FORTUNE PETROLEUM CORP, SB-2, 1995-09-25

FORTUNE PETROLEUM CORP
SB-2, 1995-09-25
CRUDE PETROLEUM & NATURAL GAS

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<PAGE> 1
As filed with the Securities and Exchange Commission on September 25, 1995
Registration Statement No. 33-
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933, AS AMENDED

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

FORTUNE PETROLEUM CORPORATION

(Name of small business issuer in its charter)

<TABLE>
<CAPTION>
DELAWARE 1311 95-4114732
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)

30101 AGOURA COURT, SUITE 110
AGOURA HILLS, CALIFORNIA 91301
(818) 991-0526
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive
offices and principal place of business)
TYRONE J. FAIRBANKS
FORTUNE PETROLEUM CORPORATION
30101 AGOURA COURT, SUITE 110
AGOURA HILLS, CALIFORNIA 91301
(818) 991-0526
(Name, address including zip code, and telephone number,
including area code, of agent for service)
COPY TO:
Bruce L. Ashton, Esq.
Reish & Luftman
11755 Wilshire Blvd., 10th Floor
Los Angeles, California 90025
(310) 478-5656
</TABLE>

Approximate date of commencement 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, check the following box. /X/
CALCULATION OF REGISTRATION FEE
<TABLE>
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Title of each Proposed Proposed
class of Amount maximum maximum Amount of
securities to to be offering price aggregate registration
be registered registered per unit offering price fee
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 861,548(1) $2.61(1) $ 2,248,640 $ 776
Common Stock, $.01 par value 117,869(2) $3.26(2) $ 384,253 $ 133
Common Stock, $.01 par value 1,903,335(3) $4.46(3) $ 8,502,035 $2,932
Common Stock, $.01 par value 187,500(4) $2.00(4) $ 375,000 $ 129
------
$3,968
======
- -----------------------------------------------------------------------------------------------------
</TABLE>

(1) Shares of Common Stock subject to outstanding publicly traded warrants
issuable as a result of price adjustment mechanism. Proposed maximum offering
price per unit is the effective per share exercise price of each warrant.
(2) Shares of Common Stock subject to outstanding warrants held by
representatives of the underwriters for the publicly traded warrants issuable as
a result of price adjustment mechanism. Proposed maximum offering price per
unit is the effective per share exercise price of each warrant.
(3) Shares of Common Stock subject to outstanding privately issued warrants.
Proposed maximum offering price per unit is the weighted average exercise price
per share exercise of each warrant.
(4) Shares of Common Stock issuable upon conversion of promissory note.

The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to Section
8(a), may determine.

This Registration Statement is comprised of 85 pages.
The Exhibit Index appears on Page 79.

<PAGE> 2

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
ITEM IN FORM SB-2 LOCATION IN PROSPECTUS
- ----------------- ----------------------
<S> <C> <C>
ITEM 1. Front of the Registration Statement and Outside
Front Cover Page of Prospectus . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus

ITEM 2. Inside Front and Outside Back Cover Pages of
Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . Inside Front and Outside Back Cover Page of
Prospectus

ITEM 3. Summary Information and Risk Factors . . . . . . . . . . . . . "Prospectus Summary;" "Risk Factors;"
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations"

ITEM 4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . "Prospectus Summary;" "Use of Proceeds;"
"Business and Properties"

ITEM 5. Determination of Offering Price . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus

ITEM 6. Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . "Dilution"

ITEM 7. Selling Security Holders . . . . . . . . . . . . . . . . . . . Not Applicable

ITEM 8. Plan of Distribution . . . . . . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus;
"The Offering"

ITEM 9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . "Business and Properties - Legal
Proceedings"

ITEM 10 Directors, Executive Officers, Promoters
and Control Persons . . . . . . . . . . . . . . . . . . . . . . "Management"

ITEM 11 Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . "Principal Stockholders"

ITEM 12. Description of Securities . . . . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus;
"Prospectus Summary;" "Dividend Policy;"
"Price Range of Common Stock;"
"Capitalization;" "Description of
Securities"

ITEM 13. Interest of Named Experts and Counsel . . . . . . . . . . . . . "Experts"
</TABLE>

(ii)
<PAGE> 3

<TABLE>
<S> <C> <C>
ITEM 14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities . . . . . . . . . . . . . . . . "Description of Securities"

ITEM 15. Organization Within Last Five Years . . . . . . . . . . . . . . Not Applicable

ITEM 16. Description of Business . . . . . . . . . . . . . . . . . . . . "Prospectus Summary;" "Management's
Discussion and Analysis of Financial
Condition and Results of Operations;"
"Business and Properties"

ITEM 17. Management's Discussion and Analysis
or Plan of Operation . . . . . . . . . . . . . . . . . . . . . "Management's Discussion and Analysis of
Financial Condition and Results of
Operations"

ITEM 18. Description of Property . . . . . . . . . . . . . . . . . . . . "Business and Properties"

ITEM 19. Certain Relationships and Related Transactions . . . . . . . . "Certain Relationships and Related
Transactions"

ITEM 20. Market for Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus;
"Price Range of Common Stock;" "Dividends;"
"Description of Securities"

ITEM 21. Executive Compensation . . . . . . . . . . . . . . . . . . . . "Management"

ITEM 22. Financial Statements . . . . . . . . . . . . . . . . . . . . . Financial Statements

ITEM 23. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . Not Applicable
</TABLE>

(iii)
<PAGE> 4
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 SEPTEMBER 25, 1995

[LOGO]

FORTUNE PETROLEUM CORPORATION
3,070,252 Common Stock

The shares of Common Stock offered hereby are issuable upon exercise of
Common Stock Purchase Warrants or upon conversion of a convertible promissory
note held by Klein Ventures (the "Klein Note") previously issued by Fortune
Petroleum Corporation (the "Company"). Such warrants include: (a) Common Stock
Purchase Warrants issued in connection with the Company's 1993 public Unit
offering (the "Public Warrants"); (b) Representatives' Unit Purchase Warrants
issued to the representatives of the underwriters in connection with the Unit
offering (the "Representatives' Warrants"), each such warrant originally
consisting of two shares of Common Stock and two stock purchase warrants; and
(c) Common Stock Purchase Warrants issued at various times in private
transactions (the "Private Warrants"). See "Description of Securities - Public
Warrants", " - Representatives' Warrants" and "- Private Warrants."

The Common Stock and the Public Warrants are listed and traded on the
AMEX under the symbols FPX and FPX.W, respectively. On September 21, 1995, the
last reported sale price of the Common Stock on the AMEX was $3.875 per share,
and the last reported sale price of the Public Warrants was $2.50 per warrant.
See "Price Range of Common Stock."

THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS."
___________________________

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

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO THE
PUBLIC COMMISSIONS (1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE (PUBLIC WARRANTS) $2.61 $-0- $2.61
PER SHARE (REPRESENTATIVES' WARRANTS) $3.26 $-0- $3.26
PER SHARE (PRIVATE WARRANTS) $4.46(2) $-0- $4.46
PER SHARE (KLEIN NOTE) $2.00(3) $-0- $-0- (3)
TOTAL $11,509,928 $-0- $11,134,928
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Before deducting estimated offering expenses of $50,000 payable by the
Company.
(2) The weighted average exercise price per share of each warrant. Exercise
prices range from $1.88 to $4.75 per share.
(3) Represents the conversion price per share of an outstanding promissory
note. If such note is converted into shares of Common Stock, the Company
will not receive any additional proceeds but will be relieved of $375,000
of debt. See "Capitalization."

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

Certificates representing the shares will be delivered against payment
in full of the exercise price of each Warrant or conversion of the Klein Note,
in accordance with the terms and conditions of each of Warrant and the Klein
Note.

The date of this Prospectus is , 1995
<PAGE> 5

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports, proxy and information
statements filed by the Company with the Commission pursuant to the
informational requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission, at Room 1024,
Judiciary Plaza Building, 450 Fifth Street, N.W. Washington, D.C. 20549, and the
Regional offices of the Commission: Seven World Trade Center, Suite 1300, New
York, New York 10048, and Kluczynski Federal Building, 230 South Dearborn
Street, Room 3190, Chicago, Illinois 60604. Copies of such material may be
obtained at prescribed rates from the Public Reference Section of the Commission
at Room 1025, Judiciary Plaza Building, 450 Fifth St., N.W. Washington, D.C.
20549. In addition, reports and other information concerning the Company can be
inspected at the offices of the American Stock Exchange, Inc., 86 Trinity Place,
New York, New York 10006-1881, on which the Common Stock is listed.

The Company has filed with the Commission a Registration Statement on
Form SB-2 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Act"), with respect to the Common Stock offered hereby. This
Prospectus, filed as part of the Registration Statement, does not contain all
the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and to the exhibits and schedules thereto, which may
be inspected at the Commission's offices without charge or copies of which may
be obtained from the Commission upon payment of the prescribed fees. Statements
made in the Prospectus as to the contents of any contract, agreement or document
referred to are not necessarily complete, and in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, and each such statement is qualified in its entirety by
such reference.

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[this space intentionally left blank]

2
<PAGE> 6

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
the Prospectus. Capitalized terms are used as defined in the Glossary included
elsewhere in this Prospectus. Reserve estimates have been prepared in
accordance with the SEC Method. The Common Stock Purchase Warrants offered
hereby involves a high degree of risk. Prospective investors should carefully
consider the matters set forth under the caption "Risk Factors" in evaluating
acquisition of the securities offered hereby.

THE COMPANY

Fortune Petroleum Corporation ("Fortune" or the "Company") is an
independent public oil and natural gas company whose primary focus is on
exploration for and development of domestic oil and natural gas properties. The
Company has recently acquired an interest in 13 exploration projects (the
"Zydeco Projects") which will enable it to participate in exploration for oil
and natural gas in the shallow Gulf Coast waters of Louisiana in a strategic
partnership with Zydeco (the "Zydeco 3D Venture"). The Zydeco Projects are in
areas adjacent to the properties held by the Bay Marchand Ventures. At the date
of this Prospectus, the Zydeco Projects are at various stages of identification,
definition and preparation for drilling, with the first expected to be drilled
under a farmout arrangement in the fourth quarter of 1995. See "The Company --
Business and Properties - Exploration, Exploitation and Development Activity -
Zydeco 3D Venture."

Under its exploration agreement with Zydeco, the Company holds a 50%
interest in each of the 13 Projects currently identified by Zydeco. To obtain
its 50% interest, the Company contributed its share of leasehold acquisition and
seismic costs for the 13 Zydeco Projects totalling $4,000,000, and is required
to contribute an additional $800,000 on or before October 25, 1995, in order to
maintain its 50% interest in all of the Projects. No assurance can be given
that the Company will elect to make such additional contribution.

Management believes that the Zydeco 3D Venture has the potential to add
materially to the Company's reserves and, ultimately, its revenues. Management
further believes that the acquisition of the Bay Marchand Venture properties
will materially assist the Company in financing its operations offshore
Louisiana and, combined with the right to participate in the development of the
Thunder Bay Properties, will be a strategic addition to exploration activities
in the Gulf Coast. No assurance can be given, however, that the drilling of
exploratory or development wells on any of these properties will occur or will
result in the discovery of commercial quantities of oil or natural gas or that
the Company will be able to successfully explore for oil and gas reserves or
ever produce such reserves. See "Risk Factors."

The Zydeco 3D Venture utilizes state-of-the-art three dimensional
("3D") seismic and computer-aided exploration ("CAEX") technology in its
exploration efforts. Zydeco has blended existing 3D seismic and CAEX
technology, production data and characteristics of wells in a particular
geographic area and advanced interpretation techniques (as well as traditional
two-dimensional ("2D") seismic data), to identify the initial 13 Zydeco
Projects. The Company believes that the use of 3D seismic and CAEX technology
provides more accurate and comprehensive geological data for evaluation of
drilling prospects than 2D and traditional evaluation methods. The Company also
believes that the techniques used by Zydeco in combining existing 3D seismic and
CAEX technology will provide the Zydeco 3D Venture and Fortune with a
competitive advantage by increasing the likelihood of finding commercial
quantities of oil and gas at lower average reserve finding costs.

Zydeco 3D Venture. The Zydeco Projects are primarily located in
geological trends where there have been discoveries of crude oil and natural gas
reserves and where the Company believes that Zydeco's use of advanced 3D seismic
and CAEX technology will be effective in defining exploration risks. In
addition to the initial 13 Zydeco Projects, the Company and Zydeco have
established areas of mutual interest ("AMI's") adjoining each project and have
agreed to provide each other with a right of first refusal on any other projects
developed along the Gulf Coast of Louisiana until December 31, 1996. The
advantage to Fortune of the establishment of the AMI's and right of first
refusal is that as Zydeco determines new projects within the AMIs, Fortune will
have the right to participate in them, though no assurance can be given that any
new projects will be identified or that Fortune will have the financial
resources to participate in such projects if any are identified. See "Risk
Factors."

The Company does not currently expect to retain a working interest of
more than 25% in each well drilled on the Zydeco Projects and intends to
"farmout" on a promoted basis its remaining interest to other oil companies.
Under such an arrangement, Fortune would enter into agreements with one or more
other companies to pay part of the Company's remaining portion of the drilling
costs of the well in exchange for a proportionate interest in the well, but
subject to an overriding royalty interest retained by Fortune which is
convertible at Fortune's option into a working interest after the other company
recoups its drilling and completion costs out of production from the well (which
is referred to as "payout"). Fortune may retain larger or smaller working
interests in certain of the Zydeco Projects depending upon capital availability
and other factors. The Company also retains a right under the Zydeco 3D Venture
to farmout a portion or all of its interest in each project to Zydeco under a
put arrangement in the exploration agreement. In the event of such a farmout of
a 50% working interest, Fortune would retain a two percent overriding royalty
interest in the project, convertible into a 20% working interest after payout to
Zydeco. Should Fortune farmout a smaller working interest to Zydeco, the
overriding royalty and after-payout working interests would be proportionately
reduced.

The Zydeco Projects are primarily located in the shallow marine waters
(five to 50 feet) within three to five miles of the Louisiana Coastline (the
"Transition Zone") and in the Timbalier Trench, a pre-historic channel of the
Mississippi River which is now offshore and filled in with sedimentary deposits.
Traditionally, the Transition Zone and Timbalier Trench have

3
<PAGE> 7

been difficult areas from which to obtain quality seismic data and interpret
using conventional technology. The principals of Zydeco have worked in these
two areas for the past 18 years and have been successful in finding commercial
quantities of oil and natural gas. At Zydeco, they have combined advanced 3D
seismic and CAEX techniques which allow them to identify potential hydrocarbon
reservoirs in these previously "seismically blind" areas.

San Juan Basin, New Mexico. In June 1994, the Company acquired working
interests of 21.5% to 25% in 70,000 acres in Rio Arriba County, New Mexico.
60,000 acres are held under Mineral Development Agreements with the Jicarilla
Apache Indian Tribe and the balance is held under lease or farmout arrangements
to the Company. This acreage lies immediately north of the West Puerto Chiquito
Field in which several wells produced more than one million barrels of oil
equivalents ("BOE") per well bore from the Mancos Trend Formation and some
produced between two million and three million BOE per well bore. The Company
believes that portions of its acreage may be an extension of that Field.
Drilling and completion costs per well in the Mancos Trend Formation usually
range from $750,000 to $1,000,000 each. See "Business and Properties -
Exploration, Exploitation and Development Activity - San Juan Basin, New
Mexico."

Business Strategy. The Company has sought to add reserves in the most
cost efficient and effective manner. Prior to mid-1994, the Company focused its
efforts on the acquisition of producing properties in an effort to take
advantage of competitive prices for proved reserves with development potential
in relation to the cost of reserves discovered through exploration activities.
See "Business and Properties -- Acquisition Activity." In mid-1994, the Company
made a strategic decision to shift its emphasis from the acquisition of
producing properties to exploration for oil and natural gas reserves, although
the Company will continue to examine attractive acquisition opportunities
presented to it. This decision was prompted by increasing price competition for
attractive producing properties (caused by larger and better capitalized
companies moving into the acquisition market) and a general tightening in
available financing for acquisitions. See "Risk Factors."

The Company's decision to shift its emphasis to exploration was further
influenced by several factors which Fortune believes create new opportunities
for exploration. These factors include increased availability of 3D seismic and
CAEX technology at competitive prices and the reallocation of exploration
budgets by major oil companies from domestic activity to international
exploration. This move by the major oil companies resulted in increased access
to geological and geophysical information relating to potential prospects, new
opportunities to enter into farmout agreements with respect to prospects held by
the major oil companies and less demand and price competition for domestic
acreage. To help facilitate its exploration strategy and focus its efforts, the
Company has begun efforts to sell all of its California producing properties and
prospects and retiring the debt secured by such properties from the proceeds of
sale. The Company also anticipates that it will relocate its headquarters to
the greater Houston, Texas area within the next six to 12 months.

Exploration and Exploitation Projects. The Company is involved in a
number of exploration and exploitation projects, including the 13 Zydeco
Projects and projects in the San Juan Basin, New Mexico and La Rosa Field,
Refugio County, Texas. Additionally, Zydeco is continuing to identify other
potential projects for the Zydeco 3D Venture. The following table sets forth a
summary of certain projects on which the Company expects to conduct exploration
activities over the next 12 to 24 months. In the table, the letter "P"
following the name of the project indicates that it is a "prospect" (a property
in near- drillable condition); the letter "L" indicates that it is a "lead"
(additional seismic work or lease acquisition (or both) is required in order for
exploratory drilling to commence); and "C" denotes a "concept" (substantial
additional seismic and leasehold acquisition must be undertaken in order to
consider exploration drilling). No assurance can be given that drilling
activities will be undertaken on any of these projects or, if undertaken, that
such efforts will be successful in finding commercial quantities of oil or
natural gas. See "Business and Properties -- Current Exploration Projects."

4
<PAGE> 8

(1) Prior to entering into the exploration agreement with Fortune, Zydeco
granted to Clayton Williams Energy the right to purchase, prior to the
commencement of drilling, a one-eighth working interest in each project in
exchange for one-eighth of all costs incurred in the project to that time, plus
one-eighth of all future costs which include drilling, completion and operating
costs for any wells drilled on the project. In such event, if Fortune held a
50% interest in a Project, its interest would be reduced to 43.833% in exchange
for a payment to Fortune of 6.166% of the costs incurred to date.

(2) Subject to substantial reduction unless Fortune continues to contribute its
share of leasehold acquisition and seismic costs, currently budgeted at
$4,800,000. The Company does not currently expect to retain a working interest
of more than 25% in each Project. See "Use of Proceeds" and "Business and
Properties - Exploration, Exploitation and Development Activity - Zydeco 3D
Venture."

(3) Represents the maximum working interest which Fortune may acquire in each
Zydeco Project based upon the maximum contribution to the Zydeco 3D Venture. No
assurance can be given that Fortune will make such contributions. Net acreage
equals the Company's interest assuming it owns the maximum working interest. See
"Risk Factors" and "Use of Proceeds."

(4) On June 1, 1995, Zydeco and Fortune entered into a farmout of 100% of the
working interest to Southern Gas Company of Delaware in exchange for a 6.166%
overriding royalty, a $100,000 bonus and a $32,000 production payment. Under
the agreement, 4.166% of the overriding royalty is convertible to a 12-1/2%
working interest after payout at Zydeco and Fortune's option. See "Business and
Properties - Exploration, Exploitation and Development Activity - Zydeco 3D
Venture."

Public Financing. On June 30, 1995, the Company closed an underwriting
of 4,100,000 shares of Common Stock at a price of $2.00 per share. On July 5,
1995, the underwriters exercised their overallotment option for an additional
500,000 shares. Total gross proceeds in the offering were $9,200,000 and the
Company netted approximately $8,169,000 after deduction of underwriting
discounts and costs of the offering.

THE OFFERING

THE OFFERING 3,070,252 shares of Common Stock issuable upon
exercise of outstanding Stock Purchase Warrants
previously issued by the Company and conversion
of the Klein Note. See "Certain Relationships
and Related Transactions," "Description of
Securities - Public Warrants," "- Representatives'
Warrants" and "- Private Warrants."

COMMON STOCK OUTSTANDING
PRIOR TO THE OFFERING 9,356,973 (AMEX symbol: FPX) at September 21, 1995
AFTER THE OFFERING 12,427,225 (assuming exercise of all outstanding
Warrants and conversion of the Klein Note)

PUBLIC WARRANTS OUTSTANDING 1,800,000 warrants exercisable at $3.75 per
warrant (AMEX symbol: FPX.W). Each Public
Warrant entitles the holder to purchase
1.4375 shares of Common Stock at an effective
exercise price of $2.61 per share.

REPRESENTATIVES' WARRANTS 90,000 warrants exercisable at $11.14 per warrant.
OUTSTANDING Upon exercise of each Representatives' Warrant,
the holder will receive 3.3097 shares of Common
Stock at an effective exercise price of $3.26 per
share plus two Public Warrants. Were the holder
to exercise such Public Warrants exerciseable at
$3.75 each, the holder would have paid a total of
$18.64 and would hold 6.18 shares of Common Stock
at an effective purchase price of $3.01 per share.

PRIVATE WARRANTS OUTSTANDING 1,903,335 private warrants outstanding exercisable
at prices ranging from $1.88 to $4.75. The
weighted average exercise price of all of the
Private Warrants is $4.46 per share.

USE OF PROCEEDS If all of the Warrants are exercised, the net
proceeds to the Company are estimated to be
$11,085,000 (after deducting estimated expenses of
$50,000 payable by the Company). The Company
anticipates that the net proceeds of this offering
will be used to provide working capital and pay
drilling and completion costs on future projects.
See "Use of Proceeds."

5
<PAGE> 9

SUMMARY FINANCIAL AND OPERATING DATA

The following Summary Condensed Financial Data for the years ended
December 31, 1992, 1993 and 1994, and the unaudited financial information for
the six months ended June 30, 1994 and 1995, are derived from and qualified by
reference to the Company's financial statements, appearing elsewhere herein. The
statement of operations data for the six months ended June 30, 1995, is not
necessarily indicative of results for a full year. The financial information
for each six month period ended June 30, 1994 and 1995 are unaudited and, in the
opinion of management, include all adjustments that are of a normal recurring
nature and necessary for a fair presentation. The Summary Condensed Financial
Data should be read in conjunction with the financial statements and
"Managements Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.

SUMMARY CONDENSED FINANCIAL DATA
(dollars and shares in thousands, except per share data)

<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA: Six Months Ended
Years Ended December 31, June 30,
-------------------------------------- --------
1992 1993 1994 1994 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Total Revenues $ 2,160 $ 2,834 $ 3,397 $1,743 $1,434
Net loss $ (198) $(3,654) $(2,943) $( 529) $( 430)
Net loss per share $ (0.27) $ (2.06) $ (1.12) $(0.20) $(0.10)
Weighted average shares
outstanding 714 1,773 2,639 2,634 4,080

<CAPTION>
BALANCE SHEET DATA: December 31, June 30,
--------------------------------------- --------
1992 1993 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Assets $ 8,175 $10,454 $11,601 $20,000
Total Debt $ 3,574 $ 3,003 $ 7,123 $ 6,851
Net Stockholders' Equity $ 4,153 $ 6,613 $ 3,665 $13,149
Net Stockholders' Equity Per Share $ 5.22 $ 2.50 $ 1.39 $ 3.22

SUMMARY OPERATING DATA

OPERATING DATA: Six Months Ended
Years Ended December 31, June 30,
-------------------------------------- --------
1992 1993 1994 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Production:
Crude oil, condensate and
gas liquids (Bbl) 87,387 78,737 87,615 41,932 38,523
Natural gas (Mcf) 233,892 723,878 1,016,771 456,714 534,385
Oil equivalent (Bbl) 126,369 199,383 257,077 118,051 127,587
Average sales price:
Crude oil, condensate and
gas liquids ($ per Bbl) $17.57 $14.10 $12.88 $13.15 $16.13
Natural gas ($ per Mcf) $ 2.39 $ 2.28 $ 2.17 $ 2.40 $ 1.41

<CAPTION>
December 31,
-----------------
RESERVES: 1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Estimated Net Proved Reserves (1):
Crude oil and condensate (MMBbl) 2,066 813 1,647
Natural gas (Bcf) 4.8 5.6 5.9
Estimated future net revenues before
income taxes (in thousands) $20,385 $12,835 $15,932
Present value of estimated future net revenues before
income taxes (discounted at 10% per annum) $ 8,555 $ 8,554 $ 8,148
Proved Reserves produced during the period 4.4% 11.4% 9.7%
- ---------------
</TABLE>
(1) Estimates of oil and gas reserves are based in part on the price at which it
is anticipated the product can be sold; and to the extent that the cost of
producing the oil and gas exceeds the sales price, the quantity of "recoverable
reserves" is reduced. Declines in reserves and reserves value in 1993 and 1994,
as compared to the prior year, despite significant reserve acquisitions, is due
primarily to the difference at December 31 of each year in average crude oil and
natural gas prices received which were used in the reserve engineering report in
calculating reserves. See "Business and Properties -- Oil and Gas Operations --
Oil and Gas Reserves."

6
<PAGE> 10

RISK FACTORS

An investment in the Common Stock and in the New Warrants offered
hereby involves a high degree of risk. The 1993 Warrants should not be exercised
by persons who cannot afford the loss of their entire investment. Prospective
investors should carefully consider all of the information contained in this
Prospectus, including the following risk factors:

RISKS ASSOCIATED WITH THE COMPANY

Working Capital Deficiency. At December 31, 1994, the Company had a
working capital deficit of $4,576,000. The working capital needs of the Company
have increased since its inception. To date, the Company has satisfied
substantially all of its working capital needs through oil and gas revenues, the
public and private sale of common stock and debentures, the Credit Facility and
other borrowings. On June 30, 1995, the Company completed a public offering of
4,600,000 shares of Common Stock (including the underwriters' overallotment
option), the net proceeds of which were used to pay down debt, including
reductions in the principal balance of the Company's credit facility with Bank
One, Texas and invest in the Zydeco 3D Venture. While such offering provided the
Company with sufficient capital to meets its obligations through mid-1996, the
Company does not currently have sufficient capital or cash flow to meet all of
its projected capital needs under the Zydeco 3D Venture or other projects.
Substantially all of the Company's producing oil and gas properties are pledged
to secure the Credit Facility, and the Company does not have any additional
borrowing capacity under the Credit Facility at the date hereof.

Need for Additional Financing. The Company has incurred net losses for
the years ended December 31, 1992, 1993 and 1994, and the first half of 1995,
and may continue to do so in the future. No assurance can be given that the
Company will be able to meet its working capital needs out of its cash flow from
operations. There can be no assurance that Fortune can attain a sufficient level
of revenues to fund such requirements or that unbudgeted costs will not be
incurred. Future events, including the problems, delays, expenses and
difficulties frequently encountered by similarly situated companies, as well as
changes in economic, regulatory and competitive conditions, may lead to cost
increases that could make the net proceeds of the Offering and cash flow from
operations insufficient to fund the Company's capital requirements for the next
12 months. The Company may require additional outside financing for the
foreseeable future to fund capital expenditures deemed desireable by management.
No assurance can be given that any such financing will be available on terms
acceptable to the Company, if at all. Additional financings may result in
dilution for then current stockholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

Need to Replace Reserves. Producing oil and gas reservoirs are, in
general, characterized by declining production rates. This decline rate depends
on reservoir characteristics, and varies from the steep decline rate
characteristic of the prolific reservoirs in the Gulf of Mexico to the
relatively slow decline rate characteristic of the long-lived (but less
prolific) fields on the Company's California properties. The Company's future
oil and natural gas reserves and production, and thus cash flow and income, are
highly dependent on the Company's ability in finding or acquiring additional
reserves. During the three years ended December 31, 1994, the Company replaced
95.16% of reserves depleted through production. Without adding new reserves in
the future, the Company's oil and gas reserves and production will decline over
the long term. There can be no assurance that the Company will be able to find
and develop or acquire additional reserves. See "Business and Properties -- Oil
and Gas Operations -- Oil and Gas Reserves."

Limited Short-term Impact of Zydeco 3D Venture. It is anticipated that
wells may be drilled on one or two of the Zydeco projects in late 1995 or early
1996, though no assurance can be given that any wells will be drilled. Even if
such wells are drilled and are successful, it is extremely unlikely that Fortune
would receive any revenues from wells drilled on any of these projects until
mid-1996. Therefore, investors should be aware that the Zydeco 3D Venture will
not have any impact on the Company's revenues or cash flow during 1995, if at
all; and any impact during 1996 will be limited to the second half of the year.
No assurance can be given that Fortune will ever receive any revenues from any
of the Zydeco projects.

Properties Pledged to Secure Debt. Substantially all of the Company's
properties (other than its interest in the 13 Zydeco Projects) are pledged to
secure the Credit Facility. A failure to pay the principal or interest or
breaches of financial covenants under the Credit Facility could cause the
Company to lose all or part of its interest in its principal producing
properties currently pledged to secure the Credit Facility. The entire principal
balance of the Credit Facility is due July 1, 1996, and the Company does not
currently have the financial resources necessary to repay the Credit Facility in
full at that time without selling certain assets. While management intends to
seek a modification or waiver of this covenant as well as an extension of the
payment date for the principal balance of the Credit Facility, no assurance can
be given that Fortune will

7
<PAGE> 11

be able to obtain any relief from Bank One. It is, therefore, possible that
substantially all of Fortune's productive properties could be seized by the Bank
through a foreclosure. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Notes 3 and 5 of Notes to Financial
Statements.

Financial Impairments. The Company uses the successful efforts method
of accounting. Due to depressed gas prices at the end of 1994, the Company was
required to take an impairment of approximately $1.0 million against its oil and
gas assets as a charge against earnings. Similarly, the Company took a $2.7
million impairment at the end of 1993 due to depressed oil prices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Years Ended December 31, 1994 and 1993."

Dependence on Key Officer. The Company depends to a large extent on the
abilities and continued participation of its key employee, Tyrone J. Fairbanks,
President, Chief Executive and Chief Financial Officer. The loss of Mr.
Fairbanks could have a material adverse effect on the Company. In an effort to
reduce the risk, the Company has entered into an employment agreement with Mr.
Fairbanks which expires December 31, 1997. See "Management." The Company intends
to apply for up to $500,000 of key man life insurance on the life of Mr.
Fairbanks.

RISKS ASSOCIATED WITH OIL AND GAS INDUSTRY

Risks Related to Current Oil and Gas Markets. There is substantial
uncertainty as to the prices at which oil and gas produced by the Company may be
sold, and it is possible that if product prices decline to a low enough level,
the cost of operating some or all of the Company's properties may not be
economical. The availability of a ready market for oil and gas and the prices
obtained for such oil and gas depend upon numerous factors beyond the control of
the Company, including competition from other oil and gas suppliers, and
national and international economic and political developments. The price for
oil of equal gravity in California is generally lower than in the mid-continent.
Substantially all of the Company's oil reserves are in California. See "Business
and Properties -- Oil and Gas Operations." The Company is not subject to any
natural gas price controls.

Uncertainty of Estimates of Proved Reserves and Future Net Revenues.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the producer. The
reserve data set forth in this Prospectus represent only estimates. Estimating
quantities of proved reserves is inherently imprecise. Such estimates are based
upon certain assumptions about future production levels, future natural gas and
crude oil prices and future operating costs made using currently available
geologic engineering and economic data, some or all of which may prove to be
incorrect over time. As a result of changes in these assumptions that may occur
in the future, and based upon further production history, results of future
exploration and development, future gas and oil prices and other factors, the
quantity of proved reserves may be subject to upward or downward adjustment. In
addition, the estimates of future net revenues from proved reserves of the
Company and the present value thereof are based on certain assumptions about
future production levels, prices, and costs that may not prove to be correct
over time. The rate of production from oil and gas properties declines as
reserves are depleted. Except to the extent the Company acquires additional
properties containing proved reserves, conducts successful exploration and
development activities or, through engineering studies, identifies additional
behind-pipe zones or secondary recovery reserves, the proved reserves of the
Company will decline as reserves are produced. Future oil and gas production is,
therefore, highly dependent upon the Company's level of success in acquiring or
finding additional reserves. See "Business and Properties -- Oil and Gas
Operations -- Oil and Gas Reserves."

Volatility of Oil and Gas Prices. Oil and gas prices have been and may
be expected to continue to be quite volatile. This volatility depends on
numerous factors, including steps taken by OPEC, tensions in the Middle East and
weather conditions. The average gas prices received by the Company were $2.39,
$2.28, $2.17 and $1.41 per Mcf in 1992, 1993 and 1994 and for the six months
ended June 30, 1995, respectively. The average oil prices received by the
Company were $17.57, $14.10, $12.88 and $16.13 per Bbl in 1992, 1993 and 1994
and for the six months ended June 30, 1995, respectively. At September 11, 1995,
the Company was receiving an average of $1.56 per Mcf for its gas production and
$15.47 per Bbl for its oil production.

Drilling Risks. Drilling for oil and natural gas involves numerous
risks, including the risk that no commercially productive hydrocarbon reservoirs
will be encountered. The cost of drilling, completing and operating wells is
often uncertain and drilling operations may be curtailed, delayed or canceled as
a result of a variety of factors, including unexpected drilling conditions,
equipment failures or accidents and adverse weather conditions. The Company's
future

8
<PAGE> 12

drilling activities may not be successful and if unsuccessful, such failure will
have an adverse effect on the Company's future results of operations and
financial condition.

Operating Hazards. The Company's operations are subject to all of the
risks normally incident to the operation and development of oil and gas
properties and the drilling of oil and gas wells, including encountering
unexpected formations or pressures, blowouts, cratering and fires, which could
result in damage or injury to, or destruction of, formations, producing
facilities or other property or could result in personal injuries, loss of life
or pollution of the environment. Any such event could result in substantial loss
to the Company which could have a material adverse effect on the Company's
financial condition. Operations on its California properties are also subject to
the risk of direct or incidental damage caused by earthquakes. In addition,
because of the Company's strategy of acquiring interests in underdeveloped oil
and gas fields that have been operated by others for many years, the Company may
be liable for any damage or pollution caused by any prior operations on such oil
and gas fields. Although such operational risks and hazards may to some extent
be minimized, no combination of experience, knowledge and scientific evaluation
can eliminate the risk of investment or assure a profit to any company engaged
in oil and gas operations.

Uninsured Risks. Under the terms of operating agreements entered into
with the operator of wells in which the Company has an interest, it is
anticipated that the operators will carry insurance against certain risks of oil
and gas operations. The Company would normally be required to pay its
proportionate share of the premiums for such insurance and be named as an
additional insured under the policy. However, the Company may not be fully
insured against all risks, either because such insurance is not available or
because of premium costs.

Weather Hazards. Weather conditions, including severe rains and winter
conditions, have adversely impacted the Company's oil and gas operations. Heavy
rains during the winter of 1995 washed out a road to the Company's Hopper
Canyon, California property, which required the producing wells on the property
to be shut in. Severe winter conditions on the San Juan Basin, New Mexico
property caused a curtailment of operations, including attempts to complete
wells which have been drilled. The inability to produce existing wells and to
complete wells which may yield commercial quantities of oil or gas has an
adverse impact on the Company's cash flow and financial condition. Further,
weather conditions in the future, including hurricanes in the Gulf of Mexico,
could interrupt or prevent exploration drilling activities on the Zydeco
Projects and, if such projects prove to be productive of oil and natural gas,
could interrupt production activities by damaging surface facilities needed to
produce the wells.

Environmental Hazards. Oil and gas operations present risks of
environmental contamination from drilling operations and leakage from oil field
storage or transportation facilities. The Company has never experienced a
significant environmental mishap, but spills of oil could occur which could
create material liability to the Company for clean-up expenses. Environmental
contamination has occurred on the San Juan Basin, New Mexico property prior to
the Company's acquisition of its interest but has been cleaned up at no cost to
the Company. Although there can be no assurance of any third party recovery in
the event of a material liability, the Company generally seeks an indemnity from
the Seller against claims for environmental hazards on properties acquired
through its acquisition program. In addition, the Company carries $2,000,000 of
primary environmental insurance per occurrence with a $2,500 deductible plus
umbrella liability coverage for an additional $4,000,000 per occurrence with a
$10,000 deductible to cover potential liability. See "Business and Properties --
Governmental Regulation."

Competition. The oil and gas exploration, production and acquisition
business is highly competitive. A large number of companies and individuals
engage in acquiring properties or drilling for oil and gas, and there is a high
degree of competition for desirable oil and gas properties. There is also
competition between the oil and gas industries and other industries in supplying
the energy and fuel requirements of industrial, commercial, residential and
other consumers. Many of the Company's competitors have greater financial and
other resources than does the Company, and no assurance can be given that the
Company will be able to compete successfully in acquiring desirable properties.
See "Business and Properties -- Competition."

Government Regulation. The Company's business is regulated by certain
federal, state and local laws and regulations relating to the development,
production, marketing and transmission of oil and gas, as well as environmental
and safety matters. There is no assurance that laws and regulations enacted in
the future will not adversely affect the Company's exploration for, or the
production and marketing of, oil and gas. From time to time, proposals are
introduced in Congress or by the Administration which could affect the Company's
oil and gas operations. See "Business and Properties -- Governmental
Regulation."

9
<PAGE> 13

RISKS ASSOCIATED WITH INVESTMENT IN THE COMMON STOCK

Market Price Volatility. The market price of the Common Stock and the
Company's warrants may be subject to significant fluctuations in response to
drilling results in the Zydeco 3D Venture, the San Juan Basin or other
properties owned by the Company and the financial results of operations.
Developments affecting the oil and gas industry generally, including national
and international economic conditions and government regulation, could also have
a significant impact on the market price of the Common Stock and warrants. In
addition, the stock market in recent years has experienced significant price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of companies, and the price of the Common Stock and
warrants could be affected by such fluctuations.

Securities Market Factors. The markets for equity securities have been
volatile and the price of the Company's Common Stock has in the past been, and
could in the future be, subject to wide fluctuations in response to quarter to
quarter variations in operating results, news announcements, trading volume,
general market trends and other factors. There can be no assurance that the
Common Stock sold in this offering will trade in the future at market prices in
excess of the public offering price of this offering.

Absence of Dividends. The Company has not paid dividends since its
inception, and it does not anticipate paying dividends on its Common Stock in
the foreseeable future. Under the Credit Facility, the Company may not pay
dividends on its capital stock without the prior written consent of the bank. In
addition, the indenture under which the Company's outstanding debentures were
issued restricts the payment of dividends. See "Dividend Policy," "Management's
Discussion and Analysis of Financial condition and Results of Operations" and
"Description of Securities -- Common Stock."

Shares Eligible for Future Sale. Sales of substantial amounts of the
Common Stock in the public market could adversely affect the market price of the
Company's Common Stock. At September 21, 1995, the Company had outstanding
options and warrants to purchase an aggregate of 5,648,752 shares of Common
Stock which are currently exercisable, and 272,943 shares of Common Stock
issuable upon conversion of the Company's outstanding Debentures and 187,500
shares of Common Stock issuable upon conversion of the Klein Note. Included in
such amount are the shares registered hereby. At September 21, 1995, there were
9,356,973 shares of Common Stock outstanding, of which 6,972,741 shares are
freely tradeable and 2,384,232 shares are restricted from sale by lockup
agreement or under Rule 144 adopted by the Commission under the Act. In
connection with the Company's recently concluded offering of Common Stock, all
of the Company's directors and certain principal stockholders of the Company
entered into "lockup" agreements with the Representatives of the Underwriters
not to dispose of any shares of Common Stock held by them until July 31, 1996,
without the prior consent of the Representatives. At the conclusion of such
"lockup" period, approximately 1,388,000 currently outstanding shares of Common
Stock will become eligible for sale subject to Commission Rule 144.

In connection with the Company's acquisition of its interest in the
Zydeco 3D Venture, Fortune issued 1,200,000 shares of Common Stock and 1,200,000
five year stock purchase warrants exercisable at $4.75 per share. Pursuant to
court order, Fortune has placed in escrow 400,000 shares of Common Stock and
400,000 warrants due to the stockholders of LEX until a dispute which has arisen
among them is resolved. See "Business and Properties -- Legal Proceedings." Even
if such dispute is resolved, 400,000 shares and warrants will remain in escrow
pending the satisfaction of certain conditions. See "Business and Properties -
Zydeco 3D Venture." Financing of subsequent contributions to the Zydeco 3D
Venture and funding of the Company's share of drilling costs on the Zydeco
Projects could require the issuance of additional securities.

Anti-Takeover Provisions. Section 203 of the Delaware General
Corporation Law could have the effect of delaying, deferring or preventing a
change of control of the Company. Section 203 prevents an "interested
stockholder" (generally, any person owning 15% or more of a corporation's
outstanding voting stock) from engaging in a "business combination" (as defined)
for three years following the date such person became an interested stockholder
unless certain exceptions are met. In addition, the Company has a substantial
amount of authorized but unissued Common Stock and preferred stock. The
Commission has indicated that the use of authorized but unissued shares of
voting stock, including both common stock and preferred stock the terms of which
may be established by the board of directors, could have an anti-takeover
effect. See "Description of Securities -- Certain Anti-Takeover Provisions."

10
<PAGE> 14

THE OFFERING

The Common Stock offered hereby will be issued by the Company upon
exercise of outstanding Warrants or conversion of the Klein Note. The Company
will receive the entire net proceeds from the exercise of such warrants and will
not pay any brokerage or underwriting fees or discounts in connection with the
issuance of shares upon exercise of the Warrants. The Company will not receive
any proceeds from the conversion of the Klein Note but will be relieved of
$375,000 in debt. The Warrants may be exercised and the Klein Note converted in
accordance with the terms and conditions set forth in each warrant certificate
and the Note.

USE OF PROCEEDS

If all of the Warrants are exercised and the Klein Note is converted,
the net proceeds to the Company, after deducting expenses payable by the Company
estimated to be $50,000, will be approximately $11,085,000. The Company
anticipates that the net proceeds of this offering will be used to provide
working capital and pay drilling costs on future projects. Pending application
of the proceeds of the offering, the Company may make temporary investments in
interest-bearing savings accounts, certificates of deposit, U.S. government
obligations, money market accounts or other short-term, interest-bearing
securities.

DIVIDEND POLICY

The Company has not paid dividends since its inception, and it does not
anticipate paying any dividends on its Common Stock in the foreseeable future.
Under the Company's line of credit, the Company may not pay dividends on its
capital stock without the prior written consent of the bank. The Indenture under
which the Company's outstanding Debentures were issued restricts the payment of
dividends in the event the Company is in default on the Debentures; and Delaware
law prevents the payment of dividends unless the Company meets certain financial
tests. See "Description of Securities -- Common and Preferred Stock" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

DILUTION

The net tangible book value of the Company at June 30, 1995, was
$12,929,000 or $1.50 per share of Common Stock. Net tangible book value per
share represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding.
Assuming net proceeds to the Company of approximately $11,085,000 (after
deducting $50,000 of in estimated expenses of this offering) from the exercise
of the Warrants and conversion of the Klein Note, the net tangible book value of
the Company at June 30, 1995 would have been $24,014,000 or $2.05 per share.
This represents an immediate increase in net tangible book value of $.55 per
share to existing stockholders and an immediate average dilution of $1.56 per
share to new investors purchasing Common Stock through the exercise of the
Warrants and conversion of the Klein Note, as illustrated in the following
table:

<TABLE>
<S> <C> <C>
Average effective exercise price per share $3.61
Net tangible book value per share before exercise $1.50
Increase attributable to new investors $ .55
-----
Adjusted net tangible book value after exercise $2.05
-----
Dilution to new investors $1.56(1)
=====

(1) Actual dilution for the various purchasers will be as follows: Public
Warrants, $1.02; Representatives' Warrants, $1.74; and, the Klein Note, $.49.
Actual dilution for holders of Private Warrants will vary depending upon
actual exercise price of such warrants, but based on the weighted average
exercise price of $4.46, would be $2.43.

</TABLE>

11
<PAGE> 15

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
June 30, 1995 and as adjusted to give effect to the sale of 3,070,252 shares of
Common Stock upon sale of all of the shares covered by this Prospectus. No
assurance can be given that any shares will be sold. The following table
should be read in conjunction with the Financial Statements and related notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
June 30, 1995
------------------------------

Actual Pro Forma
------ ---------
<S> <C> <C>
Current liabilities (including current portions of
long term debt) $ 812,000 $ 812,000
=========== ===========

Long-term debt (excluding current portion) $ 5,489,000 $ 5,114,000

Stockholders' equity
Preferred stock, $1.00 par value, 2,000,000
shares authorized, none outstanding
Common stock, $.01 par value, 40,000,000
shares authorized, 8,650,307 shares outstanding $ 86,000 $ 124,000

Additional paid-in capital $21,516,000 $32,938,000

Accumulated deficit (8,453,000) (8,453,000)
----------- -----------

Net stockholders' equity $13,149,000 $24,609,000
=========== ===========

Total capitalization $18,638,000 $29,723,000
=========== ===========

</TABLE>

12
<PAGE> 16

PRICE RANGE OF COMMON STOCK

Prior to September 28, 1993, the Company's Common Stock was traded in
the over-the-counter market and quoted on the National Association of Securities
Dealers Automated Quotation System Small Cap Market. On September 28, 1993,
trading in the Common Stock commenced on the AMEX. Trading in the Warrants on
the AMEX began on April 18, 1994. The following table sets forth the high and
the low quarterly closing prices of the Common Stock and Warrants on the AMEX
for the periods indicated and the high and low bid prices as quoted on the
NASDAQ system (which reflect inter-dealer quotations that do not necessarily
represent actual transactions and are exclusive of retail mark up, mark down and
commissions). (All share amounts and per share prices have been adjusted to
reflect a one-for-four reverse stock split effective June 16, 1993.)

<TABLE>
<CAPTION>
Common Stock Warrants
------------ --------
High Low High Low
------ ----- ------ -----
<S> <C> <C> <C> <C>
1995
Third Quarter (through
September 21, 1995) $3-15/16 $3-5/16 $2-1/2 $1
Second Quarter 3-5/16 1-3/8 1 3/8
First Quarter 2-5/8 1-5/8 7/8 1/2

1994
Fourth Quarter 3-9/16 1-7/8 1-11/16 7/16
Third Quarter 3-1/4 2 3/4 5/16
Second Quarter 2-3/8 1-3/8 5/8 3/16
First Quarter 2-11/16 2-1/8

1993
Fourth Quarter 3-3/4 2-1/8
Third Quarter (commencing
September 28, 1993) - AMEX 4 3-3/4
Third Quarter (through
September 27, 1993) - NASDAQ 5-7/8 3-3/4
Second Quarter 5-3/4 4
First Quarter 5-1/2 5
</TABLE>

The high and low closing prices of the Common Stock during the third
quarter of 1995 (through September 21, 1995) have been $3.9375 and $3.3125,
respectively. At September 21, 1995, the closing price was $3.875. At
September 21, 1995, there were 9,356,973 shares of the Company's Common Stock
outstanding held of record by approximately 1,500 stockholders.

13
<PAGE> 17

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion should be read in connection with the
Company's Financial Statements, related notes and other financial information
included elsewhere in this Prospectus.

RESULTS OF OPERATIONS

Fortune's primary focus is domestic exploration for and development of
oil and natural gas. The Company expects in the future to make use of advanced
3D and 2D seismic technology, beginning with the Zydeco 3D Venture. Prior to
June 1994, Fortune had been an oil and gas acquisition and development company
seeking to acquire proved reserves and development opportunities on proven
properties. Although Fortune has encountered losses during the past three years,
some of which were generated by conditions which were beyond its control (such
as commodity price induced impairments and key non-operated wells which had
production curtailed to meet government maximum field allowable levels), the
Company has achieved increases during the three years ended December 31, 1994,
in revenues, production and positive profit from operations before non-cash
items. Additionally, the Company has reduced its direct production expenses over
the same periods.

Revenues and Production

Over the three years ended December 31, 1994, the Company increased its
oil and gas revenues by about 62.6%, to $3,339,000 from $2,093,000.

During the three years ended December 31, 1994, Fortune's production of
crude oil remained relatively constant despite the Company's emphasis on
acquiring gas reserves. At the same time, natural gas production grew for the
same three year period almost 4.4 times to 1,016,771 Mcf from 233,892 Mcf with
1994 natural gas production surpassing the Company's natural gas production for
1993 and 1992 combined.

Direct Production Expenses per BOE

Over the three years ended December 31, 1994, the Company decreased its
direct production expense per equivalent barrel by 36% to $4.24 per BOE from
$6.62 per BOE through improved operating techniques, reduced operating costs on
its California properties and increased production volumes.

The following table presents, as a percentage of net sales, certain
financial data for the Company for the periods indicated.

<TABLE>
<CAPTION>
Years Ended December 31, June 30,
-------------------------------------- --------
1992 1993 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Revenues 100% 100% 100% 100%
Direct Production Expense 39% 33% 32% 44%
---- ---- ---- ----
Revenue in Excess of Direct
Production Expense 61% 67% 68% 56%
Operating Results
Depletion, depreciation
and amortization 22% 61% 61% 47%
General and administrative
expenses 30% 28% 30% 39%
Interest expense 11% 11% 14% 26%
Other expenses 4% 6% 20% 2%
Loss (gain) on sale of assets 3% (5%) -- --
Impairment to oil and
gas reserves -- 95% 30% --
---- ---- ---- ----
Net Loss (9%) (129%) (87%) (58%)
</TABLE>

14
<PAGE> 18

SIX MONTHS ENDED JUNE 33, 1995 AND 1994

During the three months and six months ended June 30, 1995 Fortune had
a net loss of $430,000 and $839,000 compared to a net loss of $529,000 and
$664,000 for the three months and six months ended June 30, 1994.

Net revenues from sales of oil and gas decreased approximately $272,000
(29%) and $358,000 (21%) in the three months and six months ended June 30, 1995,
respectively, compared to the same 1994 periods. The decrease resulted primarily
from lower natural gas prices combined with shutting in the Company's Hopper
Canyon oil field for 5-1/2 months due to a storm damaged access road. Natural
gas prices averaged $1.30 and $1.41 per MCF for the three months and six months
ended June 30, 1995 as compared to $1.98 and $2.40 per MCF for the three months
and six months ended June 30, 1994. Oil prices averaged $16.47 and $16.13 per
barrel compared to $14.41 and $13.15 per barrel for the three month and six
month periods ended June 30, 1994.

In the three months and six months ended June 30, 1995 other income
consisted primarily of operator overhead fee revenues being charged on jointly
owned wells and a prospect fee of $50,000 paid to the Company when it farmed out
its 50% interest in its Polaris Prospect offshore Louisiana.

Direct production expenses decreased by $17,000 (7%) and increased by
$144,000 (29%) in the three months and six months ended June 30, 1995 compared
to the three months and six months ended June 30, 1994. The increase in the six
months is due primarily to the addition of $136,000 of direct operating expense
from the acquired production in Refugio County, Texas and Rio Arriba County, New
Mexico.

Fortune's general and administrative expenses decreased by $51,000
(12%) and by $90,000 (14%) during the three months and six months ended June 30,
1995 over the 1994 general and administrative expenses. The decrease during the
three months and six months were due to reduced payroll and insurance costs
offset by a $30,000 fee paid to Bank One to maintain the Company's credit
facility and a $150,000 accelerated amortization charge incurred by Fortune when
it paid off $300,000 in loans assumed by it in the acquisition of Lagniappe
Exploration, Inc. Interest expense increased by $101,000 (109%) and $222,000
(142%) for the three months and six months ended June 30, 1995 over the same
1994 periods as a result of borrowings during the second and third calendar
quarters of 1994. The Company's provision for depletion, depreciation and
amortization decreased by $248,000 (43%) and $284,000 (30%) in the three months
and six months ended June 30, 1995 compared to 1994 due to impairments taken at
year end 1994.

YEARS ENDED DECEMBER 31, 1994 AND 1993

During the year ended December 31, 1994 Fortune had a net loss of
$2,943,000, compared to a net loss of $3,654,000 for the year ended December 31,
1993. The loss for the period ended December 31, 1994 was primarily due to
higher depletion expense, lower natural gas prices received by the Company
during the period and higher lease operating costs attributed to the properties
acquired earlier this year. The loss for the year ended December 31, 1994 period
also includes a $1,031,000 impairment against oil and gas reserves, a one time
charge of $225,000 for a severance package, to be paid over a two year period,
to Daniel E. Pasquini, the Company's former president who resigned on June 23,
1994, and a $315,000 charge for the Company's interest in a Webb County, Texas,
exploration project. The $315,000 Webb County loss consisted of $115,000 in dry
hole costs and a $200,000 non-cash impairment which was included in abandoned
leasehold expense.

Net revenues from sales of oil and gas increased $577,000 (21%) in the
year ended December 31, 1994, compared to the same 1993 period. The increase
resulted primarily from production from wells acquired and recompletion
activities at the La Rosa Field. Oil prices the Company received averaged $12.88
per barrel for the year ended December 31, 1994 as compared to $14.10 per barrel
for the year ended December 31, 1993. Gas prices averaged $2.17 per Mcf for the
period ended December 31, 1994 as compared to $2.28 for the year ended December
31, 1993. Also, in the year ended December 31, 1994 other income consisted
primarily of operator overhead fee revenues being charged on joint owned wells.

Direct production expenses increased by $144,000 (15%) in the year
ended December 31, 1994, compared to 1993. The increase was primarily due to the
increase in direct operating expense from the acquired production and additional
wells put on production as a result of recompletions and facility installations
in Refugio County, Texas and Rio Arriba County, New Mexico, net of expense
reductions in California operations due to improved operating methods and lower
electrical costs.

15
<PAGE> 19

During 1994, Fortune's general and administrative expenses increased by
$229,000 (29%), over 1993 general and administrative expenses. The increase was
due primarily to increased insurance costs, legal fees, public relations
expenses, stockholder expense and expense attributed to a failed merger attempt
during the year. Interest expense increased by $149,000 (48%) for the year ended
December 31, 1994, due to increased interest bearing debt from the Refugio
County, Texas and Rio Arriba County, New Mexico acquisitions. The Company's
provision for depletion, depreciation and amortization increased by $351,000
(20%) in the year ended December 31, 1994, compared to the same 1993 period
because of depletion related to the additional acquired oil and gas properties
and lower gas prices at year end. During 1994, the Company also had an
impairment against its oil and gas assets as a charge against earnings (as it
had for 1993, as discussed below) and abandoned leasehold costs totaling
$1,280,000 on the Company's oil and gas properties.

YEARS ENDED DECEMBER 31, 1993 AND 1992

During the year ended December 31, 1993 Fortune had a net loss of
$3,654,000 compared to net loss of $198,000 for the year ended December 31,
1992.

The lower oil prices at December 31, 1993 shortened, for the Company's
reserve report purposes, the economic life of its proved producing reserves and
almost eliminated its proved undeveloped oil reserves in California. For this
reason the Company was required to take an impairment against its oil and gas
assets as a charge against earnings. The Company elected to use the more
conservative "Present Discounted Value" ceiling test method which amounted to an
impairment at December 31, 1993 of $2,682,000. By electing to take this larger
impairment than required under the "Future Undiscounted Revenues" method, the
Company accelerated more depletion expense into 1993 which, the Company
believes, should reflect positively on earnings for future years.

Net revenues from sales of oil and gas increased approximately $669,000
(32%) in the year ended December 31, 1993, compared to the same 1992 period. The
increase resulted primarily from the net effect of increased natural gas
revenues from properties acquired in Webb County, Texas, effective July 1, 1993
and decreased revenues from lower oil prices. Oil prices averaged $14.10 per
barrel for the year ended December 31, 1993 as compared to $17.57 per barrel for
the year ended December 31, 1992. Gas prices averaged $2.28 per Mcf for the year
ended December 31, 1993 as compared to $2.39 per Mcf for 1992.

For the years ended December 31, 1993 and 1992 other income consisted
primarily of operator overhead fee revenues being charged on joint owned wells.

Direct production expenses increased by $109,000 (13%) in the year
ended December 31, 1993 compared to the year ended December 31, 1992. The
increase during the 1993 year was primarily due to increased costs of workover
and repairs to maintain production from the Company's Hopper, Holser and Sespe
properties in Ventura County and the additional operating expenses for the July
1, 1993 to December 31, 1993 period for the acquired Webb County, Texas
production.

In the year ended December 31, 1993, Fortune's general and
administrative expenses increased by $137,000 (21%) over 1992 general and
administrative expenses. The increase during the year was due primarily to
increased stockholder expense for the two additional Company Stockholders'
meetings on March 12, 1993 and August 10, 1993, increased insurance costs and
higher payroll and payroll taxes. Interest expense increased by $77,000 (33%)
for the year ended December 31, 1993 due to a full year of interest bearing debt
from the Hinkle acquisition and the Company's Debentures. The Company also
established a reserve for doubtful debt of $101,000 for the year ended December
31, 1993 marking down a note receivable to the market value of its collateral.
The Company's provision for depletion, depreciation and amortization increased
by $1,237,000 (257%) in the year ended December 31, 1993 compared to 1992
because of the acquisition of additional natural gas properties in Texas and the
dramatic effect of lower 1993 year end oil prices on the calculation of
depletion under the "Units of Production" method.

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended June 30, 1995, Fortune had a net loss of
$430,000, as compared to a net loss of $529,000 for the six months ended June
30, 1994. For the year ended December 31, 1994 Fortune had a net loss of
$2,943,000 compared to a net loss of $3,654,000 for the year ended December 31,
1993. Fortune's management expects that it could incur additional losses in the
immediate future if natural gas prices remain at their current levels or
continue to decline later

16
<PAGE> 20

this year. It is anticipated that the proceeds of this offering are sufficient
to meet planned operating expenses and working capital requirements through
mid-1996.

On January 14, 1994, the Company entered into a $10 million secured
master revolving credit facility with Bank One, Texas, N.A. The facility
expires, if not renewed or extended, on July 1, 1996. The amount the Company may
borrow under the Credit Facility is determined by the borrowing base as
calculated by the Bank on semi-annually on the basis of the Company's oil and
gas reserves. The principal balance of the Credit Facility is currently
$3,600,000. At February 1, 1995, the borrowing base under the Credit Facility
was $4,700,000 but was reduced to $4,100,000 at April 1, 1995. The borrowing
base continues to decline at the rate of $100,000 per month. The Credit Facility
is secured by a mortgage on substantially all of the Company's existing proved
oil and gas properties. Under the terms of the facility, the Company is subject
to certain covenants, including restrictions or requirements with respect to
working capital, tangible net worth, net cash flow, additional debt, asset sales
and certain mergers and shareholders' equity.

At September 1, 1995, Fortune reduced the principal balance to
$3,600,000 to bring the loan into compliance with the borrowing base at that
date. The borrowing base is being recalculated by the Bank as of October 1,
1995, and may increase or be further reduced, depending on the oil and natural
gas prices used in calculating the Company's reserves. Even if the borrowing
base is increased by the Bank above the then current balance as of October 1,
1995, the Company may continue to be required to pay down the principal balance
at the rate of $100,000 per month to the extent the borrowing base is equal to
or less than the outstanding principal balance in light of the monthly decline
in the borrowing base as described above.

At December 31, 1994 and March 31, 1995, the Company was in breach of
certain covenants under the Credit Facility. See Notes 5 and 14 of Notes to
Financial Statements set forth elsewhere herein. On April 24, 1995, the Bank
agreed to waive such covenant breaches but required the Company to enter into a
lockbox arrangement pursuant to which its revenues are paid to an account with
Bank One. In addition, the Company agreed to consider selling its California
properties, which represent approximately $1.5 million of the borrowing base
under the Credit Facility. The Company has begun efforts to sell the California
properties, though no assurance can be given that it will be able to do so or,
if successful, that such sale will be at or greater than the book value for such
properties.

The entire principal balance of the Credit Facility is due July 1,
1996, and the Company does not currently have the financial resources necessary
to repay the Credit Facility in full at that time. The Company and Bank One are
in negotiations at the date of this prospectus to obtain a further waiver or
modification of the cash flow covenant and to restructure the repayment of the
Credit Facility to reduce the required principal payments and extend the due
date of the loan beyond July 1, 1996. There can be no assurance that such
negotiations will prove successful.

Although the Company had a positive cash flow during 1994 from
operating activities of $491,000, the Company had negative working capital at
December 31, 1994 of $4,576,000 due to reclassification of the Credit Facility
to current portion of long-term debt. Current low gas prices have had a negative
impact on the Company's cash flow and terms of its Credit Facility. Therefore,
the Company's viability as a going concern is dependent upon either
restructuring its debt, completion of this offering or other offerings of equity
or equity-linked securities, pledge of additional collateral, higher commodity
prices or a combination of the foregoing which would be adequate to provide
sufficient cash flow to meet its obligations. No assurance can be given that the
Company's efforts to cure its liquidity concerns will be successful.

Fortune's internal liquidity and capital resources consist of working
capital derived from its oil and gas operations. These items comprise all of
Fortune's liquid assets. Fortune's working capital decreased during the year
ended December 31, 1994 primarily due to decreased cash flow from operations as
a result of lower natural gas prices. At June 30, 1995, December 31, 1994,
September 30, 1994, June 30, 1994, June 30, 1994, and December 31, 1993, Fortune
reported working capital of $3,785,000, $(4,576,000), $2,000, $127,000, and
$(407,000), respectively.

Total capital expenditures for the six months ended June 30, 1995,
including expenditures for property acquisition and drilling and completion
costs, were $5,517,000 as compared to $2,998,000 for the comparable 1994 period.
Capital expenditures for the year ended December 31, 1994 were $4,065,000, as
compared to $6,750,000 for the same 1993 period. It is anticipated that the
Company's costs of drilling wells in 1995 and 1996 will be paid out of general
working capital provided by the proceeds of its June 1995 Common Stock offering
and by internally generated cash flow. See "Use of Proceeds." If oil or natural
gas prices increase sufficiently to cause an increase in the Company's proved
reserves used to calculate the borrowing base, the Company may have additional
bank borrowings available under the Credit Facility.

17
<PAGE> 21

Further, if additional oil or natural gas reserves are discovered on any of the
Company's properties and Bank One increases the borrowing base under the Credit
Facility as a result, this would also permit the Company to pay drilling costs
with bank borrowings. No assurance can be given that product prices will
increase, that any such additional reserves will be discovered or that Bank One
will agree to increase the borrowing base under the Credit Facility.

As of December 31, 1994 the Company was receiving approximately $14.41
per barrel as an average price for its produced oil and $1.69 per Mcf as an
average price for its produced gas.

Fortune has limited sources of capital that provide it with additional
liquidity other than its cash flow from operations. As discussed above, the
Credit Facility is secured by substantially all of Fortune's oil and gas
properties (other than the Zydeco Projects). There was no available credit on
the Credit Facility at September 1, 1995. Therefore, Fortune is unable to borrow
additional funds in excess of its borrowing base by utilizing certain of its oil
and gas assets. This condition is not expected to improve in the near future due
to the continued depressed condition of oil and gas prices, which has the effect
of reducing Fortune's borrowing base.

In order to provide capital for development activities, in December
1994, the Company borrowed an aggregate of $750,000 from certain principal
stockholders and members of management. For additional information regarding the
terms of these loans, see "Certain Relationships and Related Transactions."

In 1994, cash flows provided by operating activities were $491,000,used
in investing activities were $4,287,000 and provided by financing activities
were $4,085,000. Net cash provided by operating activities decreased by $481,000
from 1993 and reflects the result of higher revenues from oil and gas production
activities, offset by cash used to reduce liabilities from 1993 balances. Net
cash used in investing activities increased by $2,171,000 from 1993 due to
decreased expenditures for property and equipment. Net cash provided by
financing activities decreased by $1,356,000 from 1993 as a net result of the
proceeds provided by the Company's Credit Facility, offset by the retirement of
the Klein and Halliburton notes in comparison to 1993's Common Equity offering
proceeds.

In 1993, cash flows provided by operating activities were $980,000,
used in investing activities were $6,458,000 and provided by financing
activities were $5,441,000. Net cash provided by operating activities increased
by $783,000 from 1992 and reflects significantly higher revenues and year-end
receivables and inventories from oil and gas production activities, offset by
cash used to pay down current portions of long-term debt. Net cash used in
investing activities increased by $6,222,000 from 1992 due to increased
expenditures for property and equipment. Net cash provided by financing
activities increased by $5,413,000 from 1992 as a net result of the proceeds
provided by the Company's public equity offering of Units, offset by the
retirement of the Hinkle and Halliburton Notes, payments on debt incurred in the
Webb County properties' acquisition and the Company's costs of the public equity
offering.

Fortune has obtained updated oil and gas reserve reports from
Huddleston & Co. Inc., of Houston, Texas, and Sherwin Yoelin, its independent
engineers, dated March 2, 1995 and February 27, 1995, respectively. These
reports indicated a net present value discounted at ten percent of the Company's
proved reserves equal to $8.1 million at December 31, 1994, compared to a $8.6
million discounted value at December 31, 1993. Of that total value, the proved
developed producing wells had a discounted value of $5.7 million at December 31,
1994 compared to $6.5 million at December 31, 1993. Total net proved recoverable
reserves at December 31, 1994 increased to 1,647,000 barrels of oil and 5.9
billion cubic feet of natural gas from 813,000 barrels of oil and 5.6 billion
cubic feet of natural gas at December 31, 1993. The increase in natural gas was
primarily attributable to the acquisition of the Refugio County, Texas producing
assets, though the increase was only .3 billion cubic feet due to significantly
lower gas prices at December 31, 1994 on which the reserve report is calculated.

CAPITAL EXPENDITURES

The capital expenditures of the Company for the six months ended June
30, 1995, and for the years ended December 31, 1994, 1993 and 1992, excluding
properties purchased, were $5,517,000, $1,283,000, $346,000, and $217,000,
respectively. The increase in capital expenditures for the six months ended June
30, 1995 relate to the acquisition of LEX and contributions to the Zydeco 3D
Venture, and in 1994 was principally attributable to capital expended to
acquire, explore and develop the Company's acquired interests in Rio Arriba
County, New Mexico and Refugio County, Texas.

18
<PAGE> 22

PLAN OF OPERATION

The Company has sought to add reserves in the most cost-efficient and
effective manner. Prior to mid-1994, the Company focused its efforts on the
acquisition of producing properties in an effort to take advantage of
competitive prices for proved reserves with development potential in relation to
the cost of reserves discovered through exploration activities. See "Business
and Properties -- Acquisition Activity." In mid-1994, the Company made a
strategic decision to shift its emphasis from the acquisition of producing
properties to exploration for oil and natural gas reserves. This decision was
prompted by increasing price competition for attractive producing properties
(caused by larger and better capitalized companies moving into the acquisition
market) and a general tightening in available financing for acquisitions. See
"Risk Factors - Risks Associated with Oil and Gas Industry."

The Company's decision to shift its emphasis to exploration was further
influenced by several factors which Fortune believes create new opportunities
for exploration. These factors include increased availability of 3D seismic and
CAEX technology at competitive prices and the reallocation of exploration
budgets by major oil companies from domestic activity to international
exploration. This move by the major oil companies resulted in increased access
to geological and geophysical information relating to potential prospects, new
opportunities to enter into farmout agreements with respect to prospects held by
the major oil companies and less demand and price competition for domestic
acreage. To help facilitate its exploration strategy and focus its efforts, the
Company intends to begin efforts to sell all of its California producing
properties and prospects and retiring the debt secured by such properties from
the proceeds of such sale. Fortune has not taken any significant actions with
respect to disposing of such properties. The Company also intends to relocate
its headquarters to the greater Houston, Texas area within the next six to 12
months.

The Company would expect to continue to review acquisition
opportunities which may be presented to it and to conclude acquisitions which
further its business objectives. Of course, no assurance can be given that any
such opportunities will present themselves or that the Company will be able to
conclude any transactions if they arise. The Company is not now in discussions
with any other party regarding and has no arrangements or agreements respecting
any potential acquisition.

[this space left blank intentionally]

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<PAGE> 23

BUSINESS AND PROPERTIES

GENERAL

Fortune is an independent public oil and natural gas company whose
primary focus is on exploration for and development of domestic oil and natural
gas properties. The Company has recently acquired an interest in the Zydeco
Projects which will enable it to participate in exploration for oil and natural
gas in the shallow Gulf Coast waters of Louisiana in a strategic partnership
with Zydeco Exploration, Inc. referred to as the Zydeco 3D Venture. At the date
of this Prospectus, the Zydeco Projects are at various stages of preparation for
drilling. Leases have been acquired on all of the Zydeco Projects. While
management believes that the Zydeco 3D Venture has the potential to add
materially to the Company's reserves and, ultimately, its revenues, no assurance
can be given that the drilling of exploratory wells on any of the Zydeco
Projects will occur or will result in the discovery of commercial quantities of
oil or natural gas, or that the Company will be able to successfully explore for
oil and gas reserves or ever produce such reserves.

The Zydeco 3D Venture utilizes advanced three dimensional (3D) seismic
and computer-aided exploration ("CAEX") technology in its exploration efforts.
Zydeco has blended existing 3D seismic and CAEX technology, production data and
characteristics of wells in a particular geographic area and advanced
interpretation techniques (as well as traditional two-dimensional (2D)
seismic), to identify the initial Zydeco Projects. The Company believes that the
use of 3D seismic and CAEX technology provides more accurate and comprehensive
geological data for evaluation of drilling prospects than 2D and traditional
evaluation methods. Similarly, the Company believes that the techniques used by
Zydeco in combining existing 3D seismic and CAEX technology will provide the
Zydeco 3D Venture and Fortune with a competitive advantage by increasing the
likelihood of finding commercial quantities of oil and gas and achieving lower
average reserve finding costs. See "Risk Factors."

The Company's principal executive offices are located at 30101 Agoura
Court, Suite 110, Agoura Hills, California 91301 and its telephone number at
that address is (818) 991-0526.

BUSINESS STRATEGY

The Company has sought to add reserves in the most cost efficient and
effective manner. The Company previously focused its efforts on the acquisition
of producing properties in an effort to take advantage of what it believed to be
competitive prices for proved reserves with development potential in relation to
the cost of reserves discovered through exploration activities. See " --
Acquisition Activity." In mid-1994, the Company made a strategic decision to
shift its emphasis away from the acquisition of producing properties to
exploration for oil and natural gas reserves. This decision was prompted by
increasing price competition for attractive producing properties (caused by
larger and better capitalized companies moving into the acquisition market) and
a general tightening in available financing for acquisitions.

The Company's decision to shift its emphasis to exploration was further
influenced by several factors which Fortune believes create new opportunities
for exploration. These factors include increased availability of 3D seismic and
CAEX technology at competitive prices and the reallocation of exploration
budgets by major oil companies from domestic activity to international
exploration. This move by the major oil companies resulted in increased access
to geological and geophysical information relating to potential prospects, new
opportunities to enter into farmout agreements with respect to prospects held by
the major oil companies and less demand and price competition for domestic
acreage. To help facilitate its exploration strategy and focus its efforts, the
Company is intends to begin efforts to sell all of its California producing
properties and prospects and retiring the debt secured by such properties from
the proceeds of such sale. Fortune has not taken any significant actions with
respect to disposing of such properties. The Company also intends to relocate
its headquarters to the greater Houston, Texas area within the next six to 12
months.

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<PAGE> 24

EXPLORATION, EXPLOITATION AND DEVELOPMENT ACTIVITY

Exploration and Exploitation Projects

The Company is involved in a number of exploration and exploitation
projects, including the Zydeco 3D Venture projects and projects in the San Juan
Basin, Rio Arriba County, New Mexico and La Rosa Field, Refugio County, Texas.
Additionally, Zydeco is continuing its work to identify other potential projects
for the Zydeco 3D Venture.

The following table sets forth a summary of certain projects on which
the Company expects to conduct exploration activities over the next 12 to 24
months. In the table, the letter "P" following the name of the project indicates
that it is a "prospect;" the letter "L" indicates that it is a "lead;" and "C"
denotes a "concept." No assurance can be given that drilling activities will be
undertaken on any of these projects or, if undertaken, that such efforts will be
successful in finding commercial quantities of oil or natural gas.

EXPLORATION AND EXPLOITATION PROJECTS

<TABLE>
<CAPTION>
Maximum
Technology Interest Working Gross
Used or to Owned at Interest Acreage Net
Project Location Partner Be Used May 30, 1995 Available Owned(3) Acreage(3)
------- -------- ------- ---------- ------------ --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cirrus(P) Offshore LA Zydeco(1) 3D 50%(2) 50% 245 123
Cruiser(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 1,742 871
Everest(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 290 145
E. Thunder(P) Offshore LA Zydeco(1) 3D 50%(2) 50% 816 408
Jubilee(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 1,050 525
Matador(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 344 172
Mentor(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 5,000 2,500
Opal(L) Offshore LA Zydeco(1) 3D 50%(2) 50% 2,452 1,226
Ovation(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 514 257
Polaris(P)(4) Offshore LA Zydeco(1) 3D 50%(2) 50% 2,500 1,250
Sword(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 30 15
Ulysses(P) Offshore LA Zydeco(1) 3D 50%(2) 50% 2,148 1,074
Valhalla(C) Offshore LA Zydeco(1) 3D 50%(2) 50% 140 70
Jicarilla San Juan Basin Ampolex, EnRe, 2D 21%-25% N/A 70,000 16,515
Apache(P) New Mexico DEP
LaRosa(P) Refugio Co.,Tx LAROCO 3D 50% N/A 3,689 408
------ ------
90,960 27,028
</TABLE>
- ------------------
(1) Prior to entering into the exploration agreement with Fortune, Zydeco
granted to Clayton Williams Energy the right to purchase, prior to the
commencement of drilling, a one-eighth working interest in each project in
exchange for one-eighth of all costs incurred in the project to that time, plus
one-eighth of all future costs which include drilling, completion and operating
costs for any wells drilled on the project. In such event, if Fortune held a
50% interest in a Project, its interest would be reduced to 43.833% in exchange
for a payment to Fortune of 6.166% of the costs incurred to date.

21
<PAGE> 25

Zydeco 3D Venture

On May 12, 1995, Fortune acquired Lagniappe Exploration, Inc. ("LEX")
which had previously entered into the exploration agreement with Zydeco. As a
result, Fortune acquired LEX's right to participate in the Zydeco 3D Venture.
Fortune paid the LEX stockholders an aggregate of 1,200,000 shares of Common
Stock and 1,200,000 five year stock purchase warrants exercisable at $4.75 per
share. A portion of such shares and warrants remain in escrow pending the
satisfaction of certain performance thresholds as described below. A dispute
exists among the former LEX stockholders and others regarding who is entitled
to the shares of Common Stock and stock purchase warrants issued by Fortune at
the closing of the LEX acquisition. See "- Legal Proceedings."

The only material asset of LEX was its right to participate in the
Zydeco 3D Venture. Under the exploration agreement with Zydeco, Fortune has
acquired a 50% interest in each of 13 seismically defined oil and gas projects
identified by Zydeco using advanced 3D seismic imaging, visualization and
comprehensive well log analyses in exchange for the payment of up to $4,800,000
of leasehold acquisition and seismic costs. Fortune has paid $4,000,000 of
this amount to date and is required to pay the balance on or before October 25,
1995 in order to maintain a 50% interest in all of the projects. No assurance
can be given that Fortune will elect to pay the remaining $800,000. Of these
13 initial projects, four constitute "prospects" which are in near-drillable
condition, four constitute "leads" on which additional seismic work or lease
acquisition (or both) is required in order for exploration drilling to commence
and five constitute "concepts," which means that substantial additional seismic
and leasehold acquisition must be undertaken in order to consider exploration
drilling. These 13 Zydeco Projects are primarily located in geological trends
in the "Transition Zone" and the "Timbalier Trench" areas of the Gulf Coast of
Louisiana, where there have been discoveries of crude oil and natural gas
reserves and where advanced 3D seismic and CAEX technology is considered by the
Company and Zydeco to be effective in better defining exploration risks. In
addition to the initial 13 Zydeco Projects, the Company and Zydeco have
established areas of mutual interest ("AMIs") adjoining each prospect and have
agreed to provide each other with a right of first refusal on any other
projects developed along the Gulf Coast of Louisiana until December 31, 1996.
The advantage to Fortune of the establishment of the AMIs and right of first
refusal is that as Zydeco determines new projects within the AMIs, Fortune will
have the right to participate in them, though no assurance can be given that
any new projects will be identified or that Fortune will have the financial
resources to participate in such projects if any are identified. See "Risk
Factors."

The 13 Zydeco Projects are primarily located in the shallow marine
waters (five to 50 feet) within three to five miles of the Louisiana Coastline
(the "Transition Zone") and in the Timbalier Trench, a pre-historic channel of
the Mississippi River which is now offshore and covered in sedimentary
deposits. The Transition Zone and Timbalier Trench have been difficult areas
from which to obtain quality seismic data and to interpret using conventional
technology. The principals of Zydeco have worked in these two areas for the
past 18 years and have been successful in finding commercial quantities of oil
and natural gas. At Zydeco, they have combined advanced 3D seismic and CAEX
techniques which allow them to identify potential hydrocarbon reservoirs in
these previously "seismically blind" areas.

The Company does not currently expect to retain a working interest of
more than 25% in each well drilled on the Zydeco Projects and intends to
"farmout" its remaining interest to other oil companies on a "promoted" basis.
Fortune may retain larger or smaller working interests in certain projects
depending upon capital availability and other factors. Under a farmout
arrangement, the Company would be relieved of its obligation to pay, or could
recover already paid, acquisition and exploration costs but would wind up with
a smaller interest in any given prospect. For example, in a typical promoted
farmout, the party to which the interest is farmed out would pay all of
Fortune's working interest share of the acquisition and exploration costs in
the project. Fortune would attempt to retain a two to five percent overriding
royalty interest but would not be required to pay any of the project
acquisition and lease operating costs. Under such an arrangement, Fortune
would also normally have a right to convert its overriding royalty interest
into a 20-25% working interest in the project after the promoted party
recovered all of its costs from revenues derived from the particular well.
Fortune would exercise this right to convert its overriding royalty into a
working interest if the project proved to be productive and Fortune had the
financial resources at that time to pay its working interest share of the costs
of further development. No assurance can be given that Fortune will be able to
farmout any of the projects on a promoted basis or that, if it is successful in
doing so, that the farmout will be on the exact terms described above.

The Company also has a right under the Zydeco 3D Venture to "farmout"
a portion or all of its interest in each prospect to Zydeco under a put
arrangement in the exploration agreement. In the event of such a farmout of a
50% working interest, Fortune would retain a two percent overriding royalty
interest in the project, convertible into a 20% working interest

22
<PAGE> 26

after Zydeco recouped its drilling costs of the well from production. Should
Fortune farmout a smaller working interest to Zydeco, the overriding royalty
and after-payout working interests would be proportionately reduced.

Zydeco and Fortune entered into a farmout of the Polaris Project to
Southern Gas Company of Delaware ("Southern") on May 31, 1995. Under the terms
of the farmout, Southern paid Zydeco and Fortune an aggregate of $100,000 in
exchange for 100% of the working interest in the Project. Zydeco and Fortune
also retained a 6.166% overriding royalty interest of which 4.166% is
convertible to a 12-1/2% working interest after Southern receives payout from a
completed well. Zydeco and Fortune would also receive a payment out of
production of approximately $32,500. Southern is required to commence drilling
a well on the Project on or before December 31, 1995 and will earn an interest
in the Project to a depth of 100 feet below the deepest depth drilled if
Southern completes a commercially productive well. This means that Zydeco and
Fortune will retain the right to explore the Project at deeper depths. No
assurance can be given that such farmout will be entered into, that Southern
will drill the required well or that any drilling conducted by Southern will be
successful.

Of the 1,200,000 shares and 1,200,000 warrants issued by Fortune in
connection with the LEX acquisition, 400,000 shares and 400,000 warrants will
remain in the escrow and will not be delivered to the former LEX stockholders
until the initial funds contributed to the Zydeco 3D venture by Fortune have
been expended and Fortune has accepted an accounting of those expenditures.
Since Fortune will have no control over Zydeco's expenditure of Fortune's
contributions to the venture, this arrangement is designed, in part, to give
Fortune a degree of protection that the funds contributed by Fortune will be
expended for agreed-upon purposes. All of the escrowed common shares will be
treated as outstanding when issued and may be voted on any matter presented to
the stockholders for a vote. To the best knowledge of the Company, no
arrangement or agreement to act together with respect to the Fortune shares and
warrants to be acquired has been reached among the LEX stockholders. See
"Principal Stockholders" and "Certain Relationships and Related Transactions."
A dispute exists regarding who the stockholders of LEX are and who is entitled
to receive the Common Stock and warrants issued in the LEX acquisition. See "
- - Legal Proceedings."

San Juan Basin, New Mexico

On June 24, 1994, the Company acquired non-operating working
interests, ranging from 21.5625% to 25% in 70,000 producing, development and
exploratory acres in Rio Arriba County, New Mexico. Of this amount, 60,000
acres are held under three Mineral Development Agreements ("MDAs"), of 20,000
gross acres each, from the Jicarilla Apache Indian Tribe (the "Tribe"). See
also "Business and Properties -- Historical Acquisition Activity -- EnRe
Corporation." Under these MDAs, certain development activities are required to
maintain each of the acreage blocks.

The acreage in the San Juan Basin properties lies immediately north of
the West Puerto Chiquito Field in which several wells produced more than one
million BOE per well bore from the Mancos Trend Formation and some produced
between two million and three million BOE per well bore. The Company believes
its acreage may be an extension of that Field. Drilling and completion costs
per well in the Mancos Trend Formation usually range from $750,000 to
$1,000,000 each.

Since June 1994, Fortune has participated in drilling six wells and
shooting approximately 70 miles of new seismic data. Fortune's capital
expenditures for the six wells drilled in 1994, the seismic projects, lease
bonuses and other activities, including pipelines and facilities, was
approximately $1.1 million.

The first well, a 4,500 foot Entrada formation exploratory test, was
drilled in September 1994 on the 10,000 acre Entrada Prospect but was not
completed and was abandoned in December 1994. Two 3,500 foot developmental
wells were drilled and cased on the Leavry Canyon MDA acreage block during
November and December 1994 and are awaiting completion, including artificial
stimulation treatment. Because of adverse weather conditions, the Company
cannot predict when these and other activities on the MDAs will be completed.

One 8,500 foot horizontal well was drilled on the Cedar Canyon MDA
acreage. This well was drilled, then re-drilled and then the operator elected
to attempt further re-drill operations. The Company decided not to participate
in these further re-drill operations. Under the non-consent provisions of the
Operating Agreement, should the well prove commercially productive, the Company
would begin receiving revenues, if at all, after the consenting partners has
received a return of 400% of their investment incurred after the Company's
non-consent. The Company is currently involved in litigation affecting this
well. See " - Legal Proceedings."

23
<PAGE> 27

Two wells were also drilled on the Los Indios MDA acreage. These
wells were spudded in late December 1994. Casing has been installed on both
wells, and both are awaiting perforation and artificial fracture stimulation.
Completion activities on these wells has been delayed until the fourth quarter
of 1995, due to weather conditions and disagreements among the partners in the
project on the proper completion program.

A meeting of the operating committee for this development area, which
includes representatives of the Company, scheduled for May 1995 to consider the
development schedule for 1995, was postponed due to continuing bad weather
conditions in the area which makes future planning extremely difficult. No new
date for the meeting has been set, and the Company cannot predict what
additional drilling, if any, will occur in 1995 or 1996. Under the MDAs, a
total of four wells are required to be drilled in 1995. The Company estimates
that, if such drilling were to occur, its share of the 1995 capital costs
attributable to its interests would be approximately $180,000. The Company is
not obligated to participate in these operations and would not be obligated to
pay these expenses if it elected not to participate. However, management
currently contemplates that the Company would participate and pay its share of
the costs if the operations are undertaken.

Webb County, Texas

The Company has a 20% interest in a proved undeveloped infill location
within the Belle Pepper Field, located in Webb County in South Texas. In June
1994, the Company participated in the drilling of a 10,000 foot exploratory
test well to the Lobo sand which was determined to be commercially
unproductive. Fortune had a 25% working interest in this well, and its dry
hole costs were $115,000. Additionally, the Company took a writedown of
$200,000 for its acreage cost in this exploration project. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Refugio County, Texas

Between February 7, 1994 and December 31, 1994 the Company
participated in 23 natural gas and two oil recompletions in new zones of
shut-in wells of which 18 were successful. As of December 31, 1994, the
Company added a total of 1,000 Mcf per day net natural gas production and 40
Bbls per day net oil production from the La Rosa Field at a total net expense
of $438,000. Additionally, the Company plans to participate in a 3D seismic
program over the 989 productive acres and the 2,700 undeveloped acres held by
production and offsetting the proved productive acreage.

AWP Field, McMullen County, Texas

Two development wells were drilled in 1993 as required by a continuous
drilling provision for its oil and gas interest in the AWP field located in
McMullen County, in South Texas. The Company has a 10% interest in each well.
The Company has fulfilled all of its drilling obligations in the AWP field.
There are 11 proved developed locations remaining to be drilled on either 40 or
80 acre spacing and the operator is currently in discussion with the landowners
to reduce their royalty from 35% to 25% on several of the remaining locations.
The Company's estimated share of the drilling and completion costs for each of
these wells is $43,000 each. It is anticipated that further drilling
operations will commence before the end of 1996.

Hopper Canyon and Holser Canyon Fields, Ventura County, California

In June 1994 the Company undertook efforts to improve the production
at its Hopper, Holser and Sespe fields. Activities in 1994 included workovers
and recompletions of existing wells. Within these three fields, Fortune owns
10 proven undeveloped infill locations. Fortune engages in development
drilling when oil prices create the economic incentives necessary to drill and
when the Company has the available capital to pursue this type of drilling.
However, California oil prices would need to reach a stable level above $20.00
per Bbl (an increase of approximately 35% over current prices) for the Company
to justify economically proceeding with such drilling operations. The Company
would have to improve its operating capital significantly to drill development
wells considering the median price to drill and complete a well is
approximately $500,000 in this area and Fortune owns 100% of these fields.

Additionally, during the rainstorms in Ventura County during January
1995 a section of the access road into the Hopper Canyon Field was washed out.
Fortune elected to shut-in its Hopper Canyon production in February pending the
end of the rain season (April) before commencing repair of the road. Such
repairs, which cost $48,000, were completed in mid-June 1995. Production from
the shut-in wells recommenced in late June 1995.

24
<PAGE> 28

Exploration drilling activities may require substantial outlays of
capital and involve a great amount of risk. There can be no assurance at this
time that the Company will be able to raise the capital or find the joint
venture partners required to explore these projects.

Drilling Activities

The following table sets forth information regarding development and
exploratory wells drilled by Fortune in the years ended December 31, 1992, 1993
and 1994:

WELL DRILLING ACTIVITY

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Gross Wells

Productive 2.00 3.00 5.00
Dry 1.00 0.00 3.00
---- ---- ----
Total 3.00 3.00 8.00
==== ==== ====

Net Wells

Productive 0.20 0.40 1.18
Dry 0.10 0.00 0.47
---- ---- ----
Total 0.30 0.40 1.65
==== ==== ====
</TABLE>

ACQUISITION ACTIVITY

San Juan Basin, New Mexico

On June 24, 1994, Fortune concluded the purchase of a 25% interest in
EnRe-1, LLC, a newly formed Texas Limited Liability Company, of which EnRe
Corporation is the manager. EnRe-1, LLC owns three Jicarilla Apache Minerals
Development Agreements covering 60,000 producing, development and exploratory
acres in Rio Arriba County, New Mexico and associated tangible property. At
the same time, the Company acquired an approximately 22% working interest in
certain mineral, oil and gas leasehold interests in an additional 10,000
exploratory acres in Rio Arriba County, New Mexico, from EnRe Corporation.
(The 25% interest in EnRe-1, LLC and an approximately 22% working interest in
the 10,000 exploratory acres are collectively referred to as the "EnRe
Assets.")

The EnRe Assets were acquired in exchange for $1,375,000 in cash. The
effective date under the purchase method of accounting for transferring
revenues and expenses on these properties was determined to be June 1, 1994.
See "Legal Proceedings" for information regarding litigation between the
Company and the operator of the EnRe Assets.

Brooklyn Union Exploration Company, Inc.

On February 8, 1994, the Company completed an acquisition of a 50%
working interest in a 3,689 acre lease in the La Rosa Natural Gas Field in
Refugio County, Texas from Brooklyn Union Exploration Company, Inc. for
$750,000. The effective date of the transaction using the purchase method of
accounting was February 1, 1994. The acquisition consisted of 12 producing
wells, four saltwater producing wells and 35 shut-in wells with total new
proved reserves to the Company of one BCFE and additional probable reserves
behind pipe. There is also an additional 2,700 undeveloped acres adjacent to
production which was acquired for future exploration. The Company plans to
participate in a 3D seismic program which is contemplated during 1996 to help
define exploration projects within the undeveloped acreage and the potential
for other undiscovered reserves within the productive field limits. As of
December 31, 1994 the Company has participated in 18 successful recompletions
into new natural gas zones in previously shut-in wells yielding an approximate
net increase in production to the Company of 1,000 Mcf per day and 40 barrels
of oil per day.

25
<PAGE> 29

cBase Group

Effective December 31, 1993, the Company purchased additional working
interests in the Holser Field, California, for $138,000 from cBase Group.
Additionally the Company sold its interest in the Ramona Field in Ventura
County, California to cBase Group for $13,000. The transaction was consummated
on January 31, 1994. See "-- Properties."

Michael Petroleum, et al.

On October 5, 1993, the Company completed the acquisition of certain
mineral, oil and gas leasehold interests and associated tangible property in
exchange for an adjusted price of $6,457,386 in cash and 195,000 common stock
purchase warrants from Michael Petroleum Corporation, Brazos Resources, Inc.,
Pioneer Drilling Company and Endowment Energy Partners. The common stock
purchase warrants are exercisable at $4.13 and expire on October 5, 1995. The
effective date under the purchase method of accounting for transferring revenue
and expense on these properties, however, was determined to be July 1, 1993.
The mineral, oil and gas leasehold interests include working interests in
producing and non-producing oil and gas properties located in Webb County,
Texas. The Lobo sand in this area has very low permeability (under one
millidarce) which has qualified all the acquired production as a "tight" gas
sand. As a tight gas sand, the production, from wells drilled before January
1, 1993, is exempt from Texas State severance tax on the gas production and
qualifies for the Federal Section 29 tax credit worth approximately $.52 per
Mcf produced.

Benton Oil and Gas Co.

On April 30, 1992 Fortune acquired a 100% working interest in the oil
and gas producing Hopper 12-1 well from Benton Oil and Gas Company for $5,000
in cash, 6,325 shares of Common Stock and a production payment of $42,500. The
principal balance of the production payment at December 30, 1994 was $9,800.

Hinkle Exploration, Limited, San Francisco Energy Corporation

On April 10, 1992, Fortune acquired certain oil and gas producing
properties located in the Sespe Field in Ventura County, California and the
Bracken Lease in the AWP Field, in McMullen County, Texas from Hinkle
Exploration, Limited, San Francisco Energy Corporation and each of its
respective limited partnerships and Klein Bros. Inc. (together referred to as
"Hinkle"). The transaction was accounted for as a purchase as of February 1,
1992 with the acquisition price of $3,741,000 based on the market value of
Fortune's Common Stock and debt assumed. The Company issued 243,153 shares of
Fortune Common Stock, assumed $391,000 of debt incurred against the oil and gas
properties by Hinkle and issued a note for $2,000,000 (the "H&B Note") in
exchange for the assets acquired plus revenues and expenses since August 1,
1991. Additionally, 138,888 and 13,255 common stock purchase warrants
exercisable at $7.20 and $0.04, respectively, were issued to Hinkle. The
13,255 stock purchase warrants were registered on December 2, 1992 and
exercised on December 11, 1992. The 138,888 stock purchase warrants were
adjusted to reflect an exercise price of $3.89 and their expiration extended to
September 28, 1998 in exchange for extending the final payment of $1,000,000 of
the H&B Note to July 1, 1995. On January 26, 1994, the Company retired the
remaining $2,000,000 on the H&B Note and the $391,000 of assumed debt using the
Credit Facility.

Fairbanks & Haas, Inc.

Fortune acquired substantially all of the assets (primarily California
oil and gas properties) of Fairbanks & Haas, Inc. (FHI) and its joint venture
partners effective November 1, 1990, for 143,674 unregistered shares of Common
Stock in 1990 and 10,732 shares in 1991, assumption of $103,301 of FHI's joint
venture partners' debt secured by the properties and $23,424 in cash, and
repurchased 5,708 shares of common stock originally issued in the transaction
for $50,000. The acquisition was accounted for as a purchase with the
acquisition price of $1,196,000 based on the estimated market value of the
Common Stock at November 1, 1990 and the other consideration. Tyrone J.
Fairbanks, Fortune's president, CEO and CFO, was a principal stockholder,
president and director of FHI.

26
<PAGE> 30

OIL AND GAS OPERATIONS

Oil and Gas Reserves

The Company's reserves are located in Texas, New Mexico and
California. Proved reserves represent estimated quantities of crude oil and
natural gas which geological and engineering data demonstrate to be reasonably
certain to be recoverable in the future from known reservoirs under existing
economic and operating conditions. Proved developed oil and gas reserves are
proved reserves that can be expected to be recovered through existing wells
using existing equipment and operating methods.

The oil and gas reserve estimates at December 31, 1993 and 1994, were
reviewed by Huddleston & Co., Inc., Houston, Texas, independent petroleum
engineers, and Sherwin D. Yoelin, Los Angeles, California, independent
petroleum engineer. For the year ended December 31, 1992, the oil and gas
reserve estimates were reviewed by Mr. Yoelin.

Such estimates are subject to numerous uncertainties inherent in the
estimation of quantities of proved reserves and in the projection of future
rates of production, prices and the timing of development expenditures. The
accuracy of any reserve estimate is a function of available data and of
engineering and geological interpretation and judgment. The future cash
inflow, as reflected in the "Standardized Measure of Discounted Future Net Cash
Flows Relating to Proved Oil and Gas Reserves", determined from such reserve
data are estimates only, and the present values thereof should not be construed
to be the current market values of the Company's oil and gas reserves or the
costs that would be incurred to obtain equivalent reserves. While the reserve
estimate presented herein is believed to be reasonable, it should be viewed
with the understanding that subsequent production of oil and gas from each
reservoir, the timing and success of future development drilling and changes in
pricing structure or market demand will affect the reserve estimate. See "Risk
Factors -- Risks Associated with the Company -- Engineers' Estimates of
Reserves and Future Net Revenue."

The following sets forth information with respect to estimated proved
oil and gas reserves as determined by Fortune's independent petroleum engineers
attributable to the Company's interests in oil and gas properties as of
December 31, 1992, 1993 and 1994.

ESTIMATED NET RESERVE QUANTITIES

<TABLE>
<CAPTION>
at December 31,
---------------------------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Total Proved Reserves(1):
Oil (Bbls) 2,066,000 813,000 1,647,000
Natural Gas (Mcf) 4,795,000 5,562,000 5,911,000
--------- --------- ---------
Equivalent Bbls(BOE)(2) 2,865,000 1,740,000 2,632,000
========= ========= =========

Total Proved Developed Reserves:
Oil (Bbls) 983,000 666,000 675,000
Natural Gas (Mcf) 2,582,000 4,221,000 3,317,000
--------- --------- ---------
Equivalent Bbls(BOE)(2) 1,414,000 1,370,000 1,228,000
========= ========= =========
</TABLE>

- ------------
(1) Estimates of oil and gas reserves are based in part on the price at which
it is anticipated the product can be sold; and if the cost of producing the oil
and gas exceeds the sales price, the quantity of "recoverable reserves" is
reduced. The decline in reserves from December 31, 1992 to December 31, 1993
was primarily due to the difference in the average oil price received by the
Company at those dates ($14.62 per barrel compared to $10.21 per barrel,
respectively) and the resulting decline in economically recoverable quantities.
The decline in reserves from December 31, 1993 to December 31, 1994 is
primarily due to the decrease in the average gas price received by the Company
for that period ($2.28 per MMBTU compared to $1.39 per MMBTU, respectively) and
the resulting decline in economically recoverable quantities offset by
increases in reserves from higher oil prices in 1994 as compared to 1993 year
end of $14.41 and $10.21, respectively.

(2) After conversion (6:1); six units of natural gas to one unit barrel of
crude oil.

27
<PAGE> 31

Discounted Present Value of Future Net Revenues

The following table represents the estimated future net revenues
(unescalated and discounted at 10% per annum) and the present value of the
future estimated net reserves from the proved developed producing, proved
developed non-producing and the proved undeveloped reserves at December 31,
1992, 1993 and 1994.

DISCOUNTED PRESENT VALUE OF FUTURE NET REVENUES

<TABLE>
<CAPTION>
at December 31,
---------------------------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Cumulative Future Net Revenue(1) $20,385,000 $12,835,000 $15,932,000
less adjustment to give effect to a
10% annual discount (11,830,000) (4,281,000) (7,784,000)
----------- ----------- -----------
8,555,000 8,554,000 8,148,000
less discounted present value of
future income taxes (2,909,000) (2,907,000) (2,770,000)
----------- ----------- -----------
$ 5,646,000 $ 5,647,000 $ 5,378,000
=========== =========== ===========
</TABLE>

- ----------------
(1) The decline in future net revenue from December 31, 1992, to December 31,
1993 is primarily due to the difference in the average oil price received by the
Company at those dates ($14.62 per barrel compared to $10.21, respectively) and
the resulting decline in quantities. The decline in the 10% discounted value of
future net revenue from December 31, 1993, to December 31, 1994 is primarily due
to the difference in the average gas price received by the Company at those
dates ($2.28 per MMBTU compared to $1.39 per MMBTU, respectively) and the
resulting decline in quantities offset by increases in reserves from higher oil
prices in 1994 as compared to 1993 year end of $14.41 and $10.21, respectively.

Production

The approximate net production data related to the Company's
properties for the periods ended December 31, 1992, 1993 and 1994 from the
Company's properties are set forth below:

NET PRODUCTION DATA

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Oil (Bbls) 87,387 78,737 87,615

Gas (Mcf) 233,892 723,878 1,016,771
</TABLE>

The Company has been able to maintain relatively constant oil
production and increase its natural gas production as shown in the table due to
the acquisitions described above under the heading "- Acquisition Activity."

Prices and Production Costs

The following table sets forth the approximate average sales prices
and production (lifting) costs per barrel of oil and per Mcf of gas produced
and sold in the United States from the Company's oil and gas leases for the
years ended December 31, 1992, 1993 and 1994:

28
<PAGE> 32

AVERAGE SALES PRICES AND PRODUCTION COSTS

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Average Sale Price Received:
Oil (per barrel) $17.57 $14.10 $12.88
Gas (per Mcf) $ 2.39 $ 2.28 $ 2.17

Average Production Cost
per Equivalent Barrel $ 6.62 $ 4.84 $ 4.24
</TABLE>

Producing Wells

The following table lists the total gross and net producing oil wells
in which Fortune had an interest at December 31, 1994:

PRODUCING WELLS

<TABLE>
<CAPTION>
Gross Net
------ ---
<S> <C> <C>
Texas 89 17.25
New Mexico 6 1.07
California 39 29.92
--- -----
Total 134 48.24
=== =====
</TABLE>

An additional 28 gross and 9.59 net wells owned by the Company are
either shut-in, awaiting recompletion or are used for waste water injection.

Principal Customers

For the year ended December 31, 1992, the Company sold approximately
65% of its oil production to Texaco Transportation and Trading, Inc. and
approximately 14% to Enron Energy. Approximately 63% of its natural gas
production was sold to Enron Energy during 1992, 10% was sold to Unocal and 10%
to Shell. During the year ended December 31, 1993, approximately 68% of the
Company's produced oil was sold to Texaco Transportation and Trading, Inc. and
14% was sold to Enron. During 1993, the Company sold approximately 64% of its
natural gas production to Michael Gas Marketing Co., Inc. and 26% to Enron
Energy. For the year ended December 31, 1994, approximately 72% of its
produced oil was sold to Texaco Transportation and Trading and 8% to Enron, and
48% of the Company's produced gas was sold to Michael Gas Marketing Co., Inc.,
25% to Tenneco and 15% to Enron Energy.

The Company believes that the loss of any of these customers should
not have any material adverse effect on the Company, since there are a large
number of companies which purchase crude oil and natural gas in the areas in
which the Company operates. The Company does not currently engage in any
marketing activities for its oil and gas, because it believes there is
sufficient demand among purchasers to acquire all of the Company's available
production.

PROPERTIES

Leasehold Acreage

Fortune's holdings of developed and undeveloped leasehold acreage as
of December 31, 1994 were approximately as follows:

29
<PAGE> 33

LEASEHOLD ACREAGE

<TABLE>
<CAPTION>
Developed Undeveloped
--------- -----------
Gross Net Gross Net
----- --- ----- ---
<S> <C> <C> <C> <C>
Texas 5,544 1,120 3,960 1,468
New Mexico 1,800 405 68,200 16,106
California 992 970 6,004 4,094
Oklahoma 80 5 -- --
----- ----- ------ ------
Total 8,416 2,500 78,164 21,668
===== ===== ====== ======
</TABLE>

This table does not reflect acreage acquired through the Zydeco 3D
Venture. See "-- Development and Exploration -- Exploration and Exploitation
Projects."

Texas Properties

At December 31, 1994, Fortune owned an interest in 113 gross and 26.73
net oil wells located in Texas. During 1994, approximately 19,348 net barrels
of oil and 930,448 net Mcf of gas were produced from the Texas properties as
compared to approximately 16,433 net barrels of oil and 651,201 net Mcf of gas
in 1993.

The Texas properties, which are primarily non-operated, comprised
approximately 69% of Fortune's net proven gas reserves and seven percent of
Fortune's net proven oil reserves at December 31, 1994.

New Mexico Properties

At December 31, 1994, Fortune owned an interest in six gross and 1.07
net oil and gas wells located in New Mexico. During 1994, approximately 5,246
net Bbls of oil and 17,697 Mcf of gas were produced from the New Mexico
properties acquired as of June 1, 1994. Properties located in New Mexico,
which are all non-operated, comprised a negligible portion of Fortune's net
proven gas reserves and one percent net proven oil reserves at December 31,
1994.

California Properties

At December 31, 1994, Fortune owned and operated 39 gross and 29.92
net wells located in California. Production in California during 1994 totaled
approximately 63,021 net barrels of oil and 68,626 net Mcf of gas,
respectively. Production from California during 1993 totaled approximately
61,217 net barrels of oil and 66,017 net Mcf of gas, respectively. The
increase in California oil production in 1994 is attributed primarily to the
recompletion of certain wells in the Hopper and Holser fields. The wells on
the Company's Hopper Canyon Field were shut in as a result of road damages
incurred from severe flooding during January 1995. The effect of shutting in
these wells has been to reduce the Company's monthly net revenues by about
$25,000 or seven percent. The work to repair the road was completed in
mid-June, and the wells were put back into production in late June 1995.

Properties located in California, which are all operated by the
Company, comprised approximately 92% of Fortune's net proven oil reserves and
31% of Fortune's net proven gas reserves as of December 31, 1994.

Oklahoma Properties

At December 31, 1994, Fortune owned non-operated interests in two
gross and .11 net wells located on 80 gross (5 net) acres in Oklahoma. These
two wells were not in production during 1994. For the year ended December 31,
1993, net production from Oklahoma properties was 1,087 barrels of oil and
6,660 Mcf of gas. For the year 1992 the Company's production was 2,753 barrels
of oil and 18,508 Mcf of gas from Oklahoma properties. No oil or gas reserves
were attributed to the Company's Oklahoma properties at December 31, 1994.

Title to Properties

Detailed title examinations were performed for many of the Company's
properties in December 1993 and January 1994 in conjunction with the Credit
Facility, and title opinions were issued. The Company believes it holds valid
title on all its properties, free and clear of any liens or encumbrances except
for the lien held by Bank One, Texas on substantially

30
<PAGE> 34

all of the Company's proven properties, as described herein. Title opinions
are obtained on newly acquired properties as of the date of the closing. As is
customary in the oil and gas industry, the Company performs only a perfunctory
title examination at the time exploratory oil and gas properties are acquired.
Prior to the commencement of drilling operations, a thorough title examination
is conducted and any significant defects are remedied before proceeding with
operations. Transfers of many of the Company's properties are subject to
various restrictions, including the requirement of obtaining the consent of the
landowner in many instances.

Office Facilities

The Company leases office space in Agoura Hills, California. Rent for
the 3,950 square feet which the Company occupies was $43,000 in 1993, $45,000
in 1994 and is expected to be $52,000 in 1995. It is contemplated that the
Company will relocate its headquarters to Texas by year end 1995. See Note 8
of Notes to Financial Statements.

COMPETITION

Fortune competes with numerous other companies and individuals in the
acquisition of oil and gas properties, the marketing of oil and gas and the
recruitment of experienced personnel. Fortune's competitors include major oil
companies, other small producers, investment groups and individuals, many of
which have financial resources and facilities substantially greater than those
of the Company. However, the major oil companies are selling many of their
smaller or marginal domestic properties, primarily in California. Many
operating companies interested in acquiring properties have greater capital
resources than the Company. The Company's acquisition approach is to
concentrate on the properties of smaller independents and it has had
acquisition discussions with several of these companies involving property
acquisition for stock.

EMPLOYEES

Fortune has a total of nine employees, six of whom are in management
and administration and three in its oil and gas operations. In addition, the
Company utilizes the services of outside consultants in certain technical
aspects of the Company's business. Fortune utilizes these consultants to aid
in the evaluation of Company projects and to evaluate oil and gas assets for
potential acquisitions.

GOVERNMENTAL REGULATION

Environmental laws and regulations are having an increasing impact on
Fortune's operations in nearly all the properties where it has production.
Drilling activities and the production of oil and gas are subject to
regulations under federal and state pollution control and environmental laws
and regulations. It is impossible to predict accurately the effect that
additional environmental requirements may have on future earnings and
operations, but it will continue to be necessary to incur costs in complying
with these laws and regulations. Fortune spent approximately $10,000 and
$14,000 in environmental compliance costs in 1993 and 1994, respectively.

The Company is not currently involved in any judicial or
administrative proceedings and believes that it is in substantial compliance
with applicable environmental regulations. The Company believes that it is
reasonably likely that the trend in environmental legislation and regulations
will continue toward stricter standards. The Company is unaware of future
environmental standards that are reasonably likely to be adopted that will have
a material effect on the Company's financial position or results of operations,
but cannot rule out the possibility.

The Company has never had a material environmental problem, but if a
property in which Fortune has an interest is found to be contaminated, the
Company could be required to participate in a "clean up" program. Such a clean
up, depending on its magnitude and the Company's ownership interest therein,
could require undetermined amounts of capital and exceed the Company's ability
to pay. The Company has obtained primary insurance against oil spills
providing $2,000,000 of coverage per occurrence with a $2,500 deductible and an
umbrella policy for an additional $4,000,000 per occurrence with a $10,000
deductible. See "Risk Factors -- Risks Associated with Oil and Gas Industry --
Risk of Oil and Gas Operations."

The operations of oil and gas properties covered by leases in which
the Company has or may acquire an interest will require compliance with spacing
and other conservation rules of various state commissions and of the United
States Geological Survey and the Bureau of Land Management with respect to
federal oil and gas acreage. Further, production may be limited under state
regulations for the prevention of waste. At the present time, the Company has
no operations which are adversely affected by well permitting, spacing
regulations or production limitations.

31
<PAGE> 35

LEGAL PROCEEDINGS

EnRe Litigation

On March 30, 1995, a partial settlement was reached as to payment by
Fortune of undisputed well development costs in exchange for EnRe's
co-operation in complying with provisions of the operating agreement to report
operating information to Fortune on a timely basis. As of April 24, 1995, the
Company had paid all well development costs which it believed to be undisputed,
totalling $174,499. Thus, the remaining amount in dispute is $263,000 which
the Company does not believe it will ultimately be required to pay.

In the opinion of management, Fortune has valid defenses to all claims
still in dispute made by EnRe. The Company intends to vigorously defend the
litigation and pursue appropriate affirmative relief against EnRe for its
actions as operator.

Under mutual agreement of the non-operators, EnRe was asked to resign
as operator of these properties. EnRe has agreed to do so subject to approval
of the Jicarilla Apache tribe. In the interim, for purposes of field
operations, AMPOLEX USA, Inc., the project's largest working interest owner, is
acting as contract operator. It is anticipated that AMPOLEX USA, Inc. will
become the official operator for the project at some point during 1995.

LEX Litigation

In initially entering into the LEX acquisition, Fortune was advised
that the stockholders of LEX would include only William D. Forster, BSR
Investments, a British Virgin Islands corporation ("BSR"), and Ensign Financial
Group Limited, a British Virgin Islands corporation ("Ensign"). At the time
Fortune issued its proxy statement for the special meeting of stockholders
called to vote on the LEX acquisition, Fortune was advised that the ownership
of the Fortune Common Stock and warrants to be issued in the acquisition was to
be allocated one-third each to Forster, BSR and Ensign. In preparing for the
closing of the acquisition, however, Fortune was advised that the only
stockholders of LEX were Forster and BSR and that they were the only persons or
entities entitled to vote on the merger of LEX with Fortune's subsidiary.
Fortune obtained a written representation from Forster and BSR to this effect
and received a legal opinion from LEX's counsel confirming these
representations and confirming that all corporate action on the part of LEX
necessary to authorize the merger had occurred.

On May 11, 1995, Baytree Associates, Inc. ("Baytree") and Ensign
commenced litigation in the Supreme Court of New York against Forster, BSR,
Charif Souki (the son of Samyr Souki, president of BSR), LEX and Fortune
seeking to enjoin the closing of the LEX acquisition by Fortune on the grounds
that Ensign was entitled to a one-third interest in the proceeds of the
transaction, namely the Common Stock and warrants to be issued by Fortune.
Baytree also sought $1,000,000 in damages from Fortune for allegedly providing
investment banking services to Fortune in connection with the Regulation S
offering made by the Company in February 1995 and this Offering.

At a hearing on May 12, 1995, the New York court dissolved the
temporary restraining order issued on May 11 which had prohibited the
acquisition and stated affirmatively that Fortune could proceed with the
transaction. Since it was clear from the Ensign lawsuit that Forster and BSR
owned at least two-thirds of the stock of LEX and could bind that corporation
to proceed with the transaction and since most of the Common Stock and warrants
issued by Fortune would remain in escrow following the closing, Fortune
proceeded with the acquisition, which closed on its scheduled closing date of
May 12, 1995. In issuing its Common Stock and warrants to complete the
transaction, Fortune was required to accept the representations made by Forster
and BSR that they were the only stockholders of LEX, but Fortune did not then,
has not since and will continue not to take any position on who constituted the
stockholders of LEX and who was entitled to the shares and warrants issued by
Fortune in the acquisition. Further, Fortune advised Forster and BSR that the
issues raised

32
<PAGE> 36

by Ensign would need to be resolved by them and obtained from Forster and BSR
an agreement to indemnify Fortune against any claims from any third party
asserting an ownership interest in LEX.

At a subsequent hearing on May 22, 1995, the New York court granted
the Company's motion for summary judgment and dismissed the $1,000,000 claim
against Fortune and dismissed Fortune and LEX from the suit with prejudice
based on an agreement of all parties. Forster, BSR and Souki are now the only
remaining defendants in the action. At the hearing, the parties agreed that
the escrow agent would retain and hold in escrow not less than 400,000 shares
and 400,000 warrants, representing one-third of the total shares of Common
Stock and warrants issued in the transaction, pending further order of the
court. Fortune agreed to participate in the discovery process in the action as
if it were a party to the action and, as a matter of convenience to the court,
agreed that the New York court would retain jurisdiction over Fortune and LEX
for purposes of enforcing the provisions of the stipulation.

[this space left blank intentionally]

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<PAGE> 37

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Director and/or
Executive Officer Age Title
----------------- --- -----
<S> <C> <C>
Charles A. Champion 63 Chairman of the Board
Tyrone J. Fairbanks 38 President, Chief Executive Officer, and
Chief Financial Officer and Director
Dean W. Drulias (1)(2) 48 Director and Secretary
Graham S. Folsom (1)(2) 38 Director
William T. Walker, Jr. (1)(2) 63 Director
Barry Feiner 61 Director
Gary Gelman 29 Director
Charif Souki (3) 43 Director
William D. Forster (3) 49 Director
John L. Collins 50 Vice President of Investor Relations
- ------------------
</TABLE>

(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Appointed by the Board of Directors on July 27, 1995, to fill newly
created vacancies on the Board of Directors. See "Certain
Relationships and Related Transactions."

Mr. Charles A. Champion joined Fortune's Board of Directors in March
1994 and was elected Chairman in July 1994. Mr. Champion also serves as
President and Chief Executive Officer of Tower Petroleum Corporation, a
privately held oil and gas producer, operator and petroleum consulting firm
which he founded in 1983. Mr. Champion is a certified petroleum engineer in
the States of California and Alaska and his career includes positions of
increasing responsibility with Richfield Oil Corporation (later known as
Atlantic Richfield Company), Mobil Oil Corporation and Husky Oil. Mr. Champion
was appointed by the Governor of Alaska in 1972 to serve as State Pipeline
Coordinator and to lead an agency to oversee the construction of the
Trans-Alaska pipeline. He served in that capacity until the pipeline's
completion in 1977. Mr. Champion has served as adjunct Associate Professor of
Petroleum Engineering to the University of Alaska at Anchorage and has
published a number of technical papers for the oil and gas industry. Mr.
Champion was awarded the Distinguished Achievement Medal from the Colorado
School of Mines in 1981. Mr. Champion has been a member of the Society of
Petroleum Engineers since 1954 and is currently Secretary of the Conservation
Committee of California Oil Producers, and a member of the Los Angeles Basin
Chapter of the American Petroleum Institute and the California Independent
Petroleum Association. Mr. Champion holds a B.S. degree from the Colorado
School of Mines and an M.S. degree in petroleum engineering from the University
of Southern California.

Mr. Tyrone J. Fairbanks has served as a Director of Fortune since
January 1991. Mr. Fairbanks also serves as President, Chief Executive Officer
and Chief Financial Officer of the Company. Prior to joining Fortune, Mr.
Fairbanks served as President, Chief Executive Officer and Director of
Fairbanks & Haas, Inc. from January 1990 to January 1991. Fairbanks and Haas,
Inc. was an oil and gas exploration, production, acquisition and operations
company located in Ventura, California. Mr. Fairbanks co-founded Fairbanks &
Haas, Inc. and served in the capacity of Director and Executive Vice-President
from February 1987 to January 1990. See "Business and Properties - Acquisition
Activity - Fairbanks & Haas, Inc." Prior to Fairbanks & Haas, Inc., Mr.
Fairbanks served in positions of increasing responsibility in the area of
accounting, finance, administration and operations within various segments of
the oil and gas industry. Mr. Fairbanks attended California State University
at Northridge and continued his education with courses in finance and
accounting at the University of California at Los Angeles extension and the
University of Pennsylvania - Wharton Business School extension.

Mr. Dean W. Drulias is a stockholder of and a practicing attorney at
the law firm of Burris, Drulias & Gartenberg, a Professional Corporation, which
has served as counsel to the Company since its incorporation in May 1987. Mr.
Drulias has served as a director since 1991 and as Secretary since July 1994.
During 1993 and 1994, his firm billed the Company a total of $117,357 and
$94,806, respectively, for legal fees and costs. He has practiced law in the
Los Angeles area since 1977 after graduating from Loyola Law School and
specializes in areas of energy, environmental and real property law.

34
<PAGE> 38

Mr. Drulias is chairman of the Company's Compensation Committee. Mr. Drulias
received his B.A. degree from the University of California at Berkeley in 1971.

Mr. Graham S. Folsom has served as the Chief Financial Officer of Klein
Ventures, Inc. since April 1987. Klein Ventures, Inc. is a diversified
investment company. Mr. Folsom has been active in the oil investments of such
company and its affiliates since 1987. Mr. Folsom has been licensed as a
Certified Public Accountant in the State of California since 1982 and is
responsible for all of the accounting and financial affairs of Klein Ventures
and its affiliates. Mr. Folsom is chairman of the Company's Audit Committee.
Mr. Folsom is a graduate of University of the Pacific with a B.S. degree in
business administration.

Mr. William T. Walker, Jr. joined Fortune's Board after the successful
completion of Fortune's $7.425 million secondary equity offering in October
1993. Mr. Walker founded Walker Associates, a corporate finance consulting
firm for investment banking, in 1985 and has participated in or been
instrumental in completing over $250,000,000 in public and private offerings
since its inception. Prior to forming Walker Associates, Mr. Walker served as
Executive Vice President, Manager of Investment Banking, Member of the Board
and Executive Committee and Chairman of the Underwriting Committee for Bateman
Eichler Hill Richards, a New York Stock Exchange Member firm from 1969 to 1985
when Bateman Eichler Hill Richards was purchased by Kemper Group. Prior to
joining Bateman Eichler Hill Richards, Mr. Walker served in various executive
capacities and was a partner with the investment banking firm of Glore Forgan,
William R. Staats & Co. in New York. Mr. Walker attended Stanford University.
He also serves on the boards of directors of Go Video, Inc. (AMEX) and
Ameriquest, Inc. (NYSE).

Mr. Charif Souki was appointed to the Board of Directors on July 27,
1995, to fill a vacancy created by the expansion of the board from seven to
nine members. Mr. Souki is the son of Samyr Souki, the President of BSR
Investments, Ltd. which is a substantial owner of the Common Stock. Mr. Souki
disclaims beneficial ownership of the securities held by BSR Investments, Ltd.
Mr. Souki is a private investor.

Mr. William D. Forster was also appointed to the Board of Directors on
July 27, 1995, to fill a vacancy created by the expansion of the board. Mr.
Forster is the chairman of W. Forster & Co., a New York-based private
investment banking firm. Prior to forming that company, Mr. Forster was a
managing director of Lehman Bros. for approximately 11 years.

Mr. Barry Feiner was elected to the Company's Board of Directors on
January 20, 1995. The Company agreed to elect him pursuant to an arrangement
with Mr. Jack Farber, now deceased, formerly a principal stockholder of the
Company. See "Certain Relationships and Related Transactions" and "Principal
Stockholders." Mr. Feiner graduated from Columbia Law School and is a member
of the Bar of the State of New York. He has practiced law in the State of New
York since 1965. His practice concentrates on the areas of corporate and
securities law. Prior to beginning private practice, Mr. Feiner served on the
staff of the Securities and Exchange Commission. Mr. Feiner holds a B.A.
degree from Brandeis University.

Mr. Gary Gelman was elected to the Company's Board of Directors on
January 20, 1995. The Company agreed to elect him pursuant to an arrangement
with Mr. Jack Farber, now deceased, formerly a principal stockholder of the
Company. See "Certain Relationships and Related Transactions" and "Principal
Stockholders." Mr. Gelman graduated from San Diego State University in 1989
and has served as president of GAR- COR Holding Corporation, a real estate
management and brokerage firm, since that time. Mr. Gelman also serves as a
loan consultant with National Bank of New York City and is a principal partner
of Hands-on Management, a property management and brokerage company managing
approximately 400 apartments in 15 buildings. Mr. Gelman is the grandson of
Mr. Jack Farber.

Mr. John L. Collins was hired by the Company as Vice President of
Investor Relations effective May 30, 1995. Mr. Collins will serve at the
pleasure of the Board of Directors. He formerly served as Vice President of
Investor Relations with Texas Meridian Resources Corporation, a Texas based oil
and gas company, a position he held from January 1991 until his resignation to
join Fortune in May 1995. Mr. Collins became a registered representative with
Merrill Lynch in 1970 and spent 20 years in the securities industry, serving as
Vice President-Investments with A.G. Edwards & Company from 1980 to 1989.
During 1990, he held a sales position with Frontier Directory.

Director Compensation

35
<PAGE> 39

As compensation to outside directors, the Company pays directors' fees
equal to $2,500 per quarter, one half in shares of Fortune common stock valued
at $1,250 based on the value of the stock on the last day of each quarter and
$1,250 in cash. Inside directors do not receive any compensation for serving
as directors.

Committees of the Board

During the year ended December 31, 1994, the Board of Directors met
eighteen times and the compensation committee met one time. Each director
attended all Board meetings and each member of a Board committee attended all
committee meetings.

The audit committee consists of three outside directors. Currently,
Graham Folsom is the chairman of the committee. It also meets separately with
representatives of the Company's independent auditors and with representatives
of senior management. The committee reviews the scope of audit coverage, the
fees charged by the independent auditors, matters relating to internal control
systems and the expenses of senior executives.

The compensation committee consists of three outside directors. Barry
Feiner is the chairman of the Committee. The compensation committee met once
during 1994. The committee proposes and administers the Company's stock option
plans, long-term incentive plans and executive incentive plans. In this
capacity, the committee recommends all option grants or awards to Company
officers and executives. The committee also recommends the establishment of
policies dealing with various compensation, pension and profit sharing plans,
although at this time no such plans have been created.

EXECUTIVE COMPENSATION

The following table lists the total compensation paid by the Company to
persons who served in the capacity of chief executive officer during the
periods indicated and to the only other executive officer who received annual
compensation in excess of $100,000:

SUMMARY COMPENSATION TABLE

Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
------
NAME AND PRIN- SECURITIES UNDERLYING
CIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS
- -------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Charles A. Champion(1) 1994 $ 36,000 -- 50,975
Chairman and CEO

Daniel E. Pasquini(2) 1994 $105,000 $15,000 78,900
President 1993 $ 96,000 -- 22,500
1992 $ 92,000 -- --

Tyrone J. Fairbanks(3) 1994 $102,500 $15,000 78,900
President and CFO

</TABLE>
- ---------------
(1) Mr. Champion was elected Chief Executive Officer on June 23, 1994,
concurrently with the resignation of Daniel E. Pasquini as president.
Mr. Champion did not previously serve as an executive officer of
Fortune.

(2) Mr. Pasquini served as president of Fortune from the inception of the
Company in 1987 until his resignation on June 23, 1994. See also the
following paragraph for information concerning severance paid to Mr.
Pasquini.

(3) The only year in which Mr. Fairbanks received salary and bonus
exceeding $100,000 was 1994. Mr. Fairbanks was elected President of
Fortune on June 23, 1994, and became Chief Executive Officer on January
5, 1995. Prior to his election as President, he served as a Vice
President and Chief Financial Officer.

In June 1994, Daniel E. Pasquini, formerly President and a director of
the Company, resigned. At the time of his resignation, Mr. Pasquini was
employed under an employment agreement with terms similar to Mr. Fairbanks'
agreement. In connection with the cancellation of the agreement, Mr. Pasquini
and the Company negotiated a buyout arrangement under which Mr. Pasquini was to
be paid a total severance benefit of $225,000, of which approximately one-half
was deferred until January 1995. To assist the Company's cash flow
requirements, Mr. Pasquini agreed to accept $85,000 in cash, the exercise price
of certain stock options held by him was reduced to $.575 per share and the
Company agreed to issue stock purchase

36
<PAGE> 40

warrants to him in the future to purchase 45,000 shares of Common Stock at
$2.75 per share. The reduction in exercise price of the options had no
financial statement impact, since the Company had previously expensed the
entire amount of the severance benefits payable to Mr. Pasquini.

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with Tyrone J.
Fairbanks, its President, Chief Executive Officer and Chief Financial Officer.
The agreement provides that if employment is terminated for any reason other
than for cause, death or disability within two years following a change in
control (which for purposes of this Agreement means a change in the majority of
the Board of Directors following certain special events) Mr. Fairbanks is
entitled to receive a single payment equal to two year's compensation and all
shares of Common Stock subject to stock options then held by him without
payment of the exercise price therefor. Mr. Fairbanks' agreement also provides
for two (2) years of consulting services upon the completion of the primary
term of his contract at forty percent (40%) of the last compensation
thereunder. Mr. Fairbanks' current employment agreement provides for an annual
salary of $150,000. The term of Mr. Fairbanks' employment contract expires
December 31, 1997.

The Company has entered into an employment agreement with John L.
Collins, its newly appointed Vice President of Investor Relations, pursuant to
which he will receive a salary of $96,000 per year. Pursuant to that
agreement, on May 30, 1995, Fortune issued to Mr. Collins 25,000 stock purchase
warrants exercisable at $3.25 (the market price of the Common Stock on May 30,
1995, the date of issue) and expiring May 30, 2000. The contract will be
terminable at will by either party. Mr. Collins is also entitled to receive,
without payment, shares underlying stock options then held by him in the event
of a termination by reason of a change in control.

STOCK OPTIONS

Fortune has four Stock Option Plans. The plans cover all officers and
employees of the Company. Three of the plans also provide for options for
directors of the Company. Awards are made by the Board of Directors upon
recommendations of its Compensation Committee. There is no performance formula
or measure. Options granted under the 1987 plan must be exercised within ten
years of the date of grant or they are forfeited. Options granted under the
1988 plan, the 1991 plan and a multi-year plan adopted in 1993 must be
exercised within five years of the date of grant or they are forfeited. No
future options will be granted under existing option plans at less than 85% of
the fair market value of the Common Stock. In addition, for a period of one
year following the date of this Prospectus, the Company will not grant any
options or warrants, other than options or warrants issued or granted in bona
fide financing transactions, which would result in the aggregate number of
options and warrants exceeding 10% of the then outstanding Common Stock.

All options available under the 1987, 1988 and 1991 plans have been
granted, and no shares remain under any of these plans on which options may be
granted. Options under the 1993 plan available for grant in 1993, 1994 and
1995 have been granted; additional options may be granted under the 1993 plan
in 1996 and 1997. Options have been granted as follows: (1) under the 1987
plan, options for 12,500 shares at a price of $2.60 per share; (2) under the
1988 plan, options for 27,500 shares at $2.60 per share; under the 1991 plan,
options for 32,500 shares at $6.00 per share; and (4) under the 1993 plan,
options for 75,000 shares at $5.00 per share granted in 1993, options for
263,000 shares at $5.48 per share granted in 1994 and options for 264,000
shares at $6.03 per share granted in 1995. The prices of the options granted
in 1991, 1993, 1994 and 1995 were reduced to $2.75 on January 12, 1994.

The following table shows the grants of stock options to each of the
executives named in the Summary Compensation Table during 1994. No options
were exercised by any of these individuals during 1994.

37
<PAGE> 41

OPTION GRANTS IN 1994

<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted Fiscal Year Price ($/Sh) Date
---- ------------ ------------- ---------------- ----------
<S> <C> <C> <C> <C>
Charles A. 18,000 100.0% $1.94 12/23/99
Champion 6,575 2.5% $5.48(1) 3/1/99
Daniel E. 78,900 30.0% $5.48 3/1/99
Pasquini
Tyrone J. 78,900 30.0% $5.48(1) 3/1/99
Fairbanks
- -----------------
</TABLE>
(1) The exercise price of these options was reduced to $2.75 per share on
January 12, 1994. This reduction had no financial statement impact because the
exercise price after the reduction was still higher than the market price of
the Common Stock.

In the event of a change in control of the Company, the shares of the
Company's common stock subject to options granted to all option holders under
the Company's 1987 and 1988 stock option plans will be issued to them without
further action on their part or the payment of the exercise price for such
shares, except that for a period of one year from the date of this Prospectus
no shares shall be issued upon exercise of options unless the Company receives
an amount equal to the exercise price of such options.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Subsequent to the consummation of the acquisition of LEX, Mssrs.
Forster and Souki were elected to the Board of Directors of the Company. Their
election to the Board was not a term or condition of the transaction. For
information regarding the consideration received by Mr. Forster and BSR in the
transaction, see "Business and Properties -- Exploration, Exploitation and
Development Activity -- Zydeco 3D Venture." BSR is a corporation owned by
members of the family of Mr. Souki. In connection with the acquisition, Mr.
Forster and BSR agreed to indemnify Fortune against costs and expenses in
connection with the Baytree litigation and are currently indebted to the
Company in the amount of approximately $30,000 for expenses incurred by Fortune
in the litigation. See "Business and Properties -- Legal Proceedings -- LEX
Litigation."

On April 24, 1995, the Company obtained a $300,000 "bridge" loan to
enable it to pay certain expenses, including $100,000 on its Credit Facility.
The loan was obtained from LEX, which in turn had borrowed the funds from
several individuals. Upon the consummation of the Company's acquisition of
LEX, it became liable on such loans. The loans were repaid out of the proceeds
of the Company's recently concluded Common Stock offering. Among the
individuals who loaned funds to LEX were Mrs. William H. Forster, mother of
William D. Forster, a principal of LEX and now a director and principal
stockholder of Fortune, and John E. McConnaughy, Jr., formerly a principal
stockholder of the Company. See "Principal Stockholders." Each of Mrs.
Forster and Mr. McConnaughy loaned LEX $100,000 and received from LEX, as an
inducement to make the loan, 33,333 shares of Common Stock and 33,333 stock
purchase warrants out of 170,000 shares and 170,000 warrants issued to LEX
prior to the closing of the acquisition. W. Forster & Co., Inc., a corporation
wholly owned by William D. Forster, received a $30,000 placement fee from the
Company for assistance in arranging the $300,000 bridge loan. As a result of
its acquisition of LEX, Fortune was required, at the time the bridge loan was
repaid, to accelerate the amortization of the value of the shares paid by LEX
to the lenders in connection with the bridge loan in the amount of $150,000.

In order to provide additional capital for development activities, on
December 19 and 20, 1994, the Company borrowed an aggregate of $750,000 from
certain principal stockholders and from each of its directors then serving
(Messrs. Champion, Drulias, Fairbanks, Folsom and Walker). The directors
loaned $175,000 to the Company in the aggregate; $375,000 was obtained from
Klein Ventures, Inc.; and $200,000 was obtained from Jack Farber. See
"Security Ownership of Certain Beneficial Owners and Management." The notes
are unsecured, currently bear interest at 11% per annum (1.5% above the Bank
One, Texas, prime rate), interest is payable monthly, and the notes were due
six months from their respective dates of issue. The due date of the loans
from each of the directors and Klein Ventures, Inc. is July 15, 1996.

Both the Klein Ventures, Inc. and Farber notes permit the holder to
elect to exchange their notes for shares of Common Stock at the price on the
date the notes were issued ($2.00 and $1.875 per share, respectively), and
Fortune reserved 294,166 shares of common stock for such purpose. On or about
June 30, 1995, the estate of Mr. Farber converted its note into 106,667 shares
of Common Stock. As additional consideration for making the loan, Klein
Ventures, Inc. received 10,000 stock purchase warrants with an exercise price
of $2.40 per share, and Mr. Farber received 35,000 stock purchase warrants with
an exercise price of $1.875 per share. The Company also agreed to name two
individuals nominated by Mr. Farber to fill vacancies on the Board of
Directors. Barry Feiner, Esq., who served as counsel to Mr. Farber prior to
the latter's death on May 5, 1995 and to Barry Blank, another principal
stockholder of the Company, and Mr. Gary Gelman, Mr. Farber's grandson, were
elected to the Board of Directors in January 1995 pursuant to this agreement.
Both Mr. Feiner and Mr. Gelman were re-elected to the board by the stockholders
at the 1995 annual meeting.

38
<PAGE> 42

On April 10, 1992, the Company consummated the acquisition of certain
oil and gas interests from Hinkle Exploration Limited ("Hinkle Exploration")
and San Francisco Energy Corporation. In the Hinkle acquisition, Fortune
issued 243,153 shares of common stock and 152,142 stock purchase warrants in
exchange for the acquired assets. Of those amounts, 129,973 shares and 138,888
warrants were issued to Klein Ventures and its affiliates and 35,933 shares and
13,254 warrants were issued to entities in which Charles Hinkle owns an
interest or to members of Mr. Hinkle's family. The 13,254 warrants were
exercised on December 4, 1992. Mr. Hinkle was elected a director of Fortune,
but resigned in 1993. In the acquisition, Fortune also assumed $391,000 of
payables owed by Hinkle Exploration to trade creditors, which amounts have been
paid. Hinkle Exploration was owned 50% by Mr. Hinkle and 50% by Robert
Bianchi. The payables assumed by the Company included approximately $175,000
owed to Halliburton Services, Inc. which had been guaranteed by H&B Resources
(owned 50% each by Mr. Hinkle and Mr. Bianchi) and by Messrs. Hinkle and
Bianchi individually. H&B and Mr. Hinkle remained liable on such debt, and as
a result of payments made by the Company on such obligations, Mr. Hinkle
received a personal benefit.

See "Management -- Directors and Officers" for information regarding
legal services performed by Burris, Drulias & Gartenberg, A Professional
Corporation, for the Company and the Representatives. Dean Drulias, a director
of the Company, is a stockholder of such law firm.

All of the foregoing transactions between the Company and members of
management or principal stockholders were, and any future transactions will
be, on terms no less favorable to the Company than those which could be
obtained from unaffiliated third parties. In addition, no future transaction
will be entered into between the Company and members of management or principal
stockholders unless such transactions are approved by a majority of the
directors who are not members of management or principal stockholders.

LIMITED LIABILITY OF DIRECTORS

In accordance with the Delaware General Corporation Law, the Company
has included a provision in its Certificate of Incorporation to limit the
personal liability of its directors for violations of their fiduciary duties.
The provision eliminates such directors' liability to the Company or its
stockholders for monetary damages, except (i) for any breach of the directors'
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payment of dividends or unlawful stock
purchases or redemptions or (iv) for any transaction from which any director
derived an improper personal benefit.

This provision protects the Company's directors against personal
liability for monetary damages arising from breaches of their duty of care.
Directors remain liable for breaches of their duty of loyalty to the Company
and its stockholders and for the specific matters set forth above, as well as
for violations of the federal securities laws. The provision has no effect on
the availability of equitable remedies such as injunction or rescission.
Additionally, these provisions do not protect a director from activities
undertaken in any capacity other than that of director.

INDEMNIFICATION OF OFFICERS AND DIRECTORS

The Company's bylaws provide for indemnification of its officers and
directors to the fullest extent permitted by the Delaware General Corporation
Law in effect at the time of a claim for indemnification. Such indemnification
applies to any threatened, pending or contemplated suit or proceeding arising
by reason of such person acting as an officer or director of the Company or its
affiliates.

Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is therefore unenforceable.

39
<PAGE> 43

PRINCIPAL STOCKHOLDERS

The following table contains information at September 21, 1995, as to
all persons who, to the knowledge of the Company, were the beneficial owners of
five percent (5%) or more of the outstanding shares of the Common Stock of the
Company and of all officers and directors.

<TABLE>
<CAPTION>
Amount and Nature Percent
Name Of Beneficial Ownership Of Class(1)
- ---- ----------------------- -----------
<S> <C> <C>
William D. Forster, New York, NY (Director)(2) 1,096,666(3) 11.1%
BSR Investments, Inc., Paris, France(2) 1,030,000(4) 10.4%
Klein Ventures, Inc., 710,803(5) 7.3%
Stockton, California
Barry Blank, Phoenix, AZ 641,200(6) 6.6%
Tyrone J. Fairbanks
(Director, President, CEO and CFO) 237,940(7) 2.5%
William T. Walker, Jr. (Director) 152,635(7) 1.6%
John L. Collins (Vice President) 100,000(7) 1.1%
Charles A. Champion (Director) 64,059(7) *
Graham S. Folsom (Director) 58,027 *
Dean W. Drulias (Director and Secretary) 49,163 *
Gary Gelman (Director) 18,755 *
Barry Feiner (Director) 13,255 *
Charif Souki (Director) -0-(4) *

All Officers and Directors
as a group of ten (10) persons 1,790,500(7) 17.3%
</TABLE>

- -----------------
(1) The asterisk (*) indicates less than 1%.

(2) Forster and BSR are the record holders of these shares issued in
connection with the LEX acquisition. Ensign Financial Group Limited claims a
one-third interest in such shares and the stock purchase warrants issued in the
acquisition. In light of the dispute which has arisen over the ownership of
these shares and warrants, the Company is unable to state the beneficial
ownership of such shares and warrants. See "Business and Properties -- Legal
Proceedings." If Ensign's position is upheld by the New York courts and it is
awarded one-third of the securities issued in the LEX acquisition, to the best
of the Company's knowledge, the ownership, including shares underlying the
stock purchase warrants and other securities noted in footnote (3), would be as
follows:

<TABLE>
<CAPTION>
Amount and Nature of Percent
Beneficial Ownership of Class
-------------------- --------
<S> <C> <C>
Ensign Financial Group Limited, NY, NY 800,000 8.2%
William D. Forster, New York, NY 696,666 7.2%
BSR Investments, Inc., Paris, France 630,000 6.5%
</TABLE>

(3) Includes 515,000 shares of Common Stock underlying stock purchase warrants
exercisable at $4.75 per share and expiring April 2000. Also includes 33,333
shares of Common Stock and 33,333 shares of Common Stock underlying stock
purchase warrants held by Mr. Forster's mother, as to which Mr. Forster
disclaims beneficial ownership.

(4) Includes 515,000 shares of Common Stock underlying stock purchase warrants
exercisable at $4.75 per share and expiring April 2000. Based on information
provided to the Company by BSR, voting and dispositive power is exercised by
Samyr Souki, the president of BSR. Charif Souki, a director of the Company and
son of Samyr Souki, disclaims any ownership interest in or dispositive power
over such shares.

(5) Klein Ventures, Inc. is owned by Mr. Bud Klein. The number of shares
shown includes 138,888 shares underlying stock purchase warrants issued to
Klein Ventures, Inc. in the Hinkle acquisition, 80,000 shares underlying stock
purchase warrants acquired in the Company's 1993 public equity offering
exercisable at $3.75 per share and an aggregate of 88,629 shares of stock owned
by Klein Bros. Holdings, Ltd., 187,500 shares issuable upon conversion of a
note issued by the Company on December 19, 1994, at an exchange price of $2.00
and 10,000 shares issuable upon exercise of stock purchase

40
<PAGE> 44

warrants with an exercise price of $2.40 per share which will be issued to
Klein Ventures, Inc. in connection with such note. See "Certain Relationships
and Related Transactions." Each record owner possesses sole voting and
disposition power over such shares, and Klein Ventures, Inc. and Mr. Bud Klein
disclaim beneficial ownership of shares owned by Klein Bros. Holdings, Ltd.
which is owned by Klein Ventures, Inc. and five of Mr. Klein's children and
relatives. However, Klein Ventures, Inc., Klein Bros. Holdings, Ltd. and Bud
Klein may be considered a "group" under regulations of the Securities and
Exchange Commission.

(6) Includes 310,600 shares of Common Stock and an additional 330,600 of which
are shares underlying stock purchase warrants held by Mr. Blank and exercisable
at $3.75 per share. Mr. Blank is a Vice President and registered
representative with Coleman and Company Securities, Inc., one of the
Representatives of the Underwriters. See "Underwriting."

(7) Includes 216,599 shares issuable to Mr. Fairbanks upon the exercise of
stock options granted to him under the Company's various stock option plans,
exercisable at $2.75 per share; an aggregate of 139,801 shares issuable upon
exercise of stock options granted to other officers and directors under the
Company's various stock option plans, exercisable at $2.75 per share; 18,000
shares issuable upon exercise of stock options granted to Charles A. Champion
exercisable at $1.94; 88,289 shares issuable upon exercise of common stock
purchase warrants (at $4.41 per warrant) and 22,264 shares issuable upon
exercise of 3,600 warrants (at $11.14 each for 3.3097 shares of Common Stock
and two stock purchase warrants exercisable at $3.75 each for 1.4375 shares)
issued in connection with the Company's 1993 equity offering to William T.
Walker, Jr. prior to becoming a director of the Company; and 25,000 shares
issuable upon the exercise of common stock purchase warrants (at $3.25 per
share) issued to John L. Collins on May 30, 1995.

[this space left blank intentionally]

41
<PAGE> 45
DESCRIPTION OF SECURITIES

COMMON AND PREFERRED STOCK

The following description is qualified in all respects by reference to
the Company's Certificate of Incorporation and all amendments thereto and the
Company's Bylaws, copies of which are filed as exhibits to the Registration
Statement of which this Prospectus is a part.

The Company's certificate of incorporation, as amended, currently
authorizes 40,000,000 shares of Common Stock, $.01 par value and 2,000,000
shares of preferred stock, $1.00 par value. Of this total, 15,005,725 shares
of common stock have been issued or are issuable under options and warrants and
are outstanding at September 21, 1995. Additionally, the Company has reserved
272,943 shares of the Company's Common Stock for issuance upon the conversion
of outstanding Debentures. No preferred stock is currently outstanding.

COMMON STOCK

Holders of shares of Common Stock are entitled to dividends when and
as declared by the Board of Directors from funds legally available therefor and
upon liquidation are entitled to share ratably in any distribution to
stockholders. All holders of Common Stock are entitled to one vote per share
on any matter coming before the stockholders for a vote, including the election
of directors. In keeping with stockholder democracy rights, Fortune's
Certificate of Incorporation permits the stockholders to remove any director or
the entire board of directors, with or without cause, upon a vote of a majority
of the outstanding shares.

All issued and outstanding share of Common Stock are validly issued,
fully paid and non-assessable, and shares issued upon conversion of the
Debentures will be validly issued, fully paid and non-assessable. Holders of
the Common Stock do not have pre- emptive rights or other rights to subscribe
for unissued or treasury shares or securities convertible into shares.

Additionally, under Section 145 of the Delaware General Corporation
Law, the Company has availed itself of the provisions permitting the limitation
of liability through the indemnification of officers, directors, employees and
agents of Delaware corporations. See "Certain Relationships and Related
Transactions -- Limited Liability of Directors" and " -- Indemnification of
Officers and Directors."

PREFERRED STOCK

The Certificate of Incorporation authorizes the Board of Directors to
establish and designate the classes, series, voting powers, designations,
preferences and relative, participating, optional or other rights, and such
qualifications, limitations and restrictions of the preferred stock as the
Board, in its sole discretion, may determine without further vote or action by
the stockholders.

The rights, preferences, privileges and restrictions or qualifications
of different series of preferred stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions, and other matters. The
issuance of preferred stock could decrease the amount of earnings, and assets
available for distribution to holders of Common Stock or could adversely affect
the rights and powers, including voting rights, of holders of Common Stock.

The existence of the Preferred Stock, and the power of the Board of
Directors of the Company to set its terms and issue a series of Preferred Stock
at any time without stockholder approval, could have certain anti-takeover
affects. These effects include that of making the Company a less attractive
target for a "hostile" takeover bid or rendering more difficult or discouraging
the making of a merger proposal, assumption of control through the acquisition
of a large block of Common Stock or removal of incumbent management, even if
such actions could be beneficial to the stockholders of the Company.

PUBLIC WARRANTS

Each Public Warrant originally entitled the holder to purchase one
share of Common Stock at a price of $3.75 per share. The Public Warrants
contain provisions that protect the holders against dilution by adjustment of
the exercise price

42
<PAGE> 46
in certain events, such as stock dividends and distributions, stock splits,
recapitalizations, mergers or consolidations and certain issuances below the
current market value of the Common Stock. As a result of the operation of
these provisions, the Public Warrants have been adjusted so that the holder is
entitled to purchase 1.4375 shares for an effective purchase price of $2.61 per
share. The exercise price of each Public Warrant remains $3.75 per warrant.
The Warrants are redeemable by the Company, at $.05 per Warrant, upon 30 days'
notice, at any time after the Separation Date, if the closing price per share
of the Common Stock for 20 consecutive trading days within the 30-day period
preceding the date notice of redemption is given equals or exceeds $5.50 per
share. In the event the Company gives notice of its intention to redeem, a
holder would be forced either to exercise his or her Warrant within 30 days of
the notice of redemption or accept the redemption price.

The Warrants were issued in registered form under a Warrant Agreement
between the Company and U.S. Stock Transfer, as warrant agent (the "Warrant
Agent"). The shares of Common Stock underlying the Warrants, when issued upon
exercise of a Warrant, will be fully paid and nonassessable, and the Company
will pay any transfer tax incurred as a result of the issuance of Common Stock
to the holder upon its exercise.

The Company is not required to issue fractional shares upon the
exercise of a Warrant. The holder of a Warrant will not possess any rights as
a stockholder of the Company until such holder exercises the Warrant. A copy
of the form of Warrant Agreement is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.

REPRESENTATIVES' WARRANTS

The Representatives' Warrants were issued in connection with the
Company's 1993 Unit offering. Each Unit consisted of two shares of Common
Stock and two Public Warrants, and each of the Representatives' Warrants
entitled the holder to purchase one Unit at a price of $11.14. The
Representatives' Warrants contain the same adjustment provisions as the Public
Warrants. As a result of the operation of these provisions, upon exercise of
the Representatives' Warrants, the holders will receive 3.3097 shares of Common
Stock plus two additional Public Warrants. In all other respects, the terms of
the Representatives' Warrants are identical to the terms of the Public
Warrants.

The Warrants were issued in registered form under a Warrant Agreement
between the Company and Dickinson & Co. and H.J. Meyers, Inc. The shares of
Common Stock underlying the Warrants, when issued upon exercise of a Warrant,
will be fully paid and nonassessable, and the Company will pay any transfer tax
incurred as a result of the issuance of Common Stock to the holder upon its
exercise.

PRIVATE WARRANTS

The Private Warrants entitle the holders to purchase one share of
Common Stock at prices ranging from $1.88 to $4.75 per share and with
expiration dates ranging from October 5, 1995 to September 6, 2000. The
Private Warrants do contain anti-dilution provisions similar to those in the
Public Warrants. In addition, the Private Warrants are not redeemable by the
Company. The shares of Common Stock underlying the Warrants, when issued upon
exercise of a Warrant, will be fully paid and nonassessable, and the Company
will pay any transfer tax incurred as a result of the issuance of Common Stock
to the holder upon its exercise. The Company is not required to issue
fractional shares upon the exercise of a Warrant. The holder of a Warrant will
not possess any rights as a stockholder of the Company until such holder
exercises the Warrant. A copy of the form of Warrant Agreement is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.

TRANSFER AGENT AND REGISTRAR

The principal transfer agent and registrar for the Common Stock and
the Preferred Stock offered hereby is U.S. Stock Transfer Corporation,
Glendale, California. The co-transfer agent and co-registrar for such
securities is First Interstate Bank of California.

CERTAIN ANTI-TAKEOVER DEVICES

Section 203 of the Delaware General Corporation Law (the "Delaware
Takeover Statute") applies to Delaware corporations with a class of voting
stock listed on a national securities exchange, authorized for quotation on an
inter-dealer quotation system or held of record by 2,000 or more persons. In
general, Section 203 prevents an "interested stockholder" (defined generally as
any person owning, or who is an affiliate or associate of the corporation and
has owned in the preceding three years, 15% or more of a corporation's
outstanding voting stock and affiliates and associates of such person) from
engaging in a "business combination" (as defined) with a Delaware corporation
for three years following the date such person

43
<PAGE> 47
became an interested stockholder unless (1) before such person became an
interested stockholder, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (2) the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding stock held by directors who are also
officers of the corporation and by employee stock plans that do not provide
employees with the rights to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer); or (3) on
or subsequent to the date such person became an interested stockholder, the
business combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders by the affirmative vote of the
holders of two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder. Under Section 203, the restrictions
described above also do not apply to certain business combinations proposed by
an interested stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
became an interested stockholder with the approval of a majority of the
corporation's directors.

These provisions could have the effect of delaying, deferring or
preventing a change of control of the Company.

The Commission has indicated the use of authorized unissued shares of
voting stock could have an anti-takeover effect. In such case, various
specific disclosures to the stockholders are required. It has not been
management's intent to install an anti- takeover device nor is it expected that
the Company's authorized but unissued shares of common and preferred stock
would be used for that purpose. In addition, it is not the Company's intent to
rely on any provision of Delaware Law, including Section 203, for their
anti-takeover effects. Any business combination, as that term is used in
Section 203, would be reviewed by the Company's Board of Directors solely for
its impact on the Company.

LEGAL MATTERS
Reish & Luftman, Los Angeles, California, has passed upon the legality
of the securities offered hereby for the Company.

EXPERTS
The financial statements of the Company as of and for the years ended
December 31, 1993 and 1994 and for each of the years in the three year period
ended December 31, 1994, have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.

The information appearing herein with respect to net proved oil and
gas reserves of the Company at December 31, 1993 and 1994, was estimated by
Huddleston & Co., Inc., independent petroleum engineers, and at December 31,
1992, 1993 and 1994, was estimated by Sherwin D. Yoelin, petroleum engineer,
and is included herein on the authority of such engineers as experts in
petroleum engineering.

GLOSSARY
Bbl. "Bbl" means barrel. "Mbbl" means thousand barrels. "MMBbl"
means million barrels.

BOE. "BOE" means barrel of oil equivalent, which are determined using
the ratio of one barrel of crude oil, condensate or natural gas liquids to six
Mcf of natural gas so that six Mcf of natural gas is referred to as one barrel
of oil equivalent or "BOE". "MBOE" means thousands of barrels of oil
equivalent. "MMBOE" means millions of barrels of oil equivalent.

Bcf. "Bcf" means billion cubic feet.

GAS WELL. A gas well is a well drilled for producing only gas as its
primary product and not producing oil or condensate.

GROSS ACRES OR WELLS. "Gross Acres or Wells" are the total acres or
wells, as the case may be, in which an entity has an interest, either directly
or through an affiliate.

44
<PAGE> 48
Mcf. "Mcf" means thousand cubic feet. "Mmcf" means million cubic feet.

MMBtu. One Million British Thermal Units. A British Thermal Unit is
the amount of heat needed to raise the temperature of one pound of water one
degree Fahrenheit.

NET ACRES OR WELLS. A party's "net acres" or "net wells" are
calculated by multiplying the number of gross acres or gross wells in which
that party has an interest by the fractional interest of the party in each such
acre or well.

PRODUCING PROPERTIES OR RESERVES. Producing Reserves are Proved
Developed Reserves expected to be produced from existing completion intervals
now open for production in existing wells. A Producing Property is a property
to which Producing Reserves have been assigned by an independent petroleum
engineer.

PROVED DEVELOPED RESERVES. "Proved Developed Reserves" are Proved
Reserves which can be expected to be recovered through existing wells with
existing equipment and operating methods.

PROVED RESERVES. "Proved Reserves" are the estimated quantities of
crude oil, natural gas and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known oil and gas reservoirs under existing economic and operating
conditions, that is, on the basis of prices and costs as of the date the
estimate is made and any price changes provided for by existing conditions.

PROVED UNDEVELOPED RESERVES. "Proved Undeveloped Reserves" are Proved
Reserves which can be expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major expenditure is
required for recompletion. The offset units containing the proved-undeveloped
reserves are reasonably certain of commercial production when drilled.

PROVED DEVELOPED PRODUCING RESERVES Proved Developed Producing
Reserves are defined as those that are recoverable from completion intervals in
existing wells that are currently open and delivering commercial volumes of
hydrocarbons to market.

PROVED DEVELOPED NON-PRODUCING RESERVES Proved Developed
Non-Producing Reserves are defined as those that are recoverable from zones
behind cemented casing in existing wells which will require additional
completion work or a future recompletion prior to the start of production. The
cost of making such oil reserves available for production is insignificant
relative to the volume of reserves expected to be recovered from the planned
recompletion programs. The reserves are supported by actual production
performance from wells completed in the prospective sands elsewhere in the
local area.

RESERVES. "Reserves" means crude oil and natural gas, condensate and
natural gas liquids, which are net of leasehold burdens, are stated on a net
revenue interest basis, and are found to be commercially recoverable.

ROYALTY INTEREST. A "Royalty Interest" is an interest in an oil and
gas property entitling the owner to a share of oil and gas production (or the
proceeds of the sale thereof) free of the costs of production.

SEC METHOD. The SEC method is a method of determining the present
value of proved reserves. Under the SEC method, the future net revenues from
proved reserves are estimated assuming that oil and gas prices and production
costs remain constant. The resulting stream of revenues is then discounted at
the rate of 10% per year to obtain a present value.

UNDEVELOPED ACREAGE. "Undeveloped Acreage" is 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 independent petroleum engineers.

WORKING INTEREST. A "Working Interest" is the operating interest
under 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.

In this Prospectus, natural gas volumes are stated at the legal
pressure base of the state or area in which the reserves are located at 60
degrees Fahrenheit.

45
<PAGE> 49
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditor's Report - KPMG Peat Marwick LLP F-2

Balance Sheets - December 31, 1993 and December 31, 1994 F-3

Statements of Operations for the years ended
December 31, 1992, 1993 and 1994 F-5

Statements of Stockholders' Equity for the years ended
December 31, 1992, 1993 and 1994 F-6

Statements of Cash Flows for the years ended
December 31, 1992, 1993 and 1994 F-7

Notes to Financial Statements F-8

Balance Sheets - June 30, 1994 and 1995 (unaudited) F-19

Statements of Operations and for the six months
ended June 30, 1994 and 1995 (unaudited) F-21

Statement of Stockholders' Equity for the six months
ended June 30, 1995 (unaudited) F-22

Statements of Cash Flows for the six months ended
June 30, 1994 and 1995 (unaudited) F-23

Notes to Financial Statements (unaudited) F-24
</TABLE>

F-1
<PAGE> 50

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Fortune Petroleum Corporation

We have audited the balance sheets of Fortune Petroleum Corporation as of
December 31, 1994 and 1993, and the related statements of operations,
stockholders's equity and cash flows for each of the years in the three year
period ended December 31, 1994. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Fortune Petroleum Corporation
as of December 31, 1994 and 1993, and the results of its operations and its
cash flows for the each of the years in the three-year period ended December
31, 1994, in conformity 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 14 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 14. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

KPMG PEAT MARWICK LLP

Los Angeles, California
March 10, 1995, except for Note 8
which is as of April 13, 1995

F-2
<PAGE> 51
FORTUNE PETROLEUM CORPORATION

BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
December 31,
---------------------
1993 1994
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 109,000 $ 398,000
Accounts receivable 574,000 550,000
Prepaid expenses and oil inventory 69,000 114,000
----------- ----------

Total Current Assets 752,000 1,062,000
----------- ----------

PROPERTY AND EQUIPMENT (Notes 1, 3 and 4):

Oil and gas properties, accounted for
using the successful efforts method 14,302,000 17,912,000

Automotive, office and other 307,000 330,000
----------- ----------

14,609,000 18,242,000
Less -- accumulated depletion, depreciation
and amortization (5,474,000) (8,253,000)
----------- ----------

9,135,000 9,989,000
----------- ----------
OTHER ASSETS:

Notes receivable (long-term portion) 50,000 --
Materials, supplies and other 245,000 270,000
Deferred credit facility costs (net of
accumulated amortization of $0
and $38,000) 48,000 114,000
Bond issuance costs (net of
accumulated amortization of $65,000,
and $122,000)(Note 2) 224,000 167,000
----------- ----------
567,000 550,000
----------- ----------

TOTAL ASSETS $10,454,000 $11,601,00
=========== ==========
</TABLE>

See accompanying notes to financial statements. F-3
<PAGE> 52
FORTUNE PETROLEUM CORPORATION

BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
December 31,
----------------------
1993 1994
---- ----
<S> <C> <C>
CURRENT LIABILITIES:

Current portion of long term debt (Note 5) $ 321,000 4,688,000
Accounts payable 582,000 393,000
Accrued expenses 91,000 78,000
Executive Severance Payable -- 96,000
Royalties and working interests payable 66,000 53,000
Accrued interest 99,000 130,000
Notes payable to shareholder -- 200,000
----------- -----------

Total Current Liabilities 1,159,000 5,638,000
----------- -----------

NOTES PAYABLE TO OFFICERS,
DIRECTORS AND SHAREHOLDERS -- 550,000

LONG-TERM DEBT, net of current portion (Note 5) 2,682,000 1,685,000

EXECUTIVE SEVERANCE PAYABLE -- 63,000

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS' EQUITY:

Preferred stock, $1.00 par value:
Authorized -- 100,000 shares
Issued and outstanding-- None -- --

Common stock, $.01 par value
(Notes 1, 3, 7, 9 and 10):
Authorized -- 10,000,000 shares
Issued and outstanding -- 2,633,471 and 2,644,032
shares at December 31, 1993 and
1994, respectively (Note 1) 26,000 26,000
Capital in excess of par value (Note 1 and 7) 11,258,000 11,253,000
Accumulated deficit (4,671,000) (7,614,000)
----------- -----------

NET STOCKHOLDERS' EQUITY 6,613,000 3,665,000
----------- -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,454,000 $11,601,000
=========== ===========
</TABLE>

See accompanying notes to financial statements. F-4
<PAGE> 53
FORTUNE PETROLEUM CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Sales of oil and gas, net of
royalties $2,093,000 $ 2,762,000 $ 3,339,000
Other income 67,000 72,000 58,000
---------- ----------- -----------

2,160,000 2,834,000 3,397,000

DIRECT PRODUCTION EXPENSES 837,000 946,000 1,090,000
---------- ----------- -----------

REVENUES IN EXCESS OF DIRECT
PRODUCTION EXPENSES 1,323,000 1,888,000 2,307,000
---------- ----------- -----------

OPERATING EXPENSES

Depletion, depreciation
and amortization 482,000 1,719,000 2,070,000
General and administrative expenses 654,000 791,000 1,020,000
Abandoned leasehold costs 37,000 71,000 249,000
Dry hole costs -- -- 195,000
(Gain) or loss on sale of assets 63,000 (133,000) --
Interest expense 234,000 311,000 460,000
Note extension fee 51,000 -- --
Reserve for doubtful debt -- 101,000 --
Executive severance expense -- -- 225,000
Impairment to oil and gas reserves -- 2,682,000 1,031,000
---------- ----------- -----------
1,521,000 5,542,000 5,250,000
---------- ----------- -----------

LOSS BEFORE PROVISION
FOR INCOME TAXES (198,000) (3,654,000) (2,943,000)

PROVISION FOR INCOME TAXES (Note 6) -- -- --
---------- ----------- -----------

NET LOSS $ (198,000) (3,654,000) (2,943,000)
========== =========== ===========

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING (Note 10) 713,500 1,772,739 2,638,672
========== =========== ===========

NET LOSS PER COMMON SHARE $ (0.27) $ (2.06) $ (1.12)
========== =========== ===========
</TABLE>

See accompanying notes to financial statements. F-5
<PAGE> 54

FORTUNE PETROLEUM CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Common Stock
------------ Capital in
Shares Excess of Accumulated
(Note 1) Amount Par Value Deficit Net
-------- ------ ----------- ------- ---
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1992 512,814 $ 5,000 $ 3,462,000 $ (819,000) $ 2,648,000
Common stock issued or can-
celed in exchange for
Argo shares (Note 1) (1,960) -- -- -- --
Common stock issued for
assets acquired (Note 3) 249,477 3,000 1,588,000 -- 1,591,000
Common stock issued for
exercise of warrants (Note 3) 13,255 -- -- -- 1,000
Common stock issued for
payment of interest (Note 5) 15,079 82,000 -- 82,000
Common stock issued for
exercise of stock
options (Note 11) 5,000 -- 13,000 -- 13,000
Common stock issued for
directors' fees (Note 9) 2,795 -- 17,000 -- 17,000
Net loss -- -- -- (198,000) (198,000)
--------- ------- ----------- ----------- -----------
BALANCE, December 31, 1992 796,460 $ 8,000 $ 5,162,000 $(1,017,000) $ 4,153,000
========= ======= =========== =========== ===========

Common stock returned to
treasury (Note 1) (269) -- (2,000) -- (2,000)
Common stock issued for public
offering (Note 7) 1,800,000 18,000 5,416,000 -- 5,434,000
Warrants issued for public
offering (Note 7) -- -- 444,000 -- 444,000
Warrants issued for payment of services -- -- 111,000 -- 111,000
Common stock issued for
exercise of stock options (Note 11) 9,376 -- 25,000 -- 25,000
Common stock issued for
payment of interest (Note 5) 22,365 -- 86,000 -- 86,000
Common stock issued for
directors' fees (Note 9) 5,539 -- 16,000 -- 16,000
Net loss -- -- -- (3,654,000) (3,654,000)
--------- ------- ----------- ----------- -----------
BALANCE, December 31, 1993 2,633,471 $26,000 $11,258,000 $(4,671,000) $ 6,613,000
========= ======= =========== =========== ===========

Common stock returned
to treasury (80) -- (2,000) -- (2,000)
Adjustment to proceeds
for 1993 public offering -- -- (29,000) -- (29,000)
Common stock issued for
exercise of stock options 4,688 -- 12,000 -- 12,000
Common stock issued for
directors' fees 5,953 -- 14,000 -- 14,000
Net loss -- -- -- (2,943,000) (2,943,000)
--------- ------- ----------- ----------- -----------
BALANCE, December 31, 1994 2,644,032 $26,000 $11,253,000 $(7,614,000) $ 3,665,000
========= ======= =========== =========== ===========
</TABLE>

See accompanying notes to financial statements. F-6
<PAGE> 55

FORTUNE PETROLEUM CORPORATION

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1992 1993 1994
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (198,000) $(3,654,000) $(2,943,000)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Common stock issued for interest expense 82,000 86,000 --
Common stock issued for directors' fees,
compensation and consulting fees 17,000 16,000 14,000
Debentures issued for payment of legal expenses 25,000 -- --
Depletion, depreciation and amortization 482,000 1,719,000 2,070,000
Abandoned leasehold and dry hole costs -- -- 444,000
(Gain) or Loss on disposition of assets 100,000 (62,000) --
Impairment of oil and gas assets -- 2,682,000 1,031,000
Reserve for doubtful debt -- 101,000 --
Provision for executive severance -- -- 225,000
Changes in assets and liabilities:
Accounts receivable (116,000) (263,000) 24,000
Prepaids and oil inventory (44,000) 46,000 (45,000)
Accounts payable and accrued expenses (50,000) 375,000 (202,000)
Payment of executive severance -- -- (66,000)
Royalties and working interest payable (19,000) (28,000) (13,000)
Accrued interest 30,000 43,000 31,000
Materials, supplies and other (112,000) (81,000) (79,000)
---------- ----------- -----------
Net cash provided by (used in) operating activities 197,000 980,000 491,000
---------- ----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditure for oil and gas properties (176,000) (6,746,000) (4,035,000)
Expenditures to abandon properties and dry hole costs -- -- (230,000)
Proceeds from sale of properties and equipment -- 292,000 8,000
Expenditures for other property and equipment (60,000) (4,000) (30,000)
---------- ----------- -----------
Net cash used in investing activities (236,000) (6,458,000) (4,287,000)
---------- ----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,065,000 -- 4,680,000
Proceeds from notes to shareholders -- -- 750,000
Repayment of long term debt (845,000) (571,000) (1,326,000)
Proceeds from issuance of common stock 13,000 6,336,000 12,000
Expenditures for offering costs (205,000) (322,000) (29,000)
Common stock repurchase -- (2,000) (2,000)
---------- ----------- -----------
Net cash provided by financing activities 28,000 5,441,000 4,085,000
---------- ----------- -----------
Net increase (decrease) in cash (11,000) (37,000) 289,000
----------- ----------- -----------

CASH AT BEGINNING OF PERIOD 157,000 146,000 109,000
---------- ----------- -----------

CASH AT END OF PERIOD $ 146,000 $ 109,000 $ 398,000
========== =========== ===========

Supplemental information:
Interest paid in cash $ 152,000 $ 225,000 $ 400,000
Common Stock issued or issuable as directors' fees 23,000 16,000 14,000
Common Stock issued or issuable for interest paid 82,000 86,000 --
Warrants issued for public offering -- 444,000 --
Warrants issued for public offering expenses -- 111,000 --
Supplemental disclosure of non cash investing and
financing activities:
Common stock issued for payment of executive severance $ -- $ -- $ --
========== =========== ===========
</TABLE>

See accompanying notes to financial statements. F-7
<PAGE> 56
FORTUNE PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS

(1) GENERAL

Fortune Petroleum Corporation (Fortune) is engaged in production and
exploration of oil and gas, primarily in Texas, New Mexico and California.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OIL INVENTORY

Oil inventory is stated at approximate fair market value. Market
value is determined based on current well head price of oil and natural gas
less selling and delivery costs.

PROPERTY AND EQUIPMENT

Oil and gas properties are accounted for using the successful efforts
method. Costs of acquiring non-producing acreage, drilling successful
exploration wells and development are capitalized. All other exploratory
expenses are charged to operations as incurred. The carrying value of oil and
gas properties is evaluated on an aggregate basis in relation to the estimated
present value of future net revenues based on reserve report estimates.
Depletion, depreciation and amortization are calculated using the
unit-of-production method. Oil and gas reserve quantities are based on a
reserve report by an independent petroleum engineer.

Automotive, office and other property and equipment are stated at
cost. Depreciation is provided using the straight-line method over an
estimated future service life of five years.

MATERIALS AND SUPPLIES

Materials and supplies are stated at the lower of identified actual
cost or replacement cost.

INCOME TAXES

Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes," which
changed its method of accounting for income taxes from the deferred method
under APB 11 to the asset and liability method. The cumulative effect of this
change in accounting principle for the year ended December 31, 1993 was not
material.

Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for future tax consequences attributable
to differences between financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carryforwards.

Under the deferred method of APB 11, which was applied in 1992 and
prior years, deferred income taxes were provided for when revenue and expenses
reported for tax purposes differed from their recognition for financial
statement purposes.

BOND ISSUANCE COSTS

Bond issuance costs are being amortized using the straight line method
over the 5 year life of the related debt.

DEFERRED CREDIT FACILITY COSTS

Deferred credit facility costs are being amortized using the straight
line method over the 2.5 year life of the related debt.

RESERVE IMPAIRMENT

The Company evaluates impairment to the value of aggregate proven
reserves by performing a ceiling test based on the present value of future net
revenues, discounted at ten percent. Based upon such evaluation, the Company
recorded impairments of $1,031,000 and $2,682,000 in 1994 and 1993,
respectively.

F-8
<PAGE> 57

The Company makes periodic assessments of existing unproved properties
to determine whether they have been impaired. Such assessment is made on a
property-by-property basis. If the results of the assessment indicate
impairment, the Company recognizes the impairment at the time the assessment is
made. Based on the most recent assessment, the Company believes that no
impairment to unproved properties exists at December 31, 1994.

RECLASSIFICATION

Certain reclassifications have been made to the 1993 and 1992 amounts
to conform with the current year presentation.

(3) ACQUISITIONS AND DISPOSITION OF ASSETS

EnRe CORPORATION

On June 24, 1994, the Company acquired a 25% interest in EnRe-l LLC, a
company formed to develop and explore for oil and gas lands held under certain
Jicarilla Apache mineral development agreements in Rio Arriba County, New
Mexico. The net acquisition price was $1,674,000, and the effective date of
the transaction using the purchase method of accounting was June 1, 1994. As a
result of the acquisition, the Company has effective non-operating working
interests ranging from 21.5625% to 25% in 70,000 producing, development and
exploratory acres.

Of that acreage acquired, 60,000 acres are subject to certain mineral
development agreements that require minimum levels of development activity
through December 1995. The Company believes that they are in compliance with
all development requirements as of December 31, 1994. Under the terms of the
mineral development agreements, four additional wells must be drilled in 1995.
The Company estimates that their commitment for such drilling activity will be
approximately $470,000.

LAROCO, LLP

MICHAEL PETROLEUM, ET AL.

On October 5, 1993, the Company concluded the acquisition from Michael
Petroleum Corporation, Brazos Resources, Inc., Pioneer Drilling Company and
Endowment Energy Partners of certain interests in two producing natural gas
fields in Webb County, Texas. The funding was provided by substantially all of
the net proceeds from the public offering which closed on the same date (See
Note 7). The transaction was accounted for as a purchase as of July 1, 1993
with a net acquisition price of $6,457,000 and 195,000 common stock purchase
warrants exercisable at $4.13 on October 5, 1995.

VINTAGE PETROLEUM, INC.

On May 27, 1993, the Company sold its interest in 11 gross and .42 net
productive wells in Oklahoma for a total of $278,000 cash. The sale of these
wells did not materially reduce the Company's estimated reserves or future net
revenues.

(4) OIL AND GAS PROPERTIES AND OPERATIONS

Capitalized costs relating to oil and gas producing activities and
related accumulated depletion, depreciation and amortization at December 31,
1992, 1993 and 1994 were as follows:

<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Capitalized costs of oil
and gas properties $ 7,925,000 $14,302,000 $17,912,000

Less accumulated depletion,
depreciation and amortization (1,149,000) (5,282,000) (7,193,000)
----------- ----------- -----------

$ 6,776,000 $ 9,020,000 $10,719,000
=========== =========== ===========
</TABLE>

F-9
<PAGE> 58

Of the above capitalized costs, the amount representing unproved properties was
$1,036,000, $440,000 and $16,000 in 1994, 1993 and 1992, respectively.

Costs incurred in oil and gas producing activities were as follows:

<TABLE>
<CAPTION>
1992 1993 1994
-------- --------- ----------
<S> <C> <C> <C>
Property acquisition $121,000 $ 57,000 $ 511,000
Exploration -- -- 231,000
Development 96,000 289,000 541,000
-------- -------- ----------
$217,000 $346,000 $1,283,000
======== ======== ==========
</TABLE>

The results of operations from oil and gas producing activities for the
years ended December 31, 1992, 1993 and 1994, are as follows:
<TABLE>
<CAPTION>
1992 1993 1994
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Revenues from oil and gas
producing activities:
Sales to unaffiliated parties $2,093 $ 2,762 $ 3,339
------ ------- -------

Production (lifting) costs:
Operating costs and
production and other taxes 837 946 1,090

Depreciation, depletion and amorti-
zation and valuation provisions 454 1,645 1,904

Abandonment and dry hole costs 37 71 444

Impairment to oil and gas reserves -- 2,682 1,031

Other 30 11 --
------ ------- -------

Total expenses 1,358 5,355 4,469
------ ------- -------

Pretax income (loss) from producing activities 735 (2,593) (1,130)

Income tax (expense) benefit (250) -- --
------ ------- -------

Results of oil and gas producing activities
(excluding corporate overhead and interest costs) $ 486 $(2,593) (1,130)
====== ======= =======
</TABLE>

F-10
<PAGE> 59
(5) LONG TERM DEBT

A summary of long-term debt follows:

<TABLE>
<CAPTION>
December 31,
-----------------------
1993 1994
--------- --------
<S> <C> <C>
Note payable to Halliburton due in monthly installments
of $8,072 through May 1, 1994 including interest
of 10% per annum $ 40,000 --

Note payable to H&B Resources $275,000 due in January
1994 and $1,000,000 due on June 30, 1995 including
interest of 1% over prime which is calculated and
paid monthly in shares of the Company's Common Stock 1,275,000 --

Convertible Subordinated Debentures of $1,725,000
(net of discount of $88,000 and $72,000) due
December 31, 1997, including interest of 10-1/2%
per annum paid semi-annually 1,637,000 1,653,000

Bank One credit facility due July 1, 1996 including
interest at 1-1/2% over Bank One, Texas, NA's
prime rate payable monthly 4,680,000

Other debt with interest ranging from 0%
to 9-1/4% per annum due through 1998 51,000 40,000
---------- ----------

Total long-term debt 3,003,000 6,373,000

Less current installments 321,000 4,688,000
---------- ----------

Long-term debt, excluding current installments $2,682,000 $1,685,000
========== ==========
</TABLE>

In 1993 the Company paid $86,000, in interest on the H&B Note using
common stock as payment. The H&B Resources Note and the Halliburton Notes were
paid in full in January 1994.

The 10-1/2% Convertible Subordinated Debentures due December 31, 1997
bear an effective interest rate of 12.13% and were convertible into shares of
the Company's common stock, after April 1, 1994, at a conversion price of $6.32
per share or 158 shares per Debenture. Therefore, if all $1,725,000 were
converted the number of the Company's common shares then outstanding would
increase by 272,981 shares.

The Company has a $10,000,000 credit facility with Bank One under which
it has the ability to borrow amounts up to an available borrowing base as
defined in the credit agreement. This borrowing base was $4,700,000 at December
31, 1994. The credit facility contains various financial covenants, is secured
by all of the Company's oil and gas properties and currently requires monthly
principal reduction payments of $100,000.

At December 31, 1994, the Company was not in compliance with its cash
flow coverage ratio, current ratio and tangible net worth covenants. Under the
terms of credit facility agreement the bank has the right to demand repayment of
the entire loan balance in the event of covenant defaults. The Company is
currently in discussions with Bank One regarding breach of these covenants,
however, it has not obtained a waiver or amendment of such covenants for at
least one year from the bank. Accordingly, the entire amount outstanding is
classified as current in the accompanying financial statements. Should
discussions with the bank be unsuccessful the bank has the right to place the
loan in default. Should a default occur the Company shall have thirty days to
cure such default. If the default is not cured the bank may accelerate repayment
of this outstanding debt and there would be substantial doubt as to the
Company's ability to continue as a going concern. Refer to note 14 for
management's plans in regard to these matters.

F-11
<PAGE> 60

The Company's maturities of long-term debt over the next four years are
as follows:

<TABLE>
<CAPTION>
Year Long-term debt maturity
---- -----------------------

(6) INCOME TAXES

No provision for income taxes was required for the years ended
December 31, 1994, 1993 and 1992.

Deferred taxes consist of the following:

Deferred tax assets:
1994 1993
---------- ----------
<S> <C> <C>

Net operating loss carryforwards $1,762,000 797,000

Oil and Gas Properties difference
in accumulated depletion 1,634,000 1,180,000
---------- ---------
3,426,000 1,977,000

Less valuation allowance (100%) 3,426,000 1,977,000
---------- ---------
Net deferred taxes 0 0
========== =========
</TABLE>

At December 31, 1994, the Company estimates it had cumulative net
operating loss carryforwards for Federal and State income tax purposes of
$4,336,000 and $2,105,000, respectively which are subject to certain
restrictions under I.R.C. 382 and which are available to offset future Federal
and State taxable income, if any, with various expirations through 2008. Also
at December 31, 1994 the Company had a basis difference of $3,713,000 for
Federal and State purposes which is attributable to write down of oil and gas
properties in 1994 for financial statement purposes. The Company is uncertain
as to the recoverability of the above deferred tax assets and has therefore
applied a 100% valuation allowance.

The Company has available IRC Section 29 Tax Credits that may be used
to reduce or eliminate any corporate taxable income in future years. It is
uncertain at this time to what extent the Company will be able to utilize these
federal tax credits, as their utilization is dependent upon the amount, if any,
of future federal income tax incurred, after application of the Company's net
operating loss carryforwards.

(7) PUBLIC OFFERING

On October 5, 1993, the Company completed a $7,425,000 public offering
of 900,000 Units, for $8.25 per Unit. The net proceeds from the offering were
$5,989,000. Each Unit consists of two shares of the Company's common stock,
$.01 par value and two five-year warrants. Each warrant entitles the holder to
purchase one share of the Company's common stock at a price of $3.75 after the
warrant becomes separately transferable until September 28, 1998. The common
stock and the warrants included in the Units became separately transferable on
April 15, 1994. The Warrants are redeemable by the Company at any time after
the Warrants become separately transferable at $.05 per Warrant upon 30 days
notice if the market price of the common stock for 20 consecutive trading days
within the 30 day period preceding the date the notice is given equals or
exceeds $5.50.

(8) COMMITMENTS AND CONTINGENCIES

The Company has an employment agreement with its president, chief
executive officer and chief financial officer that provides for an annual
salary of $102,500 through December 31, 1995, and is subject to renewal upon
expiration. Upon termination of the employment agreement, the president, chief
executive officer and chief financial officer has a two-year consulting
agreement at 40% of his annual salary.

F-12
<PAGE> 61
In June 1994, Daniel E. Pasquini, formerly President and a director of
the Company, resigned. At the time of his resignation, Mr. Pasquini was
employed under an employment agreement with terms similar to Mr. Fairbanks'
agreement. In connection with the cancellation of the agreement, Mr. Pasquini
and the Company negotiated a buyout arrangement under which Mr. Pasquini will
be paid a total severance benefit of $225,000 through July 1996.

The Company leases certain office space under a non-cancelable
operating lease. Rental Expense under the office lease for the years ended
December 31, 1994, 1993 and 1992 was $45,000, $43,000 and $49,000,
respectively.

Minimum future lease payments under the non-cancelable lease are as
follows:

<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1995 $ 52,000
1996 $ 58,000
1997 $ 35,000
--------
$145,000
========
</TABLE>

The Company's interest in the AWP Field in McMullen County, Texas, and
its Sespe Leases in Ventura County, California, were pledged as collateral to a
$1,275,000 mortgage due to H&B Resources at December 31, 1993. The H&B Resources
Note was retired on January 26, 1994 and the Sespe lease and the AWP Field were
released as collateral from this Note.

On March 14, 1995, Fortune was served with a lawsuit in the District
Court of Bexar County, Texas, by EnRe Corporation, in which EnRe , as operator
of the Company's New Mexico properties, seeks recovery of approximately $438,000
allegedly owed by Fortune for the drilling of certain wells on such properties
which are currently still in the process of being completed. The lawsuit is the
result of on-going disputes between the parties regarding the manner in which
EnRe has conducted operations on the property and the proper interpretation of
the operating agreement among the interest owners ont he property. The Company
believes that EnRe has operated the property in a negligent manner, causing loss
to Fortune and the other interest owners. In addition, the Company believes that
the Company was permitted under the terms of the operating agreement to elect
not to participate in the drilling operations for which EnRe now seeks payment.
On March 24, 1995 Fortune answered EnRe's lawsuit and filed a counterclaim
against EnRe for an undeterminable amount for damages suffered by Fortune for
EnRe's actions. On March 30, 1995, a partial settlement was reached as to
payment of undisputed well development costs to be determined by Fortune in
exchange for EnRe's co-operation in complying with provisions of the operating
agreement to provide Fortune with timely information reporting. As of April 13,
1995, the Company had paid $122,000 in undisputed well development costs and
estimated there may be a much as $50,000 in additional well development costs
which may qualify as undisputed.

In the opinion of management, Fortune has valid defenses to all remaining
claims made by EnRe. The Company intends to vigorously defend the litigation
and pursue appropriate affirmative relief against EnRe for its actions as
operator.

(9) RELATED PARTY TRANSACTIONS

In December 1994, the Company obtained $750,000 from certain principal
shareholders and directors in exchange for notes payable. The notes are
unsecured and bear interest at 1.5% above Bank One, Texas,prime rate (9% at
December 31, 1994). Interest is payable monthly. $525,000 in notes are due
January 1, 1996 and $225,000 in notes must be repaid in June 1995. $375,000 of
the notes are convertible into 187,500 shares of common stock ar a price of
$2.00 per share and $200,000 of the notes are convertible into 106,667 shares of
common stock at a price of $1.875 per share. In connection with this financing,
the Company issued 35,000 stock purchase warrants exercisable at $1.875 per
share, and 10,000 stock purchase warrants exercisable at $2.40 per share to
holders of the notes.

(10) NET INCOME OR LOSS PER COMMON SHARE

Net loss per share is calculated based on the weighted average number
of outstanding common shares.

F-13
<PAGE> 62

(11) STOCKHOLDERS' EQUITY

On June 16, 1993, the Company effected a 1-for-4 reverse split of the
Company's common stock. In connection with this action, the Company elected to
repurchase fractional shares at a price of $6.50 per share.

In December 1992, the Company adjusted 138,889 common stock purchase
warrants to reflect an exercise price of $3.89 and extended their expiration to
September 28, 1998 in exchange for extending the final payment of $1,000,000 of
the H&B Resources note to July 1, 1995.

Fortune has four non-compensatory Stock Option Plans. The plans cover
all officers and employees of the Company. Three plans also provide for options
for directors of the Company. Awards are made by the Board of Directors upon
recommendations of its Compensation Committee. There is no performance formula
or measure. Options granted under the 1987 plan must be exercised within ten
years of the date of grant or are forfeited. Options granted under the 1988,
1991 and 1993 plans must be exercised within five years of the date of grant or
they are forfeited.

All options available under the 1987, 1988, 1991 and 1993 plans
(including the 1994 and 1995 grants under this plan) have been granted, and no
shares remain under any of these plans on which options may be granted. Options
have been granted as follows: options under the 1987 plan have been granted to
acquire 12,500 shares of Fortune Petroleum common stock, at a price of $2.60 per
share; options of 27,500 at $2.60 per share under the 1988 plan; 32,500 at $6.00
per share under the 1991 plan have been granted by the Board of Directors; and
75,000 options at $5.00 per share (the 1993 portion) and 263,000 options at
$5.48 per share (the 1994 portion) and 264,000 options at $6.03 per shares (the
1995 portion) have been granted under the five year plan adopted in 1993. The
prices of the options granted in 1991, 1993, 1994 and 1995 were reduced for all
optionholders who remain employees of the Company to $2.75 per share on January
12, 1995.

In July 1994, a director, exercised 4,688 options at an exercise price
of $2.60 per share from his option under the 1988 stock option plan.

In October 1992, Cecil Basenberg exercised 5,000 options at an exercise
price of $2.60 per share from his option under the 1987 Stock Option Plan.
Additionally, 2,187 options granted under the 1988 Stock Option Plan were
forfeited. In March 1993, James J. Penney exercised 4,688 options at an exercise
price of $2.60 per share from his option under the 1988 Stock Option Plan. Barry
W. Blank also exercised 4,688 options at an exercise price of $2.60 per shares
from his option under the 1988 Stock Option Plan.

At December 31, 1994 the Company's outstanding warrants to purchase
common stock consisted of:

<TABLE>
<CAPTION>
Number of Warrants Exercise Price Range Expiration Date
------------------ -------------------- ---------------
<S> <C> <C>
195,000 $4.13 10/5/95
50,000 $3.89 2/8/96
2,068,653 $3.75 - $4.41 9/28/98
90,000 $11.14 9/28/98*
---------
2,403,653
</TABLE>

- ----------
* Each warrant permits the holder to purchase two shares of common stock plus
two stock purchase warrants, expiring September 28, 1998, which permit the
holder to purchase one additional share of common stock at an exercise price of
$3.75.

(12) MAJOR CUSTOMER

The Company sold oil representing 72% of its oil production under
contracts to one customer for the year ended December 31, 1994. 92% of the
Company's gas production was sold under contracts to three customers (48%, 25%
and 15%, respectively) for the year ended December 31, 1994.

The Company sold oil representing 83% of its oil production under
contracts to two customers (68% and 14%, respectively) for the year ended
December 31, 1993. 90% of the Company's gas production was sold to two customers
(64% and 26%, respectively) for the year ended December 31, 1993.

F-14
<PAGE> 63

The Company sold oil representing 79% of its oil production under
contracts to two customers (65% and 14%, respectively) for the year ended
December 31, 1992. 83% of the Company's gas production was sold to three
customers (63%, 10% and 10%, respectively) for the year ended December 31, 1992.

(13) SUBSEQUENT EVENTS

On January 20, 1995, the Company amended its Certificate of
Incorporation to increase the number of authorized shared of common stock from
10,000,000 shares to 40,000,000 and the number of authorized preferred shares
from 100,000 to 2,000,000.

On January 5, 1995, Daniel E. Pasquini, the former president of the
Company, agreed to a modification of his severance package. He accepted $85,000
in cash, the exercise price of 45,000 stock options held by him was reduced to
$.575 per share and the Company issued him warrants to purchase 45,000 shares of
common stock at $6.03 per share, which he exercised immediately. The Company
continues to be responsible, under the terms of Mr. Pasquini's severance
agreement for certain medical insurance and vehicle lease payments, however,
such expenses have been reduced due to lower premiums for which the Company may
reclassify into income in the first quarter of 1995 as much as $5,000 of the
previously expensed severance.

(14) LIQUIDITY

Although the Company had a positive cash flow during 1994 from
operating activities of $491,000, the Company had negative working capital at
December 31, 1994 of $4,576,000 due to the re-classification of the Bank One
credit facility to current portion of long-term debt. Current low gas prices
have had a negative impact on the Company's cash flow and terms of its credit
facility. Therefore, the Company's viability as a going concern is dependent
upon either restructuring its debt, completion of a securities offering, pledge
of additional collateral, higher commodity prices or a combination of the
foregoing which would be adequate to provide sufficient cash flow to meet its
obligations. No assurance can be given that the Company's efforts to cure its
liquidity concerns will be successful.

Additionally, the Company and Bank One are in negotiations at the time
of the filing of this Form 10-KSB to waive covenant breaches which occurred at
December 31, 1994 as a result of the impact of lower natural gas prices on the
Company's cash flow and estimated collateral value of its oil and gas properties
pledged to the bank and principal payments required by the bank. There can be no
assurance at this time that these matters involving the covenants or principal
retirements will be resolved to the Company's satisfaction and an event of
default could occur.

(15) UNAUDITED PRO-FORMA OIL AND GAS PRODUCING ACTIVITIES AND OIL AND GAS
COST INFORMATION

All of the Company's reserves are located within the United States.
Proved reserves represent estimated quantities of crude oil and natural gas
which geological and engineering data demonstrate to be reasonably certain to be
recoverable in the future 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 using existing equipment and
operating methods.

For the years ended December 31, 1994 and 1993, the oil and gas reserve
estimates were reviewed by Huddleston & Co., Inc., Houston, Texas independent
petroleum engineers and Sherwin D. Yoelin, independent petroleum engineer, and
for the year ended December 31, 1992, the oil and gas reserve estimates were
reviewed by Sherwin D. Yoelin, independent petroleum engineer, in accordance
with guidelines established by the Securities and Exchange Commission. Such
estimates are subject to numerous uncertainties inherent in the estimation of
quantities of proved reserves and in the projection of future rates of
production, prices and the timing of development expenditures. The future cash
inflow, as reflected in the "Standardized Measure of Discounted Future Net Cash
Flows Relating to Proved Oil and Gas Reserves", determined from such reserve
data are estimates only, and the present values thereof should not be construed
to be the current market values of the Company's oil and gas reserves or the
costs that would be incurred to obtain equivalent reserves.

CHANGES IN ESTIMATED RESERVE QUANTITIES

The Company's net interests in estimated quantities of proved developed
and undeveloped reserves of crude oil and natural gas at December 31, 1992,
1993, and 1994, and changes in such quantities during the years, 1992, 1993 and
1994, were as follows:

F-15
<PAGE> 64
<TABLE>
<CAPTION>
CRUDE OIL (Barrels)
------------------------------
Year Year Year
1992 1993 1994
------ ------ ------
(in thousands)
<S> <C> <C> <C>
BEGINNING OF PERIOD 1,679 2,066 813
Revisions of previous estimates (48) (1,195) 866
Production (58) (79) (88)
Purchase of minerals in place 542 77 56
Sales of minerals in place (20) (56) --
----- ------ -----

END OF PERIOD 2,066 813 1,647
===== ====== =====

Proved developed reserves
Beginning of period 855 983 666
===== ====== =====

End of period 983 666 675
===== ====== =====
</TABLE>

<TABLE>
<CAPTION>
NATURAL GAS (Mcf)
------------------------------
Year Year Year
1992 1993 1994
------ ------ ------
(in thousands)
<S> <C> <C> <C>
BEGINNING OF PERIOD 2,390 4,795 5,562
Revisions of previous estimates 41 (1,183) 533
Production (234) (724) (1,017)
Purchase of minerals in place 2,598 3,010 833
Sales of minerals in place -- (336) --
----- ------ ------

END OF PERIOD 4,795 5,562 5,911
===== ====== ======

Proved developed reserves
Beginning of period 1,111 2,582 4,221
===== ====== ======

End of period 2,582 4,221 3,317
===== ====== ======
</TABLE>

NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES

This statement attempts to present future net cash flows related to
proved oil and gas reserves without the subjectivity inherent in either direct
estimation of market value or entity specific discounted net cash flow. This
measure is not a measure of fair market value nor a measure of the present value
of future cash flows, but rather a rough estimation of such. This measure should
be responsive to some of the key variables that affect fair market value, such
as changes in reserve quantities, selling prices, production costs and tax
rates.

The future net cash inflows are developed as follows:

(1) Estimates are made of quantities of proved reserves and the future
periods during which they are expected to be produced based on period-end
economic conditions.

(2) The estimated future production of proved reserves is priced on the
basis of period-end prices except for fixed and determinable escalation
provisions in existing contracts.

(3) The resulting future gross revenue streams are reduced by estimated
future costs to develop and to produce the proved reserves, based on period-end
cost estimates.

F-16
<PAGE> 65

(4) The resulting future net revenue streams are reduced to present
value amounts by applying a 10 percent discount factor.

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES

Disclosure of the principal component of the standardized measure of
discounted future net cash flows provides information concerning the factors
involved in making the calculation. In addition, the disclosure of both
undiscounted and discounted net flows provides a measure of comparing proved oil
and gas reserves both with and without an estimate of production timing. The
standardized measure of discounted future net cash flows relating to proved
reserves reflects income taxes.

<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Future cash in flows $ 43,499 $22,153 $ 32,898

Future costs:

Production (17,549) (7,950) (11,283)

Development (5,565) (1,368) (5,683)
-------- ------- --------

Future net inflows before income taxes
20,385 12,835 15,932

Future income taxes (6,931) (4,364) (5,417)
-------- ------- --------

Future net cash flows 13,454 8,471 10,515

10% discount factor (7,808) (2,824) (5,137)
-------- ------- --------

Standardized measure of
discounted net cash flows $ 5,646 $ 5,647 $ 5,378
======== ======= ========
</TABLE>

CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVEN
RESERVE QUANTITIES

This statement discloses the sources of changes in the standardized
measure from period to period. The amount reported as "Net change in sales and
transfer prices" represents the approximate effect of increasing the evaluation
of reserves proved in prior periods to reflect higher prices in effect in the
following years. The "Accretion of discount" was computed by applying the 10
percent discount factor to be valuation of the proved reserves as of the
beginning of the period before income tax effects. "Changes in estimated future
development costs" arise from several sources: (1) revisions of previous
estimates for both development costs actually incurred in the current period and
for development costs estimated to be incurred in succeeding periods, (2) new
discoveries from which future development must be performed and (3)
current-period expenditures which reduced the future expenditures estimated in
prior periods (the amounts at the beginning of the period). The "Sales and
transfers, net of production costs" are expressed in actual dollar amounts.
"Revisions of quantity estimates" are expressed at period-end prices. The "Net
change in income taxes" is computed as the change in present value of future
income taxes. The "Changes in production rates (timing) and other" reflects all
other changes, such as changes in timing, and includes the residual from
estimation errors in computing other elements of change.

<TABLE>
<CAPTION>
Year Year Year
1992 1993 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Standardized Measure:

Beginning of period $ 2,708 $ 5,646 $ 5,647

Increases (decreases):

Sales and transfers, net of
production costs (1,271) (1,797) (2,249)
</TABLE>

F-17
<PAGE> 66
<TABLE>
<S> <C> <C> <C>
Net change in sales and transfer
prices net of production costs 4,354 (2,087) (1,635)

Changes in estimated future
development costs (1,436) 4,197 (4,315)

Revisions of quantity estimates (1,027) (10,999) 6,385

Accretion of discount 271 565 565

Net change in income taxes (1,308) 2,998 (909)

Purchases of reserves in place 3,761 7,231 1,464

Sales of reserves in place (70) (291) --

Changes in production rates
(timing) and other 336 184 425
------- -------- -------

Standardized Measure:

End of period $ 5,646 $ 5,647 $ 5,378
======= ======== =======
</TABLE>

F-18
<PAGE> 67
FORTUNE PETROLEUM CORPORATION

BALANCE SHEETS

ASSETS (unaudited)

<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 30, December 31,
-------- ------------
1995 1994
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,808,000 $ 398,000
Accounts receivable 649,000 550,000
Prepaid expenses and oil inventory 140,000 114,000
---------- -----------
Total Current Assets 4,597,000 1,062,000
----------- -----------
PROPERTY AND EQUIPMENT (Note 1):
Oil and gas properties, accounted for
using the successful efforts method 23,429,000 17,912,000
Automotive, office and other 336,000 330,000
----------- -----------
23,765,000 18,242,000
Less -- accumulated depletion, depreciation
and amortization (8,834,000) (8,253,000)
----------- -----------
14,931,000 9,989,000
----------- -----------
OTHER ASSETS:
Materials, supplies and other 252,000 270,000
Deferred credit facility costs (net of accumulated
amortization of $70,000 and $39,000) 83,000 114,000
Bond issuance costs (net of accumulated
amortization of $152,000 and $122,000)(Note 3) 137,000 167,000
----------- -----------
472,000 550,000
----------- -----------
TOTAL ASSETS $20,000,000 $11,601,000
=========== ===========
</TABLE>

See accompanying notes to financial statements.
F-19
<PAGE> 68
FORTUNE PETROLEUM CORPORATION

BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
------- ------------
1995 1994
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long term debt (Note 3) $ 8,000 $ 4,688,000
Accounts payable 324,000 393,000
Accrued expenses 94,000 78,000
Executive severance payable -- 96,000
Royalties and working interests payable 57,000 53,000
Accrued interest 129,000 130,000
Notes payable to officers, directors and shareholders 200,000 200,000
----------- -----------
Total Current Liabilities 812,000 5,638,000
NOTES PAYABLE TO OFFICERS, DIRECTORS
AND SHAREHOLDERS 550,000 550,000
LONG-TERM DEBT, NET OF CURRENT PORTION (NOTE 3) 5,489,000 1,685,000
EXECUTIVE SEVERANCE PAYABLE -- 63,000

STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized -- 2,000,000 shares
Issued and outstanding -- None -- --
Common stock, $.01 par value (Note 1):
Authorized -- 40,000,000 shares
Issued and outstanding -- 8,650,307 and
2,644,032 shares at June 30, 1995 and
December 31, 1994, respectively 86,000 26,000
Capital in excess of par value 21,516,000 11,253,000
Accumulated deficit (8,453,000) (7,614,000)
----------- -----------
NET STOCKHOLDERS' EQUITY 13,149,000 3,665,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,000,000 $11,601,000
=========== ===========
</TABLE>

See accompanying notes to financial statements.

F-20
<PAGE> 69
FORTUNE PETROLEUM CORPORATION

STATEMENTS OF OPERATIONS (unaudited)

<TABLE>
<CAPTION>
(Unaudited)
For the six months ended
---------------------------------------
June 30, 1995 June 30, 1994
------------- -------------
<S> <C> <C>
REVENUES:
Sales of oil and gas, net of royalties $1,355,000 $1,713,000
Other income 79,000 30,000
---------- ----------
1,434,000 1,743,000

DIRECT PRODUCTION EXPENSES 638,000 494,000
---------- ----------

REVENUES IN EXCESS OF DIRECT
PRODUCTION EXPENSES 796,000 1,249,000
---------- ----------

OPERATING EXPENSES

Provision for depletion, depreciation
and amortization expense 668,000 952,000
General and administrative expenses 566,000 656,000
Abandoned leasehold costs 23,000 34,000
Dry hole costs -- 115,000
Interest expense 378,000 156,000
---------- ----------
1,635,000 1,688,000
---------- ----------

LOSS BEFORE PROVISION
FOR INCOME TAXES (839,000) (664,000)

PROVISION FOR INCOME TAXES -- --
---------- ----------

NET LOSS (839,000) (664,000)
========== ==========

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,503,251 2,634,411
========== ==========

NET LOSS PER COMMON SHARE (Note 7) $ (0.24) $ (0.25)
========== ==========
</TABLE>

See accompanying notes to financial statements

F-21
<PAGE> 70
FORTUNE PETROLEUM CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994
AND THE SIX MONTHS ENDED JUNE 30, 1995
(unaudited)

<TABLE>
<CAPTION>
Common Stock Capital in
Shares Excess of Accumulated
(Note A) Amount Par Value Deficit Net
-------- ------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 2,633,471 $26,000 $11,258,000 $(4,671,000) $ 6,613,000
========= ======= =========== =========== ===========

Common stock returned to treasury
(Note 1) (80) -- (2,000) -- (2,000)
Adjustment to proceeds for
1993 Public Offering -- -- (29,000) -- (29,000)
Common stock issued for
exercise of stock options 4,688 -- 12,000 -- 12,000
Common stock issued for
directors' fees 5,953 -- 14,000 -- 14,000

Net loss -- -- -- (2,943,000) (2,943,000)
--------- ------- ----------- ----------- -----------

BALANCE, December 31, 1994 2,644,032 $26,000 $11,253,000 $(7,614,000) $ 3,665,000
========= ======= =========== =========== ===========

Common stock returned to
treasury (6) -- -- -- --
Common stock issued for
public offerings 4,748,000 48,000 7,685,000 -- 7,733,000
Common stock issued for
merger 1,200,000 12,000 2,480,000 -- 2,492,000
Common stock issued or
issuable for exercise
of stock options 48,750 -- 79,000 -- 79,000
Common stock issued or
issuable for directors' fees 9,531 -- 19,000 -- 19,000

Net loss -- -- -- (839,000) (839,000)
--------- ------- ----------- ---------- -----------

BALANCE, June 30, 1995 8,650,307 $86,000 $21,516,000 $(8,453,000) $13,149,000
========= ======= =========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

F--22
<PAGE> 71
FORTUNE PETROLEUM CORPORATION

STATEMENT OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
(Unaudited)
For the six months ended
June 30, 1995 June 30, 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (839,000) $ (664,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Common stock issued for directors' fees,
compensation and consulting fees 19,000 5,000
Depletion, Depreciation and amortization 668,000 952,000
Loss on abandonment 23,000 34,000
Provision for executive severance (17,000) 225,000
Financing costs incurred by LEX prior to
acquisition/merger 150,000 --
Changes in assets and liabilities:
Accounts receivable (99,000) (57,000)
Prepaids and oil inventory (26,000) (56,000)
Accounts payable and accrued expenses (102,000) (171,000)
Payment on executive severance (91,000) --
Royalties and working interest payable 4,000 55,000
Accrued interest (1,000) 12,000
Other assets 18,000 (101,000)
----------- -----------
Net cash provided by (used in)
operating activities (293,000) 234,000
----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditure for oil and gas properties (3,175,000) (2,970,000)
Expenditures to abandon properties -- (34,000)
Expenditures for other property and equipment (5,000) (28,000)
----------- -----------
Net cash used in
investing activities (3,180,000) (3,032,000)
----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long term debt -- 4,360,000
Repayment of long term debt (876,000) (1,313,000)
Proceeds from issuance of common stock 8,079,000 --
Expenditures for offering costs (320,000) (20,000)
----------- -----------

Net cash provided by financing activities 6,883,000 3,027,000
----------- -----------

Net increase (decrease) in cash 3,410,000 229,000
----------- -----------

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 398,000 109,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD 3,808,000 $ 338,000
=========== ===========
Supplemental information:
Interest paid $ 378,000 $ 144,000
=========== ===========
Supplemental disclosure of significant
non cash transactions:
Common stock issued or issuable as directors' fees $ 19,000 $ 10,000
Common stock issued for payment of executive severance $ 43,000 $ --
Common stock issued to acquire LEX $ 2,492,000 $ --
</TABLE>

See accompanying notes to financial statements.

F-23
<PAGE> 72
FORTUNE PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS
June 30, 1995 (unaudited)

(1) LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PROCEDURE

The condensed financial statements at June 30, 1995, and for the three
months and six months then ended included herein have been prepared by the
Company, without audit, pursuant to the Rules and Regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such Rules and
Regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10- KSB.
In the opinion of the Company, the financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of Fortune Petroleum Corporation as of
June 30, 1995 and December 31, 1994 and the results of its operations for the
three months and six months ended June 30, 1995 and June 30, 1994 and the cash
flows for the six month periods ended June 30, 1995 and June 30, 1994. The
results of the operations for such interim periods are not necessarily
indicative of the results for the full year.

(2) ACQUISITION OF ASSETS AND MERGER

On May 12, 1995 the Company acquired Lagniappe Exploration, Inc. of New
York, NY and its interest in an exploration agreement with Zydeco Exploration
Inc. to explore for oil and gas in the Gulf Coast area of the United States
principally in Louisiana and offshore state and federal leases. Fortune
acquired all of the issued and outstanding equity securities of LEX in exchange
for 1.2 million shares of Fortune Petroleum common stock and 1.2 million
warrants, and Lagniappe Exploration became a wholly-owned subsidiary of
Fortune. The market value of the shares, when issued, was $2,572,000. The
acquisition was approved by Fortune's shareholders at a special shareholders
meeting held on May 12, 1995. Lagniappe was merged into Fortune on June 30,
1995.

(3) LONG TERM DEBT

At June 30, 1995 a summary of long-term debt is as follows:
<TABLE>
<CAPTION>
June 30 December 31,
1995 1994
---- ----
<S> <C> <C>
Convertible Subordinated Debentures of $1,725,000 (net of
discount of $64,000 and $72,000) due December 31, 1997,
including interest of 10-1/2% per annum paid semi-annually $1,661,000 $1,653,000

Bank One credit facility due July 1, 1996 including interest
at 1-1/2% over Bank One, Texas, NA's prime rate payable monthly 3,800,000 4,680,000

Other debt with interest ranging from 0% to 9-1/4% per annum
due through 1998 36,000 40,000
---------- ----------
Total long-term debt $5,497,000 $6,373,000
Less current installments 8,000 4,688,000
---------- ----------
Long-term debt, excluding current installments $5,489,000 $1,685,000
========== ==========
</TABLE>

The 10-1/2% Convertible Subordinated Debentures due December 31, 1997 bear
an effective interest rate of 12.13% and are convertible into shares of the
Company's common stock, after April 1, 1994, at a conversion price of $6.32 per
share or 158 shares per $1,000 Debenture. Therefore, if all $1,725,000 were
converted the number of the Company's common shares then outstanding would
increase by 272,981 shares.

The Company has a $10,000,000 credit facility with Bank One, Texas, N.A.
under which it has the ability to borrow amounts up to an available borrowing
base as defined in the credit agreement. This borrowing base was adjusted to
$4,100,000 at April 1, 1995 due to lower natural gas prices. The credit
facility contains various financial covenants, is secured by all of

F-24
<PAGE> 73

the Company's oil and gas properties and currently requires monthly reduction
payments of $100,000. At June 30, 1995, the Company was in compliance with its
credit facility covenants except its cash flow covenant which the Bank has
indicated it is willing to waive.

The Company's maturities of long-term debt over the next five years are as
follows:

<TABLE>
<CAPTION>
Year Long-term debt maturity
---- -----------------------
<S> <C>
1995 8,000
1996 3,808,000
1997 1,665,000
1998 16,000
----------
$5,497,000
</TABLE>

(4) INCOME TAX EXPENSE

No provision for income taxes was required for the three months and six
months ended June 30, 1995.

At June 30, 1995 deferred taxes consist of the following:

<TABLE>
<CAPTION>
Deferred tax assets:
<S> <C>
Net operating loss carryforwards $2,038,000
Oil and Gas Properties difference
in accumulated depletion 1,634,000
----------
3,672,000
Less valuation allowance (100%) 3,672,000
----------
Net deferred taxes 0
==========
</TABLE>

At June 30, 1995, the Company estimates it had cumulative net operating loss
carryforwards for Federal and State income tax purposes of $5,175,000 and
$2,524,000, respectively which are subject to certain restrictions under I.R.C.
382 and which are available to offset future Federal and State taxable income,
if any, with various expirations through 2010. Also at June 30, 1995 the
Company had a basis difference of $3,713,000 for Federal and State purposes
which is attributable to write downs of oil and gas properties in 1993 and 1994
for financial statement purposes. The Company is uncertain as to the
recoverability of the above deferred tax assets and has therefore applied a 100%
valuation allowance.

The Company has available IRC Section 29 Tax Credits that may be used to
reduce or eliminate any corporate taxable income in future years. It is
uncertain at this time to what extent the Company will be able to utilize these
federal tax credits, as their utilization is dependent upon the amount, if any,
of future federal income tax incurred, after application of the Company's net
operating loss carryforwards.

(5) OFFERING OF COMMON STOCK

On June 27, 1995, the Company entered into an Underwriting Agreement with
Coleman and Company Securities, Inc. and Starr Securities, Inc., both New York
Stock Exchange member firms, as Representatives of the Underwriters to sell 4.1
million shares of the Company's common stock at $2.00 per share. The net
proceeds received from the sale of those shares after the underwriters'
commissions and non-accountable expense allowance were $7,289,000 and were
received on June 30, 1995.

(6) LEGAL PROCEEDINGS

There are no pending material legal proceedings involving any of the
Company's properties or that involves a claim for damages which exceeds 10% of
the Company's current assets.

F-25
<PAGE> 74

(7) COMPUTATION OF EARNINGS (LOSS) PER SHARE

Primary earnings per common share are computed by dividing the Company's net
loss by the weighted average number of common and common equivalent shares
outstanding. Common equivalent shares are shares which may be issuable upon
exercise of outstanding stock options and warrants; however, they are not
included in the computation for the three month and six month periods ended June
30, 1995 and 1994, since their effect would be to reduce the net loss per share.

Fully diluted earnings per common share are not presented since the
conversion of the Company's 10-1/2% Convertible Subordinated Debentures and its
publicly traded common stock warrants would have an anti-dilutive effect.

(8) SUBSEQUENT EVENTS

On July 3, 1995, Coleman and Company Securities, Inc., representing several
underwriters, advised the Company they were exercising their right to purchase
500,000 shares of common stock of the Company at $2.00 per share under the terms
of the Underwriting Agreement executed on June 27, 1995. The net proceeds from
the sale of the overallotment shares were received by the Company on July 7,
1995.

On July 13, 1995, the Company was advised by the Estate of Jack Farber that
it wished to convert the $200,000 Farber Note into unregistered common shares of
the Company under the terms of the note. On July 20, 1995 the Estate of Jack
Farber was issued 106,667 shares as payment in full. Under the terms of the
note, the Company will endeavor to register such shares prior to December 1995.

(9) UNAUDITED PRO-FORMA OIL AND GAS PRODUCING ACTIVITIES AND OIL AND GAS COST
INFORMATION

Capitalized costs relating to oil and gas producing activities and related
accumulated depletion, depreciation and amortization for the six month period
ended June 30, 1995 were as follows:

<TABLE>
<S> <C>
Capitalized costs balance at beginning
of year before accumulated depletion
depreciation and amortization $17,912,000

Property and leasehold acquisition costs --

Oil and Gas acquisition 5,072,000

Development 447,000

Exploration --

Less dispositions and transfers (net) (2,000)
-----------
$23,429,000
Less accumulated depletion,
depreciation and amortization (8,602,000)
-----------
$14,827,000
===========
</TABLE>

Capitalized costs of unproved properties are not significant.

F-26
<PAGE> 75
================================================================================

3,070,252 SHARES

COMMON STOCK

FORTUNE PETROLEUM
CORPORATION

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

PROSPECTUS

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

, 1995
---------------

================================================================================
<PAGE> 76

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

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

------------------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
Available Information 2
Prospectus Summary 3
Risk Factors 7
The Offering 11
Use of Proceeds 11
Dividend Policy 11
Dilution 11
Capitalization 12
Price Range of Common Stock 13
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations 14
Business and Properties 20
Management 34
Certain Relationships and
Related Transactions 38
Principal Stockholders 40
Description of Securities 42
Legal Matters 44
Experts 44
Glossary 44
Index to Financial Statements F-1

-----------------
</TABLE>
<PAGE> 77

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law permits the
indemnification of officers, directors, employees and agents of Delaware
corporations. The Certificate of Incorporation and Bylaws of the Company
provide that the corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware as it may be
amended from time to time, indemnify and hold harmless each person who was or
is a party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
whom he or she is a legal representative, is or was a director or officer of
the Company or is or was serving at the request of the Company as director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action or
inaction in an official capacity or in any other capacity while serving as a
director, officer, employee or agent, against all costs, charges, expenses,
liabilities and losses (including attorney's fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith, and
such indemnification shall continue as to person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of his or
her heirs, executors and administrators.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The Registrant estimates that expenses in connection with the offering
described in the Registration Statement will be as follows:

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee . . . . . $ 3,968
Accountants' Fees and Expenses . . . . . . . . . . . . . . . $ 5,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . $ 15,000
American Stock Exchange fees . . . . . . . . . . . . . . . . $ 17,000
Printing and Engraving Expenses . . . . . . . . . . . . . . . $ 5,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . $ 3,532
-------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000
=======
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

On August 23, 1989, the Company's Board of Directors passed a
resolution that, in some cases, each outside director could receive a certain
number of the Company's shares of Common Stock in lieu of the quarterly
directors' fee of $1,250 cash. The following table lists the shares issued
during the last three years. Such shares were issued without registration
under the Securities Act of 1933 (the "Act") in reliance upon the exemption
contained in Section 4(2) of the Act. No underwriters were involved in the
sale of such shares.

S-1
<PAGE> 78

<TABLE>
<CAPTION>
Director Date Number of Shares Equivalent Amount of Director Fees
- -------- ---- ---------------- ----------------------------------
<S> <C> <C> <C>
Cecil O. Basenberg 8/28/92 800 $1,250
Dean W. Drulias 8/28/92 800 $1,250
Graham S. Folsom 8/28/92 800 $1,250
Charles E. Hinkle 8/28/92 800 $1,250
J. Donald Langston 8/28/92 800 $1,250
Dean W. Drulias 11/13/92 870 $1,250
Graham S. Folsom 11/13/92 870 $1,250
Charles E. Hinkle 11/13/92 870 $1,250
J. Donald Langston 11/13/92 870 $1,250
Dean W. Drulias 2/08/93 906 $1,250
Graham S. Folsom 2/08/93 906 $1,250
Charles E. Hinkle 2/08/93 906 $1,250
J. Donald Langston 2/08/93 906 $1,250
Dean W. Drulias 4/28/93 870 $1,250
Graham S. Folsom 4/28/93 870 $1,250
Charles E. Hinkle 4/28/93 870 $1,250
Dean W. Drulias 12/27/93 204 $1,250
Graham S. Folsom 12/27/93 204 $1,250
Charles E. Hinkle 12/27/93 204 $1,250
Dean W. Drulias 12/27/93 339 $1,250
Graham S. Folsom 12/27/93 339 $1,250
Charles E. Hinkle 12/27/93 339 $1,250
Dean W. Drulias 12/27/93 588 $1,250
Graham S. Folsom 12/27/93 588 $1,250
Charles E. Hinkle 12/27/93 588 $1,250
William T. Walker, Jr. 12/27/93 588 $1,250
Charles A. Champion 4/04/94 556 $1,250
Dean W. Drulias 4/04/94 556 $1,250
Graham S. Folsom 4/04/94 556 $1,250
William T. Walker, Jr. 4/04/94 556 $1,250
Charles A. Champion 7/14/94 606 $1,250
Dean W. Drulias 7/14/94 606 $1,250
Graham S. Folsom 7/14/94 606 $1,250
William T. Walker, Jr. 7/14/94 606 $1,250
Dean W. Drulias 9/30/94 435 $1,250
Graham S. Folsom 9/30/94 435 $1,250
William T. Walker, Jr. 9/30/94 435 $1,250
Dean W. Drulias 3/29/95 667 $1,250
Graham S. Folsom 3/29/95 667 $1,250
William T. Walker, Jr. 3/29/95 667 $1,250
Charles A. Champion 4/03/95 714 $1,250
Dean W. Drulias 4/03/95 714 $1,250
Barry Feiner 4/03/95 714 $1,250
Graham S. Folsom 4/03/95 714 $1,250
Gary Gelman 4/03/95 714 $1,250
William T. Walker, Jr. 4/03/95 714 $1,250
Charles A. Champion 7/21/95 541 $1,250
Dean W. Drulias 7/21/95 541 $1,250
Barry Feiner 7/21/95 541 $1,250
Graham S. Folsom 7/21/95 541 $1,250
Gary Gelman 7/21/95 541 $1,250
William T. Walker, Jr. 7/21/95 541 $1,250
</TABLE>

As a condition of the Company's Purchase and Sale Agreement and Note
Agreement dated April 10, 1992 with H & B Resources and Klein Bros., Inc., the
Company issued the following shares as payment of interest on the H & B
Resources Note to Klein Bros., Inc. without registration under the Act in
reliance upon the exemption contained in Section 4(2) of the Act.

S-2
<PAGE> 79
<TABLE>
<CAPTION>
Date Paid Interest Period Number of Shares
--------- --------------- ----------------
<S> <C> <C>
July 1992 April - June 1992 5,741
August 1992 July 1992 2,327
November 1992 August - October 1992 6,980
January 1993 November and December 1992 4,203
April 1993 January - March 1993 5,935
June 1993 April 1993 1,660
July 1993 May 1993 1,900
December 1993 June - November 1993 8,669
</TABLE>

On December 19 and 20, 1994, the Company issued stock purchase
warrants to purchase 10,000 shares to Klein Ventures, Inc. and stock purchase
warrants to purchase 35,000 shares to Mr. Jack Farber, respectively, in
connection with loans made to the Company in December 1994. Such warrants were
issued without registration under the Act in reliance upon the exemption
contained in Section 4(2) of the Act.

On February 24, 1995, the Company issued 648,000 shares of Common
Stock for cash to a number of foreign purchasers. Such shares were issued
without registration under the Act in reliance upon the exemption contained in
Regulation S under the Act.

On April 24, 1995, the Company issued 170,000 shares of Common Stock
and 170,000 warrants to Lagniappe Exploration, Inc. in connection with the
Company's acquisition of an interest in the Zydeco 3d Venture. Such shares and
warrants were issued without registration under the Act in reliance upon the
exemption contained in Section 4(2) of the Act.

On May 12, 1995, the Company issued an aggregate of 1,030,000 shares
of Common Stock and 1,030,000 warrants to William D. Forster and BSR
Investments, Inc., the record holders of the common stock of Lagniappe
Exploration, Inc. in connection with the Company's acquisition of that company.
Such shares and warrants were issued without registration under the Act in
reliance upon the exemption contained in Section 4(2) of the Act.

In July, 1995, the Company issued 100,000 shares of Common Stock and
100,000 common stock purchase warrants exerciseable at $4.75 per share to OSTIS
Ltd as compensation under a consulting agreement for investment banking
services in the European markets. The shares were issued without registration
under the Act in reliance upon the exemption contained in Regulation S under
the Act and the warrants were issued in reliance upon the exemption contained
in Section 4(2) of the Act.

On September 6, 1995, the Company issued 20,000 stock purchase
warrants exerciseable for a period of five years at a price of $3.625 per
shares of Common Stock to each of Ten Square Research, TNC Incorporated and
Wagner Investment Management as compensation for consulting services. Such
warrants were issued without registration under the Act in reliance upon the
exemption contained in Section 4(2) of the Act.

ITEM 27. EXHIBITS

(a) Exhibits

<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
2.1 Purchase and Sale Agreement, dated May 28, 1993, among Registrant, Michael Petroleum Corporation, Pioneer Drilling
and Endowment Energy Partners, L.P. (incorporated by reference to Fortune's Registration Statement on Form SB-2,
Registration No. 33-64600)

2.2 Purchase and Sale Agreement, dated May 28, 1993, among Registrant and Brazos Resources, Inc. (incorporated by
reference to Fortune's Registration Statement on Form SB-2, Registration No. 33-64600)

2.3 Purchase and Sale Agreement entered into between Registrant and EnRe Corporation dated June 24, 1994 (incorporated
by reference to Fortune's Current Report on Form 8-k, filed July 7, 1994, File No. 1-12334)
</TABLE>

S-3
<PAGE> 80
<TABLE>
<S> <C>
2.4 LLC Agreement entered into between Registrant and EnRe Corporation dated June 24, 1994 (incorporated by reference
to Fortune's Current Report on Form 8-k, filed July 7, 1994, File No. 1-12334)

2.5 Letter agreement dated February 13, 1995, between Registrant and Lagniappe Exploration, Inc. and related
Exploration Agreement, as amended (incorporated by reference to Fortune's Registration Statement on Form SB-2,
Registration No. 33-88452)

2.6 Agreement of Reorganization and Merger, dated May 12, 1995, among Registrant, Lanacorp, Inc., Lagniappe
Exploration, Inc., William D. Forster and BSR Investments Limited (incorporated by reference to Fortune's
Registration Statement on Form SB-2, Registration No. 33-88452)

3.1 Certificate of Incorporation of Fortune Petroleum Corporation (incorporated by reference to Fortune's Registration
Statement Form 10, File No. 0-16370)

3.2 Bylaws of Fortune Petroleum Corporation (incorporated by reference to Fortune's Registration Statement Form 10,
File No. 0-16370)

3.3 Certificate of Amendment to Certificate of Incorporation of Registrant increasing authorized capital stock
(incorporated by reference to Fortune's Registration Statement on Form SB-2, Registration No. 33-88452)

4.1 Indenture, dated October 30, 1992, by and between Fortune Petroleum Corporation and IBJ Schroder Bank & Trust
Company, Trustee, as amended (incorporated by reference to Fortune's Registration Statement on Form S-1,
Registration No. 33-49190)

4.2 Form of Warrant Agreement between Registrant and U.S. Stock Transfer Corporation (incorporated by reference to
Fortune's Registration Statement on Form SB-2, Registration No. 33-88452)

5.1 Opinion of Reish & Luftman regarding legality of securities (to be filed by amendment).

10.1 Employment Agreement, dated July 1, 1994, by and between Fortune Petroleum Corporation and Tyrone J. Fairbanks
(incorporated by reference to Fortune's Registration Statement on Form SB-2, Registration No. 33-88452)

10.2 Severance Agreements between Registrant and Daniel E. Pasquini (incorporated by reference to Fortune's Registration
Statement on Form SB-2, Registration No. 33-88452)

10.3 1993 Stock Option Plan (incorporated by reference to Fortune's Registration Statement on Form SB-2, Registration
No. 33-64600)

10.4 Bank One, Texas, N.A. line of credit agreement (incorporated by reference to Fortune's Annual Report on Form 10K-
SB, File No. 1-12334)

10.5 Notes issued to certain related persons on December 19 and 20, 1994 (incorporated by reference to Fortune's
Registration Statement on Form SB-2, Registration No. 33-88452)

10.6 Note issued to Lagniappe Exploration, Inc. on April 24, 1995 (incorporated by reference to Fortune's Registration
Statement on Form SB-2, Registration No. 33-88452)

10.7 Employment Agreement by and between Fortune Petroleum Corporation and John L. Collins (incorporated by reference
to Fortune's Registration Statement on Form SB-2, Registration No. 33-88452)

17.1 Resignation Letter of Mr. Daniel E. Pasquini as President, Chief Executive Officer and Director dated June 23, 1994
(incorporated by reference to Fortune's Current Report on Form 8-k, filed July 7, 1994, File No. 1-12334)

24.1* Consent of KPMG Peat Marwick LLP
</TABLE>

S-4
<PAGE> 81
<TABLE>
<S> <C>
24.2* Consent of Huddleston & Co., Inc.

24.3* Consent of Sherwin D. Yoelin

24.4 Consent of Reish & Luftman (included in Exhibit 5.1)

25.1 Power of Attorney (included on signature page)
- -----------------
</TABLE>
* Filed herewith.

ITEM 28. UNDERTAKINGS

The undersigned registrant hereby undertakes:

(a) (1) To file during any period in which offers or sales are being
made, a post effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement:

Provided however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be initial
bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.

(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 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 of controlling
person of the registrant in the successful defense of any action, suit of
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

(f) The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bone fide offering thereof.

S-5
<PAGE> 82
SIGNATURES

In accordance with 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 authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Agoura Hills, State of California, on September 25,
1995.

FORTUNE PETROLEUM CORPORATION

By: /s/ Tyrone J. Fairbanks
----------------------------------------
Tyrone J. Fairbanks
President and Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints
Tyrone J. Fairbanks and Dean W. Drulias, and each of them, as his true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign any or all amendments (including post effective amendments)
to this Registration Statement, and to file the same, with all exhibits hereto,
and other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorney-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following person in the capacities
and on the dates stated.

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----

<S> <C> <C>
/s/ Charles A. Champion Chairman of the Board and Director September 25, 1995
- ---------------------------------------
Charles A. Champion

/s/ Tyrone J. Fairbanks President, Chief Executive Officer, Chief September 25, 1995
- --------------------------------------- Financial and Accounting Officer, and Director
Tyrone J. Fairbanks

/s/ Dean W. Drulias Director September 25, 1995
- ---------------------------------------
Dean W. Drulias

/s/ Graham S. Folsom Director September 25, 1995
- ---------------------------------------
Graham S. Folsom

/s/ William T. Walker, Jr. Director September 25, 1995
- ---------------------------------------
William T. Walker, Jr.

/s/ Barry Feiner Director September 25, 1995
- ---------------------------------------
Barry Feiner

/s/ Gary Gelman Director September 25, 1995
- ---------------------------------------
Gary Gelman

/s/ William D. Forster Director September 25, 1995
- ---------------------------------------
William D. Forster

/s/ Charif Souki Director September 25, 1995
- ---------------------------------------
Charif Souki
</TABLE>

<PAGE> 1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Fortune Petroleum Corporation:

We consent to the use of our report included herein and to the reference to our
firm under the heading "experts" in the prospectus.

Our report dated March 10, 1995 except for Note 8 which is as of April 13,
1995, contains an explanatory paragraph that states that the Company has
suffered recurring losses from operations and has a net working capital
deficiency, which raise substantial doubt about its ability to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.

KPMG Peat Marwick LLP

Los Angeles, California
September 25, 1995

Exhibit 24.1

<PAGE> 1
HUDDLESTON & CO., INC.
PETROLEUM AND GEOLOGICAL ENGINEERS
1111 FANNIN-SUITE 1700
HOUSTON, TEXAS 77002

-----

(713) 658-0248

CONSENT OF INDEPENDENT PETROLEUM ENGINEER

September 25, 1995

Fortune Petroleum Corporation
30101 Agoura Court, Suite 110
Agoura Hills, California 91301

Dear Sirs:

We hereby consent to the filing of this consent as an exhibit to the
Registration Statement on Form SB-2 of Fortune Petroleum Corporation to be
filed with the Securities and Exchange Commission on or about September 25,
1995, to the use of our name therein, and to the inclusions of or reference to
our reports of estimated future reserves and revenues effective December 31,
1993, and December 31, 1994.

HUDDLESTON & CO., INC.

/s/ M. Drayton Prator, III
- -----------------------------
M. Drayton Prator, III, P.E.

Exhibit 24.2

<PAGE> 1
SHERWIN D. YOELIN, PETROLEUM ENGINEER INC.
1439 BONNIE JEAN ROAD
LA HABRA HEIGHTS, CALIFORNIA 90631
310/697-3700

September 25, 1995

Fortune Petroleum Corporation
30101 Agoura Court
Suite 100
Agoura Hills, California 91301

Re: Consent of Independent Petroleum Engineer

Gentlemen:

I hereby consent to the incorporation of my January 1, 1993, January 1, 1994
and January 1, 1995, Annual Reserve Reports of the oil and gas reserves of
Fortune Petroleum Corporation dated February 20, 1993, February 15, 1994, and
February 27, 1995, respectively, in the Prospectus constituting part of the
Registration Statement on Form SB-2 to be filed on or about September 25, 1995.

Respectfully,

/s/ Sherwin D. Yoelin

Sherwin D. Yoelin
Registered Petroleum Engineer
State of California
Certificate No. P 1241

Exhibit 24.3