reserves nor their present worth. The
limitations inherent in the reserve quantity estimation process
described above are equally applicable to the standardized measure
computations since these estimates are the basis for the valuation
process.

-F12-

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)

Standardized measure of discounted future net cash flows relating to
proved reserves:

AT JUNE 30,
1996 1995
---------------------- -------------
Future cash inflows $ 118,003,000 $ 98,023,000
Future production costs (15,013,000) (13,249,000)
Future development costs (12,446,000) (12,361,000)
--------------- ---------------
Future net cash flows, before income tax 90,544,000 72,413,000
Future income tax expenses (30,785,000) (24,723,000)
--------------- ---------------
Future net cash flows 57,759,000 47,690,000
10% discount to reflect timing of net cash flows (19,315,000) (17,890,000)
--------------- ---------------
Standardized measure of discounted future net
cash flows $ 40,444,000 (1) $ 29,800,000 (1)
============= ============
</TABLE>

(1) Excludes approximately $4,000,000 of standardized measure of
discounted future net cash flows attributable to an option
agreement. The related property interests had not been
assigned to the Company as of June 30, 1996.

Changes in standardized measure of discounted future net cash flows
relating to proved reserves:

FOR THE PERIOD ENDED
JUNE 30,
1996 1995
----------------- -----------
Standardized measure, beginning of period $ 29,800,000 $ -
Net change in sales price, net of production costs 11,762,000 -
Accretion of discount 2,980,000 -
Purchases of reserves in-place - 45,249,000
Net changes in income taxes (4,098,000) (15,449,000)
------------ -----------
Standardized measure, end of period $ 40,444,000 $29,800,000
============= ===========

-F13-

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

CONSOLIDATED CONDENSED BALANCE SHEET
(Expressed in U.S. Dollars)
December 31, 1996
(Unaudited)

ASSETS

CURRENT ASSET - Cash $ 239,905

PROVED OIL AND GAS PROPERTIES (full cost method) 11,798,858

OFFICE EQUIPMENT, net of accumulated depreciation of $7,256 33,226

OTHER ASSETS 43,831

Total Assets $12,115,820
==========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Accounts payable .................................... $ 732,177

Current portion of long-term debt ................... 586,049

Total Current Liabilities ........................... 1,318,226

ADVANCES FROM RELATED PARTIES ................................ 171,709

DEFERRED INCOME TAXES ........................................ 1,293,000

STOCKHOLDERS' EQUITY:

Preferred stock, no par value, authorized-unlimited,
issued - none Common Stock, no par value, authorized-
unlimited, issued -10,404,901 .............................. 10,697,279
Deficit accumulated in development stage ................... (1,364,394)
------------
Total Stockholders' Equity .......................... 9,332,885

Total Liabilities and Stockholders' Equity .......... $ 12,115,820
============

See accompanying note to these financial statements

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
(Unaudited)

Period from
Period from Period from February 15,
July 1, 1996 July 1, 1995 1995 to
to December 31. to December 31, December 31,
1996 1996 1996

REVENUE- Oil and gas sales ........ $ 41,865 $ -- $ 41,365

EXPENSES:
General and Administrative ...... 903,319 634,572 1,938,626
Interest ........................ 35,162 21,631 174,133
----------- -----------

Total Expenses ........... 938,481 656,203 2,112,759
----------- -----------

LOSS BEFORE INCOME TAXES .......... (897,116) (656,203) (2,071,394)

INCOME TAX BENEFIT ................ 295,000 230,000 707,000
----------- -----------

NET LOSS .......................... $ (602,116) $ (426,203) $(1,364,394)
=========== ===========

NET LOSS PER SHARE $ (0.05) $ (0.04)
================== =============

WEIGHTED AVERAGE SHARES 13,390,524 9,923,236
================ =============

See accompanying note to these financial statements
<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)
(Unaudited)

Period From Period From Period From
July 1, 1996 To July 1, 1995 To February 15, 1995 To
December 31, 1996 December 31, 1995 June 30, 1996
----------------- ------------ ---- -------------

CASH FLOWS FROM OPERATING
ACTIVITES:
Net loss .................................. $ (602,116) $ (426,203) $(1,364,394)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Deferred income tax benefit ............ (295,000) (230,000) (707,000)
Amortization of debt discount .......... -- -- 88,000
Depreciation ........................... 5,572 -- 7,256
Common stock issued for services ....... 322,932 446,950 772,063
Change in accounts payable ............. (85,674) -- 201,016
Other .................................. (3,263) -- 2,580
----------- ----------- -----------
Net cash used by operating activities .. (657,549) (209,253) (1,000,479)

CASH FLOWS FROM FINANCING
ACTIVITIES:
Advances from related parties ............. -- 112,500 171,709
Sale of common stock ...................... 455,949 -- 2,555,821
Issuance of convertible debentures ........ -- 426,474 426,474
Issuance of note payable subsequently
converted into convertible debentures ..... -- 146,300 146,300
Costs related to sale of stock
and debentures ............................ (14,600) -- (423,976)
Issuance of note payable .................. -- -- 250,000
Repayment of note payable ................. (250,000)
-----------
Net cash provided by financing activities . 441,349 685,274 2,876,328

CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of oil and gas properties ..... (303,134) (477,021) (1,554,893)
Purchase of other assets .................. (43,831) -- (81,051)
----------- ----------- -----------
Net cash used by investing activities ..... (346,965) (477,021) (1,635,944)
----------- ----------- -----------

INCREASE (DECREASE) IN CASH ............... (563,165) (1,000) 239,905

CASH - beginning of period ................ 803,070 1,000 --

CASH - end of period ...................... $ 239,905 $ nil $ 239,905
=========== =========== ===========
SUPPLEMENTAL INFORMATION
Cash paid for interest ........... $ 17,581 $- $ 54,591
Debt incurred in acquisition
of oil and gas properties ........ -- -- 1,086,049
Conversion of debentures to
common stock ..................... -- -- 426,474
Retirement of debenture upon
merger with Arjon ................ 146,300 -- 146,300
Oil and gas property acquired
with payable ..................... 355,000 -- 585,000
Oil and gas properties acquired
with common stock ................ -- 7,072,914
Issuance of common stock for stock
offering costs ................... -- -- 506,409

</TABLE>

See accompanying note to these statements financial

<PAGE>

COTTON VALLEY RESOURCES CORPORATION
(a development stage company)

NOTE TO CONDENSED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
(Unaudited)

(1) Nature of Business and Basis of Preparation and Presentation

The Company's primary business focus is the acquisition of ownership
interests in, and the production of oil and gas from, existing oil and
gas fields that indicate a potential for increased production through
rehabilitation.

The consolidated condensed financial statements of Cotton Valley
Resources Corporation and subsidiaries (collectively the "Company")
included herein have been prepared by the Company, without audit.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, since the
Company believes that the disclosures included are adequate to make
the information presented not misleading. In the opinion of
management, the consolidated condensed financial statements include
all adjustments consisting of normal recurring adjustments necessary
to present fairly the financial position, results of operations, and
cash flows as of the dates and for the periods presented. These
consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included herein for the fiscal year ended June 30, 1996.

(2) Common Stock

During the six months ended December 31, 1996, the Company issued
36,888 shares of common stock to individuals for services which was
recorded at $30,932, issued 73,750 shares of common stock to settle
debts which was recorded at $53,838, issued 400,000 shares of common
stock to Liviakis Financial Communications, Inc. which was recorded at
$292,000, issued 302,667 shares of common stock to former Arjon
shareholders on exercise of warrants for $145,524, issued 300,000
shares of common stock in Canadian private placements for proceeds of
$235,425 (before deducting costs of $14,600), and issued 100,000 shares
of common stock to Liviakis Financial Communications, Inc. for cash of
$75,000.

(3) Liviakis Financial Communications, Inc.

During the period, the Company entered into an agreement with Liviakis
Financial Communications, Inc. of Sacramento, California ("Liviakis")
to assist and consult with the Company in matters concerning corporate
finance and to provide investor communications and public relations
services. In consideration of Liviakis' services, the Company will sell
a total of 500,000 shares of its common stock to Liviakis and an
officer of Liviakis for $.75 per share and issue 1,490,000 shares of
its common stock to Liviakis for services. The Company also granted
Liviakis and an officer of Liviakis warrants to purchase 500,000 shares
of its common stock from January 2, 1998, until November 8, 2001, at
$.80 per share.

<PAGE>

No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by Cotton Valley or the Underwriters.
This prospectus does not constitute an offer to sell or the solicitation of an
offer to buy any of the securities to which it relates in any state to any
person to whom it is unlawful to make such offer or solicitation in such state.
Neither the delivery of this prospectus nor any sale hereunder shall, under any
circumstances, create any implication that there has been no change in Cotton
Valley's affairs since the date hereof or that the information contained herein
is correct as of any time subsequent to its date.

---------------------------
1,250,000 Units

COTTON VALLEY RESOURCES
CORPORATION

Consisting of

2,500,000 Shares of Common Stock

and

2,500,000 Redeemable Warrants to Purchase
Common Stock
<PAGE>

TABLE OF CONTENTS
Page
Prospectus Summary ................................
Risk Factors ......................................
Use of Proceeds ...................................
Capitalization ....................................
Dilution ..........................................
Dividend Policy ...................................

P R O S P E C T U S

Management's Discussion and Analysis or
Plan of Operation ..............................
Business and Properties ...........................
Management ........................................
Certain Relationships and Related Transactions ....
Principal Shareholders ............................
Description of Securities .........................
Securities Eligible for Future Sale ...............
Certain Income Tax Considerations .................
Underwriting ......................................
Limitations on Director Liability .................
Legal Matters .....................................
Experts ...........................................
Glossary ..........................................

NATIONAL SECURITIES CORPORATION

---------------------------

Until , 1997 (25 days after the date of this prospectus), all dealers effecting
transactions in the Units, whether or not participating in this distribution,
may be required to deliver a prospectus. This is in addition to the obligation
of dealers to deliver a prospectus when acting as Underwriters and with respect
to their unsold allotments or subscriptions.

, 1997

- - - - -----------------------------------------------------
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers.

Cotton Valley has no contract or arrangement that insures or indemnifies a
controlling person, director or officer of Cotton Valley which affects his or
her liability in that capacity. Cotton Valley's bylaws provide for such
indemnification, subject to applicable law.

If available at reasonable cost, Cotton Valley intends to maintain
insurance against any liability incurred by its officers and directors in
defense of any actions to which they are made parties by reason of their
positions as officers and directors.

Item 25. Other Expenses of Issuance and Distribution.

Expenses in connection with the public offering of Securities by Cotton
Valley pursuant to this prospectus are as follows:

Securities and Exchange Commission Filing Fee $ 4,312
American Stock Exchange Listing Fee 20,000*
Accounting Fees and Expenses 60,000*
Legal Fees and Expenses 80,000*
Printing and Engraving 25,000*
Fees of Transfer Agent and Registrar 20,000*
Listing, Blue Sky Fees and Expenses 40,000*
Underwriter's Nonaccountable Expense Allowance 193,750*
Miscellaneous 136,938*
--------
Total $580,000*
=========
- - - - ---------------------
*Estimated

Item 26. Recent Sales of Unregistered Securities.

The following is a summary of transactions by Cotton Valley since February
15, 1995 (date of incorporation) involving securities which were not registered
under the Securities Act. With regard to all of the following transactions,
which occurred in the United States, Cotton Valley relied on the exemption from
registration under Section 4(2) of the Securities Act afforded on the basis that
such transactions do not involve any public offering. The transactions in Canada
took place in accordance with documents filed with the Ontario Securities
Commission. Management believes that Cotton Valley has complied in all material
respects with applicable Canadian securities regulation with respect to all such
transactions.

a) Shares of Common Stock
<PAGE>

Date Transaction Number Consideration
02/95 To Eugene A. Soltero and James E. Hogue for 1,840,001 $ 1,401
pre-incorporation services
03/95 To unaffiliated parties, for Cheneyboro Property 3,252,533 5,935,279
04/95 To various entities, for subsequently abandoned oil and
gas interests 310,800 777
06/95 To two corporations, for Movico Property 623,424 1,137,635
06/95 To an individual for cash 10,000 10,000
12/95 To Dalcun Investments Ltd. and Arjon Enterprises Inc. for
a $250,000 note and a $146,000 note, net 107,258 88,008

Date Transaction Number Consideration
12/95 To Eugene A. Soltero in exchange for pre-incorporation 80,000 2,920
services
To James E. Hogue, for pre-incorporation services 80,000 2,920
To Peter Lucas, for post-incorporation services 150,000 223,475
To C. Ronald Burden, for post-incorporation services 150,000 223,475
To Robert Harris, for services 100,000 148,944
To other individuals, for services 240,000 357,465
04/96 To Royal Trust, for cash (1) 1,000,000 1,642,291
To Majendie Securities, Ltd., for cash (1) 22,500 36,956
To Cramer & Cie, for cash (1) 150,000 246,375
To Tewson Ltd., for cash 100,000 164,250
06/96 To debenture holders, on conversion of debenture (2) 288,529 426,474
To former Arjon shareholders on merger 686,551 146,300
07/96 To individuals, for services 4,388 7,207
To former Arjon shareholders on exercise of warrants 8,344 4,015
11/96 To former Arjon shareholders on exercise of warrants 166,667 80,000
12/96 To individuals for services 32,500 23,725
To settle debts 73,750 53,838
To Liviakis Financial Communications, Inc. for services 400,000 292,000
Private Placements 400,000 310,425
To former Arjon shareholders on exercise of warrants 127,656 61,509
Share issuance costs(3) (930,385)
------------------ ---------

TOTAL ISSUED AND OUTSTANDING 10,404,901 $10,697,279
========== ===========
</TABLE>

- - - - ---------------------------

(1) Cotton Valley sold in Canada units, consisting of one common share and
one-half a warrant to purchase a common share until December 31, 1997, at
Cdn $2.75 ($2.00) per share, for Cdn $2.25 ($1.64) each.

(2) Cotton Valley sold in Canada convertible debentures which were converted to
shares of common stock at the rate Cdn $2.02 ($1.48) per share of common
stock.

(3) Costs relate to the sale of common shares and units in Canada, the sale of
debentures in Canada and the merger with Arjon.

b) Reserved Shares

In addition to the shares of common stock issued by Cotton Valley, Cotton
Valley has reserved for issuance 4,969,220 shares of common stock pursuant to:

(I) 1,266,985 Class A Warrants, where each Class A Warrant
entitles the holder to purchase one share in the common stock
of Cotton Valley until December 31, 1997, at the price of Cdn
$2.75 ($2.00).
These Class A Warrants were issued:

(a) 636,250 in connection with a sale of units in Canada;

(b) 112,390 in connection with conversion of debenture; and

(ii) 236,480 Agent's Options in connection with the sale of debentures
and units. The terms are:

(a) 37,741 at Cdn $2.02 ($1.48) until August 31, 1998;

II-2

<PAGE>

(b) 73,739 at Cdn $2.75 ($2.00) until December 31, 1997;
and

(iii)980,000 stock options issued to directors and employees. These
options are exercisable at Cdn $2.50 ($1.83) and expire August 6,
1999 (130,000), November 7, 1999 (50,000) and July 1, 2000
(800,000).

(iv) 30,668 warrants granted to former Arjon shareholders. Each
warrant is exercisable at Cdn $0.66 ($0.48) until December 31,
1998.

(v) 98,421 Series B Warrants granted to former Arjon shareholders.
Each Series B Warrant is exercisable at Cdn $2.25 ($1.64) until
December 31, 1997.

(vi) 200,000 warrants issued in connection with private placement of
shares in December 1996. Each warrant is exercisable at Cdn $1.00
($.73) until December 31, 1999.

(vii)500,000 warrants issued to Liviakis Financial Communications,
Inc. in connection with a financial consulting contract. Each
warrant is exercisable at Cdn $1.10 ($.80) from January 2, 1998
until November 7, 2001.

(vii)400,000 shares of common stock to be issued to Liviakis
Financial Communications, Inc. at $.75 per share between January
and March 1997.

(ix) 1,090,000 shares of common stock to be issued to Liviakis
Financial Communications, Inc. for services to be rendered during
1997.

(x) 166,666 warrants issued to the spouses of Eugene A. Soltero and
James E. Hogue to replace warrants exercised at the request of
Cotton Valley. Each warrant is exerciseable at Cdn $1.00 ($.73)
until December 31, 1999.

Item 27. Exhibits

The following documents are filed as exhibits to this registration
statement:

Exhibit Number Description Sequentially
Numbered Page

1* Underwriting Agreement
3** Articles of Amalgamation
3** Bylaws
4(a)* Text and Description of Graphics and Images Appearing on Certificate for Common
Stock
4(b)* Text and Description of Graphics and Images Appearing on Certificate for Units
4(c)* Text and Description of Graphics and Images Appearing on Certificate for Warrants
5* Opinion of Weir & Foulds
9** Voting Trust Agreement, as amended
10(a)** Property Option Purchase Agreement (Movico)
10(b)** Letter Agreement with Decker Exploration, Inc. (Movico)
10(c)* Consulting Agreement with Liviakis Financial Communications, Inc.
21** Subsidiaries
23(a)* Consent of Weir & Foulds
23(b)* Consent of Hein + Associates, LLP
23(c)* Consent of K&A Energy Consultants, Inc.
</TABLE>

II-3

<PAGE>

23(d)* Consent of Wendell & Associates
27 Financial Data Schedule
- - - - -----------------------
* Filed herewith.
** Previously filed and incorporated by reference herein.

Item 28. Undertakings.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to: (i) include any prospectus required by Section
10(a)(3) of the Securities Act; (ii) reflect in the prospectus
any facts or events which, individually or together, represent a
fundamental change in the information in the registration
statement; and (iii) include any additional or changed material
information on the plan of distribution. Notwithstanding the
foregoing, any increase or decrease in the volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the SEC pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.

(2) For determining liability under the Securities Act, to treat
each post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at
that time to be the initial bona fide offering.

(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering.

(4) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that, in the
opinion of the SEC, such indemnification is against public
policy, as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the shares of
common stock being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

(6) For determining any liability under the Securities Act, to treat
the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A
and contained in the form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act as part of this registration statement as of the time the
SEC declared it effective.

(7) For determining any liability under the Securities Act, to treat
each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in
the registration statement, and that offering of the securities
at that time as the initial bona fide offering of those
securities.

II-4

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on _____________, 1997.

COTTON VALLEY RESOURCES CORPORATION
(Registrant)
<TABLE>
<S> <C>

By: ___________________________________ By: ___________________________________
- - - - -------------------------------------------- --------------------------------------------
Eugene A. Soltero Peter Lucas
- - - - -------------------------- --------------------
Chairman of the Board and Chief Executive Senior Vice President and Chief Financial
- - - - -------------------------------------------------- --------------------------------------------------
Officer Officer
------- -------
(Principal Executive Officer) (Principal Financial and Accounting
- - - - -------------------------------------- --------------------------------------------
Officer)
</TABLE>

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated:

Signature Title Date
- - - - --------- ----- ----
Chairman of the Board and Chief _______________, 1997
Executive Officer
- - - - -----------------------------------------
Eugene A. Soltero
President, Chief Operating Officer and
Director
- - - - -----------------------------------------
James E. Hogue _______________, 1997
Senior Vice President and Chief
Financial Officer
- - - - -----------------------------------------
Peter Lucas _______________, 1997
Senior Vice President of Exploration
- - - - -----------------------------------------
C. Ron Burden _______________, 1997
Director
- - - - -----------------------------------------
Wayne T. Egan _______________, 1997

Director
- - - - -----------------------------------------
Michael Kamis _______________, 1997

Director
- - - - -----------------------------------------
Richard J. Lachcik _______________, 1997

</TABLE>

II-5

<PAGE>

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 5
<CIK> 0001023947
<NAME> COTTON VALLEY RESOURCES

<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1996
<PERIOD-START> JUL-01-1995 JUL-01-1996
<PERIOD-END> JUN-30-1996 DEC-31-1996
<EXCHANGE-RATE> 1 1
<CASH> 803,070 239,905
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 803,070 239,905
<PP&E> 11,177,944 11,883,171
<DEPRECIATION> 1,684 7,256
<TOTAL-ASSETS> 11,979,330 12,115,820
<CURRENT-LIABILITIES> 516,689 1,318,226
<BONDS> 0 0
0 0
0 0
<COMMON> 9,879,160 10,697,279
<OTHER-SE> (762,277) (1,364,394)
<TOTAL-LIABILITY-AND-EQUITY> (11,979,330) (12,115,820)
<SALES> 5,386 41,365
<TOTAL-REVENUES> 5,386 41,365
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 965,776 302,788
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 138,970 35,162
<INCOME-PRETAX> 1,099,360 897,116
<INCOME-TAX> 387,000 295,000
<INCOME-CONTINUING> 712,360 602,116
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (712,360) (602,116)
<EPS-PRIMARY> (0.06) (0.05)
<EPS-DILUTED> (0.06) (0.05)

</TABLE>