MALLON RESOURCES CORP, 424B1, 1996-10-17

MALLON RESOURCES CORP
424B1, 1996-10-17
CRUDE PETROLEUM & NATURAL GAS

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<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-10985

2,000,000 SHARES
MALLON RESOURCES LOGO LOGO

COMMON STOCK

All of the 2,000,000 shares of Common Stock offered hereby are being sold
by Mallon Resources Corporation (the "Company").

The Common Stock is quoted on the Nasdaq National Market under the symbol
"MLRC." The last reported sale price of the Common Stock on October 16, 1996, as
reported by the Nasdaq National Market, was $6.50 per share. See "Price Range of
Common Stock."

FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING
ON PAGE 7 HEREOF.

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

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
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $6.50 $0.455 $6.045
- -------------------------------------------------------------------------------------------------
Total(3).......................... $13,000,000 $910,000 $12,090,000
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including certain liabilities under the Securities Act of 1933,
as amended. Does not reflect additional compensation to the Underwriters in
the form of (i) a non-accountable expense allowance of $292,500 ($336,375 if
the over-allotment option is exercised in full) and (ii) a warrant to
purchase an aggregate of 160,000 shares of Common Stock at 120% of the Price
to Public for two years beginning one year after the effective date of the
Registration Statement of which this Prospectus is a part. For additional
information with respect to the arrangements between the Company and the
Representative, see "Underwriting."
(2) Before deducting offering expenses estimated to be approximately $300,000,
payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 300,000 additional shares of Common Stock, solely to cover
over-allotments, if any, on the same terms and conditions as the shares
offered hereby. If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $14,950,000, $1,046,500 and $13,903,500, respectively. See
"Underwriting."

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

The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of such
shares will be made at the offices of Rodman & Renshaw, Inc., New York, New
York, on or about October 22, 1996.

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

RODMAN & RENSHAW, INC.

The date of this Prospectus is October 16, 1996
<PAGE> 2

PRINCIPAL AREAS OF ACTIVITY

The map below reflects the general location of the Company's principal
acreage positions in the Delaware and San Juan Basins of New Mexico. Although,
as reflected by the map, the Company's acreage is largely located in the
vicinity of acreage that has, historically, produced oil or natural gas, no
assurance can be given that the Company's undeveloped acreage in these areas
contains commercial quantities of oil or natural gas. Also, due to limitations
of the map's scale, the Company's acreage blocks are depicted as relatively
larger than they are in fact. See "Business and Properties -- Selected Fields
and Areas of Interest."

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS
AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE
"UNDERWRITING."

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and Consolidated Financial
Statements (including the notes thereto) appearing elsewhere in this Prospectus
and incorporated herein by reference. The term "Company" refers to Mallon
Resources Corporation and its wholly-owned subsidiary, Mallon Oil Company
("Mallon Oil"), but such references do not include Laguna Gold Company
("Laguna"), the Company's majority owned, consolidated subsidiary, except when
consolidated financial information is being presented or unless the context
requires otherwise. Unless otherwise indicated, the information in this
Prospectus assumes that the Underwriters' over-allotment option will not be
exercised. Unless otherwise indicated, all dollar amounts are in U.S. dollars.
All Common Stock amounts, share prices and per share data have been adjusted to
give effect to a four to one reverse stock split that occurred on September 9,
1996. See "Glossary of Terms" for definitions of certain oil and gas terms used
in this Prospectus. Investors should carefully consider the information set
forth in "Risk Factors," beginning on page 7.

THE COMPANY

GENERAL

Mallon Resources Corporation is an independent energy company engaged in
the domestic oil and gas development, exploration and production business. The
Company's activities are focused in the Delaware Basin of southeast New Mexico
where it has been active since 1982, and in the San Juan Basin of northwest New
Mexico where it has been active since 1984. The Company owns interests in
approximately 24,100 gross (18,900 net) acres in the Delaware Basin and
approximately 31,100 gross (16,500 net) acres in the San Juan Basin. At June 30,
1996, these two basins accounted for 99% of the Company's estimated proved
reserves. The Company's properties are primarily located in fields with
established production histories, which typically contain multiple productive
geologic formations and zones. To date, the Company's efforts to develop its
properties have been constrained by its limited capital resources. The Company
intends to use a majority of the net proceeds from this Offering to drill or
recomplete approximately 55 wells in these two basins through the end of 1997.

The Company increased its estimated proved reserves from 2.2 MMBOE as of
December 31, 1992, to 5.5 MMBOE as of June 30, 1996, a 150% increase. As of June
30, 1996, the Company's proved reserves, as estimated by its independent
petroleum engineers, GeoQuest Reservoir Technologies, Inc. ("GeoQuest")
consisted of 1.9 MMBbls of crude oil and 21.2 Bcf of natural gas, with a Pre-tax
SEC 10 Value of $23.8 million. At June 30, 1996, the Company owned interests in
225 gross (74 net) producing wells and operated 88, or 39%, of them. The Company
also has interests in four waterflood units, which contain a total of 544 gross
(8.5 net) wells. The Company's geographic concentration of its activities and
its control over its operating expenses resulted in average production costs of
$4.93 per BOE for 1995.

BUSINESS STRATEGY

The Company's objectives are to develop its inventory of properties, expand
its oil and gas reserves and increase its cash flow. The Company intends to
pursue these objectives by increasing its drilling and recompletion activities
on its Delaware and San Juan Basin properties, while maintaining control over
its drilling, completion and operating costs.

Approximately $9.6 million of the net proceeds of this Offering will be
dedicated to the exploitation of the Company's current inventory of properties
in the Delaware and San Juan Basins. During the next 15 months, using net
proceeds from this Offering and cash flow from operations, the Company intends
to drill approximately 30 wells on its Delaware Basin acreage and approximately
five wells on its San Juan Basin acreage, and recomplete approximately 20 of its
San Juan Basin wells. Thereafter, the Company anticipates that cash flow from
its operations will be sufficient to fund the continued development of its
current properties.

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<PAGE> 4

Numerous potentially productive geologic formations and zones tend to be
stacked atop one another in the Delaware and San Juan Basins. This feature
allows most wells to target multiple potential pay zones, thus reducing drilling
risks. It also permits the Company to conduct exploration operations in
conjunction with its development drilling. Wells drilled to one horizon offer
opportunities to examine up-hole zones or can be drilled to deeper prospective
formations for relatively little additional cost. The Company believes that its
substantial experience in the Delaware and San Juan Basins has enabled it to
drill and complete wells for lower costs than those incurred by other operators
in these areas. The Company also believes that innovative fracturing and
completion techniques it employs extend the lives of its wells and accelerate
their production. Since 1990, the Company has completed 18 of the 21 wells it
has drilled in these two basins. Due to its substantial acreage positions and
operating experience in these areas, the Company intends to continue to
concentrate its operational efforts on these two basins for the foreseeable
future.

LAGUNA GOLD COMPANY

The Company owns 14 million common shares, representing an approximate 56%
interest, in Laguna, a company with interests in gold mining concessions in
Costa Rica. To establish itself as a financially independent company, Laguna
recently completed a financing in Canada and listed its common shares on The
Toronto Stock Exchange under the trading symbol "LGC." Laguna received
approximately $4.3 million of net proceeds from its Canadian financing, which
will permit Laguna to continue its operations without further reliance on the
Company for financial support. The Company does not have any obligation or
intention to finance Laguna's future operations. Over time, the Company may
reduce its investment in Laguna. Approximately 8.4 million of the Laguna shares
owned by the Company are subject to an escrow agreement with The Toronto Stock
Exchange that restricts the ability of the Company to sell such shares for up to
three years. Proceeds from any disposition of the Company's Laguna shares will
be devoted to the Company's oil and gas operations. On October 16, 1996, the
closing price for a share of Laguna common stock, as quoted on The Toronto Stock
Exchange was Cdn$1.50 (approximately US$1.10). See "Risk Factors -- Ownership
Interest in Laguna" and "Business and Properties -- Laguna Gold Company."

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 2,000,000 shares
Common Stock to be Outstanding After the
Offering(1)................................ 4,083,305 shares
Use of Proceeds.............................. To fund drilling activities and to acquire
all of the outstanding shares of the
Company's Series A Convertible Preferred
Stock.
Nasdaq National Market Symbol................ "MLRC"
</TABLE>

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(1) Does not include (i) 145,414 shares of Common Stock issuable upon exercise
of currently outstanding options and warrants, (ii) 351,185 shares of Common
Stock issuable upon conversion of the Company's outstanding Series B
Mandatorily Redeemable Convertible Preferred Stock, and (iii) 160,000 shares
of Common Stock issuable upon exercise of the Representative's warrant. See
"Description of Capital Stock and Other Securities."

4
<PAGE> 5

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following table sets forth, for the periods and at the dates indicated,
selected historical consolidated financial data of the Company. The consolidated
financial data for each of the five fiscal years ended December 31, 1991, 1992,
1993, 1994 and 1995 is derived from the Company's audited Consolidated Financial
Statements. The consolidated financial data of the Company for the six months
ended June 30, 1995 and 1996 is derived from the Company's unaudited interim
consolidated financial statements, which, in the opinion of management of the
Company, have been prepared on the same basis as the annual Consolidated
Financial Statements and include all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the financial data
for such periods. The information in this table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere herein. The results for the six month period ended June 30,
1996 are not necessarily indicative of results for the full year.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- -------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF OPERATIONS DATA:
Revenues:
Oil and gas sales........................... $ 1,349 $ 1,408 $ 2,061 $ 4,629 $ 4,800 $ 2,603 $ 2,834
Other....................................... 259 568 230 280 628 118 107
------- ------- -------- ------- ------- ------- -------
1,608 1,976 2,291 4,909 5,428 2,721 2,941
------- ------- -------- ------- ------- ------- -------
Costs and expenses:
Oil and gas production...................... 846 800 976 2,024 1,868 996 973
Mining project expenses..................... 52 171 133 169 448 247 359
Depreciation, depletion and amortization.... 4,034 306 937 2,409 2,340 1,233 1,170
General and administrative.................. 1,157 891 1,183 1,806 2,015 982 953
Interest and other.......................... 150 76 249 132 433 111 465
------- ------- -------- ------- ------- ------- -------
6,239 2,244 3,478 6,540 7,104 3,569 3,920
------- ------- -------- ------- ------- ------- -------
Minority interest in loss of consolidated
subsidiary.................................. -- -- -- -- -- -- 54
------- ------- -------- ------- ------- ------- -------
Loss before extraordinary item................ (4,631) (268) (1,187) (1,631) (1,676) (848) (925)
Extraordinary loss on early retirement of
debt........................................ -- -- -- -- (253) -- (160)
------- ------- -------- ------- ------- ------- -------
Net loss...................................... (4,631) (268) (1,187) (1,631) (1,929) (848) (1,085)
Dividends on preferred stock and accretion.... -- -- -- (258) (360) (158) (186)
------- ------- -------- ------- ------- ------- -------
Net loss attributable to common
shareholders................................ $(4,631) $ (268) $ (1,187) $(1,889) $(2,289) $(1,006) $(1,271)
======= ======= ======== ======= ======= ======= =======
SELECTED PER SHARE DATA(1):
Loss attributable to common shareholders
before extraordinary item................... $ (3.96) $ (0.24) $ (0.88) $ (1.00) $ (1.04) $ (0.52) $ (0.55)
Extraordinary loss............................ -- -- -- -- (0.12) -- (0.08)
------- ------- -------- ------- ------- ------- -------
Net loss attributable to common
shareholders................................ $ (3.96) $ (0.24) $ (0.88) $ (1.00) $ (1.16) $ (0.52) $ (0.63)
======= ======= ======== ======= ======= ======= =======
Weighted average shares outstanding........... 1,168 1,195 1,368 1,916 1,947 1,944 2,005
SELECTED CASH FLOW AND OTHER DATA:
EBITDA(2)..................................... $ (549) $ 56 $ (79) $ 876 $ 1,093 $ 465 $ 706
Capital expenditures.......................... $ 906 $ 190 $ 20,612 $ 2,379 $ 3,883 $ 2,351 $ 3,988
</TABLE>

<TABLE>
<CAPTION>
AT JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets........................................................................... $37,540 $ 47,157
Long-term debt(4)...................................................................... 7,705 7,705
Mandatorily redeemable convertible preferred stock..................................... 3,870 3,870
Shareholders' equity................................................................... 11,290 20,907
</TABLE>

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(1) As adjusted for four to one reverse stock split.

(2) EBITDA is income before income taxes, interest, depreciation, depletion and
amortization, and extraordinary loss. EBITDA is a financial measure commonly
used in the Company's industry and should not be considered in isolation or
as a substitute for net income, cash flow provided by operating activities
or other income or cash flow data prepared in accordance with generally
accepted accounting principles or as a measure of a company's profitability
or liquidity.

(3) As adjusted to reflect the receipt by the Company of estimated net proceeds
from the issuance of 2.0 million shares of Common Stock and the application
of such proceeds. See "Use of Proceeds" and "Capitalization."

(4) Long-term debt includes long-term debt net of current maturities, notes
payable-other and capital lease obligations net of current portion.

5
<PAGE> 6

SUMMARY OIL AND GAS RESERVE DATA

The following table sets forth summary information concerning the Company's
estimated proved oil and gas reserves as of June 30, 1996, based upon a report
prepared by GeoQuest, a summary of which is included as Annex A to this
Prospectus. All calculations have been made in accordance with the rules and
regulations of the Securities and Exchange Commission and give no effect to
federal or state income taxes otherwise attributable to estimated future net
revenues from the sale of oil and gas. The present value of estimated future net
revenues has been calculated using a discount factor of 10%. See "Risk
Factors -- Uncertainty of Estimates of Reserves and Future Net Revenues."

<TABLE>
<CAPTION>
NATURAL
OIL GAS TOTAL
(MBBL) (MMCF) (MBOE)
----- ------- -------
<S> <C> <C> <C>
Proved developed reserves................................ 1,272 16,074 3,951
Proved undeveloped reserves.............................. 665 5,139 1,521
Total proved reserves.................................... 1,937 21,213 5,473
Estimated future net revenues (in thousands)................................ $41,166
Present value of estimated future net revenues (in thousands)............... $23,784
</TABLE>

SUMMARY OPERATING DATA

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET PRODUCTION:
Oil (MBbl)(1)............................... 70 146 173 89 91
Natural Gas (MMcf)(1)....................... 695 1,648 1,238 731 700
AVERAGE SALES PRICE REALIZED(2):
Oil (per Bbl)............................... $14.75 $14.81 $16.45 $16.58 $16.98
Natural Gas (per Mcf)....................... $ 1.48 $ 1.50 $ 1.58 $ 1.54 $ 1.84
Per BOE..................................... $11.08 $11.00 $12.66 $12.34 $13.63
AVERAGE COST DATA (per BOE):
Production costs............................ $ 5.25 $ 4.81 $ 4.93 $ 4.72 $ 4.68
Depreciation, depletion and amortization.... $ 4.70 $ 5.53 $ 5.70 $ 5.51 $ 5.22
PRODUCING WELLS (at end of period):
Gross wells(3).............................. 218 220 222 223 225
Net wells(3)................................ 70 66 71 67 74
</TABLE>

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(1) Includes 6 MBbl and 70 MMcf in 1993, 48 MBbl and 961 MMcf in 1994, 26 MBbl
and 692 MMcf in 1995 and 20 MBbl and 520 MMcf for the six months ended June
30, 1995 delivered pursuant to the terms of a volumetric production payment
agreement.

(2) Includes effects of hedging. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Hedging Activities."

(3) In addition, the Company owns interests in four waterflood units, which
contain a total of 544 gross wells (8.5 net wells), and five gross (2.1 net)
salt water disposal wells.

6
<PAGE> 7

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business and Properties," as well as those
discussed elsewhere in this Prospectus. Statements contained in this Prospectus
that are not historical facts are forward-looking statements that are subject to
the safe harbor created by the Private Securities Litigation Reform Act of 1995.

RISK FACTORS

In evaluating an investment in the Common Stock being offered hereby,
prospective investors should consider carefully, among other things, the
following risk factors.

OIL AND GAS PRICES; MARKETABILITY OF PRODUCTION

The Company's oil and gas revenues and profitability are substantially
affected by prevailing prices for oil and natural gas. Hydrocarbon prices can be
extremely volatile. In general, hydrocarbon prices are affected by numerous
factors such as economic, political and regulatory developments. Prices have
risen recently but there can be no assurance that such price levels will be
sustained. The unsettled nature of the energy market, which is sensitive to
foreign political and military events and the unpredictability of the actions of
the Organization of Petroleum Exporting Countries, makes it particularly
difficult to estimate future prices of oil and natural gas. Any significant
decline in prices of oil or natural gas for an extended period could have a
material adverse effect on the Company's financial condition, liquidity and
results of operations. Additionally, substantially all of the Company's sales of
oil and natural gas are made in the spot market or pursuant to contracts based
on spot market prices and not pursuant to longterm fixed price contracts. With
the objective of reducing price risk, the Company enters into hedging
transactions with respect to a portion of its expected future production. There
can be no assurance, however, that such hedging transactions will reduce risk or
mitigate the effect of any substantial or extended decline in oil or natural gas
prices.

In addition, the marketability of the Company's production depends upon the
availability and capacity of pipelines and gas gathering systems, the effect of
federal and state regulation of such production and transportation, general
economic conditions and changes in demand, all of which could adversely affect
the Company's ability to market its production. All of these factors are beyond
the control of the Company, and the Company is limited in its ability to protect
its economic interests from their effect. The Company conducts substantially all
of its operations in the Delaware and San Juan Basins in the State of New Mexico
and, consequently, is particularly subject to marketing constraints that exist
or may arise in the future in those areas. Historically, due to the San Juan
Basin's relatively isolated location and the resulting limited access its
natural gas production has to the natural gas marketplace, natural gas produced
in the San Juan Basin has tended to command prices that are lower than natural
gas prices that prevail in other areas.

UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET REVENUES

This Prospectus contains estimates of the Company's proved oil and gas
reserves and the estimated future net revenues therefrom based upon a report
(the "GeoQuest Report") prepared by GeoQuest that relies upon various
assumptions, including assumptions required by the Securities and Exchange
Commission (the "Commission") as to oil and gas prices, drilling and operating
expenses, capital expenditures, taxes and availability of funds. For a
description of assumptions utilized by GeoQuest in preparing such estimates, see
Annex A. The process of estimating oil and gas reserves is complex, requiring
significant decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir. As a result, such
estimates are inherently imprecise. Actual future production, oil and gas
prices, revenues, taxes, development expenditures, operating expenses and
quantities of recoverable oil and gas reserves may vary substantially from those
estimated in the GeoQuest Report. Any significant variance in these assumptions
could materially affect the estimated quantity and value of reserves set forth
in this Prospectus. In addition, the Company's reserves may be subject to
downward or upward revision based upon production history, results of future
development and exploration, prevailing oil and gas prices and other

7
<PAGE> 8

factors, many of which are beyond the Company's control. Actual production,
revenues, taxes, development expenditures and operating expenses with respect to
the Company's reserves will likely vary from the estimates used, and such
variances may be material.

Approximately 28% of the Company's total proved reserves at June 30, 1996
were undeveloped, which are by their nature less certain. Recovery of such
reserves will require significant capital expenditures and successful drilling
operations. The reserve data set forth in the GeoQuest Report as of June 30,
1996 assumes, based on the Company's estimates, that aggregate capital
expenditures by the Company of approximately $6.0 million through 1998 will be
required to develop such reserves. Although cost and reserve estimates
attributable to the Company's oil and gas reserves have been prepared in
accordance with industry standards, no assurance can be given that the estimated
costs are accurate, that development will occur as scheduled or that the results
will be as estimated. See "Business and Properties -- Proved Reserves."

The present value of future net revenues referred to in this Prospectus
should not be construed as the current market value of the estimated oil and gas
reserves attributable to the Company's properties. In accordance with applicable
requirements of the Commission, the estimated discounted future net cash flows
from proved reserves are generally based on prices and costs as of the date of
the estimate, whereas actual future prices and costs may be materially higher or
lower. Actual future net cash flows also will be affected by changes in
consumption and changes in governmental regulations or taxation. The timing of
actual future net cash flows from proved reserves, and thus their actual present
value, will be affected by the timing of both the production and the incurrence
of expenses in connection with development and production of oil and gas
properties. In addition, the 10% discount factor, which is required by the
Commission to be used in calculating discounted future net cash flows for
reporting purposes, is not necessarily the most appropriate discount factor
based on interest rates in effect from time to time and risks associated with
the Company or the oil and gas industry in general.

LACK OF PROFITABLE OPERATIONS

The Company recorded net losses attributable to common shareholders for
1993, 1994, 1995 and the six months ended June 30, 1996 of $1,187,000,
$1,889,000, $2,289,000 and $1,271,000, respectively. The Company's ability to
continue in business and maintain its financing arrangements would be adversely
affected by a continued lack of profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

WORKING CAPITAL DEFICITS; NEED FOR ADDITIONAL CAPITAL

Due to its active development and exploration program, the Company has
substantial working capital requirements and currently has a working capital
deficit. While the Company believes that the net proceeds from the Offering and
cash flow from operations should allow the Company to successfully implement its
present business strategy, some or all of the Company's cash flow from
operations may be required to service the Company's bank debt. As a consequence,
additional financing may be required in the future to fund the Company's
developmental and exploratory drilling. No assurances can be given as to the
availability or terms of any such additional financing that may be required. In
the event such capital resources are not available to the Company, its drilling
activity may be curtailed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

REPLACEMENT OF RESERVES

The Company's future success will depend upon its ability to find, develop
or acquire additional oil and gas reserves at prices that permit profitable
operations. Unless the Company conducts successful exploitation or exploration
activities or acquires properties containing reserves, the proved reserves of
the Company will decline. There can be no assurance that the Company's
acquisition, exploitation and exploration activities will result in additional
reserves, or that the Company will be able to drill productive wells at
acceptable costs.

OPERATING HAZARDS; UNINSURED RISKS

8
<PAGE> 9

spills, gas leaks, ruptures and discharges of toxic gases, the occurrence of any
of which could result in substantial losses to the Company due to injury and
loss of life, damage to and destruction of property and equipment, pollution and
other environmental damage and related suspension of operations. Gathering
systems and processing plants are subject to many of the same hazards, and any
significant problems related to those facilities could adversely affect the
Company's ability to market its production. Drilling activities are subject to
numerous risks, including the risk that no commercially productive oil or gas
reservoirs will be encountered or that particular wells will not produce at
economic levels. The cost of drilling, completing and operating wells may vary
from initial estimates. Drilling activities may be curtailed, delayed or
canceled as a result of numerous factors outside the Company's control,
including but not limited to title problems, weather conditions, compliance with
governmental requirements, mechanical difficulties and shortages or delays in
the delivery of drilling rigs or other equipment. The Company maintains
insurance against some, but not all, potential risks; however, there can be no
assurance that such insurance will be adequate to cover any losses or exposure
for liability. Furthermore, the Company cannot predict whether insurance will
continue to be available at premium levels that justify its purchase or whether
insurance will be available at all. See "Business and Properties -- Operating
Hazards and Environmental Matters."

REGULATION

Virtually all of the Company's oil and gas activities are subject to a wide
variety of federal, state, local and foreign governmental regulations, which are
changed from time to time in response to economic or political conditions.
Matters subject to regulation include, but are not limited to, environmental
matters, discharge permits for drilling operations, drilling and operating
bonds, reports concerning operations, the spacing of wells, unitization and
pooling of properties, allowable rates of production, restoration of surface
areas, plugging and abandonment of wells, requirements for the operation of
wells and taxation. From time to time, regulatory agencies have imposed price
controls and limitations on production by restricting the rate of flow of oil
and gas wells below actual production capacity in order to conserve supplies of
oil and gas. Many states have raised state taxes on energy sources and
additional increases may occur, although there can be no certainty of the effect
that such increases would have on the Company. Legislation and new regulations
concerning oil and gas exploration and production operations are constantly
being reviewed and proposed. All of the jurisdictions in which the Company owns
and operates properties have statutes and regulations governing a number of the
matters enumerated above. Compliance with such laws and regulations generally
increases the Company's cost of doing business and consequently affects its
profitability. Due to the frequently changing requirements of laws and
regulations, there can be no assurance that costs of future compliance will not
impose new or substantial burdens on the Company. See "Business and
Properties -- Regulation."

ENVIRONMENTAL MATTERS

The discharge of oil, gas or other pollutants into the air, soil or water
may give rise to liabilities to governmental agencies and third parties, and may
require the Company to incur costs to remedy such discharges. Oil, natural gas
and other pollutants (including salt water brine) may be discharged in many
ways, including from a well or drilling equipment at a drill site, leakage from
pipelines or other gathering and transportation facilities, leakage from storage
tanks and tailings ponds, and sudden discharges from damage or explosion at
natural gas facilities, oil and gas wells or other facilities. Discharged
hydrocarbons and other pollutants may migrate through soil to water supplies or
adjoining property, giving rise to additional liabilities. A variety of federal,
state and foreign laws and regulations govern the environmental aspects of oil
and natural gas exploration, production and transportation and may, in addition
to other laws and regulations, impose liability in the event of discharges
(whether or not accidental), failure to notify the proper authorities of a
discharge, and other failures to comply with those laws and regulations.
Compliance with environmental quality requirements and reclamation laws imposed
by governmental authorities may necessitate significant capital outlays, may
materially affect the acquisition or operating costs of a given property, or may
cause material changes or delays in the Company's intended activities.
Management of the Company does not believe that its environmental, health, and
safety risks are materially different from those of comparable companies engaged
in similar businesses. Nevertheless, new or different environmental standards
imposed in the future may adversely affect the Company's activities and there
can be no assurance that significant costs for compliance will not be incurred
in the future. Moreover, no assurance can be given that environmental laws

9
<PAGE> 10

will not, in the future, result in curtailment of production or material
increases in the cost of exploration, development or production or otherwise
adversely affect the Company's operations and financial condition. See "Business
and Properties -- Operating Hazards and Environmental Matters."

OWNERSHIP INTEREST IN LAGUNA

The Company currently owns 14 million shares of Laguna common stock. The
Company has no current plans for disposing of such shares, and approximately 8.4
million of the shares owned by the Company are subject to an escrow agreement
with The Toronto Stock Exchange that restricts the ability of the Company to
sell such shares for up to three years. No assurance can be given as to the
value that might be received by the Company in the future from any transaction
in which such interest is sold. Furthermore, although the common stock of Laguna
is publicly traded in Canada on The Toronto Stock Exchange, trading prices on
that exchange are not necessarily representative of the consideration the
Company could obtain for such shares currently or in the future. See "Business
and Properties -- Laguna Gold Company."

The value of the Company's investment in Laguna will be affected by the
business results of Laguna. There are many uncertainties in any mineral
exploration and development program, such as the location of economic ore
bodies, the receipt of necessary government permits and the construction of
mining and processing facilities, as well as widely fluctuating prices of
minerals. Because Laguna's properties are in Costa Rica, additional
uncertainties include currency risks, risks of changes in foreign laws and the
risk of expropriation. Substantial expenditures will be required to pursue
Laguna's exploration and development activities, and substantial time may elapse
from the initial phases of development until Laguna's activities are fully
operational.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market could
adversely affect the market price for the Common Stock. If the Company's
shareholders were to sell a significant number of shares, the prevailing market
price of the Common Stock could be adversely affected. The Company and its
officers and directors have agreed that they will not sell any shares of Common
Stock until at least 180 days after the Offering. See "Principal Shareholders"
and "Underwriting."

ANTI-TAKEOVER PROVISIONS

The Company's Restated Articles of Incorporation impose restrictions on
changes in control of the Company. The existence of these provisions may
discourage a party from making a tender offer for or otherwise seeking to obtain
control of the Company. See "Description of Capital Stock and Other
Securities -- Certain Voting Requirements."

RELIANCE ON KEY PERSONNEL

The Company is dependent upon its executive officers, key employees and
certain consultants. The unexpected loss of services of one or more of these
individuals could have a detrimental effect on the Company. At present, the
Company relies on consultants for geological analysis of its properties. The
Company does not maintain key man insurance on any of its executive officers or
key employees. In addition, the continued growth and expansion of the Company
will depend upon, among other factors, the successful retention of skilled and
experienced management and technical personnel. See "Key Employees and
Consultants."

COMPETITION

The oil and gas industry and the mining industry are both highly
competitive. The Company and Laguna compete with major companies, other
independent concerns and individual producers and operators. Many of these
competitors have substantially greater financial and other resources than do the
Company and Laguna. See "Business and Properties -- Competition."

10
<PAGE> 11

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
being offered hereby are estimated to be approximately $11.5 million ($13.3
million if the Underwriters' over-allotment option is exercised in full) after
deducting underwriting discounts and estimated offering expenses.

Approximately $9.6 million of the net proceeds of the Offering will be used
to finance the Company's oil and gas drilling activities in the Delaware and San
Juan Basins.

In addition, approximately $1.9 million of the proceeds of the Offering
will be used to acquire all of the outstanding shares of the Company's Series A
Convertible Preferred Stock ("Series A Preferred Stock"). See "Transactions With
Related Parties" and "Description of Capital Stock and Other
Securities -- Series A Convertible Preferred Stock."

Prior to the expenditure of the net proceeds of this Offering that are to
be used for oil and gas drilling activities, a portion of such proceeds will be
used to pay down the Company's line of credit with Bank One, Texas, N.A. (the
"Bank"). On March 20, 1996, the Company replaced its previous line of credit
with a revolving line of credit facility (the "Facility") from the Bank,
consisting of a revolving line of credit (the "Revolver") and a separate
drilling line of credit (the "Drilling Line"). Under the Revolver, the current
borrowing base is $8,820,000 and the amount outstanding at August 31, 1996 was
approximately $8,570,000. The initial borrowing under the Revolver was used to
repay a previous bank credit facility. The Facility requires a reduction in the
commitment under the Revolver of $130,000 per month beginning on January 31,
1997, subject to any borrowing base redetermination. The interest rate on
amounts drawn down under the Revolver is, at the Company's election, either the
Bank's base rate plus 0.75% or the London Interbank Offered Rate ("LIBOR") plus
2.5% (7.875% as of June 30, 1996). The Drilling Line consists of a $2.0 million
line of credit established to be used for development drilling approved by the
Bank. Amounts drawn under the Drilling Line are repayable from 100% of the net
revenues generated by wells under the Company's drilling program. If borrowing
base levels increase under the Revolver, such amounts must be borrowed and used
to prepay amounts outstanding under the Drilling Line. Amounts outstanding under
the Drilling Line bear interest at the greater of 12.5% or the Bank's base rate
plus 4%. The Facility is collateralized by substantially all of the Company's
oil and gas properties and expires on March 31, 1999. Under the Facility, the
Company is obligated to pay down $1.0 million under the Revolver and $2.0
million under the Drilling Line from the net proceeds of this Offering. Such
amounts may be reborrowed by the Company under the terms, and subject to the
restrictions, of the Facility, including the right of the Bank to redetermine
the borrowing base under the Revolver at any time.

11
<PAGE> 12

PRICE RANGE OF COMMON STOCK

The Common Stock is quoted on the Nasdaq National Market under the symbol
"MLRC." The following table sets forth, for the periods indicated, the high and
low sale prices of the Common Stock as reported on the Nasdaq National Market.
All of the following quotations have been adjusted to reflect the four to one
reverse stock split of the Common Stock that occurred on September 9, 1996.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
First Quarter.................................................... $18.00 $14.00
Second Quarter................................................... 15.00 10.50
Third Quarter.................................................... 14.00 9.50
Fourth Quarter................................................... 12.50 5.50
YEAR ENDED DECEMBER 31, 1995:
First Quarter.................................................... $ 8.00 $ 5.00
Second Quarter................................................... 8.50 5.50
Third Quarter.................................................... 10.00 6.00
Fourth Quarter................................................... 11.00 4.00
YEAR ENDING DECEMBER 31, 1996:
First Quarter.................................................... $ 8.25 $ 5.50
Second Quarter................................................... 11.00 6.00
Third Quarter.................................................... 8.00 5.00
Fourth Quarter (through October 16, 1996)........................ 7.38 6.50
</TABLE>

On October 16, 1996, the last reported sale price for the Common Stock on
the Nasdaq National Market was $6.50. As of October 16, 1996, there were
approximately 750 shareholders of record of the Common Stock.

DIVIDEND POLICY

The Company does not intend to pay cash dividends on Common Stock in the
foreseeable future. The Company instead intends to retain its earnings to
support the growth of the Company. Any future cash dividends would depend on
future earnings, capital requirements, the Company's financial condition and
other factors deemed relevant by the Board of Directors. Under the terms of the
Facility, the Company may not pay dividends without the consent of the Bank. For
a description of the Facility, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

12
<PAGE> 13

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company as of June 30, 1996 and as adjusted (i) to reflect the sale of 2.0
million shares of Common Stock offered by the Company hereby and (ii) the
application of the estimated net proceeds to the Company therefrom, as described
under "Use of Proceeds." The following table should be read in conjunction with
the Consolidated Financial Statements of the Company and the related notes and
other financial information included elsewhere in this Prospectus. All Common
Stock amounts have been adjusted to reflect the four to one reverse stock split
that occurred on September 9, 1996.

<TABLE>
<CAPTION>
AT JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt(1)..................................................... $ 7,705 $ 7,705
Series B Mandatorily Redeemable Convertible Preferred Stock, $0.01 par
value, 500,000 shares authorized, 400,000 shares issued and
outstanding, liquidation preference and mandatory redemption of
$4,000,000.......................................................... 3,870 3,870
Shareholders' equity:
Series A Convertible Preferred Stock, $0.01 par value, 1,467,890
shares authorized, 1,100,918 shares issued and outstanding,
liquidation preference $6,000,000, and 0 shares, as
adjusted(2)...................................................... 5,730 --
Common Stock, $0.01 par value, 25,000,000 shares authorized;
2,083,305 shares issued and outstanding and 4,083,305 shares as
adjusted(3)...................................................... 21 41
Additional paid-in capital.......................................... 39,191 54,518
Accumulated deficit................................................. (33,652) (33,652)
-------- --------
Total shareholders' equity.................................. 11,290 20,907
-------- --------
Total capitalization........................................ $ 22,865 $ 32,482
======== ========
</TABLE>

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

(1) Long-term debt includes long-term debt net of current maturities, notes
payable-other and capital lease obligations net of current portion. Assumes
the Company will reborrow the $1,000,000 that the Company is obligated to
pay down under the Revolver from the net proceeds of this Offering. See
"Use of Proceeds."

(2) Assumes the purchase of the Series A Convertible Preferred Stock for
approximately $1.9 million. See "Transactions With Related Parties."

(3) Does not include (i) 145,414 shares of Common Stock issuable upon exercise
of currently outstanding options and warrants, (ii) 351,185 shares of
Common Stock issuable upon conversion of the Company's outstanding Series B
Mandatorily Redeemable Convertible Preferred Stock and (iii) 160,000 shares
of Common Stock issuable upon exercise of the Representative's warrant. See
"Description of Capital Stock and Other Securities."

13
<PAGE> 14

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following is a summary of selected consolidated financial data which
the Company believes highlights trends in its financial condition and results of
its operations. The table presents the consolidated results of operations for
the years ended December 31, 1991, 1992, 1993, 1994 and 1995, and balance sheet
data as of June 30, 1996 and as adjusted as of that date to reflect the results
of this Offering. This information should be read in conjunction with the
Consolidated Financial Statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere herein.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF OPERATIONS DATA:
Revenues:
Oil and gas sales.............................. $ 1,349 $1,408 $ 2,061 $ 4,629 $ 4,800 $ 2,603 $ 2,834
Other.......................................... 259 568 230 280 628 118 107
------- ------ ------- ------- ------- ------- -------
1,608 1,976 2,291 4,909 5,428 2,721 2,941
------- ------ ------- ------- ------- ------- -------
Costs and expenses:
Oil and gas production......................... 846 800 976 2,024 1,868 996 973
Mining project expenses........................ 52 171 133 169 448 247 359
Depreciation, depletion and amortization....... 4,034 306 937 2,409 2,340 1,233 1,170
General and administrative..................... 1,157 891 1,183 1,806 2,015 982 953
Interest and other............................. 150 76 249 132 433 111 465
------- ------ ------- ------- ------- ------- -------
6,239 2,244 3,478 6,540 7,104 3,569 3,920
------- ------ ------- ------- ------- ------- -------
Minority interest in loss of consolidated
subsidiary..................................... -- -- -- -- -- -- 54
------- ------ ------- ------- ------- ------- -------
Loss before extraordinary item................... (4,631) (268) (1,187) (1,631) (1,676) (848) (925)
Extraordinary loss on early retirement of debt... -- -- -- -- (253) -- (160)
------- ------ ------- ------- ------- ------- -------
Net loss......................................... (4,631) (268) (1,187) (1,631) (1,929) (848) (1,085)
Dividends on preferred stock and accretion....... -- -- -- (258) (360) (158) (186)
------- ------ ------- ------- ------- ------- -------
Net loss attributable to common shareholders..... $(4,631) $ (268) $(1,187) $(1,889) $(2,289) $(1,006) $(1,271)
======= ====== ======= ======= ======= ======= =======
SELECTED PER SHARE DATA(1):
Loss attributable to common shareholders before
extraordinary item............................. $ (3.96) $(0.24) $ (0.88) $ (1.00) $ (1.04) $ (0.52) $ (0.55)
Extraordinary loss............................... -- -- -- -- (0.12) -- (0.08)
------- ------ ------- ------- ------- ------- -------
Net loss attributable to common shareholders..... $ (3.96) $(0.24) $ (0.88) $ (1.00) $ (1.16) $ (0.52) $ (0.63)
======= ====== ======= ======= ======= ======= =======
Weighted average shares outstanding.............. 1,168 1,195 1,368 1,916 1,947 1,944 2,005
SELECTED CASH FLOW AND OTHER DATA:
EBITDA (2)....................................... $ (549) $ 56 $ (79) $ 876 $ 1,093 $ 465 $ 706
Capital expenditures............................. $ 906 $ 190 $20,612 $ 2,379 $ 3,883 $ 2,351 $ 3,988
</TABLE>

<TABLE>
<CAPTION>
AT JUNE 30, 1996
AT DECEMBER 31, ----------------------
------------------------------------------------- AS
1991 1992 1993 1994 1995 ACTUAL ADJUSTED(3)
------ ------ ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets.................................. $8,026 $7,675 $28,773 $28,226 $31,635 $37,540 $47,157
Long-term debt(4)............................. 41 30 20 -- 10,037 7,705 7,705
Mandatorily redeemable preferred stock........ -- -- -- 3,804 3,844 3,870 3,870
Shareholders' equity.......................... 6,645 6,738 15,029 13,549 11,760 11,290 20,907
</TABLE>

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

(1) As adjusted for four to one reverse stock split.

(4) Long-term debt includes long-term debt net of current maturities, notes
payable-other and capital lease obligations net of current portion.

14
<PAGE> 15

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

The following discussion is intended to assist in understanding the
Company's historical consolidated financial position at December 31, 1993, 1994
and 1995, and June 30, 1996, and results of operations and cash flows for each
of the three years in the period ended December 31, 1995 and the unaudited six
month periods ended June 30, 1995 and 1996. The Company's historical
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus contain detailed information that should be referred to in
conjunction with the following discussion. The financial information discussed
below is consolidated information, which includes the accounts of Laguna.

OVERVIEW

Historically, the Company has engaged in two separate and distinct facets
of the natural resources business. Through Mallon Oil, the Company has pursued
its core oil and gas interests. Through Laguna, the Company has pursued its
mining interests. The Company has determined that the level of capital and
management resources required to fully develop each of these businesses make it
inadvisable for the Company to continue to pursue both. Accordingly, the Company
decided to separate the businesses by establishing the financial independence of
Laguna and having the Company focus its efforts on the oil and gas business.
Laguna's recent Canadian financing and listing on The Toronto Stock Exchange
have been major steps toward the accomplishment of that goal and should permit
Laguna to operate independently without further reliance on the Company for
financial support. The Company does not have any obligation or intention to
finance Laguna's future operations.

In light of the recent implementation of this fundamental change in the
manner in which the Company will henceforth pursue its business, the Company's
past financial performance is not necessarily indicative of its future
operations.

The Company's revenues, profitability and future rate of growth will be
substantially dependent upon prevailing prices for oil and gas, which are in
turn dependent upon numerous factors that are beyond the Company's control, such
as economic, political and regulatory developments and competition from other
sources of energy. The energy markets have historically been volatile, and there
can be no assurance that oil and gas prices will not be subject to wide
fluctuations in the future. A substantial or extended decline in oil or gas
prices could have a material adverse effect on the Company's financial position,
results of operations and access to capital, as well as the quantities of oil
and gas reserves that the Company may economically produce.

LIQUIDITY AND CAPITAL RESOURCES

The Company has been significantly constrained by a continued shortage of
capital. The Company had working capital deficits of $1,764,000 and $476,000 at
December 31, 1994 and 1995, respectively. To address those deficits, the Company
has, at various times, obtained debt financing and limited infusions of equity
capital. However, management has always been of the view that the Company's
liquidity problem will only be solved, on a long term basis, by the Company's
development of its oil and gas properties. Management believes that such
operations, if successful, will increase the Company's cash flow and improve its
liquidity, and thereby correct the Company's working capital deficits. To date,
the Company has lacked the funds necessary to fund such operations at a level
sufficient to achieve such results.

Historically, the Company's involvement in both oil and gas and mining
activities has hampered its ability to raise capital due to the complexity of
the Company's financial structure and apparent market perceptions that the
Company was too small to effectively pursue two such disparate businesses. By
establishing independent financing arrangements for Laguna, management hopes to
overcome these problems, raise development capital and place the Company in a
position to exploit its oil and gas acreage. The elimination of the Company's
commitment to fund Laguna's operations should assist the Company in these
efforts.

To implement the drilling and development programs described in this
Prospectus, the Company will require expenditures of approximately $10.7 million
during the balance of 1996 and through 1997. Without the

15
<PAGE> 16

net proceeds of this Offering, the Company could not fund all of its planned
operations, and its capital expenditure plans would need to be scaled back.
However, with the net proceeds of this Offering, the Company's working capital
and credit facility and the operating cash flows that are expected to be
generated by the application of such funds to the Company's drilling program,
management anticipates that the Company will have sufficient capital to fund the
continued development of its current properties in an orderly fashion and to
meet the Company's liquidity requirements for the foreseeable future.

In March 1996, the Company established the Facility with the Bank. The
significant terms of the Facility, as it has been amended, are as follows:

- The Facility establishes two separate lines of credit: the Revolver and
the Drilling Line.

- The borrowing base under the Revolver is subject to redetermination every
six months, at June 30 and December 31, or at such other times as the
Bank may determine.

- The interest rate on amounts drawn under the Revolver is, at the
Company's election, either the Bank's base rate plus 0.75%, or LIBOR plus
2.5% (7.875% as of June 30, 1996). Amounts outstanding under the Drilling
Line bear interest at the greater of 12.5% or the Bank's base rate plus
4%.

- The Facility requires a reduction in the commitment under the Revolver of
$130,000 per month beginning January 31, 1997, subject to borrowing base
redeterminations.

- Amounts drawn under the Drilling Line are repayable from 100% of the net
revenues generated by wells drilled with such funds. If the borrowing
base under the Revolver increases, such additional amounts must be
borrowed and used to reduce amounts outstanding under the Drilling Line.

- The principal amount drawn under the Drilling Line is due on the earlier
of the completion of this Offering or December 31, 1996.

- The Facility is collateralized by substantially all of the Company's oil
and gas properties.

- The Company is obligated to maintain certain financial and other
covenants, including a minimum current ratio, minimum net equity, a debt
coverage ratio and a total bank debt ceiling.

- The Facility expires on March 31, 1999.

Initial amounts drawn under the Revolver were used to retire the Company's
prior line of credit and related accrued interest. At June 30, 1996, the
borrowing base under the Revolver was $8,820,000, and the principal amount
outstanding was $8,231,000, leaving the amount available under the Revolver at
$589,000. The principal amount outstanding under the Drilling Line was
$2,000,000 at June 30, 1996. The Company is currently in compliance with the
covenants of the Facility.

16
<PAGE> 17

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT AVERAGE PRICES AND $ PER BOE)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Oil and gas revenues........................ $2,061 $4,629 $4,800 $2,603 $2,834
Oil and gas production expenses............. 976 2,024 1,868 996 973
Depreciation, depletion and amortization.... 937 2,409 2,340 1,233 1,170
Mining project expenses..................... 133 169 448 247 359
General and administrative expenses......... 1,183 1,806 2,015 982 953
NET PRODUCTION:
Oil (MBbl).................................. 70 146 173 89 91
Natural Gas (MMcf).......................... 695 1,648 1,238 731 700
AVERAGE SALES PRICE REALIZED:
Oil (per Bbl)............................... $14.75 $14.81 $16.45 $16.58 $16.98
Natural Gas (per Mcf)....................... $ 1.48 $ 1.50 $ 1.58 $ 1.54 $ 1.84
AVERAGE PRODUCTION COSTS AND TAXES (PER
BOE):....................................... $ 5.25 $ 4.81 $ 4.93 $ 4.72 $ 4.68
AVERAGE DEPRECIATION, DEPLETION AND
AMORTIZATION (PER BOE):..................... $ 4.70 $ 5.53 $ 5.70 $ 5.51 $ 5.22
</TABLE>

Six Months Ended June 30, 1996 Compared with Six Months Ended June 30, 1995

Revenues. Total revenues for the six months ended June 30, 1996 increased
8.1% to $2,941,000, compared with $2,721,000 for the six months ended June 30,
1995. The increase was primarily due to higher oil and gas prices. Average oil
prices for the six months ended June 30, 1996 increased 2.4% to $16.98 per Bbl,
compared with $16.58 per Bbl for the six months ended June 30, 1995. Average gas
prices for the six months ended June 30, 1996 increased 19.5% to $1.84 per Mcf,
compared with $1.54 per Mcf for the six months ended June 30, 1995.

Oil and Gas Production Expenses. Oil and gas production expenses for the
six months ended June 30, 1996 decreased 2.3% to $973,000, compared with
$996,000 for the six months ended June 30, 1995. The decrease was primarily
attributable to fewer new wells drilled which typically have higher operating
expenses in their first six months of production.

Mining Project Expenses. Mining project expenses for the six months ended
June 30, 1996 increased 45.3% to $359,000, compared with $247,000 for the six
months ended June 30, 1995. The increase was primarily due to Laguna's business
development expenses related to reviewing other mineral concessions. During the
six months ended June 30, 1995 and 1996 there were no sales of gold or silver
and the Company does not expect sales in the immediate future.

General and Administrative Expenses. General and administrative expenses
for the six months ended June 30, 1996 decreased 3.0% to $953,000, compared with
$982,000 for the six months ended June 30, 1995.

Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the six months ended June 30, 1996 decreased 5.1% to
$1,170,000, compared with $1,233,000 for the six months ended June 30, 1995.
Depreciation, depletion and amortization decreased 5.3% to $5.22 per BOE for the
six months ended June 30, 1996, compared with $5.51 per BOE for the six months
ended June 30, 1995 primarily due to an increase in oil and gas reserves.

Interest and Other Expenses. Interest and other expenses for the six months
ended June 30, 1996 increased 318.9% to $465,000, compared with $111,000 for the
six months ended June 30, 1995. The increase was primarily due to higher
outstanding borrowings under the Company's credit facility which were used
primarily to terminate a volumetric production payment in August 1995.

17
<PAGE> 18

Other Items. Minority interest in loss of consolidated subsidiary of
$54,000 represents the minority interest share in the Laguna loss. The minority
interest in the Laguna common stock was created in June 1996. The Company
incurred an extraordinary loss of $160,000 during the six months ended June 30,
1996 as a result of the refinancing of its credit facility with a new lender.

Income Taxes. The Company did not recognize any tax benefit from its losses
in the six months ended June 30, 1996 and June 30, 1995.

Net Loss. Net loss for the six months ended June 30, 1996 increased 27.9%
to $1,085,000, compared with $848,000 for the six months ended June 30, 1995 as
a result of the factors discussed above. The Company paid the 8% dividend
totaling $160,000 on its $4,000,000 face amount Series B Mandatorily Redeemable
Convertible Preferred Stock ("Series B Preferred Stock") during the six months
ended June 30, 1996, and realized accretion of $26,000. Net loss attributable to
common shareholders for the six months ended June 30, 1996 increased 26.3% to
$1,271,000, compared with $1,006,000 for the six months ended June 30, 1995.

Year Ended December 31, 1995 Compared with Year Ended December 31, 1994.

Revenues. Total revenues for the year ended December 31, 1995 increased
10.6% to $5,428,000, compared with $4,909,000 for the year ended December 31,
1994. The increase was primarily due to a gain on termination of a volumetric
production payment. For the year ended December 31, 1995 oil and gas sales,
including amortization of deferred revenue from a volumetric production payment,
increased 3.7% to $4,800,000 from $4,629,000 for the year ended December 31,
1994. Total oil production increased 18.5% to 173,000 Bbls and total gas
production decreased 24.9% to 1,238,000 Mcf for the year ended December 31,
1995. The increase in oil sales was due to the completion of eight productive
wells during 1995, and the decrease in gas sales was due in part to a decrease
in production from one of the Company's producing properties, which has a steep
decline curve, accounting for 267,000 Mcf of the production decrease. Average
oil prices for the year ended December 31, 1995 increased 11.1% to $16.45 per
Bbl, compared with $14.81 per Bbl for the year ended December 31, 1994. Average
gas prices for the year ended December 31, 1995 increased 5.3% to $1.58 per Mcf,
compared with $1.50 per Mcf for the year ended December 31, 1994.

Oil and Gas Production Expenses. Oil and gas production expenses for the
year ended December 31, 1995 decreased 7.7% to $1,868,000, compared with
$2,024,000 for the year ended December 31, 1994. The decrease was primarily due
to a reduction in repair costs in some of the Company's older fields.

Mining Project Expenses. Mining project expenses for the year ended
December 31, 1995 increased 165.1% to $448,000, compared with $169,000 for year
ended December 31, 1994. The increase was due primarily to increased general and
administration costs relating to the Rio Chiquito Project. During the year ended
December 31, 1995 there were no sales of gold or silver and the Company does not
expect sales in the immediate future.

General and Administrative Expenses. General and administrative expenses
for the year ended December 31, 1995 increased 11.6% to $2,015,000, compared
with $1,806,000 for the year ended December 31, 1994. The increase was primarily
due to an increase in investment banking fees related to a contract which
expired in 1995 and additional salary expense for two officers hired April 1,
1994, which was included for a full year in 1995. These increases were partially
offset by a reduction in legal fees and office expenses. Additionally, during
1995, consulting fees related to Laguna's exploration program increased
significantly and travel and related expenses increased due to expenditures
incurred in pursuing the Laguna private placement and financing arrangement and
for new personnel traveling to Costa Rica.

Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the year ended December 31, 1995 decreased 2.9% to $2,340,000,
compared with $2,409,000 for the year ended December 31, 1994. Depreciation,
depletion and amortization for the year ended December 31, 1995 increased 3.1%
to $5.70 per BOE, compared with $5.53 per BOE for the year ended December 31,
1994, due primarily to lower gas production.

Interest and Other Expenses. Interest and other expenses for the year ended
December 31, 1995 increased 228.0% to $433,000, compared with $132,000 for the
year ended December 31, 1994. The increase was

18
<PAGE> 19

primarily due to higher outstanding borrowings under the Company's credit
facility which were used primarily to terminate a volumetric production payment
in August 1995.

Other Items. The Company incurred an extraordinary loss of $253,000 during
1995 as a result of the refinancing of its credit facility with a new lender.

Income Taxes. The Company incurred net operating losses ("NOLs") for
Federal income tax purposes in 1995, 1994 and 1993, which can be carried forward
to offset future taxable income. Statement of Financial Accounting Standards No.
109 requires that a valuation allowance be provided if it is more likely than
not that some portion or all of a deferred tax asset will not be realized. The
Company's ability to realize the benefit of its deferred tax asset will depend
on the generation of future taxable income through profitable operations and the
expansion of the Company's oil and gas producing activities. The market and
capital risks associated with achieving the above requirement are considerable,
resulting in the Company's conclusion to provide a valuation allowance equal to
the deferred tax asset. Accordingly, the Company did not recognize any tax
benefit in its consolidated statement of operations for the years ended December
31, 1995, 1994, and 1993.

Net Loss. Net loss for the year ended December 31, 1995 increased 18.3% to
$1,929,000, compared with $1,631,000 for the year ended December 31, 1994 as a
result of the factors discussed above. The Company paid the 8% dividend totaling
$320,000 on its Series B Preferred Stock during 1995, and realized accretion of
$40,000. Net loss attributable to common shareholders for the year ended
December 31, 1995 increased 21.2% to $2,289,000, compared to $1,889,000 for the
year ended December 31, 1994.

Year Ended December 31, 1994 Compared with Year Ended December 31, 1993

Revenues. Total revenues for the year ended December 31, 1994 increased
114.3% to $4,909,000, compared with $2,291,000 for the year ended December 31,
1993. The increase was primarily due to the Company's acquisition of producing
properties in September 1993. For the year ended December 31, 1994 oil and gas
sales increased 124.6% to $4,629,000 from $2,061,000 for the year ended December
31, 1993. The increase was attributable to a substantial property acquisition in
September 1993, and drilling and enhancement operations completed during 1994.
Total oil production increased 108.6% to 146,000 Bbls and total gas production
increased 137.1% to 1,648,000 Mcf for the year ended December 31, 1994. Average
oil prices for the year ended December 31, 1994 increased 0.4% to $14.81 per
Bbl, compared with $14.75 per Bbl for the year ended December 31, 1993. Average
gas prices for the year ended December 31, 1994 increased 1.4% to $1.50 per Mcf,
compared with $1.48 per Mcf for the year ended December 31, 1993.

Oil and Gas Production Expenses. Oil and gas production expenses for the
year ended December 31, 1994 increased 107.4% to $2,024,000, compared with
$976,000 for the year ended December 31, 1993. The increase was primarily due to
expenses related to the oil and gas properties acquired in September 1993.

Mining Project Expenses. Mining project expenses for the year ended
December 31, 1994 increased 27.1% to $169,000, compared with $133,000 for the
year ended December 31, 1993. The increase was due to direct costs related to
Laguna's exploration program. During the year ended December 31, 1994 there were
no sales of gold or silver.

General and Administrative Expenses. General and administrative expenses
for the year ended December 31, 1994 increased 52.7% to $1,806,000, compared
with $1,183,000 for the year ended December 31, 1993. The increase was primarily
due to increased salary expense for additional personnel directly related to the
Company's September 1993 acquisition of producing properties and legal fees
incurred in connection with a lawsuit initiated by the Company. Additionally,
travel expenses increased significantly due to efforts related to the Laguna
mining operation.

Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the year ended December 31, 1994 increased 157.1% to
$2,409,000, compared with $937,000 for the year ended December 31, 1993.
Depreciation, depletion and amortization for the year ended December 31, 1994
increased 17.7% to $5.53 per BOE, compared with $4.70 per BOE for the year ended
December 31, 1993. This increase primarily reflects a decrease in production in
one of the Company's major properties and the effect of low year-end 1993 gas
prices on reserves.

19
<PAGE> 20

Interest and Other Expenses. Interest and other expenses for the year ended
December 31, 1994 decreased 47.0% to $132,000, compared with $249,000 for the
year ended December 31, 1993. The decrease was primarily due to lower
outstanding borrowings resulting from the refinancing of a net profits interest
with the proceeds of the sale of the Series B Preferred Stock, which bears an 8%
dividend rate.

Net Loss. Net loss for the year ended December 31, 1994 attributable to
common shareholders increased 37.4% to $1,631,000, compared with $1,187,000 for
the year ended December 31, 1993 as a result of factors discussed above. The
Company paid the 8% dividend totaling $228,000 on its Series B Preferred Stock
during 1994, and realized accretion of $30,000. Net loss attributable to common
shareholders increased 59.1% to $1,889,000, compared with $1,187,000 for year
ended December 31, 1993.

HEDGING ACTIVITIES

The Company has in the past and may in the future engage in hedging
transactions when management believes it is in the Company's interest to do so.
Such transactions "lock in" prices, thus protecting against future price
downturns, but they also limit the Company's ability to benefit from future
price increases. The Company's use of hedging arrangements is limited to
management of commodity price risks. Gains and losses on such transactions are
matched to product sales and charged or credited to oil and gas sales when that
product is sold. Management believes that the use of various hedging
arrangements can be a prudent means of protecting the Company's financial
interests from the volatility of oil and gas prices.

In November 1995, the Company entered into a "collar" hedging transaction
with an independent crude oil buyer covering 12,000 Bbls per month of its oil
production. Under this arrangement, for each month beginning November 1995
through October 1996, the Company will receive a minimum of $16.50 per Bbl and a
maximum of $18.00 per Bbl for the 12,000 Bbls subject to the collar agreement.
The premium for this collar is $0.30 per Bbl, payable monthly.

Also in November 1995, the Company entered into a "floor" hedging
transaction with an independent purchaser covering 30,000 MMBtus per month of
the Company's gas production. Under this arrangement, for each month beginning
November 1995 through October 1996, if the price for gas as quoted on the New
York Mercantile Exchange ("NYMEX") is less than $1.70, the Company will receive
the difference between $1.70 and the average settlement price for that month for
the 30,000 MMBtus subject to the floor agreement. The premium for this floor is
$.095 per MMBtu, payable monthly.

MISCELLANEOUS

The Company's oil and gas operations are significantly affected by certain
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), that
are applicable to the oil and gas industry. Current law permits the Company to
deduct currently, rather than capitalize, intangible drilling and development
costs incurred or borne by it. The Company, as an independent producer, is also
entitled to a deduction for percentage depletion with respect to the first 1,000
Bbls per day of domestic crude oil (and/or equivalent units of domestic natural
gas) produced (if such percentage depletion exceeds cost depletion). Generally,
this deduction is 15% of gross income from an oil and gas property, without
reference to the taxpayer's basis in the property. The percentage depletion
deduction may not exceed 100% of the taxable income from a given property.
Further, percentage depletion is limited in the aggregate to 65% of the
Company's taxable income. Any depletion disallowed under the 65% limitation,
however, may be carried over indefinitely.

At December 31, 1995, the Company had an NOL carryforward for Federal
income tax purposes of approximately $13,400,000, which will begin to expire in
2005. The amount and availability of an NOL carryforward is subject to a variety
of interpretations and restrictions. Under a provision of the Code, a
corporation's ability to utilize an NOL carryforward to offset taxable income
following an "ownership change" is limited. If an ownership change occurs, the
ability of the Company to use its NOL carryforward will be limited so that a
portion of the Company's NOL carryforward will not be available to offset the
Company's taxable income in a particular year. The Company believes that this
Offering may effect such an ownership change.

20
<PAGE> 21

Inflation has not historically had a material impact on the Company's
financial statements, and management does not believe that the Company will be
materially more or less sensitive to the effects of inflation than other
companies in the oil and gas business.

When evaluating the Company, its operations, or its expectations, the
reader should bear in mind that the Company and its operations are subject to
numerous risks and uncertainties. Among these are risks related to the oil and
gas and the mining businesses (including operating risks and hazards and the
plethora of regulations imposed thereon), risks and uncertainties related to the
volatility of the prices of oil and gas and minerals, uncertainties related to
the estimation of reserves of oil and gas and minerals and the value of such
reserves, the effects of competition and extensive environmental regulation, the
uncertainties related to foreign operations, and many other factors, many of
which are necessarily beyond the Company's control.

21
<PAGE> 22

BUSINESS AND PROPERTIES

GENERAL

Mallon Resources Corporation is an independent energy company engaged in
the domestic oil and gas development, exploration and production business. The
Company's activities are focused in the Delaware Basin of southeast New Mexico
where it has been active since 1982, and in the San Juan Basin of northwest New
Mexico where it has been active since 1984. The Company owns interests in
approximately 24,100 gross (18,900 net) acres in the Delaware Basin and
approximately 31,100 gross (16,500 net) acres in the San Juan Basin. The
Company's properties are primarily located in fields with established production
histories, which typically contain multiple productive geologic formations and
zones. To date, the Company's efforts to develop its properties have been
constrained by its limited capital resources. The Company intends to use a
majority of the net proceeds from this Offering to drill or recomplete
approximately 55 wells in these two basins through the end of 1997.

The Company increased its estimated proved reserves from 2.2 MMBOE as of
December 31, 1992, to 5.5 MMBOE as of June 30, 1996, a 150% increase. As of June
30, 1996, the Company's proved reserves, as estimated by its independent
petroleum engineers, GeoQuest, consisted of 1.9 MMBbls of crude oil and 21.2 Bcf
of natural gas, with a Pre-tax SEC 10 Value of $23.8 million. At June 30, 1996,
the Company owned interests in 225 gross (74 net) producing wells and operated
88, or 39%, of them. The Company also has interests in four waterflood units,
which contain a total of 544 gross (8.5 net) wells. The Company's geographic
concentration of its activities and its control over its operating expenses
resulted in average production costs of $4.93 per BOE for 1995.

BUSINESS STRATEGY

SELECTED FIELDS AND AREAS OF INTEREST

The Company's activities are focused in the Delaware Basin of southeastern
New Mexico and in the San Juan Basin of northwestern New Mexico. At June 30,
1996, these areas accounted for 99% of the Company's 5.5 MMBOE of estimated
proved reserves. Of this total, 3.9 MMBOE were attributable to the Company's
Delaware Basin properties and 1.6 MMBOE were attributable to its San Juan Basin
properties.

22
<PAGE> 23

DELAWARE BASIN, SOUTHEASTERN NEW MEXICO

The Delaware Basin has been an area of significant activity for the Company
since 1982, when the Company acquired an interest in the Brushy Draw field.
Wells in the Delaware Basin produce from a variety of formations, the principal
of which are the Cherry Canyon, Brushy Canyon, Strawn and Morrow Formations.
These formations each contain multiple potentially productive zones. The Cherry
Canyon and Brushy Canyon formations are shallow and primarily produce oil, while
the Strawn and Morrow Formations, which are deeper, generally produce natural
gas. The Company's primary properties in the Delaware Basin are in the Lea
Northeast, Quail Ridge, White City and South Carlsbad fields. The Company also
continues to assess potential in its Shipp, Lovington Northeast and Brushy Draw
properties. The Company owns interests in approximately 24,100 gross (18,900
net) acres of oil and gas leases in the Delaware Basin.

Lea Northeast Field, Lea County, New Mexico. The Company is actively
developing a Cherry Canyon Formation play in this field. Since 1994 it has
drilled 13 wells here, 11 of which were productive and one of which is used as a
salt water disposal well. These wells extended the productive limits of the Lea
Northeast Field by more than a mile to the northwest. The Company currently
operates 12 wells in this field. The Company's wells in Lea Northeast typically
target between 10 and 15 zones that are productive in the area. The primary
producing interval in the field is in the Cherry Canyon Formation, although more
recently attention has also been directed to the deeper Brushy Canyon Formation.
The Company intends to drill wells to 10,500 feet in order to test zones in the
Bone Springs Formation, which is also productive on portions of the Company's
acreage. These formations contain multiple reservoir zones that occur at depths
between 5,500 and 8,200 feet. The Company intends to drill 16 wells in Lea
Northeast by the end of 1997 and has delineated 30 additional drill locations in
the field. The Company's working interest in these wells range from 36% to 84%,
and averages approximately 55%.

Quail Ridge, Lea County, New Mexico. Adjacent to Lea Northeast, the Company
controls a large block of acreage on which it operates wells producing from the
Bone Springs, Atoka, and Morrow Formations. The Quail Ridge Field has produced
primarily from the Morrow sandstone at depths of approximately 13,500 feet. The
Company currently has an interest in 10 wells in this area and operates five of
them. The Company plans to further develop this block by drilling at least seven
wells in 1997. These wells will be drilled for production from the same Cherry
Canyon Formation and Brushy Canyon Formation zones found by the Company's recent
development activities in Lea Northeast, and, if successful, would extend the
limits of the field by more than two miles to the northwest. The Company
controls an approximate 40% working interest in this acreage.

White City and South Carlsbad Fields, Eddy County, New Mexico. These
adjacent fields have been the focus of much of the Company's recompletion and
development activities since 1993. The Company has interests in 28 wells in
these fields and operates 10 of them. After the Lea Northeast/Quail Ridge area,
this is the Company's largest operated acreage block in the Delaware Basin. The
Company has successfully recompleted gas wells in the Canyon, Strawn, Atoka, and
Morrow Formations. Plans for development include drilling wells to the Morrow at
12,000 feet. Like all of the Company's recent drilling, a Morrow well will allow
for exploration of various up-hole zones in the Cherry Canyon and Brushy Canyon
Formations at depths from 1,500 to 5,300 feet, as well as the targeted Canyon,
Strawn, Atoka and Morrow Formations, which range in depth from 9,000 feet to
12,000 feet. The Company's working interest averages 38%.

Shipp and Lovington Northeast Fields, Lea County, New Mexico. Shipp and
Lovington Fields are comprised of a collection of individual reservoirs, or
algal mounds, in a Strawn Formation interval at depths of approximately 11,500
feet. The mounds range in size from 100 to 700 acres. The Company has interests
in 33 wells and operates 23 wells in these adjacent fields. The Company recently
initiated a low installation cost pilot waterflood project on one of these
mounds. The Company will evaluate the success of this secondary recovery project
and determine the feasibility of expanding the project to other mounds in the
fields. The Company's working interest averages 33% in Lovington Northeast, and
46% in Shipp.

Brushy Draw Field, Eddy County, New Mexico. The Company's initial drilling
and field development here began in 1982. Current production is from the base of
the Cherry Canyon Formation, at a depth of approximately 5,000 feet. The Company
operates 14 wells with an average working interest of 68%. The

23
<PAGE> 24

Company will continue its Cherry Canyon development here, drilling three wells
in 1997, which will also be analyzed to evaluate potential productive zones in
the Brushy Canyon Formation.

SAN JUAN BASIN, NORTHWESTERN NEW MEXICO

The San Juan Basin has been a significant area of activity for the Company
since 1984. The Company's primary areas of interest in the San Juan Basin are
the East Blanco, Gavilan and Otero areas. The Company owns interests in
approximately 31,100 gross (16,500 net) acres of oil and gas leases in the San
Juan Basin. Wells on these leases produce from a variety of zones in the
Pictured Cliffs, Mesaverde, Mancos and Dakota Formations and primarily produce
natural gas. Historically, due to the San Juan Basin's relatively isolated
location and the resulting limited access its natural gas production has to the
natural gas marketplace, natural gas produced in the San Juan Basin has tended
to command prices that are lower than natural gas prices that prevail in other
areas.

East Blanco Area, Rio Arriba County, New Mexico. This area has been under
development by the Company since 1986. The Company holds interests in 23 wells
in this area. All production in the area has been natural gas, and East Blanco
wells typically contain reserves in more than one productive zone, primarily in
the Pictured Cliffs Formation and the Ojo Alamo Formation. The wells also
penetrate the Fruitland Coal Formation, which is productive in fields adjacent
to East Blanco. At present, management has identified 44 potential drilling and
recompletion locations on its East Blanco acreage. Of the locations currently
identified, 14 have been assigned proved undeveloped reserves in the Pictured
Cliffs or Ojo Alamo Formations. The Company owns a 59% average working interest
in this 20,000 acre block to the bottom of the Pictured Cliffs Formation.

Gavilan Field, Rio Arriba County, New Mexico. The Company operates seven
wells in this field. Current production is primarily natural gas from the Mancos
Formation at approximately 5,600 feet. In 1997 the Company plans to recomplete
three wells in the Mesaverde Formation and to utilize such wells to test the
Pictured Cliffs gas sand and two additional Mesaverde pays. The Company holds an
average 34% working interest in this acreage.

Otero Field, Rio Arriba County, New Mexico. The Company operates its two
wells in this field, which produce oil from the Mancos Formation at
approximately 5,300 feet. The Company intends to drill one well in this field in
1997, which will commingle production from the Pictured Cliffs, Mesaverde and
Mancos Formations. The Company has an 88% working interest in this acreage.

OTHER AREAS

All of the Company's oil and gas operations are currently conducted
on-shore in the United States. In addition to the properties described above, it
has properties in the states of Colorado, Oklahoma, Wyoming, North Dakota and
Alabama. While it intends to continue to produce its current wells in those
states, it currently does not expect to engage in any development activities in
those areas. The Company also owns a 2.25% working interest in an exploration
venture to drill one or more wells offshore Belize, where the Company is
committed to spend approximately $220,000, beginning in late 1996 or early 1997.

24
<PAGE> 25

ACREAGE

The majority of the Company's producing oil and gas properties are located
on leased land held by the Company for as long as production is maintained. The
following table summarizes the Company's oil and gas acreage holdings as of
December 31, 1995.

<TABLE>
<CAPTION>
GROSS NET GROSS NET
DEVELOPED DEVELOPED UNDEVELOPED UNDEVELOPED
AREA ACREAGE ACREAGE ACREAGE ACREAGE
-------------------------------------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Delaware Basin........................ 22,582 18,555 1,560 312
San Juan Basin........................ 10,308 3,503 20,773 13,033
Other................................. 10,225 3,953 2,931 50
------ ------ ------ ------
Total....................... 43,115 26,011 25,264 13,395
====== ====== ====== ======
</TABLE>

Much of the Delaware Basin developed acreage relates to deeper natural gas zones
as to which larger spacing rules apply. Most of this developed acreage is
undeveloped as to shallower zones.

PROVED RESERVES

The following table sets forth summary information concerning the Company's
estimated proved oil and gas reserves as of June 30, 1996, based upon the
GeoQuest Report, a summary of which is included as Annex A to this Prospectus.
All calculations have been made in accordance with the rules and regulations of
the Commission and give no effect to federal or state income taxes otherwise
attributable to estimated future net revenues from the sale of oil and gas. The
present value of estimated future net revenues has been calculated using a
discount factor of 10%. See "Risk Factors -- Uncertainty of Estimates of
Reserves and Future Net Revenues."

<TABLE>
<CAPTION>
OIL GAS TOTAL
(MBBL) (MMCF) (MBOE)
------ ------ -------
<S> <C> <C> <C>
Proved developed reserves............................. 1,272 16,074 3,951
Proved undeveloped reserves........................... 665 5,139 1,521
Total proved reserves................................. 1,937 21,213 5,473
Estimated future net revenues (in thousands)............................. $41,166
Present value of estimated future net revenues (in thousands)............ $23,784
</TABLE>

DRILLING ACTIVITY

The following table sets forth, for each of the last three years, and for
the six months ended June 30, 1996, the drilling activities conducted by the
Company:

<TABLE>
<CAPTION>
DEVELOPMENT WELLS
----------------------------------------------------
GROSS WELLS NET WELLS
------------------------ -------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
---------- --- ----- ---------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
1993........................................ 0 0 0 0 0 0
1994........................................ 4 0 4 1.75 0 1.75
1995........................................ 7 1 8 4.64 0.68 5.32
Six months ended June 30, 1996.............. 3 0 3 2.43 0 2.43
</TABLE>

<TABLE>
<CAPTION>
EXPLORATORY WELLS
---------------------------------------------------
GROSS WELLS NET WELLS
------------------------ ------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
---------- --- ----- ---------- --- -----
<S> <C> <C> <C> <C> <C> <C>
1993......................................... 0 0 0 0 0 0
1994......................................... 0 0 0 0 0 0
1995......................................... 1 0 1 .3 0 .3
Six months ended June 30, 1996............... 0 0 0 0 0 0
</TABLE>

25
<PAGE> 26

PRODUCTIVE WELLS

The following table summarizes the Company's gross and net interests in
productive wells at June 30, 1996. Net interests represented in the table are
net "working interests" which bear the cost of operations.

<TABLE>
<CAPTION>
GROSS WELLS NET WELLS
- --------------------------------- ---------------------------------
OIL NATURAL GAS TOTAL OIL NATURAL GAS TOTAL
- --- ----------- ----- --- ----------- -----
<S> <C> <C> <C> <C> <C>
118 107 225 40 34 74
</TABLE>

In addition, the Company owns interests in four waterflood units, which contain
a total of 544 gross wells (8.5 net wells), and five gross (2.1 net) salt water
disposal wells.

PRODUCTION AND SALES PRICE

The following table sets forth information concerning the Company's total
oil and gas production (including deliveries under its volumetric production
payment) and sales for each of the last three years and for the six months ended
June 30, 1996:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET PRODUCTION:
Oil (MBbl).......................... 70 146 173 89 91
Natural Gas (MMcf).................. 695 1,648 1,238 731 700
AVERAGE SALES PRICE REALIZED(1):
Oil (per Bbl)....................... $14.75 $14.81 $16.45 $16.58 $16.98
Natural Gas (per Mcf)............... $ 1.48 $ 1.50 $ 1.58 $ 1.54 $ 1.84
Per BOE............................. $11.08 $11.00 $12.66 $12.34 $13.63
AVERAGE COST (PER BOE):
Production costs.................... $ 5.25 $ 4.81 $ 4.93 $ 4.72 $ 4.68
Depreciation, depletion and
amortization..................... $ 4.70 $ 5.53 $ 5.70 $ 5.51 $ 5.22
PRODUCING WELLS (at end of period)(2):
Gross Wells......................... 218 220 222 223 225
Net Wells........................... 70 66 71 67 74
</TABLE>

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

(1) Includes effects of hedging. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Hedging Activities."

(2) In addition, the Company owns interests in four waterflood units, which
contain a total of 544 gross wells (8.5 net wells), and five gross (2.1 net)
salt water disposal wells.

MARKETING

For 1996, approximately 400 Bbls per day (more than 80%) of the Company's
oil production is committed under a contract, which extends through October 31,
1996, with one company, Gulfmark Energy Incorporated. Other oil and liquids are
sold on the open market to unaffiliated purchasers, generally pursuant to
purchase contracts that are cancelable on 30 days' notice. The price paid for
this production is generally an established or posted price that is offered to
all producers in the field, plus any applicable differentials. Natural gas is
generally sold on the spot market or pursuant to short term contracts. Prices
paid for crude oil and natural gas fluctuate substantially. Because future
prices are difficult to predict, the Company hedges a portion of its oil and gas
sales to protect against market downturns. The nature of hedging transactions is
such that producers forego the benefit of some price increases that may occur
after the hedging arrangement is in place. The Company nevertheless believes
that hedging is prudent in certain circumstances in order to minimize the risk
of falling prices. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Hedging Activities."

26
<PAGE> 27

LAGUNA GOLD COMPANY

The Company owns 14 million common shares, representing an approximate 56%
interest, in Laguna, a company with interests in gold mining concessions in
Costa Rica. To establish itself as a financially independent company, Laguna
recently completed a financing in Canada and listed its common shares on The
Toronto Stock Exchange, under the trading symbol "LGC." Laguna received
approximately $4.3 million of net proceeds from its Canadian financing, which
will permit Laguna to continue its operations without further reliance on the
Company for financial support. The Company does not have any obligation or
intention to finance Laguna's future operations. Over time, the Company may
reduce its investment in Laguna. Proceeds from any disposition of the Company's
Laguna shares will be devoted to the Company's oil and gas operations. The
Company entered into an agreement with The Toronto Stock Exchange pursuant to
which it has agreed to escrow 8.4 million shares of Laguna common stock, and
one-third of such shares will be released from escrow in each of the three years
after the date of the agreement. On October 16, 1996, the closing price for a
share of Laguna common stock, as quoted on The Toronto Stock Exchange was
Cdn$1.50 (approximately US$1.10). See "Risk Factors -- Ownership Interest in
Laguna" and "Business and Properties -- Laguna Gold Company."

COMPETITION

The oil and natural gas industry is intensely competitive. Competition is
particularly intense in the acquisition of prospective oil and natural gas
properties and oil and gas reserves. The Company's competitive position depends
on its geological, geophysical and engineering expertise, on its financial
resources, its ability to develop its properties and its ability to select,
acquire and develop proved reserves. The Company competes with a substantial
number of other companies having larger technical staffs and greater financial
and operational resources. Many such companies not only engage in the
acquisition, exploration, development and production of oil and natural gas
reserves, but also carry on refining operations, generate electricity and market
refined products. The Company also competes with major and independent oil and
gas companies in the marketing and sale of oil and gas to transporters,
distributors and end users. There is also competition between the oil and
natural gas industry and other industries supplying energy and fuel to
industrial, commercial and individual consumers. The Company also competes with
other oil and natural gas companies in attempting to secure drilling rigs and
other equipment necessary for drilling and completion of wells. Such equipment
may be in short supply from time to time, although there is no current shortage
of such equipment. Finally, companies not previously investing in oil and
natural gas may choose to acquire reserves to establish a firm supply or simply
as an investment. Such companies will also provide competition for the Company.
The Company's business is affected not only by such competition, but also by
general economic developments, governmental regulations and other factors that
affect its ability to market its oil and natural gas production. The prices of
oil and natural gas realized by the Company are both highly volatile and
generally dependent on world supply and demand. Declines in crude oil prices or
natural gas prices adversely impact the Company's activities. The Company's
financial position and resources may also adversely affect the Company's
competitive position. Lack of available funds or financing alternatives will
prevent the Company from executing its operating strategy and from deriving the
expected benefits therefrom. For further information concerning the Company's
financial position, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

REGULATION

Various aspects of the Company's oil and natural gas operations are
regulated by administrative agencies under statutory provisions of the states
where such operations are conducted and by certain agencies of the Federal
government for operations on Federal leases. The Federal Energy Regulatory
Commission ("FERC") regulates the transportation and sale for resale of natural
gas in interstate commerce pursuant to the Natural Gas Act of 1938 ("NGA") and
the Natural Gas Policy Act of 1978 ("NGPA"). In the past, the Federal government
has regulated the prices at which oil and gas could be sold. While sales by
producers of natural gas, and all sales of crude oil, condensate and natural gas
liquids can currently be made at uncontrolled market prices, Congress could
reenact price controls in the future. Deregulation of wellhead sales in the
natural gas

27
<PAGE> 28

industry began with the enactment of the NGPA in 1978. In 1989, Congress enacted
the Natural Gas Wellhead Decontrol Act (the "Decontrol Act"). The Decontrol Act
removed all NGA and NGPA price and nonprice controls affecting wellhead sales of
natural gas effective January 1, 1993.

Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, and 636-B
("Order No. 636"), which require interstate pipelines to provide transportation
separate, or "unbundled," from the pipelines' sales of gas. Also, Order No. 636
requires pipelines to provide open-access transportation on a basis that is
equal for all gas supplies. Although Order No. 636 does not directly regulate
the Company's activities, the FERC has stated that it intends for Order No. 636
to foster increased competition within all phases of the natural gas industry.
It is unclear what impact, if any, increased competition within the natural gas
industry under Order No. 636 will have on the Company's activities. Although
Order No. 636 could provide the Company with additional market access and more
fairly applied transportation service rates, Order No. 636 could also subject
the Company to more restrictive pipeline imbalance tolerances and greater
penalties for violation of those tolerances. Numerous parties have filed
petitions for review of Order No. 636, as well as orders in individual pipeline
restructuring proceedings. In July 1996, Order No. 636 was generally upheld on
appeal. The portions remanded for further action do not appear to materially
affect the Company. It is difficult to predict when all appeals of Order No. 636
will be completed or their impact on the Company.

The FERC has recently announced several important transportation-related
policy statements and proposed rule changes. In 1995, the FERC issued a policy
statement on how interstate natural gas pipelines can recover the costs of new
pipeline facilities. In January 1996, the FERC issued a policy statement and a
request for comments concerning alternatives to its traditional cost-of-service
ratemaking methodology, including criteria to be used in evaluating proposals to
charge market-based rates for the transportation of natural gas. In addition,
the FERC recently issued a notice of proposed rulemaking pursuant to which it
proposes to substantially revise its regulations regarding releases of firm
interstate natural gas pipeline capacity. While any resulting FERC action
regarding these matters would affect the Company only indirectly, the FERC's
current rules and policy statements may have the effect of enhancing competition
in natural gas markets by, among other things, encouraging non-producer natural
gas marketers to engage in certain purchase and sale transactions. The Company
cannot predict what action the FERC will take on these matters, nor can it
accurately predict whether the FERC's actions will achieve the goal of
increasing competition in markets in which the Company's natural gas is sold.
However, the Company does not believe that it will be treated materially
differently than other natural gas producers and marketers with which it
competes.

Commencing in October 1993, the FERC issued a series of rules (Order Nos.
561 and 561-A) establishing an indexing system under which oil pipelines will be
able to change their transportation rates, subject to prescribed ceiling levels.
The indexing system, which allows or may require pipelines to make rate changes
to track changes in the Producer Price Index for Finished Goods, minus one
percent, became effective January 1, 1995.

Substantially all of the Company's operations are located on federal oil
and gas leases, which are administered by the United States Department of the
Interior Minerals Management Service ("MMS"). Such leases are issued through
competitive bidding, contain relatively standardized terms and require
compliance with detailed MMS regulations. The MMS is conducting an inquiry into
certain contract agreements from which producers on MMS leases have received
settlement proceeds that the MMS contends are royalty-bearing and the extent to
which producers have paid the appropriate royalties on those proceeds. The
Company believes that this inquiry will not have a material impact on its
financial condition, liquidity or results of operations.

In 1995, the MMS issued a notice of proposed rulemaking in which it
proposes to amend its regulations governing the calculation of royalties and the
valuation of natural gas produced from federal leases. The principal feature in
the amendments, as proposed, would establish an alternative market index-based
method to calculate royalties on certain natural gas production sold to
affiliates or pursuant to non-arm's-length sales contracts. The MMS has proposed
this rulemaking to facilitate royalty valuation in light of changes in the gas
marketing environment. The MMS has recently announced its intention to
re-examine these proposed rules

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<PAGE> 29

and to allow interested parties to file additional comments. The MMS has also
recently proposed a rule describing the types of transportation components that
are deductible for purposes of calculating and reporting royalties, as well as
various cost components associated with marketing functions that are not
deductible. The Company cannot predict what action the MMS will take on these
matters, nor can it predict at this stage of these rulemaking proceedings how
the Company might be affected by amendments to the regulations.

Additional proposals and proceedings that might affect the oil and gas
industry are pending before the FERC and the courts. The Company cannot predict
when or whether any such proposals may become effective. In the past, the
natural gas industry has been heavily regulated. There is no assurance that the
regulatory approach currently pursued by the FERC will continue indefinitely.
Notwithstanding the foregoing, the Company does not anticipate that compliance
with existing federal, state and local laws, rules and regulations will have a
material or significantly adverse effect upon the capital expenditures, earnings
or competitive position of the Company or its subsidiaries. No material portion
of the Company's business is subject to renegotiation of profits or termination
of contracts or subcontracts at the election of the Federal government.

OPERATING HAZARDS AND ENVIRONMENTAL MATTERS

The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures and discharges of toxic gases, the occurrence of any of
which could result in substantial losses to the Company due to injury or loss of
life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations.

The Company's operations relating to the exploration, development and
production of oil and natural gas are subject to extensive federal, state and
local laws governing the discharge of materials into the environment or
otherwise relating to the protection of the environment. Numerous governmental
departments issue rules and regulations to implement and enforce such laws which
are often difficult and costly to comply with and which carry substantial civil
and criminal penalties for failure to comply. These laws, rules, and regulations
may require the acquisition of a permit before drilling commences, restrict the
types, quantities, and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands, frontier and other protected areas, require some form of remedial
action to prevent pollution from former operations, such as pit cleanups and
plugging abandoned wells, and impose substantial liabilities for pollution
resulting from the Company's operations. In addition, these laws, rules and
regulations may restrict the rate of oil and natural gas production below the
rate that would otherwise exist. The regulatory burden on the oil and natural
gas industry increases its cost of doing business and consequently affects its
profitability. These laws, rules and regulations affect the operations of the
Company and compliance with the underlying environmental requirements generally
could have a material adverse effect upon the capital expenditures, earnings or
competitive position of the Company. While the Company believes that it is in
substantial compliance with current applicable environmental laws and
regulations and that continued compliance with existing requirements will not
have a material adverse impact on the Company, changes in environmental law have
the potential to adversely affect the Company's operations. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), also known as
the "Superfund" law, imposes liability, without regard to fault or the legality
of the original conduct, on certain classes of persons who are considered to be
responsible for the release of "hazardous substances" into the environment.
These persons include the owner or operator of the disposal site or sites where
the release occurred and companies that disposed or arranged for the disposal of
the hazardous substances at the site where the release occurred. Under CERCLA,
such persons may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the
environment, for damages to natural resources and for the costs of certain
health studies and it is not uncommon for neighboring landowners and other third
parties to file claims for personal injury and property damage allegedly caused
by the release of hazardous substances or other pollutants into the environment.
Furthermore, although petroleum, including crude oil and natural gas is

29
<PAGE> 30

exempt from CERCLA, at least two separate courts have ruled that certain wastes
associated with the production of crude oil may be classified as hazardous
substances under CERCLA and thus the Company could become subject to the
burdensome cleanup and liability standards established under the federal
Superfund program if significant concentrations of such wastes were determined
to be present at the Company's properties or to have been produced as a result
of the Company's operations.

Although the Company maintains insurance against some, but not all, of the
risks described above, including insuring the costs of clean-up operations,
public liability and physical damage, there is no assurance that such insurance
will be adequate to cover all such costs or that such insurance will continue to
be available in the future or that such insurance will be available at premium
levels that justify its purchase. The occurrence of a significant event not
fully insured or indemnified against could have a material adverse effect on the
Company's financial condition and operations.

CORPORATE OFFICES; EMPLOYEES

The Company's principal office is located at 999 18th Street, Suite 1700,
Denver, Colorado 80202. The Company's phone number is (303) 293-2333. The
Company employs 14 full time employees and one part time employee at this
office. The Company maintains an oil field operations office in Carlsbad, New
Mexico, where it employs four individuals.

Certain of the Company's employees, including George Mallon, Roy Ross and
Alfonso Lopez, devote a portion of their time to Laguna. Laguna bears a portion
of the compensation of these individuals, and also bears a portion of the
general and administrative expenses of the Denver office.

CHANGE OF INDEPENDENT ACCOUNTANTS

Effective November 10, 1994, the Company released Hein + Associates LLP
("H+A") as its independent certified public accounting firm. During the two most
recent fiscal years, and for the period from December 31, 1993 through November
10, 1994, there were no disagreements with H+A on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, and H+A's reports did not contain any adverse or qualified opinions.
The release of H+A was approved by the Company's Board of Directors at its
November 9, 1994 meeting. At that same meeting, the Company's Board of Directors
approved the selection of Price Waterhouse LLP as the Company's independent
accounting firm for the fiscal years 1993 through 1996. The Company had no prior
business dealings or consultations with Price Waterhouse LLP.

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<PAGE> 31

MANAGEMENT

The following are the members of the Company's Board of Directors and the
Company's executive officers:

<TABLE>
<CAPTION>
NAME AGE TITLE(S)
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
George O. Mallon, Jr .................. 51 Director, Chairman of the Board and
President of the Company; Chairman of
Mallon Oil and Director of Laguna
Kevin M. Fitzgerald.................... 41 Director and Executive Vice President
of the Company; President of Mallon Oil
Roy K. Ross............................ 45 Director, Executive Vice President and
General Counsel of the Company, Laguna,
and Mallon Oil
James A. McGowen....................... 54 Director
Frank Douglass......................... 63 Director
Roger R. Mitchell...................... 64 Director
Francis J. Reinhardt, Jr............... 65 Director
Alfonso R. Lopez....................... 47 Vice President-Finance and Treasurer
Carolena F. Chapman.................... 52 Secretary and Controller
</TABLE>

The directors serve until the next annual meeting of shareholders.
Following are brief descriptions of the business experience of the Company's
directors and executive officers:

George O. Mallon, Jr. has been the President and Chairman of the Board
of the Company since December 1988. He formed Mallon Oil in 1979, and
served as its President until December 1988, when he became that company's
Chairman of the Board. Mr. Mallon was a co-founder of Laguna in 1980, and
served as its President until April 1986. He is now a director of Laguna.
Mr. Mallon earned a B.S. degree in Business from the University of Alabama
in 1965, and an M.B.A. degree from the University of Colorado in 1977.

Kevin M. Fitzgerald has been Executive Vice President of the Company
since June 1990. He joined Mallon Oil in 1983 as Petroleum Engineer and
served as Vice President of Engineering from 1987 through December 1988,
when he became President of that company. Mr. Fitzgerald was Vice
President, Oil and Gas Operations for the Company from 1988 through October
1990, when he was named Executive Vice President. Mr. Fitzgerald is also a
director of Mallon Oil. Mr. Fitzgerald earned a B.S. degree in Petroleum
Engineering from the University of Oklahoma in 1978.

James A. McGowen has been a director of the Company since December
1988. He was a co-founder of Laguna and served as Vice President of
Production and a director of Laguna from its inception in 1980 until
December 1988, when he became President of that company. Mr. McGowen is
currently Chairman and a director of Laguna. He earned an A.B. degree in
Zoology from the University of California in 1966.

Roy K. Ross has been Executive Vice President and General Counsel of
the Company since 1992. From June 1976 through September 1992, Mr. Ross was
an attorney in private practice with the Denver-based law firm of Holme
Roberts & Owen. Mr. Ross is also Executive Vice President, General Counsel
and a director of Mallon Oil and Laguna. He earned his B.A. degree in
Economics from Michigan State University in 1973, and his J.D. degree from
Brigham Young University in 1976.

Frank Douglass has been a director since 1988. He is a Senior Partner
in the Texas law firm of Scott, Douglass, Luton & McConnico, LLP, where he
has been a partner since 1976. Mr. Douglass earned a B.B.A. degree from
Southwestern University in 1953 and a L.L.B. degree from the University of
Texas School of Law in 1958.

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<PAGE> 32

Roger R. Mitchell has been a director of the Company since 1990. He
joined the Company in January 1989 as a Vice President with responsibility
for investor relations, broker-dealer liaison, and special marketing
projects. He was President of Mallon Securities Corporation, a limited
broker-dealer firm wholly owned by Mallon Oil, from 1982 until that firm
was dissolved in October 1990. In August 1991, Mr. Mitchell left the
employment of the Company to start First Federated Telepartners, a private
telecommunications business headquartered in Chicago. In December 1992, Mr.
Mitchell sold his interest in First Federated Telepartners, and retired,
although he continues to provide consulting services to various businesses
on a part-time basis. He earned a B.S. degree in Business from Indiana
University in 1954 and an M.B.A. degree from Indiana University in 1956.

Francis J. Reinhardt, Jr. has been a director since 1994. He is with
the New York investment banking firm of Carl H. Pforzheimer & Co., where he
has been a partner since 1966. He is a member and past president of the
National Association of Petroleum Investment Analysts. Mr. Reinhardt is
also a director of The Exploration Company of Louisiana, a public company
engaged in the oil and gas business. Mr. Reinhardt holds a B.S. degree from
Seton Hall University, and an M.B.A. from New York University.

Alfonso R. Lopez joined the Company in July 1996 as Vice
President-Finance and Treasurer. He was Vice President-Finance for
Consolidated Oil & Gas, Inc. (now Hugoton Energy Corporation) from 1993 to
1995. Mr. Lopez was a consultant from 1991 to 1992. From 1981 to 1990, he
was Controller for Decalta International Corporation, a Denver based
exploration and production company. He served as Controller for Western
Crude Oil, Inc. (now Texaco Trading and Transportation, Inc.) from 1978 to
1981. Mr. Lopez is a certified public accountant and was with Arthur Young
& Company (now Ernst & Young) from 1970 to 1978. Mr. Lopez earned his B.A.
degree in Accounting and Business Administration from Adams State College
in Colorado in 1970.

Carolena F. Chapman has been Controller and Secretary of the Company
since 1989. She also serves as Secretary and Controller for Mallon Oil.

KEY EMPLOYEES AND CONSULTANTS

The following is information concerning certain of the Company's employees
and consultants who are instrumental to the Company's success:

Ray E. Jones is Vice President-Engineering of Mallon Oil. Before
joining the Company in January 1994, Mr. Jones spent eight years with Jerry
R. Bergeson & Associates (now GeoQuest), an independent consulting firm,
where he did reservoir engineering, field studies and reserve evaluations,
and taught industry courses in basic reservoir engineering, reservoir
simulation and well testing. Mr. Jones graduated from of Colorado School of
Mines in 1979, and is a registered professional engineer.

Randy Stalcup has been the Vice President-Land of Mallon Oil since
April 1995. Prior to joining the Company in April 1994, Mr. Stalcup was
employed by Beard Oil Company for 13 years, where he was the Acquisition
and Unitization Manager from 1989 on. Mr. Stalcup, a Certified Professional
Landman, earned his B.B.A. degree in Petroleum Land Management from the
University of Oklahoma in 1979.

Duane Winkler is Production Superintendent of Mallon Oil, working out
of the Carlsbad, New Mexico office. Before joining the Company in October
1993, he was employed by Natural Gas Processing as Production
Superintendent from 1986 to 1993. Mr. Winkler, who has 24 years of
experience in drilling, completion and production operations, completed his
Associates of Engineering Certificate from Central Wyoming College in 1996.

Wendell A. Bond, an independent geological consultant, has been
engaged by the Company since July 1994. Mr. Bond has 23 years of experience
in the petroleum industry, both domestically and internationally, and is
president of Wendell A. Bond, Inc., a company specializing in petroleum
geological consulting services that he formed in 1988. Prior to 1988, Mr.
Bond had been employed in a variety of positions for several independent
and major oil and gas companies, including Project Geologist for Webb
Resources, District Geologist for Sohio Petroleum and Chief Geologist for
Samuel Gary Jr. &

32
<PAGE> 33

Associates. Mr. Bond earned his B.S. degree in geology from Capital
University, Columbus, Ohio, and his M.S. degree in geology from the
University of Colorado.

Laura Levorsen, an independent geological consultant, has been engaged
by the Company since 1994. Ms. Levorsen has been an independent consultant
since 1992. Prior to 1992, she worked as a geologist for Pecten
International (a Shell Oil subsidiary) and Anadarko Petroleum. Her
geological experience has involved working with active foreign and domestic
drilling programs, wellsite evaluation, basin analysis and prospect
generation. Ms. Levorsen earned a Masters of Science in geology from the
Colorado School of Mines in 1987 and has a B.A. in geology from the
University of Colorado, a B.A. in Eastern Asian Languages and Cultures and
a B.A. in biology from the University of Kansas.

33
<PAGE> 34

PRINCIPAL SHAREHOLDERS

The following table sets forth information concerning the beneficial
ownership of the Common Stock as of October 16, 1996, by (i) the Company's chief
executive officer; (ii) each of the Company's directors; (iii) each shareholder
known by the Company to own of record or beneficially more than 5% of the
Company's outstanding Common Stock; and (iv) all directors and executive
officers as a group. The following share amounts have been adjusted to reflect
the four to one reverse stock split that occurred on September 9, 1996.

<TABLE>
<CAPTION>
PERCENT OWNED
---------------------
NUMBER OF BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES OFFERING OFFERING
------------------------------------------------------ --------- -------- --------
<S> <C> <C> <C>
George O. Mallon, Jr.................................. 309,350(2,3) 14.8% 7.6%
Kevin M. Fitzgerald................................... 27,028(3) 1.3 *
Roy K. Ross........................................... 7,675(3) * *
James A. McGowen...................................... 14,546(3) * *
Frank Douglass........................................ 7,926 * *
Roger R. Mitchell..................................... 47,793 2.3 1.2%
Francis J. Reinhardt, Jr.............................. 31,119(4) 1.5 *
Larry Abrams.......................................... 141,279 6.8 3.5%
Thomas B. McMillan, Jr................................ 116,465(5) 5.6 2.9%
Bank of America NT&SA................................. 278,293(6) 11.8 --(7)
Robert J. Monroe...................................... 239,995(8) 11.0 5.7%
All officers and directors as a group (8 persons)..... 445,437(3) 20.9 10.8%
</TABLE>

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

* Less than 1%

(1) The address of Messrs. Mallon, Fitzgerald, McGowen and Ross is 999 18th
Street, Suite 1700, Denver, Colorado 80202. The address of Mr. Mitchell is
5436 Lake Edge Drive, Holly Spring, North Carolina 27540. The address of
Mr. Douglass is 4350 Beltway Drive, Dallas, Texas 75244-3110. The address
of Mr. Reinhardt is 650 Madison Avenue, 23rd Floor, New York, New York
10022. The address of Mr. Abrams is 24 Park Central South, New York, New
York 10019. The address of Mr. McMillan is PO Box 809, Brewton, Alabama
36427. The address of Mr. Monroe is 228 St. Charles Avenue, New Orleans,
Louisiana 70130. The address of Bank of America NT&SA is 555 California
Street, San Francisco, California 94104.

(2) Includes 2,166 shares owned by Mr. Mallon's wife.

(3) Includes shares that could be acquired upon the exercise of immediately
exercisable stock options.

(4) Includes 12,175 shares of the Company's Series B Preferred Stock, which are
currently convertible into 10,689 shares of Common Stock. Does not include
5,000 shares owned by Mr. Reinhardt's children for which beneficial
ownership is disclaimed.

(5) Includes 6,849 shares owned by Mr. McMillan's children.

(6) Consists of shares of Common Stock issuable to Bank of America NT&SA upon
the conversion of its 1,100,918 shares of Series A Preferred Stock, which
are convertible at any time. The "Percent Owned" calculation for Bank of
America NT&SA assumes that such a conversion is made; all other "Percent
Owned" calculations ignore the potential effect of the conversion of Bank
of America NT&SA's Series A Preferred Stock. Bank of America NT&SA owns
100% of the outstanding shares of Series A Preferred Stock, which carry a
voting power equal to 278,293 shares of Common Stock and the right to elect
one director.

(7) Reflects the purchase by the Company of the Series A Preferred Stock held
by Bank of America NT&SA. See "Use of Proceeds" and "Transactions With
Related Parties."

(8) Consists of the following amounts: 7,000 shares owned directly; 25,375
shares of Common Stock, warrants to purchase 28,422 shares of Common Stock,
and 30,000 shares of Series B Preferred Stock convertible into 26,339
shares of Common Stock owned by a foundation of which Mr. Monroe is

34
<PAGE> 35

president and a director; 85,875 shares of Common Stock, warrants to
purchase 28,425 shares of Common Stock and 15,000 shares of Series B
Preferred Stock convertible into 13,169 shares of Common Stock owned by an
estate of which Mr. Monroe is the executor; and 21,000 shares of Common
Stock and 5,000 shares of Series B Preferred Stock convertible into 4,390
shares of Common Stock owned by a company of which the estate is the sole
shareholder. The "Percent Owned" calculation for Mr. Monroe assumes that
all outstanding Series B Preferred Stock has been converted; all other
"Percent Owned" calculations ignore the potential effect of the conversion
of the Series B Preferred Stock.

TRANSACTIONS WITH RELATED PARTIES

The Huxford Field, in which the Company has working interests, is operated
by Smackco Ltd., a company that is owned by Thomas E. McMillan, who owned
beneficially, prior to the Offering, in excess of 5% of the outstanding Common
Stock.

The Company serves as operator of certain oil and gas properties in which
some of the officers and directors of the Company have working interests. Such
individuals pay their pro-rata share of all costs relating to the properties, on
the same basis as other unaffiliated interest owners.

During the year ended December 31, 1995, the Company paid $31,000 of legal
fees to the law firm of Scott, Douglass, Luton & McConnico, LLP, of which Mr.
Douglass is a senior partner.

During the year ended December 31, 1995, the Company paid $200,000 of
consulting and other fees to the investment banking firm of Carl H. Pforzheimer
& Co., of which Mr. Reinhardt is a partner.

In February 1995, the Company entered into a loan agreement establishing a
$2.5 million line of credit facility pursuant to which it could borrow funds
from three entities, two of which are affiliates of Robert J. Monroe, an
individual who owns, beneficially, in excess of 5% of the Company's outstanding
common stock. The line of credit was retired in August 1995.

The Company has entered into a Securities Repurchase and Sale Agreement
under which it has agreed to purchase all of the outstanding shares of the
Company's Series A Preferred Stock from Bank of America National Savings and
Trust Association ("BofA") for a purchase price of approximately $1.9 million.
The purchase price (which is equal to $6.76 per share of Common Stock into which
the Series A Preferred Stock is convertible) is equal to the average between the
bid and asked quotations for a share of Common Stock on July 22, 1996, the day
prior to the day the Company and BofA agreed to the purchase and sale. In
connection with the purchase, the Company also agreed to pay fees and expenses
in the approximate amount of $99,000 to Carl H. Pforzheimer & Co., a company
that was separately engaged by BofA to assist in the sale of the Series A
Preferred Stock to others.

DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES

GENERAL

The Company's Articles of Incorporation (the "Articles") authorize the
Company to issue 25,000,000 shares of Common Stock, par value $.01 per share,
and 10,000,000 shares of Preferred Stock, par value $.01 per share. The shares
of the Company's preferred stock are issuable from time to time in one or more
series and with such designations, powers, preferences and rights, and
qualifications, limitations or restrictions thereof, as may be determined by the
Board, consistent with the Articles and with the laws of the State of Colorado.
Unless otherwise indicated, all Common Stock amounts have been adjusted to give
effect to a four to one reverse stock split that occurred on September 9, 1996.

COMMON STOCK

The Company had 2,083,305 shares of Common Stock outstanding prior to this
Offering, which were held by approximately 750 shareholders of record. Each
share of Common Stock entitles the shareholder to one vote. Holders of Common
Stock are not entitled to cumulative voting in the election of directors and
have

35
<PAGE> 36

no preemptive or subscription rights. Subject to the rights of holders of any
outstanding shares of Preferred Stock, shares of Common Stock are entitled to
share equally in dividends paid from the funds legally available for the payment
thereof, when, as and if declared by the Board. Subject to the rights of holders
of any outstanding shares of Preferred Stock, holders of Common Stock are also
entitled to share ratably in the assets of the Company available for
distribution to holders of Common Stock upon liquidation or dissolution of the
Company, whether voluntary or involuntary. The Common Stock is listed on the
Nasdaq National Market under the symbol "MLRC." The Company's transfer agent is
Securities Transfer Corporation, Dallas, Texas.

OPTIONS

At October 16, 1996, options to purchase an aggregate of 45,021 shares of
the Company's Common Stock were issued and outstanding. These options were
issued under the Company's Equity Plan to various of the Company's employees and
consultants.

WARRANTS

Warrants to purchase an aggregate of 75,393 shares of the Company's Common
Stock at an exercise price of $8.29 per share, as adjusted to reflect this
Offering, are issued and outstanding. These warrants were issued to the holders
of Laguna's Series A Preferred Stock in connection with the private placement of
that stock. The warrants expire February 15, 2000.

In August 1995, the Company issued warrants to purchase an aggregate of
25,000 shares of the Common Stock at an exercise price of $10.00 per share to an
affiliate of Midland Bank plc, New York Branch, as an "equity kicker" in
connection with the establishment of a $15 million line of credit with that
bank. The Company paid off the line of credit in March 1996, and has sued
Midland Bank to recover the warrants and the fees and expenses it incurred in
establishing the line on the grounds that the bank misled the Company as to its
true intentions at the time the line of credit was initially established. The
outcome of this litigation cannot be predicted at this time.

The Company will issue to the Representative a warrant to purchase 160,000
shares of Common Stock in connection with the Offering, with an exercise price
equal to 120% of the price of the Common Stock to the public in the Offering.
The warrant will be exercisable for a two-year period beginning one year after
the effective date of the Registration Statement of which this Prospectus is a
part. See "Underwriting."

PREFERRED STOCK

The Board is authorized under the Articles to issue up to 10,000,000 shares
of Preferred Stock from time to time in one or more series and to fix (without
shareholder action) the voting rights and other special rights, including,
without limitation, the conversion rights, rights and terms of redemption
(including sinking fund provisions), and dividend and liquidation rights of each
series.

Shareholders will not have any preemptive rights with respect to any of the
authorized but unissued shares of Common Stock and Preferred Stock. Issuance of
shares of Preferred Stock could impact the voting rights of the holders of
Common Stock by creating a series of shares with disproportionately higher
voting rights and by the creation of class or series voting rights on particular
matters. The issuance of shares of Preferred Stock with conversion rights or
which are redeemable for shares of Common Stock could increase the potential
number of shares of Common Stock outstanding. It is probable that when shares of
Preferred Stock are issued they will have rights prior to the Common Stock as to
dividends and as to the distribution of assets in the event of liquidation. In
addition, the Board may provide that the holders of any series of Preferred
Stock will be entitled, in addition to their preferential rights, to participate
with the holders of Common Stock in dividends and in distributions in
liquidation. The authorized shares of preferred stock are available for issuance
at such times and for such purposes as the Board may deem advisable, without
further action by the shareholders. The Board, without shareholder approval, can
issue Preferred Stock with voting and conversion rights that could adversely
affect the voting power of holders of Common Stock. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has no present plans to issue any additional
shares of Preferred Stock.

36
<PAGE> 37

SERIES A CONVERTIBLE PREFERRED STOCK

In 1989, the Company sold 1,100,918 shares of its Series A Preferred Stock
to BofA in a private transaction for $6 million. The Series A Preferred Stock is
convertible to Common Stock at any time at the option of the holder. The
conversion price, as adjusted, is $21.56 per share, which means a total of
278,293 shares of Common Stock are issuable upon the conversion of the Series A
Preferred Stock. The Series A Preferred Stock is convertible to Common Stock
automatically if the Common Stock trades at a price in excess of 135% of the
original issue price ($21.80 per share, or a target price of approximately
$29.44 per share) for each day in a period of 20 consecutive trading days. The
Series A Preferred Stock provides for a non-cumulative, preferential dividend
only to the extent declared by the Company's Board. The Series A Preferred Stock
has a preference on liquidation of $6 million (the original face value).
Thereafter, after an equivalent amount has been distributed to holders of the
Common Stock, it shares proportionately with the Common Stock. Except as
otherwise required by law, and except with respect to elections of directors,
holders of Series A Preferred Stock vote together with holders of Common Stock
on all matters submitted to a vote of the Company's shareholders and holders of
Series A Preferred Stock are entitled to one vote for each share of common stock
into which their shares of Series A Preferred Stock are then convertible. In
addition, the Series A Preferred Stock has the right to elect one director to
the Company's board of directors, which BofA has not exercised in the last two
years. BofA and Messrs. George Mallon and Roger Mitchell are parties to an
agreement that provides that if BofA converts its Series A Preferred Stock into
Common Stock, Messrs. Mallon and Mitchell will vote their Common Stock to elect
BofA's designees as a director of the Company. The Series A Preferred Stock is
not redeemable.

The Company has entered into a Securities Repurchase and Sale Agreement
under which it has agreed to purchase all of the outstanding shares of the
Company's Series A Preferred Stock from BofA for a purchase price of
approximately $1.9 million. The purchase price is equal to $6.76 per share of
Common Stock into which the Series A Preferred Stock is convertible.

SERIES B MANDATORILY REDEEMABLE PREFERRED STOCK

In April 1994, the Company sold 400,000 shares of its Series B Preferred
Stock to several institutional investors in private transactions for an
aggregate of $4 million. The Series B Preferred Stock is convertible to Common
Stock at any time at the option of the holder. The conversion price, as adjusted
to reflect this Offering, is currently $11.39, which means a total of 351,185
shares of Common Stock are issuable upon the conversion of the Series B
Preferred Stock. The Series B Preferred Stock is convertible to Common Stock
automatically if the Common Stock trades at a price in excess of 140% of the
conversion price (meaning the target price is currently $15.95 per share) for
each day in a period of 10 consecutive trading days. The Series B Preferred
Stock provides for a preferential 8% dividend, payable quarterly. The Series B
Preferred Stock has a preference on liquidation of $4 million (the original face
value). The Series B Preferred Stock is redeemable at the Company's election, at
any time. The optional redemption price is $10.00 per preferred share (the
original purchase price), plus a decreasing early redemption premium if it is
redeemed before April 1, 2001. Starting April 1, 1997, 20% of the Series B
Preferred Stock must be redeemed each year. No early redemption premium is
payable in connection with such mandatory redemptions. Except as otherwise
required by law, holders of Series B Preferred Stock have no voting rights,
except upon default. In the event of a default, holders of the Series B
Preferred Stock have the right to elect two additional directors to the
Company's Board during the duration of the default.

CERTAIN VOTING REQUIREMENTS

The Articles require a super-majority vote of the Company's shareholders to
approve certain business combinations or other significant corporate
transactions involving the Company and a substantial shareholder of the Company.
The Articles require the affirmative vote of the holders of a majority of the
outstanding shares entitled to vote to approve a merger, consolidation or
dissolution of the Company or a disposition of all or substantially all of the
Company's assets, under ordinary circumstances. The Articles raise the required
affirmative vote to 80% of the total number of votes entitled to be cast to
approve these and other significant

37
<PAGE> 38

corporate transactions ("Business Combinations") if a "9% Shareholder" (as
defined) is a party to the transaction or its percentage equity interest in the
Company or any subsidiary of the Company will be increased by the transaction. A
majority of the whole Board may, in all such cases, determine not to require
such 80% affirmative vote, but only if 80% of the "Continuing Directors" (as
defined) so determine. The required 80% approval of any such business
combination must include at least a majority of all votes entitled to be cast
with respect to voting shares not beneficially owned by any 9% Shareholder.

A "9% Shareholder" generally is defined as the "beneficial owner" as
defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange
Act") of 9% or more of the outstanding shares of Company stock entitled to vote
generally in the election of directors ("voting shares"). A Business Combination
includes: a merger or consolidation involving the Company or any of its
subsidiaries (as defined) and a 9% Shareholder; a sale, lease or other
disposition of a substantial part of the assets of the Company or any of its
subsidiaries (that is, assets constituting in excess of 10% of the book value of
the total consolidated assets of the Company) to a 9% Shareholder; an issuance
of equity securities of the Company or any of its subsidiaries to a 9%
Shareholder for consideration aggregating $5 million or more; liquidation or
dissolution of the Company (if as of the record date for the determination of
shareholders entitled to vote with respect thereto any person is a 9%
Shareholder); and a reclassification or recapitalization of securities
(including any reverse stock split) of the Company or any of its subsidiaries or
a reorganization, in any case having the effect, directly or indirectly, of
increasing the percentage interest of a 9% Shareholder in any class of equity
securities of the Company or such subsidiary.

A "continuing director" is defined as one designated in the original
Articles or one designated as a continuing director (prior to his initial
election or appointment) by a majority of the whole board of directors, but only
if a majority of the whole board shall then consist of continuing directors, or,
if a majority of the whole board does not then consist of continuing directors,
by a majority of the then continuing directors. Each of the directors identified
in this Prospectus is a continuing director.

These provisions are intended to provide safeguards to the Company's public
shareholders in the event another entity first gains working control of the
Company and then wishes to accomplish a combination of the two businesses, or
otherwise eliminate the holdings of the public.

Accordingly, these provisions are intended to provide some assurance that
adequate time and needed information will be available to the public
shareholders and the Board in order that a considered judgment may be made with
respect to a business combination, taking into account such matters as the
proposed price and form of consideration, the tax implications to public
shareholders and the impact of the business combination upon the employees of
the Company. This result is intended to be accomplished by encouraging another
entity that is interested in a business combination with or acquisition of the
Company to negotiate the terms of the business combination or acquisition in
advance of its acquisition of a substantial number of shares of the Company.

Under those circumstances in which the provisions would apply, a minority
of the Company's shareholders may prevent the consummation of a transaction
favored by a majority of shareholders. As a practical matter, the requirement of
an 80% vote may also mean that the type of business combination to which these
provisions are addressed might not be accomplished by the controlling entity
while there remains any widely dispersed public market in the Company's voting
shares. Because the affirmative vote of at least 80% of the total votes entitled
to be cast (rather than the votes actually cast at a meeting) would be required,
the failure of shareholders to vote also could result in the defeat of a
proposed transaction. These provisions could operate to the disadvantage of
present management by restricting its flexibility in the conduct of corporate
affairs.

These provisions may not be amended, altered, changed or repealed without
the affirmative vote of 80% or more of the votes entitled to be cast by all
holders of voting shares (which 80% vote must include the affirmative vote of a
majority of the votes entitled to be cast by all holders of voting shares not
beneficially owned by any 9% Shareholder). This vote requirement will not apply
to any amendment, alteration, change or repeal recommended to the shareholders
by 75% of the whole Board, provided that a majority of the members of the Board
acting upon such matter are continuing directors. Under such circumstances, an
amendment, alternation, change or repeal may be approved by a simple majority of
the votes entitled to be cast.

38
<PAGE> 39

UNDERWRITING

The Underwriters named below, for whom Rodman & Renshaw, Inc. is acting as
representative (the "Representative"), have severally agreed to purchase from
the Company the respective number of shares of Common Stock set forth opposite
their names:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Rodman & Renshaw, Inc. ................................................... 1,430,000
EVEREN Securities, Inc. .................................................. 60,000
Jefferies & Company....................................................... 60,000
Davenport & Co. of Virginia, Inc. ........................................ 30,000
Fahnestock & Co. Inc. .................................................... 30,000
Ferris, Baker Watts, Incorporated......................................... 30,000
Gaines, Berland Inc. ..................................................... 30,000
Gerard Klauer Mattison & Co., LLC......................................... 30,000
Gilford Securities Corporation............................................ 30,000
Hanifen, Imhoff Inc. ..................................................... 30,000
Johnson Rice & Company, L.L.C. ........................................... 30,000
Kirkpatrick, Pettis, Smith, Polian Inc. .................................. 30,000
Neidiger, Tucker, Bruner, Inc. ........................................... 30,000
Rothschild Inc. .......................................................... 30,000
Sanders Morris Mundy...................................................... 30,000
Southcoast Capital Corporation............................................ 30,000
Starr Securities, Inc. ................................................... 30,000
Van Kasper & Company...................................................... 30,000
---------
Total........................................................... 2,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other considerations. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of Common Stock if any are purchased.

The Underwriters, through the Representative, have advised the Company that
they propose to offer the Common Stock initially at the public offering price
set forth on the cover page of this Prospectus; that the Underwriters may allow
to selected dealers a concession of $0.255 per share; and that such dealers may
reallow a concession of $0.10 per share to certain other dealers. After the
public offering, the offering price and other selling terms may be changed by
the Underwriters. The Common Stock is included for quotation on the Nasdaq
National Market.

The Company has granted to the Underwriters a 30-day over-allotment option
to purchase up to an aggregate of 300,000 additional shares of Common Stock,
exercisable at the public offering price less the underwriting discount. If the
Underwriters exercise such over-allotment option, then each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares of Common
Stock to be purchased by it as shown in the above table bears to the 2,000,000
shares of Common Stock offered hereby. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the shares of
Common Stock offered hereby.

The Company and the officers and directors of the Company have agreed that
they will not sell or dispose of any shares of Common Stock of the Company for a
period of 180 days after the later of the date on which the Registration
Statement is declared effective by the Commission or the first date on which the
shares are bona fide offered to the public, without the prior written consent of
the Representative.

In connection with the offering made hereby, the Company has agreed to sell
to the Representative, for nominal consideration, a warrant (the
"Representative's Warrant") to purchase from the Company up to

39
<PAGE> 40

160,000 shares of Common Stock. The Representative's Warrant is exercisable, in
whole or in part, at an exercise price of 120% of the price to public at any
time during the two-year period commencing one year after the effective date of
the Registration Statement of which this Prospectus is a part. The
Representative's Warrant contains provisions providing for adjustment of the
exercise price and the number and type of securities issuable upon exercise of
the Representative's Warrant should any one or more of certain specified events
occur. The Representative's Warrant grants to the holders thereof certain rights
of registration for the securities issuable upon exercise of the
Representative's Warrant.

The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities Act
of 1933, as amended (the "Securities Act") or to contribute to payments that the
Underwriters may be required to make in respect thereof. The Company has agreed
to pay to the Representative a nonaccountable expense allowance of 2.25% of the
gross proceeds derived from the sale of the Common Stock (including the sale of
any Common Stock subject to the Underwriters' over-allotment option).

In addition, the Representative has a right of first refusal to perform
services for the Company with respect to future transactions for a period of
three years after the closing of the Offering.

In connection with the Offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market making
transactions in the Common Stock on the Nasdaq National Market in accordance
with Rule 10b-6A under the Securities Exchange Act of 1934 (the "Exchange Act"),
during a specified period before commencement of offers or sales of the Common
Stock. The passive market making transactions must comply with applicable volume
and price limits and be identified as such. In general, a passive market maker
may display its bid at a price not in excess of the highest independent bid for
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.

LEGAL MATTERS

The legality of the securities offered hereby will be passed on for the
Company by Holme Roberts & Owen LLP, Denver, Colorado. Certain legal matters in
connection with the sale of such securities will be passed on for the
Underwriters by Vinson & Elkins L.L.P., Dallas, Texas.

EXPERTS

The consolidated financial statements as of December 31, 1995 and 1994 and
for each of the three years in the period ended December 31, 1995 included in
this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.

Information set forth in this Prospectus relating to the Company's
estimated proved oil and gas reserves at June 30, 1996, the related calculations
of future net production revenues and net present value thereof have been
derived from an independent petroleum engineering report prepared by GeoQuest
Reservoir Technologies, Inc., independent petroleum engineers, and is included
herein in reliance on such firm as an expert in preparing such information. A
summary of the GeoQuest Report is included herein as Annex A.

AVAILABLE INFORMATION

The Company has filed with the Commission a registration statement on Form
S-2 (the "Registration Statement," which term encompasses all amendments,
exhibits, annexes and schedules thereto) under the Securities Act with respect
to the Common Stock offered hereby. This Prospectus, which constitutes a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement, to which reference is hereby made. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract,

40
<PAGE> 41

agreement or other document filed as an exhibit to the Registration Statement
and the exhibits thereto, reference is hereby made to the exhibit for a more
complete description of the matter involved, and each statement made herein
shall be deemed qualified in its entirety by such reference.

The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files periodic reports, proxy and information
statements and other information filed with the Commission. The Registration
Statement filed by the Company with the Commission, as well as such reports,
proxy and information statements and other information filed by the Company with
the Commission, are available at the web site that the Commission maintains at
http:(w)ww.sec.gov. and can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048, and the
Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material, when filed, may
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Common Stock
is quoted on the Nasdaq National Market and such reports, proxy and information
statements and other information concerning the Company are available at the
offices of the Nasdaq National Market located at 1735 K Street, N.W.,
Washington, D.C. 20006.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

Incorporated by reference in this Prospectus are (i) the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, (ii) the
Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996
and June 30, 1996 and (iii) the Company's Current Reports on Form 8-K dated
March 20, May 24, May 29, June 27, July 19, August 15, August 16, September 3,
September 11 and September 24, 1996 filed previously with the Commission
pursuant to Section 13 of the Exchange Act. Any statement contained in a
document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.

The Company will provide without charge to each person, including any
beneficial owner of Common Stock, to whom a copy of this Prospectus has been
delivered, on the written or oral request of such person, a copy of any or all
of the foregoing documents incorporated by reference in this Prospectus, other
than exhibits to such documents unless such exhibits are specifically
incorporated by reference into the information that this Prospectus
incorporates. Written or oral requests for such copies should be directed to
Carolena F. Chapman, Secretary, Mallon Resources Corporation, 999 18th Street,
Suite 1700, Denver, Colorado 80202 (telephone: (303) 293-2333).

41
<PAGE> 42

GLOSSARY OF TERMS

Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.

Bcf. Billion cubic feet.

BOE. Barrels of oil equivalent, determined using the ratio of six Mcf of
natural gas (including natural gas liquids) to one Bbl of crude oil or
condensate.

Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.

Development location. A location on which a development well can be
drilled.

Development well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive in an
attempt to recover proved undeveloped reserves.

Dry hole. A well found to be incapable of producing either oil or gas in
sufficient quantities to justify completion as an oil or gas well.

Estimated future net revenues. Revenues from production of oil and gas, net
of all production-related taxes, lease operating expenses and capital costs.

Exploratory well. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.

Gross acres. An acre in which a working interest is owned.

Gross well. A well in which a working interest is owned.

MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.

MBOE. One thousand barrels of oil equivalent.

Mcf. One thousand cubic feet.

MMBbl. One million barrels of crude oil or other liquid hydrocarbons.

MMBOE. One million barrels of oil equivalent.

MMBtu. One million Btus.

MMcf. One million cubic feet.

Net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells.

Pre-tax SEC 10 Value or present value of estimated future net revenues.
Estimated future net revenues discounted by a factor of 10% per annum, before
income taxes and with no price or cost escalation or de-escalation, in
accordance with guidelines promulgated by the Commission.

Production costs. All costs necessary for the production and sale of oil
and gas, including production and ad valorem taxes.

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

Proved developed reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.

Proved reserves. 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 reservoirs
under existing economic and operating conditions.

Proved undeveloped reserves. Reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion.

42
<PAGE> 43

Recompletion. The completion for production of an existing wellbore in
another formation from that in which the well has previously been completed.

Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.

Working interest. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.

43
<PAGE> 44

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995........................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994
and 1995......................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1993, 1994 and 1995................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994
and 1995......................................................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1995 and June 30, 1996............... F-24
Consolidated Statements of Operations for the Six Months and the Three Months Ended
June 30, 1995 and 1996........................................................... F-25
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1995 and
1996............................................................................. F-26
Notes to Interim Consolidated Financial Statements.................................. F-27
</TABLE>

F-1
<PAGE> 45

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Mallon Resources Corporation

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows, and of changes in
shareholders' equity present fairly, in all material respects, the financial
position of Mallon Resources Corporation and its subsidiaries at December 31,
1995 and 1994, and the results of their operations and cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

Denver, Colorado
April 12, 1996, except as to
the reverse stock split described
in Note 1, which is as of
September 9, 1996

F-2
<PAGE> 46

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 88,000 $ 1,269,000
Accounts receivable, with no allowance for doubtful accounts:
Joint interest participants...................................... 490,000 376,000
Related parties.................................................. 15,000 22,000
Oil and gas sales................................................ 551,000 1,065,000
Other............................................................ 79,000 --
Inventories......................................................... 30,000 53,000
Other............................................................... 89,000 143,000
------------ ------------
Total current assets........................................ 1,342,000 2,928,000
------------ ------------
Property and equipment:
Oil and gas properties, under full cost method...................... 41,127,000 43,751,000
Mining properties and equipment..................................... 5,010,000 6,248,000
Other equipment..................................................... 375,000 508,000
------------ ------------
46,512,000 50,507,000
Less accumulated depreciation, depletion and amortization............. (19,834,000) (22,085,000)
------------ ------------
26,678,000 28,422,000
------------ ------------
Notes receivable - related parties.................................... 43,000 63,000
Other, net............................................................ 163,000 222,000
------------ ------------
Total Assets.......................................................... $ 28,226,000 $ 31,635,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation......................... $ -- $ 23,000
Trade accounts payable.............................................. 2,253,000 2,309,000
Undistributed revenue............................................... 584,000 711,000
Drilling advances................................................... 207,000 271,000
Accrued taxes and expenses.......................................... 62,000 90,000
------------ ------------
Total current liabilities................................... 3,106,000 3,404,000
------------ ------------
Long-term debt........................................................ -- 10,000,000
Capital lease obligation, net of current portion...................... -- 37,000
Drilling advances..................................................... 315,000 315,000
Deferred revenues..................................................... 7,452,000 --
------------ ------------
Total non-current liabilities............................... 7,767,000 10,352,000
------------ ------------
Total liabilities..................................................... 10,873,000 13,756,000
------------ ------------
Commitments and contingencies (Note 7)................................ -- --
Minority interest..................................................... -- 2,275,000
Series B Mandatorily Redeemable Convertible Preferred Stock, $0.01 par
value, 500,000 shares authorized, 400,000 shares issued and
outstanding, respectively; liquidation preference and mandatory
redemption of $4,000,000............................................ 3,804,000 3,844,000
Shareholders' equity:
Series A Convertible Preferred Stock, $0.01 par value, 1,467,890
shares authorized, 1,100,918 shares issued and outstanding;
liquidation preference $6,000,000................................ 5,730,000 5,730,000
Common Stock, $0.01 par value, 25,000,000 shares authorized;
1,918,125 and 1,949,914 shares issued and outstanding,
respectively..................................................... 19,000 19,000
Additional paid-in capital.......................................... 38,785,000 38,965,000
Accumulated deficit................................................. (30,985,000) (32,954,000)
------------ ------------
Total shareholders' equity.................................. 13,549,000 11,760,000
------------ ------------
Total Liabilities and Shareholders' Equity............................ $ 28,226,000 $ 31,635,000
============ ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE> 47

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Oil and gas sales................................. $ 1,877,000 $ 2,263,000 $ 3,380,000
Deferred revenue amortization..................... 184,000 2,366,000 1,420,000
Mining management fee............................. 81,000 -- --
Operating service revenue......................... 101,000 174,000 158,000
Interest and other................................ 48,000 106,000 115,000
Gain on termination of volumetric production
payment........................................ -- -- 355,000
----------- ----------- -----------
2,291,000 4,909,000 5,428,000
----------- ----------- -----------
Costs and expenses
Oil and gas production............................ 976,000 2,024,000 1,868,000
Mining project expenses........................... 133,000 169,000 448,000
Depreciation, depletion and amortization.......... 937,000 2,409,000 2,340,000
General and administrative........................ 1,183,000 1,806,000 2,015,000
Interest and other................................ 249,000 132,000 433,000
----------- ----------- -----------
3,478,000 6,540,000 7,104,000
----------- ----------- -----------
Loss before extraordinary item...................... (1,187,000) (1,631,000) (1,676,000)
Extraordinary loss on early retirement of debt...... -- -- (253,000)
----------- ----------- -----------
Net loss............................................ (1,187,000) (1,631,000) (1,929,000)
Dividends on preferred stock and accretion.......... -- (258,000) (360,000)
----------- ----------- -----------
Net loss attributable to common shareholders........ $(1,187,000) $(1,889,000) $(2,289,000)
=========== =========== ===========
Per share:
Loss attributable to common shareholders before
extraordinary item............................. $ (0.88) $ (1.00) $ (1.04)
Extraordinary loss................................ -- -- (0.12)
----------- ----------- -----------
Net loss attributable to common shareholders...... $ (0.88) $ (1.00) $ (1.16)
=========== =========== ===========
Weighted average shares outstanding................. 1,368,000 1,916,000 1,947,000
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE> 48

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ---------- --------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances 1/1/93....................... 1,100,918 $5,730,000 1,210,257 $12,000 $29,133,000 $(28,137,000) $ 6,738,000
Private placement of common stock... -- -- 553,472 6,000 8,934,000 -- 8,940,000
Stock options exercised............. -- -- 25,000 -- 262,000 -- 262,000
Employee stock options exercised.... -- -- 810 -- 16,000 -- 16,000
Stock issued to directors........... -- -- 392 -- 12,000 -- 12,000
Stock issued for Fruitland Gas
Company........................... -- -- 100,000 1,000 (102,000) -- (101,000)
Stock issued for property and
equipment......................... -- -- 7,500 -- 151,000 -- 151,000
Options exercised for services...... -- -- 2,000 -- 33,000 -- 33,000
Employee stock options granted...... -- -- -- -- 165,000 -- 165,000
Net loss............................ -- -- -- -- -- (1,187,000) (1,187,000)
--------- ---------- --------- ------- ----------- ------------ -----------
Balances 12/31/93..................... 1,100,918 5,730,000 1,899,431 19,000 38,604,000 (29,324,000) 15,029,000
Employee stock options exercised.... -- -- 1,250 -- -- -- --
Stock issued to directors........... -- -- 769 -- 11,000 -- 11,000
Stock issued for property and
equipment......................... -- -- 16,675 -- 300,000 -- 300,000
Employee stock options granted...... -- -- -- -- 32,000 -- 32,000
Other............................... -- -- -- -- 66,000 -- 66,000
Dividends on preferred stock........ -- -- -- -- (228,000) -- (228,000)
Accretion of preferred stock........ -- -- -- -- -- (30,000) (30,000)
Net loss............................ -- -- -- -- -- (1,631,000) (1,631,000)
--------- ---------- --------- ------- ----------- ------------ -----------
Balances 12/31/94..................... 1,100,918 5,730,000 1,918,125 19,000 38,785,000 (30,985,000) 13,549,000
Employee stock options exercised.... -- -- 1,250 -- -- -- --
Stock issued to directors........... -- -- 1,539 -- 12,000 -- 12,000
Stock issued for property........... -- -- 14,000 -- 112,000 -- 112,000
Stock issued for loan fees.......... -- -- 15,000 -- 112,000 -- 112,000
Employee stock options granted...... -- -- -- -- 89,000 -- 89,000
Issuance of warrants................ -- -- -- -- 175,000 -- 175,000
Dividends on preferred stock........ -- -- -- -- (320,000) -- (320,000)
Accretion of preferred stock........ -- -- -- -- -- (40,000) (40,000)
Net loss............................ -- -- -- -- -- (1,929,000) (1,929,000)
--------- ---------- --------- ------- ----------- ------------ -----------
Balances 12/31/95..................... 1,100,918 $5,730,000 1,949,914 $19,000 $38,965,000 $(32,954,000) $11,760,000
========= ========== ========= ======= =========== ============ ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE> 49

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(1,187,000) $(1,631,000) $(1,929,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of deferred revenues......................... (184,000) (2,366,000) (1,420,000)
Depletion, depreciation and amortization.................. 937,000 2,409,000 2,340,000
Stock issued for compensation............................. 210,000 43,000 101,000
Termination of volumetric production payment.............. -- -- (5,586,000)
Gain on termination of volumetric production payment...... -- -- (355,000)
Non-cash portion of extraordinary loss.................... -- -- 90,000
Other..................................................... -- -- (8,000)
Proceeds from volumetric production payment............... 10,002,000 -- --
Changes in operating assets and liabilities:
Increase in:
Accounts receivable.................................. (607,000) (257,000) (328,000)
Inventory and other current assets................... (117,000) (100,000) (77,000)
Increase (decrease) in:
Accounts payable and undistributed revenue........... 963,000 1,549,000 183,000
Accrued taxes and expenses........................... 105,000 14,000 28,000
Drilling advances.................................... (8,000) 104,000 64,000
----------- ----------- -----------
Net cash provided by (used in) operating activities........... 10,114,000 (235,000) (6,897,000)
----------- ----------- -----------
Cash flows from investing activities:
Increase in notes receivable - related party................ (8,000) (2,000) (20,000)
Additions to property and equipment......................... (13,048,000) (2,079,000) (3,820,000)
----------- ----------- -----------
Net cash used in investing activities......................... (13,056,000) (2,081,000) (3,840,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt................................ -- -- 10,000,000
Payments on long-term debt and capital lease obligation..... (70,000) (31,000) (3,000)
Debt issue costs paid....................................... -- -- (159,000)
Payments of note payable.................................... (7,343,000) -- --
Proceeds from sale of net profits interest.................. 1,998,000 -- --
Payments on net profits interest............................ -- (2,075,000) --
Payment of origination fee for net profits interest......... (120,000) -- --
Net proceeds from private placement of common stock......... 8,940,000 -- --
Proceeds from stock options exercised....................... 278,000 -- --
Issuance of preferred stock, net of issuance costs.......... -- 3,774,000 --
Issuance of preferred stock in subsidiary, net of issuance
costs..................................................... -- -- 2,275,000
Issuance of warrants........................................ -- -- 125,000
Payment of preferred dividends.............................. -- (228,000) (320,000)
----------- ----------- -----------
Net cash provided by financing activities..................... 3,683,000 1,440,000 11,918,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.......... 741,000 (876,000) 1,181,000
Cash and cash equivalents, beginning of year.................. 223,000 964,000 88,000
----------- ----------- -----------
Cash and cash equivalents, end of year........................ $ 964,000 $ 88,000 $ 1,269,000
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest...................................... $ 93,000 $ 175,000 $ 525,000
=========== =========== ===========
Cash paid for income taxes.................................. $ -- $ -- $ --
=========== =========== ===========
Non-cash transactions:
Note payable exchanged for oil and gas property........... $ 7,343,000 $ -- $ --
Issuance of common stock in exchange for:
Acquisition of FGC, net of $70,000 property acquisition... (101,000) -- --
Acquisition of property and equipment..................... 151,000 $ 300,000 $ 112,000
Loan origination fee...................................... -- -- 112,000
Issuance of warrants in exchange for:
Loan origination fee...................................... -- -- 50,000
Acquisition of equipment under capital lease.............. -- -- 63,000
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE> 50

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization:

Mallon Resources Corporation (the "Company" or "MRC") was incorporated on
July 18, 1988 under the laws of the State of Colorado. The Company had no
significant business activity until December 21, 1988 when the combination of
two companies and 19 limited partnerships into MRC became effective (the
"Consolidation"). The participants in the Consolidation were Mallon Oil Company
("MOC"), Laguna Gold Company ("Laguna"), and 19 Colorado limited partnerships
for which MOC or Laguna served as a general partner. Effective December 21,
1988, the Company issued shares of its $0.01 par value common stock in exchange
for all of the shares of MOC and Laguna and for the net assets of all of the
partnerships.

Nature of Operations:

The Company operates in two lines of business: oil and gas exploration and
production, and gold and silver exploration. The significant majority of the
Company's assets and revenues are utilized in its oil and gas operations, which
are conducted primarily in the State of New Mexico, and entirely within the
United States. Mining operations are conducted through Laguna in Costa Rica and
are in the pre-production stage.

Reverse Stock Split:

On September 9, 1996, a four to one reverse stock split of the Company's
issued and outstanding shares of common stock was effected. Common stock,
paid-in capital and earnings per share information have been restated to give
retroactive effect to the reverse stock split.

Principles of Consolidation:

The consolidated financial statements include the accounts of MOC, Laguna,
and all of their wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated from the consolidated financial
statements.

Cash Equivalents:

Cash equivalents include amounts which are readily convertible into cash
and have an original maturity of three months or less, such as bankers
acceptances, certificates of deposit, and commercial paper.

Fair Value of Financial Instruments:

The Company's on-balance sheet financial instruments consist of cash and
cash equivalents, accounts receivable, inventories, accounts payable, other
accrued liabilities and long-term debt. Except for long-term debt, the carrying
amounts of such financial instruments approximate fair value due to their short
maturities. At December 31, 1995, based on rates available for similar types of
debt, the fair value of long-term debt was not materially different from its
carrying amount.

The Company's off-balance sheet financial instruments consist of "collar"
and "floor" derivative instruments which are intended to manage commodity price
risk (see Note 10). Based on market prices at December 31, 1995, the Company
will receive approximately $70,000 less revenue than at spot price over the term
of the derivative agreements.

Inventories:

Inventories, which are composed of oil and gas lease and well equipment,
and mining materials and supplies, are valued at the lower of average cost or
estimated net realizable value.

F-7
<PAGE> 51

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Oil and Gas Properties:

Oil and gas properties are accounted for using the full cost method of
accounting. Under this method, all costs associated with property acquisition,
exploration and development are capitalized. All such costs are accumulated in
one cost center, the continental United States.

Proceeds on disposal of properties are ordinarily accounted for as
adjustments of capitalized costs, with no profit or loss recognized, unless such
adjustment would significantly alter the relationship between capitalized costs
and proved oil and gas reserves. Costs capitalized, net of accumulated
depreciation, depletion and amortization and deferred revenue from any
volumetric production payments, cannot exceed the estimated future net revenues,
net of the related income tax effects, discounted at 10%, of the Company's
proved reserves.

Depletion is calculated using the units-of-production method based upon the
ratio of current period production to estimated proved oil and gas reserves
expressed in physical units, with oil and gas converted to a common unit of
measure on the basis of relative energy content.

Estimated abandonment costs (including plugging, site restoration, and
dismantlement expenditures) are accrued if such costs exceed estimated salvage
values, as determined using current market values and other information.
Abandonment costs are estimated based primarily on environmental and regulatory
requirements in effect from time to time. As of December 31, 1995, estimated
salvage values equaled or exceeded estimated abandonment costs.

Mineral Properties and Equipment:

The Company expenses general prospecting costs and the costs of acquiring
and exploring unevaluated mining properties. When a property is determined to
have development potential, further exploration and development costs are
capitalized. When commercially profitable ore reserves are developed and
operations commence, capitalized costs will be amortized using the
units-of-production method based on the estimated tons of ore to be recovered.
Upon abandonment or sale of projects, all capitalized costs relating to the
specific project are expensed in the year abandoned or sold and any gain or loss
would be recognized. Proceeds from advanced royalties are to be accounted for as
adjustments of capitalized costs, with no profit or loss recognized.

Mining equipment is depreciated using the units-of-production method,
except during suspended operations. When not in production, this equipment is
depreciated at approximately 2% per year.

Capitalized costs, net of accumulated depreciation, depletion and
amortization, may not exceed the estimated net realizable value of the
properties, as determined by management on a periodic basis. Management
estimates net realizable values based on reserve estimates (including informal
deposit, resource and reserve estimates prepared by Company staff), feasibility
studies, engineering data, commodity prices and market trends, actual or
projected mining and operating costs, estimated income, severance and other
taxes, and other information deemed to be relevant to such estimations. As of
December 31, 1995, capitalized costs were less than estimated net realizable
values.

Other Property and Equipment:

Other property and equipment is recorded at cost, and is depreciated over
the estimated useful lives (five to seven years) using the straight-line method.
The cost of normal maintenance and repairs is charged to expense as incurred.
Significant expenditures which increase the life of an asset are capitalized and
depreciated over the estimated useful life of the asset. Upon retirement or
disposition of assets, related gains or losses are reflected in operations.

F-8
<PAGE> 52

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Impairment of Long-Lived Assets:

In the fourth quarter of 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
prescribes that an impairment loss is recognized in the event that facts and
circumstances indicate that the carrying amount of an asset may not be
recoverable, and an estimate of future undiscounted cash flows is less than the
carrying amount of the asset. Impairment is recorded based on an estimate of
future discounted cash flows. The adoption of SFAS No. 121 had no effect on the
Company's financial position or results of operations.

Gas Balancing:

The Company uses the entitlements method of accounting for recording
natural gas sales revenues. Under this method, revenue is recorded based on the
Company's net working interest in field production. Deliveries of natural gas in
excess of the Company's working interest are recorded as liabilities while
under-deliveries are recorded as receivables.

Concentration of Credit Risk:

The Company is exposed to credit losses in the event of non-performance by
counterparties to financial instruments, but does not expect any counterparties
to fail to meet their obligations. The Company generally does not obtain
collateral or other security to support financial instruments subject to credit
risk but does monitor the credit standing of counterparties.

Intangible Assets:

Intangible assets are recorded at cost and are amortized over their
estimated useful lives using the straight-line method.

Drilling Advances and Deferred Revenues:

Revenues billed in advance for services are deferred and recorded in income
in the period in which the related services are rendered. Revenues received in
advance of production are classified as deferred revenue. The deferred revenue
is amortized as production and delivery occur.

Income Taxes:

In fiscal 1993, the Company adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of those assets and
liabilities based on currently enacted tax rates.

The benefits of tax credits will be reflected as a reduction of income tax
expense in the year in which management determines that such credits are more
likely than not to be realized.

Stock-Based Compensation:

SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in
October 1995 with an effective date for fiscal years beginning after December
15, 1995. As permitted under SFAS No. 123, the Company has elected to continue
to measure compensation cost using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Upon adoption

F-9
<PAGE> 53

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

in 1996, the Company will make pro forma disclosures of net income and earnings
per share as if the fair value based method of accounting as defined in SFAS No.
123 had been applied.

Management Fees:

Management fees received in connection with oil and gas properties are
credited to the full cost pool. All other management fees are recorded as income
when earned.

Foreign Currency Translation:

Management has determined the U.S. dollar to be the functional currency for
the Company's Costa Rican operations. Accordingly, the assets, liabilities and
results of operations of the Costa Rican subsidiaries are measured in U.S.
dollars. Transaction gains and losses are not material for any of the periods
presented herein.

Hedging Activities:

The Company's use of derivative financial instruments is limited to
management of commodity price risk. Gains and losses on such transactions are
matched to product sales and charged or credited to oil and gas sales when that
product is sold.

Per Share Data:

Loss per share of common stock is computed by dividing net loss
attributable to shares of common stock by the weighted average number of common
shares outstanding. Loss attributable to shares of common stock is net loss,
preferred stock dividends and accretion of Series B Mandatorily Redeemable
Convertible Preferred Stock. Preferred stock dividends and accretion totaled
$360,000 and $258,000 for the years ended December 31, 1995 and 1994,
respectively. The computation of fully diluted loss per share of common stock
for each of the three years in the period ended December 31, 1995 was not
dilutive; therefore, only primary loss per share of common stock is presented.

Use of Estimates and Significant Risks:

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make significant
estimates and assumptions that affect the amounts reported in these financial
statements and accompanying notes. The more significant areas requiring the use
of estimates relate to oil and gas and mineral reserves, fair value of financial
instruments, future cash flows associated with assets, valuation allowance for
deferred tax assets, and useful lives for depreciation, depletion and
amortization. Actual results could differ from those estimates.

The Company and its operations are subject to numerous risks and
uncertainties. Among these are risks related to the oil and gas and the mining
businesses (including operating risks and hazards and the plethora of
regulations imposed thereon), risks and uncertainties related to the volatility
of the prices of oil and gas and minerals, uncertainties related to the
estimation of reserves of oil and gas and minerals and the value of such
reserves, the effects of competition and extensive environmental regulation, the
uncertainties related to foreign operations, and many other factors, many of
which are necessarily out of the Company's control. The nature of oil and gas
drilling operations is such that the expenditure of substantial drilling and
completion costs are required well in advance of the receipt of revenues from
the production developed by the operations. Drilling activities are subject to
numerous risks, including the risk that no commercially productive oil or gas
reservoirs will be encountered. Also, the sales from successful drilling
activities are affected by prevailing prices for oil

F-10
<PAGE> 54

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

and gas. Hydrocarbon prices can be extremely volatile and can substantially
affect the Company's revenues, cash flows and working capital.

Reclassifications:

Certain prior years' amounts in the consolidated financial statements have
been reclassified to conform to the presentation used in 1995.

NOTE 2. OIL AND GAS PROPERTIES

During 1995, the Company's oil and gas activities were conducted entirely
in the United States. Subsequent to December 31, 1995, Mallon Oil acquired a
2.5% working interest in an exploration venture to drill one or more wells
offshore Belize. The company is initially committed to spend approximately
$200,000. These expenditures will not begin until late 1996 or early 1997.

Depreciation, depletion and amortization of oil and gas property costs were
$4.70, $5.53 and $5.70 per equivalent barrel of oil production for the years
ended December 31, 1993, 1994, and 1995, respectively.

On September 30, 1993, the Company purchased interests in certain
properties for approximately $19,300,000. The purchase price was paid with $10.0
million of proceeds from the sale of a volumetric production payment (which was
terminated in August 1995), $2.0 million of proceeds from the sale of a net
profits interest (which was retired in April 1994), and with a note payable to
the seller of $7.3 million (which was repaid in November 1993).

The operations of the acquired properties have been included in the
Company's accompanying consolidated statements of operations, beginning October
1, 1993. The following represents the unaudited pro forma results of operations
for the year ended December 31, 1993, assuming the acquisition had taken place
as of January 1, 1993:

<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
Total revenues................................................... $ 6,006,000
===========
Net loss attributable to common shareholders..................... $ (242,000)
===========
Net loss per share............................................... $ (.03)
===========
</TABLE>

Capitalized Costs Relating to Oil and Gas Activities:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Oil and gas properties..................... $ 38,885,000 $ 41,127,000 $ 43,751,000
Accumulated depreciation, depletion and
amortization............................. (16,683,000) (19,011,000) (21,173,000)
------------ ------------ ------------
22,202,000 22,116,000 22,578,000
Deferred revenues attributable to the
volumetric production payment............ (9,818,000) (7,452,000) --
------------ ------------ ------------
$ 12,384,000 $ 14,664,000 $ 22,578,000
============ ============ ============
</TABLE>

The Company does not have significant costs of unproved properties or costs
excluded from the full cost pool amortization base. As of December 31, 1995, the
net book value of the Company's oil and gas properties exceeded the net present
value of the underlying reserves by $1,540,000. However, oil and gas prices
increased

F-11
<PAGE> 55

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

substantially subsequent to yearend. Applying these increased prices to yearend
oil and gas reserves indicates that the oil and gas properties were not, in
fact, impaired. Accordingly, the $1,540,000 impairment was not charged to
expense during the year ended December 31, 1995.

Costs Incurred in Oil and Gas Producing Activities:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
----------- ---------- ----------
<S> <C> <C> <C>
Property acquisition costs...................... $16,919,000 $ 648,000 $ 131,000
Termination of volumetric production payment.... -- -- 5,586,000
Exploration costs............................... -- -- 180,000
Development costs............................... 3,318,000 1,736,000 2,379,000
Full cost pool credits.......................... (21,000) (142,000) (66,000)
----------- ---------- ----------
$20,216,000 $2,242,000 $8,210,000
=========== ========== ==========
</TABLE>

Results of Operations from Oil and Gas Producing Activities:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Oil and gas sales.............................. $1,877,000 $ 2,263,000 $ 3,380,000
Deferred revenue amortization.................. 184,000 2,366,000 1,420,000
Lease operating expense........................ (976,000) (2,024,000) (1,868,000)
Depreciation, depletion and amortization....... (874,000) (2,330,000) (2,162,000)
---------- ----------- -----------
Results of operations from producing activities
(excluding corporate overhead, interest and
income taxes)................................ $ 211,000 $ 275,000 $ 770,000
========== =========== ===========
</TABLE>

F-12
<PAGE> 56

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Estimated Quantities of Proved Oil and Gas Reserves (unaudited):

Set forth below is a summary of the changes in the net quantities of the
Company's proved crude oil and natural gas reserves estimated by an independent
consulting petroleum engineering firm for the years ended December 31, 1993,
1994, and 1995. All of the Company's reserves are located in the continental
United States.

<TABLE>
<CAPTION>
OIL GAS
(BBLS) (MCF)
--------- ----------
<S> <C> <C>
PROVED RESERVES
Reserves, January 1, 1993.................................. 337,000 10,892,000
Acquisition of reserves in place........................ 855,000 14,967,000
Sale of reserves in place............................... (215,000) (3,626,000)
Extensions, discoveries and additions................... 8,000 20,000
Production.............................................. (64,000) (625,000)
Revisions............................................... (62,000) 708,000
--------- ----------
Reserves, December 31, 1993................................ 859,000 22,336,000
Extensions, discoveries and additions................... 664,000 448,000
Production.............................................. (98,000) (687,000)
Revisions............................................... 119,000 (5,803,000)
--------- ----------
Reserves, December 31, 1994................................ 1,544,000 16,294,000
Acquisition of reserves in place........................ 136,000 2,246,000
Extensions, discoveries and additions................... 163,000 1,129,000
Production.............................................. (173,000) (1,238,000)
Revisions............................................... 143,000 1,490,000
--------- ----------
Reserves, December 31, 1995................................ 1,813,000 19,921,000
========= ==========
RESERVES ATTRIBUTABLE TO THE VOLUMETRIC PRODUCTION
PAYMENT (NOT INCLUDED ABOVE)
December 31, 1993.......................................... 209,000 3,575,000
========= ==========
December 31, 1994.......................................... 162,000 2,938,000
========= ==========
December 31, 1995.......................................... -- --
========= ==========
PROVED DEVELOPED RESERVES
December 31, 1993.......................................... 602,000 17,999,000
========= ==========
December 31, 1994.......................................... 811,000 11,733,000
========= ==========
December 31, 1995.......................................... 1,238,000 14,702,000
========= ==========
</TABLE>

F-13
<PAGE> 57

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves (unaudited):

The following summary sets forth the Company's unaudited future net cash
flows relating to proved oil and gas reserves based on the standardized measure
prescribed in Statement of Financial Accounting Standards No. 69:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Future cash in-flows..................... $ 61,012,000 $ 50,964,000 $ 66,178,000
Future production and development
costs.................................. (27,075,000) (28,435,000) (30,522,000)
Future income taxes...................... (1,701,000) -- --
------------ ------------ ------------
Future net cash flows.................... 32,236,000 22,529,000 35,656,000
Discount at 10%.......................... (14,048,000) (8,771,000) (14,618,000)
------------ ------------ ------------
Standardized measure of discounted future
net cash flows......................... $ 18,188,000 $ 13,758,000 $ 21,038,000
============ ============ ============
</TABLE>

Future net cash flows were computed using yearend prices and yearend
statutory income tax rates (adjusted for permanent differences, operating loss
carryforwards and tax credits) that relate to existing proved oil and gas
reserves in which the Company has an interest.

The following are the principal sources of changes in the standardized
measure of discounted future net cash flows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Standardized measure, beginning of
year................................... $ 4,425,000 $ 18,188,000 $ 13,758,000
Net revisions to previous quantity
estimates and other.................... (2,910,000) (4,523,000) (1,852,000)
Extensions, discoveries, additions, and
changes in timing of production, net of
related
costs.................................. 85,000 3,959,000 1,631,000
Purchase of reserves in place............ 27,485,000 -- 5,701,000
Sales of reserves in place............... (10,002,000) -- --
Increase in future development costs..... (906,000) (1,065,000) (127,000)
Sales of oil and gas produced, net of
production costs....................... (901,000) (239,000) (1,512,000)
Net change in prices and production
costs.................................. 602,000 (5,341,000) 2,063,000
Accretion of discount.................... 443,000 1,819,000 1,376,000
Net change in income taxes............... (133,000) 960,000 --
------------ ------------ ------------
Standardized measure, end of year........ $ 18,188,000 $ 13,758,000 $ 21,038,000
============ ============ ============
</TABLE>

Reserves to be delivered pursuant to the Company's volumetric production
payment were excluded from the SFAS No. 69 calculations presented for 1993 and
1994. Accordingly, the standardized measure of discounted future net cash flows,
which is cash flow-based, does not include deferred revenues to be amortized as
production and delivery occurs in the future. However, all costs related to such
production and delivery, which is a commitment of the Company, are included.

F-14
<PAGE> 58

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and in projecting the future rates of production,
particularly as to natural gas, and timing of development expenditures. Such
estimates may not be realized due to curtailment, shut-in conditions and other
factors which cannot be accurately determined. The above information represents
estimates only and should not be construed as the current market value of the
Company's oil and gas reserves or the costs that would be incurred to obtain
equivalent reserves.

NOTE 3. LAGUNA GOLD COMPANY

The Company's principal precious metals property is the Rio Chiquito
project located in Guanacaste Province, Costa Rica, where Laguna holds 18
exploration concessions and one exploitation concession covering 277 square
kilometers. The Company believes that it has valid rights to the Rio Chiquito
concessions, and that all necessary exploration work has been performed. The
project is owned 90% by Laguna and 10% by Red Rock Ventures, Inc. ("Red Rock").

In order to achieve profitable operations, management believes that an
additional capital investment will be required for equipment and improvements
necessary to achieve acceptable production rates and unit costs.

Laguna's authorized capital consists of 200,000,000 shares of $.01 par
value common stock and 1,000,000 shares of preferred stock, par value $.01 per
share, with designations, rights, preferences and limitations as may be
determined by the Board. At December 31, 1995, 14,400,000 shares of common stock
were issued, outstanding and owned by the Company. Effective June 30, 1995, the
Company privately placed 25,000 shares of Laguna's Series A Convertible
Preferred Stock (the "Laguna Series A Stock") for net proceeds of $2,275,000.
Each share of Laguna Series A Stock can be converted into 144 shares of Laguna
$.01 par value common stock at the option of the stockholder, or automatically
in the event of a public offering of the common stock. The net effect of this
sale is that the Company now retains an 80% equity stake in Laguna. Each share
of Laguna Series A Stock includes 10 detachable warrants; each warrant
represents the right to purchase one-fourth share of Mallon's common stock at
$10 per whole share. The warrants, which are valued at $2 each for an aggregate
value of $125,000, expire on February 15, 2000. The net proceeds received from
the Laguna Series A Stock placement, net of the value assigned to the detachable
warrants which was reflected as additional paid-in capital, are reflected as
Minority Interest in the accompanying financial statements.

In February 1994, Laguna adopted the Laguna Gold Company Equity
Participation Plan (the "Equity Plan"). Under the Equity Plan, shares of common
stock have been reserved for issuance in order to provide for incentive
compensation and awards to employees and consultants. The Equity Plan provides
that stock options, stock bonuses, stock appreciation rights, and other forms of
stock-based compensation may be granted in accordance with the provisions of the
Plan. Effective January 1, 1995, options to purchase a total of 1,620,000 shares
of Laguna's common stock were granted to four officers of Laguna, exercisable at
a price of $0.01 per share. The options vest over a period of up to four years.
The options vest in full if controlling interest in Laguna or substantially all
of its assets are sold, or if Laguna is merged into another company, or if
control of Laguna's Board is obtained by a person or persons not expressly
approved of by a majority of the members of the Board as of the date the options
are granted. The difference between the exercise price and the estimated fair
value of the shares at the date of grant was charged to compensation expense
with a corresponding entry classified as an increase to Shareholders' Equity. To
date, none of these options have been exercised.

Laguna maintains an "Outside Directors Equity Plan" for outside directors
of Laguna. This plan provides that Laguna's non-management directors will be
compensated with shares of Laguna's $0.01 par value common stock. Initial stock
awards are to be for $5,000 worth of stock. The Plan has not yet been
implemented and Laguna has recorded no associated expense. Laguna currently has
one outside director.

F-15
<PAGE> 59

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Subsequent to December 31, 1995, Laguna signed a letter of intent with a
Canadian underwriter for the sale of a minimum of 4,000,000 and a maximum of
5,000,000 units at a price of $1.00 per unit. Each unit will include one share
of common stock and one warrant to purchase one share of common stock,
exercisable for $1.50 for an 18-month period. Laguna also agreed to grant the
underwriter an option to purchase an additional 500,000 shares of common stock,
exercisable at $1.00, also for an 18-month period following the issuance of the
common stock.

NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT

On February 15, 1995, the Company established a $2,500,000 line of credit
pursuant to a loan agreement with three private investors. Borrowings under this
line bore interest at 11%. On August 24, 1995, the Company established a
$15,000,000 revolving line of credit facility with a commercial bank, which bore
interest at the London Interbank Offered Rate (LIBOR) plus 2.5% (8% at December
31, 1995). The proceeds from this facility were used to retire the Company's
existing $2,500,000 line of credit and to terminate its volumetric production
payment (see Note 6). The Company paid a $125,000 prepayment penalty in order to
retire the $2,500,000 line of credit, and such amount, along with the remaining
unamortized loan origination fees of the initial line of credit, is included in
the $253,000 extraordinary loss on debt retirement. As a part of the fee for the
$15,000,000 facility, the Company issued warrants, valued at $2 each, to
purchase 25,000 shares of the Company's common stock at a price of $10 per
share. As of December 31, 1995, the total amount outstanding under the line of
credit facility was $10,000,000.

In March 1996, the Company established a credit facility (the "Facility")
with Bank One, Texas, N.A. (the "Bank"). The significant terms of the Facility,
as it has been amended, are as follows:

- The Facility establishes two separate lines of credit: a primary
revolving line of credit (the "Revolver") and a line of credit to be used
for development drilling approved by the Bank (the "Drilling Line").

- The borrowing base under the Revolver is subject to redetermination every
six months, at June 30 and December 31, or at such other times as the
Bank may determine.

- The interest rate on amounts drawn under the Revolver is at the Company's
election, either at the Bank's base rate plus 0.75%, or LIBOR plus 2.5%.
Amounts outstanding under the Drilling Line bear interest at the greater
of 12.5% or the Bank's base rate plus 4%.

- The Facility requires a reduction in the commitment under the Revolver of
$130,000 per month beginning January 31, 1997, subject to borrowing base
redeterminations.

- The Facility is collateralized by substantially all of the Company's oil
and gas properties.

- The Company is obligated to maintain certain financial and other
covenants, including a minimum current ratio, minimum net equity, a debt
coverage ratio and a total bank debt ceiling.

- The Facility expires on March 31, 1999.

NOTE 5. DRILLING ADVANCES

In 1988 the Company sold a portion of its working interest in seven proved
developed and various undeveloped gas properties located in the Burns Ranch
Field to a group of related and unrelated investors. Proceeds from the sale were
divided between acquisition costs (approximately 25%) and future drilling and
completion costs (approximately 75%). Because of unfavorable gas prices in the
area, the Company has no

F-16
<PAGE> 60

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

current plans to drill in this field in 1996. Accordingly, the portion of the
sales proceeds allocated to future drilling and completion costs have been
included in non-current liabilities at December 31, 1995.

NOTE 6. DEFERRED REVENUE

In connection with its September 30, 1993 acquisition of producing oil and
gas properties, the Company sold a volumetric production payment burdening the
Company's interest in the acquired properties for net proceeds of $10.0 million.
The proceeds received were recorded as deferred revenue. The production payment
covered approximately 4,354,000 MMBtu of natural gas at an indicated average
price of $1.65 and 215 MBbls barrels of oil at an indicated average price of
$13.01 per barrel to be delivered over eight years. The Company was responsible
for production costs associated with operating the properties subject to the
production payment agreement. In August 1995, the volumetric production payment
was terminated through the Company's payment of $5,586,000. This settlement
resulted in a $355,000 gain to the Company.

NOTE 7. COMMITMENTS AND CONTINGENCIES

Operating Leases:

The Company leases office space, vehicles and software under non-cancelable
leases which expire in 1998. Rental expense is recognized on a straight-line
basis over the terms of the leases. The total minimum rental commitments at
December 31, 1995 are as follows:

Rent expense was $56,000, $74,000 and $83,000 for the years ended December
31, 1993, 1994, and 1995, respectively.

Benefit Plans:

Effective January 1, 1989, the Company and its affiliates established the
Mallon Resources Corporation 401(k) Profit Sharing Plan (the "401(k) Plan"). MRC
and its affiliates match an employee's contribution to the 401(k) Plan in an
amount up to 25% of his or her eligible monthly contributions. The Company may
also contribute additional amounts at the discretion of the Compensation
Committee of the Board of Directors, contingent upon realization of earnings by
the Company which, in the sole discretion of the Compensation Committee, are
adequate to justify a corporate contribution. For the years ended December 31,
1993, 1994 and 1995, the Company made $6,000, $8,000 and $13,000, respectively,
of matching contributions. No discretionary contributions were made during any
of the three years in the period ended December 31, 1995.

The Company maintains a plan to provide additional compensation to
employees from lease revenues which are included in a pool to be distributed at
the discretion of the Chairman of the Board. For the years ended December 31,
1993, 1994 and 1995, a total of $40,000, $59,000 and $69,000, respectively, was
distributed to employees.

Contingencies:

In 1993, the Minerals Management Service commenced an audit of royalties
payable on certain oil and gas properties in which the Company owns an interest.
The operator of the properties is contesting certain deficiencies. The audit is
not complete, and it is not possible for the Company to estimate any potential

F-17
<PAGE> 61

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

liability. However, management of the Company does not believe that the ultimate
outcome of this matter will have a material negative impact on the financial
position, liquidity or results of operations of the Company. This matter has
been dormant for more than two years.

NOTE 8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

On April 15, 1994, the Company completed the private placement (the
"Placement") of 400,000 shares of Series B Mandatorily Redeemable Convertible
Preferred Stock, $0.01 par value per share (the "Series B Stock"). The Series B
Stock bears an 8% dividend payable quarterly, and is convertible into shares of
the Company's common stock at an adjusted conversion price of $16.72 per share.
Mandatory redemption of this stock begins on April 1, 1997, when 20% of the
total outstanding shares will be redeemed. An additional 20% per year will be
redeemed on each April 1 thereafter until all $4,000,000 of the Series B Stock
has been redeemed. Proceeds from the Placement were $3,774,000, net of stock
issue costs of $226,000. In connection with the Series B Stock, dividends of
$228,000 and $320,000 were paid in 1994 and 1995, respectively. Accretion of
preferred stock was $30,000 and $40,000 in 1994 and 1995, respectively.

NOTE 9. CAPITAL

Preferred Stock:

The Board of Directors is authorized to issue up to 10,000,000 shares of
preferred stock having a par value of $.01 per share, to establish the number of
shares to be included in each series and to fix the designation, rights,
preferences and limitations of the shares of each series.

The 1,100,918 outstanding shares of Series A Convertible Preferred Stock
(the "Series A Stock") are convertible to common stock of the Company on a
share-for-share basis at any time at the option of the holder, or automatically
if the common stock of the Company trades at $29.44 per share for a period of
time. The Series A Stock provides for a non-cumulative, preferential dividend
only to the extent declared by the Company's Board of Directors. The Series A
Stock has a preference upon liquidation of $6,000,000 (the original face value);
thereafter, after an equivalent amount has been distributed to holders of the
Company's common stock, the Series A shareholders share proportionately with the
common shareholders. The Series A Stock has the right to one vote for each share
of common stock into which it could be converted, with voting powers equal to
holders of common stock. In addition, the Series A Stock has the right to elect
one director to the Company's Board of Directors. The Series A Stock is not
redeemable and may not be called.

Common Stock:

The Company has reserved 278,480 and 243,342 shares of common stock for
issuance upon a possible conversion of the Series A Stock and Series B Stock,
respectively.

The Company adopted the Mallon Resources Corporation 1988 Equity
Participation Plan (the "Equity Plan"). Under the Equity Plan, 1,000,000 shares
of common stock have been reserved in order to provide for incentive
compensation and awards to employees and consultants. The Equity Plan provides
that a three-member committee may grant stock options, awards, stock
appreciation rights, and other forms of stock-based compensation in accordance
with the provisions of the Equity Plan.

On June 22, 1990, the Compensation Committee of the Board of Directors of
the Company approved the grant of options for 44,700 shares of the Company's
common stock to certain officers and employees, exercisable at a price of $0.04
per share. Subsequently, options for 7,890 shares that had not vested were
canceled due to employee resignations. During 1994, an additional 17,250 options
were issued to certain officers and employees exercisable at a price of $0.04
per share, which vest annually beginning in 1995 and continuing through 1999.
During 1995, 10,250 shares vested, resulting in non-cash compensation expense of

F-18
<PAGE> 62

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

$39,000. As of December 31, 1995, options for 38,934 shares were vested and
exercisable. The difference between the exercise price and the estimated fair
value of the shares at the date of grant is charged to compensation expense with
a corresponding increase to Shareholders' Equity.

Also on June 22, 1990, options exercisable at $0.04 per share for 10 years
were granted that do not vest until the market price of the Company's common
stock exceeds certain prices for in excess of 120 consecutive days, as follows:

<TABLE>
<CAPTION>
STOCK PRICE AGGREGATE
IN EXCESS OF: SHARES COVERED:
-------------------------------------------------------- ---------------
<S> <C>
$32.00.................................................. 5,187
$40.00.................................................. 5,187
$48.00.................................................. 10,375
</TABLE>

Management of the Company reviews the probability of these options vesting
on a quarterly basis. When management believes it is probable that the stock
will reach the required levels for vesting, it will begin accruing compensation
expense based on the difference between the market price of the stock at that
date and the exercise price. No compensation expense was recorded for these
options during the years ended December 31, 1993, 1994 and 1995. Any difference
between the amount of accrued compensation at the date the stock has attained
the required level for 120 consecutive days and the amount accrued will be
charged to operations in that period.

The Board of Directors of the Company approved a Stock Compensation Plan
for outside directors of the Company. This plan provides that the Company's
outside directors (presently three in number) will be compensated by
periodically granting them shares of the Company's $0.01 par value common stock
worth $1,000 for each board meeting, but no less than $4,000 per year, for each
outside director. The Company expensed $12,000, $11,000 and $12,000 for the
years 1993, 1994 and 1995, respectively, in relation to the Stock Compensation
Plan.

Effective October 1, 1995, the Compensation Committee of the Board of
Directors approved a plan whereby three of the Company's executive officers
would receive a portion of their compensation in stock options, payable
quarterly. The options are exercisable at $0.04 per share. For the quarter ended
December 31, 1995, the officers were awarded options valued at $50,000.

In April 1993, the Company sold 50,000 shares of its common stock for net
proceeds of $931,000 in a private placement offering.

Also in April 1993, the Company issued 7,500 shares of common stock at
$20.00 per share to an existing stockholder in satisfaction of an obligation
relating to the drilling of a well.

In November 1993, the Company completed a private placement of its common
stock, selling 503,472 shares at $18.00 per share for net proceeds of
$8,025,000.

Subsequent to December 31, 1995, the Company agreed to issue 61,250 shares
of common stock to certain consultants in exchange for services valued at
approximately $400,000.

NOTE 10. HEDGING ACTIVITIES

The Company engages in hedging transactions to manage commodity price
risks. Gains and losses on such transactions are matched to product sales and
charged or credited to oil and gas sales when that product is sold.

F-19
<PAGE> 63

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

In November 1995, the Company entered into a "collar" hedging transaction
with an independent crude oil buyer covering 12,000 barrels per month of its oil
production. Under this arrangement, for each month beginning November 1995
through October 1996, the Company will receive a minimum of $16.50 per barrel
and a maximum of $18.00 per barrel for the 12,000 barrels subject to the collar
agreement. The premium for this collar is $.30 per barrel payable monthly.

Also in November 1995, the Company entered into a "floor" hedging
transaction with an independent crude oil buyer covering 30,000 MMBtus per month
of the Company's gas production. Under this arrangement, for each month
beginning November 1995 through October 1996, if the price for gas as quoted on
the NYMEX is less than $1.70, the Company will receive the difference between
$1.70 and the average settlement price for that month for the 30,000 MMBtus
subject to the floor agreement. The premium for this floor is $.095 MMBtu,
payable monthly.

NOTE 11. MAJOR CUSTOMERS

Sales to customers in excess of 10% of total revenues were:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
-------- ---------- ----------
<S> <C> <C> <C>
Customer A...................................... $222,000 $2,579,000 $2,213,000
Customer B...................................... 323,000 298,000 --
Customer C...................................... 308,000 573,000 1,319,000
Customer D...................................... 302,000 -- --
</TABLE>

NOTE 12. INCOME TAXES

The Company incurred a loss for both book and tax purposes in 1993, 1994,
and 1995. There is no income tax benefit (expense) for the years ended December
31, 1993, 1994 or 1995.

Deferred tax assets (liabilities) are comprised of the following as of
December 31, 1994 and 1995:

<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred Tax Assets (Liabilities):
Net operating loss carryforwards........................ $ 2,567,000 $ 5,000,000
Accumulated depreciation and amortization differences... 5,355,000 4,900,000
Other................................................... 209,000 200,000
----------- -----------
Total deferred tax assets....................... 8,131,000 10,100,000
----------- -----------
Mining properties basis differences..................... (1,312,000) (1,800,000)
Oil, gas and other properties basis differences......... (5,856,000) (6,500,000)
----------- -----------
Total deferred tax liabilities.................. (7,168,000) (8,300,000)
----------- -----------
Net deferred tax assets................................. 963,000 1,800,000
Less valuation allowance................................ (963,000) (1,800,000)
----------- -----------
Net deferred tax assets (liabilities)........... $ -- $ --
=========== ===========
</TABLE>

At December 31, 1995, the Company's remaining net operating loss ("NOL")
carryforwards were approximately $13,400,000, which expire in varying amounts
during the period 2005 through 2009. This NOL carryforward is in addition to net
operating losses arising from the operations of Laguna prior to 1989 which can
be utilized only to the extent of future taxable income of Laguna.

F-20
<PAGE> 64

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Under the Internal Revenue Code of 1986, as amended (the "Code"), the
Company generally would be entitled to reduce its future federal income tax
liabilities by carrying the unused NOL forward for a period of 15 years to
offset its future income taxes. The Company's ability to utilize any NOL in
future years may be restricted, however, in the event the Company undergoes an
"ownership change" as defined in the Code. Management is not aware of any such
change.

NOTE 13. SEGMENT INFORMATION

The Company operates in two business segments: oil and gas exploration and
production in the United States, and gold and silver mining in Costa Rica.
Information regarding total assets by business segment and geographic location
for the Company as of December 31, 1993, 1994, and 1995 is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Total assets:
Oil and gas............................... $24,442,000 $23,746,000 $24,791,000
Mining.................................... 4,331,000 4,480,000 6,844,000
----------- ----------- -----------
$28,773,000 $28,226,000 $31,635,000
=========== =========== ===========
United States............................. $24,375,000 $23,777,000 $25,867,000
Costa Rica................................ 4,398,000 4,449,000 5,768,000
----------- ----------- -----------
$28,773,000 $28,226,000 $31,635,000
=========== =========== ===========
</TABLE>

The following tables summarize the Company's revenues, operating loss,
depreciation, depletion and amortization and capital expenditures by business
segment for the years ended December 31, 1993, 1994, and 1995:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Oil and gas............................... $ 2,210,000 $ 4,909,000 $ 5,428,000
Mining.................................... 81,000 -- --
----------- ----------- -----------
$ 2,291,000 $ 4,909,000 $ 5,428,000
=========== =========== ===========
Operating loss:
Oil and gas............................... $(1,090,000) $(1,427,000) $(1,176,000)
Mining.................................... (97,000) (204,000) (500,000)
----------- ----------- -----------
$(1,187,000) $(1,631,000) $(1,676,000)
=========== =========== ===========
Depreciation, depletion and amortization:
Oil and gas............................... $ 893,000 $ 2,373,000 $ 2,288,000
Mining.................................... 44,000 36,000 52,000
----------- ----------- -----------
$ 937,000 $ 2,409,000 $ 2,340,000
=========== =========== ===========
Capital expenditures:
Oil and gas............................... $20,216,000 $ 2,242,000 $ 2,624,000
Mining.................................... 396,000 137,000 1,259,000
----------- ----------- -----------
$20,612,000 $ 2,379,000 $ 3,883,000
=========== =========== ===========
</TABLE>

F-21
<PAGE> 65

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

The following tables summarize the Company's revenues and net loss by
geographic area for the years ended December 31, 1993, 1994 and 1995:

<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
United States............................... $ 2,210,000 $ 4,909,000 $ 5,428,000
Costa Rica.................................. 81,000 -- --
----------- ----------- -----------
$ 2,291,000 $ 4,909,000 $ 5,428,000
=========== =========== ===========
Net loss:
United States............................... $ (940,000) $(1,427,000) $(1,800,000)
Costa Rica.................................. (247,000) (204,000) (129,000)
----------- ----------- -----------
$(1,187,000) $(1,631,000) $(1,929,000)
=========== =========== ===========
</TABLE>

NOTE 14. RELATED PARTY TRANSACTIONS

The accounts receivable from related parties consists primarily of joint
interest billings to directors, officers, shareholders, employees and affiliated
entities for drilling and operating costs incurred on oil and gas properties in
which these related parties participate with MOC and MOC partnerships as working
interest owners. These amounts will generally be settled in the ordinary course
of business without interest.

Notes receivable of $43,000 and $63,000 at December 31, 1994 and 1995,
respectively, consist of loans to employees, which bear interest at prime plus
2%.

On June 30, 1993, the Company acquired all of the stock of Fruitland Gas
Corporation ("FGC") in exchange for 100,000 shares of the Company's common
stock. The acquisition was made in order to acquire the acreage in the Burns
Ranch gas field that was owned by the seller. The value of the acreage acquired,
net of a $171,000 receivable owed by FGC to the Company, was set at $2,500,000,
a value deemed "fair" in the opinion of an independent third party appraiser.
For purposes of the exchange, shares of the Company's common stock were valued
at $25. The shares issued in the transaction are restricted securities. The
acquisition was accounted for as a reorganization of entities under common
control and recorded at predecessor cost. The assets and operations of FGC are
insignificant to the Company's balance sheet and results of operations. FGC is
owned by the former shareholders of MOC, two of whom are also directors of the
Company, and one of whom is also chairman of the Company. The former
shareholders of FGC also own Deep Gas LLC, a Colorado limited liability company
that acquired the mineral rights underlying the Burns Ranch gas field at depths
more than 20 feet below the bottom of the Pictured Cliffs geologic formation
from FGC immediately prior to the Company's acquisition of FGC.

Certain oil and gas properties located in Alabama, in which the Company has
working interests, are operated by a company owned by an individual who also
owns, beneficially, in excess of 5% of the Company's common stock. As of
December 31, 1994 and 1995, the Company had a payable to the related company of
$7,000 and $25,000, respectively, which is included in accounts payable on the
accompanying consolidated balance sheets.

Red Rock is owned by an individual who owns, beneficially, in excess of 5%
of the Company's common stock. The Company has payables to the stockholder of
$9,000 and $100,000 as of December 31, 1994 and 1995, respectively, which are
included in accounts payable on the accompanying consolidated balance sheets.

During 1993, Red Rock purchased 12,500 shares of the Company's common stock
at $10 per share and 12,500 shares at $11 per share. Red Rock is the Company's
joint venture partner in the Rio Chiquito project.

F-22
<PAGE> 66

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

During the years ended December 31, 1994 and 1995, the Company paid legal
fees of $1,000 and $31,000 to a law firm of which a director of the Company is a
senior partner. Additionally, consulting fees valued at $300,000 were paid to a
member of the same firm in the form of 16,675 shares of the Company's common
stock. In January 1995, an additional 14,000 shares valued at $112,000 were
issued for services to the same individual. Also in 1995, fees of $32,000 were
paid to this individual.

During the year ended December 31, 1994, the Company recorded offering
costs of $200,000, of which $17,000 was payable at December 31, 1994, to an
investment banking firm in which a director is a partner. The Company also has a
consulting agreement with that firm for investment banking services of $200,000
in 1995, of which $90,000 was payable at December 31, 1995.

In February 1995, the Company entered into a Loan Agreement establishing a
$2,500,000 line of credit facility pursuant to which it could borrow funds from
three entities, two of which are affiliates of an individual who owns,
beneficially, in excess of 5% of the Company's outstanding common stock. This
line of credit was retired in August 1995.

NOTE 15. SUBSEQUENT EVENTS (UNAUDITED)

On May 24, 1996, Laguna Gold sold 5,000,000 Special Warrants for $1.00 per
Warrant in a private placement. Laguna Gold received proceeds of $4,325,000, net
of offering costs of $675,000. Upon exercise, each Special Warrant will be
converted into one Unit. Each Unit will consist of one share of Laguna Gold's
common stock and one Common Share Purchase Warrant. A portion of the net
proceeds derived from the sale of the Special Warrants, in the amount of
$3,750,000, was deposited with an escrow agent who will release the proceeds to
Laguna Gold upon notification that a final prospectus has been received by the
Ontario Securities Commission or upon exercise of the Special Warrants. A
receipt for the final prospectus was issued August 26, 1996. Each Common Share
Purchase Warrant entitles the holder to purchase one share of Common Stock for
$1.50 (subject to adjustment) on or before November 24, 1997.

Laguna Gold has, in connection with the sale of the Special Warrants,
issued to the underwriters non-assignable, special brokers' warrants. These
warrants are exercisable, without payment of additional consideration, into
compensation options entitling the holders to purchase 500,000 shares of Laguna
Gold's Common Stock on or before November 24, 1997 at $1.00 per share.

Effective June 3, 1996, Laguna Gold acquired Red Rock Ventures, Inc. ("Red
Rock") for 2 million shares of Laguna Gold's common stock valued at $1.00 per
share, and Convertible Secured Promissory Notes in the aggregate principal
amount of $230,000 for a total consideration of $2,230,000. The notes bear
interest at 5% per annum. Principal and accrued interest are due December 31,
2000. The notes are convertible into shares of Laguna Gold's common stock, at
the holder's or maker's option. The initial conversion price, which is subject
to anti-dilution adjustments, is $1.10. The note is collateralized by a general
security agreement encumbering all of the assets of Laguna Gold. Red Rock's sole
asset at the time of the merger was a 10% interest in the same Costa Rican
mining concession in which Laguna Gold holds a 90% interest.

F-23
<PAGE> 67

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
JUNE 30,
1996
DECEMBER 31, ------------
1995
------------ (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 1,269,000 $ 832,000
Funds held in escrow............................................... -- 3,750,000
Accounts receivable, with no allowance for doubtful accounts:
Oil and gas sales................................................ 1,065,000 1,080,000
Joint interest participants...................................... 376,000 167,000
Related parties.................................................. 22,000 31,000
Inventories........................................................ 53,000 44,000
Other.............................................................. 143,000 237,000
------------ ------------
Total current assets........................................ 2,928,000 6,141,000
------------ ------------
Property and equipment:
Oil and gas properties, under the full cost method................. 43,751,000 44,627,000
Mining properties and equipment.................................... 6,248,000 9,289,000
Other equipment.................................................... 508,000 541,000
------------ ------------
50,507,000 54,457,000
Less accumulated depreciation, depletion and amortization.......... (22,085,000) (23,234,000)
------------ ------------
28,422,000 31,223,000
------------ ------------
Notes receivable - related parties................................... 63,000 48,000
Other, net........................................................... 222,000 128,000
------------ ------------
Total Assets......................................................... $ 31,635,000 $ 37,540,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank............................................... $ -- $ 2,000,000
Current portion of long-term debt.................................. -- 780,000
Current portion of capital lease obligation........................ 23,000 25,000
Trade accounts payable............................................. 2,309,000 1,398,000
Undistributed revenue.............................................. 711,000 855,000
Drilling advances.................................................. 271,000 120,000
Accrued taxes and expenses......................................... 90,000 278,000
------------ ------------
Total current liabilities................................... 3,404,000 5,456,000
------------ ------------
Long-term debt....................................................... 10,000,000 7,451,000
Notes payable, other................................................. -- 230,000
Capital lease obligation, net of current portion..................... 37,000 24,000
Drilling advances.................................................... 315,000 410,000
Accrued expenses..................................................... -- 1,000
------------ ------------
Total non-current liabilities............................... 10,352,000 8,116,000
------------ ------------
Total liabilities.................................................... 13,756,000 13,572,000
------------ ------------
Commitments and contingencies........................................ -- --
Minority interest.................................................... 2,275,000 8,808,000
Series B Mandatorily Redeemable Convertible Preferred Stock, $0.01
par value, 500,000 shares authorized, 400,000 shares issued and
outstanding, liquidation preference and mandatory redemption of
$4,000,000......................................................... 3,844,000 3,870,000
Shareholders' equity:
Series A Convertible Preferred Stock, $0.01 par value, 1,467,890
shares authorized, 1,100,918 shares issued and outstanding,
liquidation preference $6,000,000................................ 5,730,000 5,730,000
Common Stock, $0.01 par value, 25,000,000 shares authorized;
1,949,914 and 2,083,305 shares issued and outstanding,
respectively..................................................... 19,000 21,000
Additional paid-in capital......................................... 38,965,000 39,191,000
Accumulated deficit................................................ (32,954,000) (33,652,000)
------------ ------------
Total shareholders' equity.................................. 11,760,000 11,290,000
------------ ------------
Total Liabilities and Shareholders' Equity........................... $ 31,635,000 $ 37,540,000
============ ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-24
<PAGE> 68

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -----------------------
1995 1996 1995 1996
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales........................... $ 1,518,000 $ 2,834,000 $1,019,000 $1,477,000
Deferred revenue amortization............... 1,085,000 -- 524,000 --
Operating service revenue................... 79,000 77,000 39,000 38,000
Interest and other.......................... 39,000 30,000 25,000 15,000
----------- ----------- ---------- ----------
2,721,000 2,941,000 1,607,000 1,530,000
----------- ----------- ---------- ----------
Costs and expenses:
Oil and gas production...................... 996,000 973,000 540,000 548,000
Mining project expenses..................... 247,000 359,000 151,000 265,000
Depletion, depreciation and amortization.... 1,233,000 1,170,000 659,000 592,000
General and administrative.................. 982,000 953,000 438,000 447,000
Interest and other.......................... 111,000 465,000 92,000 252,000
----------- ----------- ---------- ----------
3,569,000 3,920,000 1,880,000 2,104,000
----------- ----------- ---------- ----------
Minority interest in loss of consolidated
subsidiary.................................. -- 54,000 -- 54,000
----------- ----------- ---------- ----------
Loss before extraordinary item................ (848,000) (925,000) (273,000) (520,000)
Extraordinary loss on early retirement of
debt........................................ -- (160,000) -- --
----------- ----------- ---------- ----------
Net loss...................................... (848,000) (1,085,000) (273,000) (520,000)
Dividends on preferred stock and accretion.... (158,000) (186,000) (79,000) (96,000)
----------- ----------- ---------- ----------
Net loss attributable to common
shareholders................................ $(1,006,000) $(1,271,000) $ (352,000) $ (616,000)
=========== =========== ========== ==========
Per share:
Loss attributable to common shareholders
before extraordinary item................ $ (0.52) $ (0.55) $ (0.18) $ (0.30)
Extraordinary loss.......................... -- (0.08) -- --
----------- ----------- ---------- ----------
Net loss attributable to common
shareholders............................. $ (0.52) $ (0.63) $ (0.18) $ (0.30)
=========== =========== ========== ==========
Weighted average shares outstanding........... 1,944,000 2,005,000 1,949,000 2,039,000
=========== =========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-25
<PAGE> 69

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (848,000) $(1,085,000)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Amortization of deferred revenue............................. (1,085,000) --
Depletion, depreciation, and amortization.................... 1,233,000 1,170,000
Stock issued for compensation................................ 28,000 272,000
Extraordinary loss on early retirement of debt............... -- 160,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable..................................... (279,000) 185,000
Inventory and other assets.............................. (181,000) (106,000)
Increase (decrease) in:
Accounts payable........................................... 525,000 (120,000)
Undistributed revenue...................................... (157,000) 144,000
Accrued taxes and expenses................................. 13,000 189,000
Deferred revenues and drilling advances.................... 84,000 (56,000)
----------- -----------
Net cash (used in) provided by operating activities.......... (667,000) 753,000
----------- -----------
Cash flows from investing activities:
Increase in funds held in escrow................................ -- (3,750,000)
Additions to property and equipment............................. (2,239,000) (1,758,000)
Increase (decrease) in notes receivable-related party........... (2,000) 15,000
----------- -----------
Net cash used in investing activities........................ (2,241,000) (5,493,000)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt.................................... 2,500,000 10,231,000
Payments of long-term debt...................................... -- (10,000,000)
Payment of loan origination fees................................ -- (82,000)
Payment of capital lease obligation............................. -- (11,000)
Net proceeds from sale of subsidiary preferred stock............ 1,155,000 --
Net proceeds from sale of subsidiary special warrants........... -- 4,325,000
Payment of preferred dividends.................................. (158,000) (160,000)
----------- -----------
Net cash provided by financing activities.................... 3,497,000 4,303,000
----------- -----------
Net increase (decrease) in cash and cash equivalents.............. 589,000 (437,000)
Cash and cash equivalents, beginning of period.................... 88,000 1,269,000
----------- -----------
Cash and cash equivalents, end of period.......................... $ 677,000 $ 832,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest.......................................... $ 80,000 $ 383,000
=========== ===========
Supplemental schedule of non-cash investing and financing
activities:
Issuance of common stock in exchange for:
Property and equipment....................................... $ 112,000 $ --
=========== ===========
Loan origination fee......................................... $ 112,000 $ --
=========== ===========
Consultants' accounts payable................................ $ -- $ 791,000
=========== ===========
Acquisition of Red Rock Ventures, Inc. for subsidiary common
stock and notes payable...................................... $ -- $ 2,230,000
=========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-26
<PAGE> 70

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)

NOTE 1. GENERAL

Mallon Resources Corporation (the "Company") was incorporated in Colorado
in 1988, in connection with the consolidation of Mallon Oil Company ("Mallon
Oil"), Laguna Gold Company ("Laguna Gold") and 19 limited partnerships that they
sponsored. Mallon Oil continues as a wholly-owned subsidiary of the Company. As
of June 30, 1996, the Company owned 72% of Laguna Gold on a common stock
equivalent basis. All of the Company's business activities are conducted through
these two subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.

The accompanying interim consolidated financial statements are unaudited;
however, in the opinion of the Company, the consolidated financial statements
include all adjustments (consisting of normal recurring adjustments) necessary
for a fair statement of the results for the interim periods. On September 9,
1996 a four to one reverse stock split of the Company's issued and outstanding
shares of Common Stock was effected. Common Stock, paid-in capital and earnings
per share information have been restated to give retroactive effect to the
reverse stock split. These interim statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.

NOTE 2. NOTES PAYABLE AND LONG-TERM DEBT

In March 1996, the Company established a credit facility (the "Facility")
with Bank One, Texas, N.A. (the "Bank"). The significant terms of the Facility,
as it has been amended, are as follows:

- The borrowing base under the Revolver is subject to redetermination every
six months, at June 30 and December 31, or at such other times as the
Bank may determine.

- The interest rate on amounts drawn under the Revolver is, at the
Company's election, either at the Bank's base rate plus 0.75%, or LIBOR
plus 2.5% (7.875% as of June 30, 1996). Amounts outstanding under the
Drilling Line bear interest at the greater of 12.5% or the Bank's base
rate plus 4%.

- The Facility requires a reduction in the commitment under the Revolver of
$130,000 per month beginning January 31, 1997, subject to borrowing base
redeterminations.

- The Facility is collateralized by substantially all of the Company's oil
and gas properties.

- The Company is obligated to maintain certain financial and other
covenants, including a minimum current ratio, minimum net equity, a debt
coverage ratio and a total bank debt ceiling.

- The Facility expires on March 31, 1999.

Initial amounts drawn under the Revolver were used to retire the Company's
prior line of credit and related accrued interest. The initial borrowing base
under the Revolver was $10,500,000. At June 30, 1996, the borrowing base was
redetermined and reduced to $8,820,000. At the time of this redetermination, the
amount outstanding under the Revolver was $10,231,000, or $1,411,000 in excess
of the redetermined borrowing base. Under the terms of the Facility, as amended,
the Company drew $2,000,000 under the Drilling Line and applied it to reduce
amounts outstanding under the Revolver to $8,231,000, which is less than the
amount of

F-27
<PAGE> 71

MALLON RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)

the redetermined borrowing base. Accordingly, $589,000 was available under the
Revolver at June 30, 1996. The principal amount drawn under the Drilling Line is
due on the earlier of the completion of a stock offering by the Company or
December 31, 1996.

NOTE 3. LAGUNA GOLD COMPANY

On May 24, 1996, Laguna Gold sold 5,000,000 Special Warrants for $1.00 per
Warrant in a private placement. Laguna Gold received proceeds of $4,325,000, net
of offering costs of $675,000, which are reflected as an increase to minority
interest in the June 30, 1996 consolidated balance sheet. Upon exercise, each
Special Warrant was converted into one Unit. Each Unit consists of one share of
Laguna Gold's common stock and one Common Share Purchase Warrant. A portion of
the net proceeds derived from the sale of the Special Warrants, in the amount of
$3,750,000, was deposited with an escrow agent, and is shown on the balance
sheet as funds held in escrow at June 30, 1996. The escrow agent released the
proceeds to Laguna Gold on August 26, 1996, upon notification that a final
prospectus had been received by the Ontario Securities Commission. Each Common
Share Purchase Warrant entitles the holder to purchase one share of Common Stock
for $1.50 (subject to adjustment) on or before November 24, 1997.

In connection with the sale of the Special Warrants, Laguna Gold issued to
the underwriters non-assignable, special brokers' warrants. These warrants are
exercisable, without payment of additional consideration, into compensation
options entitling the holders to purchase 500,000 shares of Laguna Gold's Common
Stock on or before November 24, 1997 at $1.00 per share.

Effective June 3, 1996, Laguna Gold acquired Red Rock Ventures, Inc. ("Red
Rock") for 2 million shares of Laguna Gold's common stock, valued at $1.00 per
share, and Convertible Secured Promissory Notes in the aggregate principal
amount of $230,000 for a total consideration of $2,230,000. The notes bear
interest at 5% per annum. Principal and accrued interest are due December 31,
2000. The notes are convertible into shares of Laguna Gold's common stock, at
the holder's or maker's option. The initial conversion price, which is subject
to anti-dilution adjustments, is $1.10. The note is collateralized by a general
security agreement encumbering all of the assets of Laguna Gold. Red Rock's sole
asset at the time of the merger was a 10% interest in the same Costa Rican
mining concession in which Laguna Gold holds a 90% interest.

F-28
<PAGE> 72

ANNEX A

SEPTEMBER 16, 1996

Mr. Kevin M. Fitzgerald
Mallon Oil Company
999 18th Street Suite 1700
Denver, Colorado 80202

Dear Mr. Fitzgerald:

At your request, GeoQuest has estimated proved reserves and future net
revenue for Mallon Oil Company's interest in certain oil and gas properties
located in the United States. The reserves and future net revenues shown in this
report are estimates effective June 30, 1996. This report has been prepared
using unescalated prices, and costs for proved reserves in accordance with
Securities and Exchange Commission guidelines ("SEC").

GeoQuest's estimates of net reserves and the associated future net revenue
are summarized below. These estimates are attributable to the interest owned by
Mallon Oil Company as of June 30, 1996.

<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
NET RESERVES FUTURE NET REVENUE
------------------------ ---------------------------
NATURAL PRESENT
OIL GAS UNDISCOUNTED VALUE @10%
CATEGORY (BARRELS) (MCF) ($) ($)
- ------------------------------------------ --------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Proved Developed Producing................ 1,053,594 11,414,220 25,057,270 15,004,880
Proved Developed Non-producing............ 218,552 4,660,112 7,719,044 4,758,959
Proved Undeveloped........................ 664,871 5,138,807 8,389,499 4,019,772
TOTAL PROVED.................... 1,937,017 21,213,139 41,165,813 23,783,611
</TABLE>

The oil reserves shown include crude oil and condensate. Oil volumes are
expressed in stock tank barrels, each of which is equivalent to 42 United States
gallons. Natural gas volumes are expressed in thousands of standard cubic feet
("MCF").

This reserve report includes summary projections of reserves and revenues
for each reserve category. Production performance projections and individual
well economics are also included in this report. Please note that totals from
the various summaries may differ by a few to several units due to truncation
and/or roundoff. The estimates do not include any reserves which would be
classified as Probable or Possible, nor does this report present the value of
any acreage other than that which would be associated with Proved reserves under
the categories listed.

METHODOLOGY

Reserves were estimated for the individual Mallon properties by using
accepted engineering principles. All reserves were classified in accordance with
the SEC definitions for oil and gas reserves. A Proved Developed Non-producing
Category was incorporated at Mallon's specific request.

The calculation of the estimated future net revenue was based upon the
assumption that product prices, operating costs, and projected capital costs
would remain constant in future years. The oil prices utilized were based upon
the actual prices received on June 30, 1996, adjusted for gravity and bonus. Gas
prices were also based on the actual June 30, 1996 gas sales prices. Operating
costs were provided by Mallon Oil Company. These costs were adjusted to reflect
non-recurring costs and represent average monthly expenses. The prices, costs
and other information provided by Mallon Oil Company were not independently
verified by GeoQuest. Capital costs were included to account for planned
expenditures for workovers, new development wells and production facilities.
These costs were also provided by Mallon and were not independently verified.

A-1
<PAGE> 73

These reserve estimates assume, based on Mallon Oil Company's estimates,
that aggregate expenditures of approximately $6.0 million through 1998 will be
required to develop its Proved Undeveloped reserves.

For the purposes of this report, a field inspection of the properties has
not been performed, nor has GeoQuest attempted to confirm the integrity of the
mechanical operation or the condition of the wells and related facilities.
Further, GeoQuest has not investigated possible environmental liability related
to these properties and future net revenue estimates do not include any cost
which may be incurred as a result of such liability. The analysis has not
included any costs or future value associated with abandonment and salvage of
well or surface equipment.

The revenues shown in this report reflect a deduction for state production
and ad valorem taxes. No consideration has been made for state or federal income
taxes.

The report does not include the effect of any loans or other financial
encumbrances.

STATEMENT OF RISK

The accuracy of reserve and economic evaluations is always subject to
uncertainty. The magnitude of this uncertainty is generally proportional to the
quantity and quality of data available for analysis. As a well matures and new
information becomes available, or as wells are recompleted and new wells
drilled, revisions may be required which may result not only in a significant
change to the reserves and to the value assigned to a property, but also may
impact the total company reserve and financial status. The reserves and
forecasts contained in this report were based upon a technical analysis of the
available data using accepted engineering principles; however, they must be
accepted with the understanding that they are only estimates and that future
information and future reservoir performance subsequent to the date of this
estimate may justify their revision. Changes in Governmental policies and market
conditions may impact both the actual sales volumes and prices received for the
reserves along with the costs incurred in recovering these reserves. Property
value is highly dependent on prices, therefore, future production and revenues
may vary from the estimates included in this report depending upon actual
conditions.

The estimates provided herein do not include any consideration of matters
pertaining to legal, or accounting interpretation, or the potential of future
changes as a result of these interpretations. In addition, GeoQuest has not made
any investigation of potential gas volumes and values relating to any
overdelivery, underdelivery or gas balancing clauses relative to Mallon Oil
Company's interests. Therefore, our estimates of reserves and future revenue do
not include possible adjustments for the settlement of such imbalances. The
projections provided in this report are based upon the assumption that Mallon
Oil Company receives its net revenue interest share of estimated future gross
gas production.

The titles to the properties have not been examined by GeoQuest, nor has
the actual degree or type of interest ownership been independently confirmed.
Ownership data utilized in the estimates were provided by Mallon Oil Company,
and were accepted as accurate.

GeoQuest is an independent petroleum consulting firm and does not hold any
interest in any of the properties evaluated in this report or in Mallon Oil
Company. GeoQuest's employment to provide this report was not contingent upon
the results of our analysis.

GeoQuest appreciates the opportunity to provide this report for Mallon Oil
Company. If you should have any questions concerning the analysis presented
herein, please feel free to contact Mr. Bill Abbott.

Very truly yours,

GEOQUEST

Daniel D. Domeracki
Vice President, Operations -- The
Americas
Reservoir Technologies

A-2
<PAGE> 74

[STRATIGRAPHIC CHARTS]

[DELAWARE BASIN]

[SAN JUAN BASIN]
<PAGE> 75
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR SOLICITATION OF ANY OFFER TO BUY BY ANY ONE IN ANY JURISDICTION IN
WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. 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>
Prospectus Summary.................... 3
Cautionary Statement Regarding
Forward-Looking Statements.......... 7
Risk Factors.......................... 7
Use of Proceeds....................... 11
Price Range of Common Stock........... 12
Dividend Policy....................... 12
Capitalization........................ 13
Selected Consolidated Financial
Data................................ 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business and Properties............... 22
Management............................ 31
Principal Shareholders................ 34
Transactions with Related Parties..... 35
Description of Capital Stock and Other
Securities.......................... 35
Underwriting.......................... 39
Legal Matters......................... 40
Experts............................... 40
Available Information................. 40
Incorporation of Certain Documents by
Reference........................... 41
Glossary of Terms..................... 42
Index to Consolidated Financial
Statements.......................... F-1
Annex A -- Summary Report of
Independent Petroleum Engineers..... A-1
</TABLE>

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

LOGO

2,000,000 SHARES

COMMON STOCK

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

PROSPECTUS

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

RODMAN & RENSHAW, INC.

OCTOBER 16, 1996

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