MALLON RESOURCES CORP, S-2, 1996-08-28

MALLON RESOURCES CORP
S-2, 1996-08-28
CRUDE PETROLEUM & NATURAL GAS

Previous: FIRST TRUST COMBINED SERIES 62, 485BPOS, 1996-08-28

Next: GALLERY RODEO INTERNATIONAL, 8-K, 1996-08-28

<PAGE> 1

As filed with the Securities and Exchange Commission on August 28, 1996

File No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------

FORM S-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933

----------

Mallon Resources Corporation
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
Colorado 84-1095959
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

George O. Mallon, Jr.
Mallon Resources Corporation
999 18th Street, Ste. 1700 999 18th Street, Ste. 1700
Denver, Colorado 80202 Denver, Colorado 80202
(303) 293-2333 (303) 293-2333

(Address, including zip code, and telephone number, (Address, including zip code, and telephone number,
including area code, of registrant's principal including area code, of agent for service)
executive offices)
Copies to:
Thomas A. Richardson, Esq. Roy K. Ross, Esq. Derek R. McClain, Esq.
Holme Roberts & Owen LLC Mallon Resources Corporation Alan P. Baden, Esq.
1700 Lincoln, Ste. 4100 999 18th Street, Ste. 1700 Vinson & Elkins L.L.P.
Denver, Colorado 80203 Denver, Colorado 80202 2001 Ross Avenue, Ste. 3700
(303) 861-7000 (303) 293-2333 Dallas, Texas 75201
(214) 220-7700
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]

If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of the Form, check the following box. [ ]

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

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================================
Proposed Proposed
Title of each class of maximum maximum Amount of
securities to be Amount to be offering aggregate registration
registered registered price per share offering price fee
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock $12,420,000(1) 4,283
- ------------------------------------------------------------------------------------------------------------

============================================================================================================
</TABLE>

(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933. The registration fee has
been calculated based upon the average of the high and low prices of the
Company's Common Stock as reported on the Nasdaq National Market on August
26, 1996, which was $1.50.

----------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND
EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE> 2
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. *
* A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY *
* NOT BE SOLD NOR MAY ANY OFFERS TO BUY BE ACCEPTED TO PRIOR TO THE *
* TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS *
* SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER *
* TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE *
* IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAW OF ANY STATE. *
* *
***************************************************************************

SUBJECT TO COMPLETION, DATED AUGUST 28, 1996

1,800,000 SHARES

[LOGO] MALLON RESOURCES CORPORATION

COMMON STOCK

All of the 1,800,000 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 August 26, 1996,
as reported by the Nasdaq National Market, was $6.00 per share, as adjusted for
reverse stock split. 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 9 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 . . . . . $ $ $
- --------------------------------------------------------------------------------------------------------------
Total (3) . . . . . $ $ $
==============================================================================================================
</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
$_____ ($____ if the over-allotment option is exercised in full) and (ii) a
warrant to purchase an aggregate of _____ 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 $____,
including the Underwriters' non-accountable expense allowance in the amount
of $_____ ($_____ if the Underwriters' over-allotment option is exercised
in full) payable by the Company.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to __ 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 $_______,
$_______ and $_______, 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 ______________, 1996.

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

RODMAN & RENSHAW, INC.

The date of this Prospectus is _______________________, 1996
<PAGE> 3
[INSIDE FRONT COVER]

AREAS OF ACTIVITY

[Map of New Mexico showing location of properties]

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> 4
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, 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 a public offering price of $6.00 per share and that the Underwriters'
over-allotment option will not be exercised. All dollar amounts are in U.S.
dollars and 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 is expected
to occur on September __, 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 at page 9.

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.
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 5.1 MMBOE as of December 31, 1995, a 132% increase. As
of December 31, 1995, the Company's proved reserves, as estimated by its
independent petroleum engineers, GeoQuest Reservoir Technologies, Inc.
("GeoQuest") consisted of 1.8 MMBbls of crude oil and 19.9 Bcf of natural gas,
with a Pre-tax SEC 10 Value of $21.0 million. At June 30, 1996, the Company
owned interests in 225 gross (74 net) producing wells and operated 88, or 39%,
of these wells. 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 (i) increasing its drilling and
recompletion activities on its Delaware and San Juan Basin properties, and (ii)
continuing to control its expenditures, thereby containing its drilling,
completion and operating costs.

Approximately $7.6 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.

-3-
<PAGE> 5
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 14.4 million common shares, representing an
approximate 57% 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 has scheduled the
listing of its common shares for trading 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. See "Business and Properties--Laguna
Gold Company."

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company . . . . . . . . . . 1,800,000 shares
Common Stock to be Outstanding After the Offering (1) . . ________ 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>

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

(1) Does not include (i) 131,914 shares of Common Stock issuable upon exercise
of currently outstanding options and warrants, (ii) __________ shares of
Common Stock issuable upon conversion of the Company's outstanding Series B
Mandatorily Redeemable Convertible Preferred Stock, and (iii) __________
shares of Common Stock issuable upon exercise of the Representative's
warrant. See "Description of Capital Stock and Other Securities."

-4-
<PAGE> 6
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 1,103 973
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:
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 (1) $ (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 (2)
---------------------------
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,540 45,160
Long-term debt (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,705 7,705
Mandatorily redeemable convertible preferred stock . . . . . . . . . . . . . 3,870 3,870

Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,290 18,910
</TABLE>

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

-5-
<PAGE> 7
(1) 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.
(2) As adjusted to reflect the receipt by the Company of estimated net proceeds
from the issuance of 1.8 million shares of Common Stock and the application
of such proceeds. See "Use of Proceeds" and "Capitalization."
(3) Long-term debt includes long-term debt net of current maturities, notes
payable-other and capital lease obligations net of current portion.

-6-
<PAGE> 8
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 December 31, 1995, 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) (BCF) (MBOE)
------ ----- ------
<S> <C> <C> <C>
Proved developed reserves . . . . . . . . . . . . . . 1,238 14,702 3,688
Proved undeveloped reserves . . . . . . . . . . . . . 576 5,220 1,446
Total proved reserves . . . . . . . . . . . . . . . . 1,813 19,921 5,134

Estimated future net revenues (in thousands) . . . . . . . . . . . . . . . . . . . $35,656
Present value of estimated future net revenues (in thousands) . . . . . . . . . . . $21,038
</TABLE>

-7-
<PAGE> 9
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
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) . . . . . . . . . . 218 219 222 223 225
Net wells (3) . . . . . . . . . . . 70 66 72 67 74
</TABLE>

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

(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 four gross (1.4
net) salt water disposal wells.

-8-
<PAGE> 10
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 long-term 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

-9-
<PAGE> 11
to downward or upward revision based upon production history, results of future
development and exploration, prevailing oil and gas prices and other 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 December
31, 1995 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
December 31, 1995 assumes, based on the Company's estimates, that aggregate
capital expenditures by the Company of approximately $5.1 million through 1997
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.

-10-
<PAGE> 12
OPERATING HAZARDS; UNINSURED RISKS

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
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

-11-
<PAGE> 13
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 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 14.4 million shares of common stock of
Laguna. The Company has no current plans for disposing of such shares, and
approximately 8.4 million of such shares 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 disposed. Furthermore, although the common stock of
Laguna is scheduled to be publicly traded in Canada on The Toronto Stock
Exchange, trading prices on that exchange will not necessarily be
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."

-12-
<PAGE> 14
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."

-13-
<PAGE> 15
USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common
Stock being offered hereby (based on an assumed public offering price of $6.00
per share) are estimated to be approximately $9.5 million ($11 million if the
Underwriters' over-allotment option is exercised in full) after deducting
underwriting discounts and estimated offering expenses.

Approximately $7.6 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, 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 current amount outstanding is $8,371,000. 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.

-14-
<PAGE> 16
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 is expected to occur on
September __, 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 (through August 26, 1996) . . . . . . . . . 8.00 5.00
</TABLE>

On August 26, 1996, the last reported sale price for the Common Stock
on the Nasdaq National Market was $6.00. As of August 26, 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."

-15-
<PAGE> 17
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 1.8
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 a four to
one reverse stock split that is expected to occur on September __, 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

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 39,191 52,523
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (33,652) (33,652)
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . 11,290 18,910
-------- --------

Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,865 $ 30,485
======== ========
</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 $1,000,000 under the Revolver.
(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) 131,914 shares of Common Stock issuable upon exercise
of currently outstanding options and warrants, (ii) _____ shares of Common
Stock issuable upon conversion of the Company's outstanding Series B
Mandatorily Redeemable Convertible Preferred Stock and (iii) _____ shares
of Common Stock issuable upon exercise of the Representative's warrant.
See "Description of Capital Stock and Other Securities."

-16-
<PAGE> 18
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:

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 (1) . . . . . . . . . . . . . $ (549) $ 56 $ (79) $ 876$ 1,093 $ 465 $ 706

Capital expenditures . . . . . . . . $ 906 $ 190 $ 20,612 $ 2,379 $ 3,883 $ 2,351 $ 3,988
</TABLE>

-17-
<PAGE> 19
<TABLE>
<CAPTION>
At December 31 At June 30, 1996
------------------------------------------------ --------------------
As
1991 1992 1993 1994 1995 Actual Adjusted (2)
-------- -------- -------- -------- -------- --------- ------------
<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 $45,160
Long-term debt (3) . . . . . . . . . 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 18,910
</TABLE>

(1) 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.

(2) As adjusted to reflect the receipt by the Company of estimated net proceeds
from the issuance of 1.8 million shares of Common Stock and the
application of such proceeds. See "Use of Proceeds" and "Capitalization."

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

-18-
<PAGE> 20
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 scheduled 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 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 net proceeds

-19-
<PAGE> 21
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:

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

o 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.

o 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%.

o 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.

o 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.

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

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

o 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.

o 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.

-20-
<PAGE> 22
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,

-21-
<PAGE> 23
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.

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 sales increased 18.5% to 173,000 Bbls and total
gas sales 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

-22-
<PAGE> 24
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 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 sales increased 108.6% to 146,000 Bbls and total gas
sales increased 137.1% to 1,648,000 Mcf for the year ended December 31, 1994.
The increase in sales was primarily due to increased production resulting from a
substantial property acquisition in September 1993. 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.

-23-
<PAGE> 25
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.

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

-24-
<PAGE> 26
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.

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.

-25-
<PAGE> 27
BUSINESS AND PROPERTIES

GENERAL

The Company increased its estimated proved reserves from 2.2 MMBOE as
of December 31, 1992, to 5.1 MMBOE as of December 31, 1995, a 132% increase.
As of December 31, 1995, the Company's proved reserves, as estimated by its
independent petroleum engineers, GeoQuest, consisted of 1.8 MMBbls of crude oil
and 19.9 Bcf of natural gas, with a Pre-tax SEC 10 Value of $21.0 million. At
June 30, 1996, the Company owned interests in 225 gross (74 net) producing wells
and operated 88, or 39%, of these wells. 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

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 low additional costs. 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.

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 December 31, 1995, these areas accounted for 98% of the Company's 5.1 MMBOE
of estimated proved reserves. Of this total, 3.5 MMBOE were attributable to the
Company's Delaware Basin properties and 1.6 MMBOE were attributable to its San
Juan Basin properties.

-26-
<PAGE> 28
DELAWARE BASIN, SOUTHEASTERN NEW MEXICO

The Delaware Basin has been an area of significant activity for the
Company since 1982, when the Company drilled its first well in its Brushy Draw
field. Wells in this 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 Company will continue its Cherry

-27-
<PAGE> 29
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 2.5% working interest in an
exploration venture to drill one or more wells offshore Belize, where the
Company is initially committed to spend approximately $200,000, beginning in
late 1996 or early 1997.

-28-
<PAGE> 30
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 December 31, 1995, 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) (BCF) (MBOE)
------ ----- ------
<S> <C> <C>
Proved developed reserves . . . . . . . . . . . . . . . 1,238 14,702 3,688
Proved undeveloped reserves . . . . . . . . . . . . . . 576 5,220 1,446
Total proved reserves . . . . . . . . . . . . . . . . . 1,813 19,921 5,134

Estimated future net revenues (in thousands) . . . . . . . . . . . . . . . . . $35,656
Present value of estimated future net revenues (in thousands) . . . . . . . . . $21,038
</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 4.40 .56 4.96
Six months ended June 30,
1996 . . . . . . . . . . . 3 0 3 2.41 0 2.41
</TABLE>

-29-
<PAGE> 31
<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>

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>
121 108 225 40 33 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 four gross (1.4 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
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 . . . . . . . . . . 218 219 222 223 225
Net Wells . . . . . . . . . . . 70 66 72 67 74
</TABLE>

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

-30-
<PAGE> 32
(2) In addition, the Company owns interests in four waterflood units,
which contain a total of 544 gross wells (8.5 net wells) and four gross (1.4
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."

LAGUNA GOLD COMPANY

The Company owns 14.4 million common shares, representing an
approximate 57% 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 has scheduled the
listing of its common shares for trading 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.

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

-31-
<PAGE> 33
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 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

-32-
<PAGE> 34
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 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 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

-33-
<PAGE> 35
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 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, Messrs. 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.

-34-
<PAGE> 36
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

James A. McGowen . . . . . . . . . . . . 53 Director and Executive Vice President of the Company;
Chairman of Laguna
Roy K. Ross . . . . . . . . . . . . . . . 45 Director, Executive Vice President and General Counsel of
the Company, Laguna, and Mallon Oil
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 Executive Vice President 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.

-35-
<PAGE> 37
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. &
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.

-36-
<PAGE> 38
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.

-37-
<PAGE> 39
PRINCIPAL SHAREHOLDERS

The following table sets forth information concerning the beneficial
ownership of the Common Stock as of August 26, 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 is expected to occur on September _,
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% %
Kevin M. Fitzgerald . . . . . . . . . . . . . . . 28,278 (3) 1.4 *
James A. McGowen . . . . . . . . . . . . . . . . 14,546 (3) * *
Roy K. Ross . . . . . . . . . . . . . . . . . . . 7,675 (3) * *
Frank Douglass . . . . . . . . . . . . . . . . . 7,926 * *
Roger R. Mitchell . . . . . . . . . . . . . . . . 47,757 2.3
Francis J. Reinhardt, Jr. . . . . . . . . . . . . 27,641 (4) 1.3 *
Larry Abrams . . . . . . . . . . . . . . . . . . 141,279 6.8
Thomas B. McMillan, Jr. . . . . . . . . . . . . . 116,465 (5) 5.6
John Simmet Estate . . . . . . . . . . . . . . . 149,415 (6) 7.2
Bank of America NT&SA . . . . . . . . . . . . . . 278,293 (7) 11.8 0(8)
Robert J. Monroe . . . . . . . . . . . . . . . . 184,299 (9) 8.5
All officers and directors as a group (8 persons) 443,173 (3) 21.6
</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 the John Simmet Estate is PO Box 9, Newport,
Minnesota 55055. 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 7,162 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) Includes shares owned by two companies under the control of the Simmet
Estate.
(7) 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.
(8) 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."
(9) Consists of the following amounts: 4,250 shares owned directly; 13,500
shares of Common Stock, warrants to purchase 23,567 shares of Common Stock,
and 30,000 shares of Series B Preferred Stock convertible into 17,647
shares of Common Stock owned by a foundation of which Mr. Monroe is
president and a director; 70,250 shares of Common Stock, warrants to
purchase 23,570 shares of Common Stock and 15,000 shares of Series B
Preferred Stock convertible into 8,823 shares of Common Stock owned by an
estate of which Mr. Monroe is the executor;

-38-
<PAGE> 40
and 19,750 shares of Common Stock and 5,000 shares of Series B Preferred
Stock convertible into 2,941 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.

-39-
<PAGE> 41
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 $49,000 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 is expected
to occur on September __, 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 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

-40-
<PAGE> 42
is listed on the Nasdaq National Market under the symbol "MLRC." The Company's
transfer agent is Securities Transfer Corporation, Dallas, Texas.

OPTIONS

At August 1996, options to purchase an aggregate of 44,414 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 62,500 shares of the Company's
Common Stock at an exercise price of $10.00 per share 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
144,000 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.

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

-41-
<PAGE> 43
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 four
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, is currently $____, which means a total of _______ 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 $____ 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 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

-42-
<PAGE> 44
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.

-43-
<PAGE> 45
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>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Rodman & Renshaw, Inc. . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . 1,800,000
=========
</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 $_____ per share; and that such
dealers may reallow a concession of $____ 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 270,000 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
1,800,000 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 144,000 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.

-44-
<PAGE> 46
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, LLC, 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 December 31, 1995, the related
calculations of future net production revenues and net present value thereof
have been derived from independent petroleum engineering reports prepared by
Schlumberger/GeoQuest Reservoir Technologies, Inc., independent petroleum
engineers, and is included herein in reliance on such firm as an expert in
preparing such information.

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, 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:\www.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.

-45-
<PAGE> 47

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, and August 16,
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).

-46-
<PAGE> 48
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.

-47-
<PAGE> 49
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.

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.

-48-
<PAGE> 50
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-5

Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1993, 1994 and 1995 . . . . . . . . . . . . . . . . . . . . . . F-6

Consolidated Statements of Cash Flows for the Years Ended December 31, 1993,
1994 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . F-9

UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets as of December 31, 1995 and June 30, 1996 . . . . . F-28

Consolidated Statements of Operations for the Six Months and the Three Months
Ended June 30, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . F-30

Consolidated Statements of Cash Flows for the Six Months and the Three Months
Ended June 30, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . F-31

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . F-33
</TABLE>

F-1
<PAGE> 51
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Mallon Resources Corporation

The reverse stock split described in Note 1 to the financial statements has not
been consummated at August 28, 1996. When it has been consummated, we will be
in a position to furnish the following report:

"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

F-2
<PAGE> 52
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
============= =============
</TABLE>

(Continued on next page)

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

F-3
<PAGE> 53
MALLON RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

----------

LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
December 31,
-----------------------------
1994 1995
------------ ------------
<S> <C> <C>
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-4
<PAGE> 54
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-5
<PAGE> 55
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock
Shares Amount Shares Amount
--------- ---------- --------- -------
<S> <C> <C> <C> <C>
Balances 1/1/93 . . . . . . . . . . . . . . . 1,100,918 $5,730,000 1,210,257 $12,000
Private placement of common stock . . . . -- -- 553,472 6,000
Stock options exercised . . . . . . . . . -- -- 25,000 --
Employee stock options exercised . . . . . -- -- 810 --
Stock issued to directors . . . . . . . . -- -- 392 --
Stock issued for Fruitland Gas Company . . -- -- 100,000 1,000
Stock issued for property and equipment . -- -- 7,500 --
Options exercised for services . . . . . . -- -- 2,000 --
Employee stock options granted . . . . . . -- -- -- --
Net loss . . . . . . . . . . . . . . . . . -- -- -- --
--------- ---------- --------- -------

Balances 12/31/93 . . . . . . . . . . . . . . 1,100,918 5,730,000 1,899,431 19,000
Employee stock options exercised . . . . . -- -- 1,250 --
Stock issued to directors . . . . . . . . -- -- 769 --
Stock issued for property and equipment . -- -- 16,675 --
Employee stock options granted . . . . . . -- -- -- --
Other . . . . . . . . . . . . . . . . . . -- -- -- --
Dividends on preferred stock . . . . . . . -- -- -- --
Accretion of preferred stock . . . . . . . -- -- -- --
Net loss . . . . . . . . . . . . . . . . . -- -- -- --
--------- ---------- --------- -------

Balances 12/31/94 . . . . . . . . . . . . . . 1,100,918 5,730,000 1,918,125 19,000
Employee stock options exercised . . . . . -- -- 1,250 --
Stock issued to directors . . . . . . . . -- -- 1,539 --
Stock issued for property . . . . . . . . -- -- 14,000 --
Stock issued for loan fees . . . . . . . . -- -- 15,000 --
Employee stock options granted . . . . . . -- -- -- --
Issuance of warrants . . . . . . . . . . . -- -- -- --
Dividends on preferred stock . . . . . . . -- -- -- --
Accretion of preferred stock . . . . . . . -- -- -- --
Net loss . . . . . . . . . . . . . . . . . -- -- -- --
--------- ---------- --------- -------

Balances 12/31/95 . . . . . . . . . . . . . . 1,100,918 $5,730,000 1,949,914 $19,000
========= ========== ========= =======

<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
----------- ------------ ------------
<S> <C> <C> <C>
Balances 1/1/93 . . . . . . . . . . . . . . . $29,133,000 $(28,137,000) $ 6,738,000
Private placement of common stock . . . . 8,934,000 -- 8,940,000
Stock options exercised . . . . . . . . . 262,000 -- 262,000
Employee stock options exercised . . . . . 16,000 -- 16,000
Stock issued to directors . . . . . . . . 12,000 -- 12,000
Stock issued for Fruitland Gas Company . . (102,000) -- (101,000)
Stock issued for property and equipment . 151,000 -- 151,000
Options exercised for services . . . . . . 33,000 -- 33,000
Employee stock options granted . . . . . . 165,000 -- 165,000
Net loss . . . . . . . . . . . . . . . . . -- (1,187,000) (1,187,000)
----------- ------------ ------------

Balances 12/31/93 . . . . . . . . . . . . . . 38,604,000 (29,324,000) 15,029,000
Employee stock options exercised . . . . . -- -- --
Stock issued to directors . . . . . . . . 11,000 -- 11,000
Stock issued for property and equipment . 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 . . . . . . . . . . . . . . 38,785,000 (30,985,000) 13,549,000
Employee stock options exercised . . . . . -- -- --
Stock issued to directors . . . . . . . . 12,000 -- 12,000
Stock issued for property . . . . . . . . 112,000 -- 112,000
Stock issued for loan fees . . . . . . . . 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 . . . . . . . . . . . . . . $38,965,000 $(32,954,000) $ 11,760,000
=========== ============ ============
</TABLE>

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

F-6
<PAGE> 56
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 -- -- 2,275,000
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
============== ============ ============
</TABLE>

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

F-7
<PAGE> 57
MALLON RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)

<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------
1993 1994 1995
------------- ------------ ------------
<S> <C> <C> <C>
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-8
<PAGE> 58
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

In September, 1996, a four to one reverse stock split of the Company's
issued and outstanding shares of common stock will be 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.

F-9
<PAGE> 59
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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.

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.

F-10
<PAGE> 60
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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.

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 counterparts 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 counterparts.

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.

F-11
<PAGE> 61
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 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

F-12
<PAGE> 62
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 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 available to common shareholders $ (242,000)
==========

Net loss per share $ (.03)
==========
</TABLE>

F-13
<PAGE> 63
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 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>

F-14
<PAGE> 64
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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>

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.

F-15
<PAGE> 65
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

<TABLE>
<CAPTION>
Oil Gas
Proved Reserves (BBLS) (MCF)
--------- ----------
<S> <C> <C>
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-16
<PAGE> 66
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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-17
<PAGE> 67
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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-18
<PAGE> 68
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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:

o 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").

o The borrowing base under the Revolver is subject to
redetermination every six months, or at such other times as the
Bank may determine.

o The interest rate on amounts drawn under the Revolver is, at the
Company's election, either a 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 base
rate plus 4%.

o 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.

o Amounts drawn under the Drilling Line are repayable from 100% of
the net revenues generated by successful 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.

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

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

o The Facility expires on March 31, 1999.

F-19
<PAGE> 69
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 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:
<TABLE>
<S> <C>

1996 . . . . . . . . . . . $ 123,000
1997 . . . . . . . . . . . 110,000
1998 . . . . . . . . . . . 29,000
---------

$ 262,000
=========
</TABLE>

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.

F-20
<PAGE> 70
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 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.

F-21
<PAGE> 71
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 $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.

F-22
<PAGE> 72
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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.

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.

F-23
<PAGE> 73
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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.

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.

F-24
<PAGE> 74
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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-25
<PAGE> 75
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 $62,000 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.

F-26
<PAGE> 76
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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.

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 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-27
<PAGE> 77
MALLON RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

----------

ASSETS

<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 1,269,000 $ 832,000
Funds held in escrow . . . . . . . . . . . . . . . . . . . . . . -- 3,750,000
Accounts receivable:
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
============ ============
</TABLE>

(Continued on next page)

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

F-28
<PAGE> 78
MALLON RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

----------

LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ ------------
(Unaudited)
<S> <C> <C>
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
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, 19,000 21,000
respectively
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-29
<PAGE> 79
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 available 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-30
<PAGE> 80
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 from operations:
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
============ ===========
</TABLE>

(Continued on following page)

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

F-31
<PAGE> 81
MALLON RESOURCES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(Continued)

<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-------------------------------
1995 1996
------------- ------------
<S> <C> <C>
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-32
<PAGE> 82
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(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. In
September 1996 a four to one reverse stock split of the Company's issued and
outstanding shares of Common Stock will be 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:

o 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").

o The borrowing base under the revolver is subject to
redetermination every six months, or at such other times as the
Bank may determine.

o The interest rate on amounts drawn under the revolver is, at the
Company's election, either a 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 base
rate plus 4%.

o 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.

o Amounts drawn under the drilling line are repayable from 100% of
the net revenues generated by successful 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.

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

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

o The Facility expires on March 31, 1999.

F-33
<PAGE> 83
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

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 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
this Offering 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, and are reflected as an increase
to minority interest in the June 30, 1996 consolidated balance sheet. 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, and is shown on the balance sheet as funds held in escrow at June 30,
1996. The escrow agent 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 by the Ontario Securities Commission on 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.

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 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-34
<PAGE> 84
[ANNEX A]

February 29, 1996

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

Dear Mr. Fitzgerald:

At your request, GeoQuest has provided the attached estimate of proven
reserves and future net revenue for Mallon Oil Company's interest in certain
oil and gas properties located in the United States. The analysis shown in
this report presents estimates that are effective December 31, 1995. This
report has been prepared using unescalated prices, and costs for proved
reserves as requested by Mallon Oil Company.

GeoQuest's estimates of net reserves and the associated future net
revenue are summarized below and are presented in detail in subsequent sections
of this report. These estimates are attributable to the interest owned by
Mallon Oil Company as of December 31, 1995.

<TABLE>
<CAPTION>
==========================================================================================================
ESTIMATED ESTIMATED
NET RESERVES FUTURE NET REVENUE
--------------------------------------------------------------
PRESENT
OIL GAS UNDISCOUNTED VALUE @10%
CATEGORY STB MSCF $ $
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Mallon Properties
Proved Developed Producing 1,158,840 11,779,350 25,443,040 15,500,480
Proved Developed Nonproducing 78,797 2,922,380 2,593,055 1,502,837
Proved Undeveloped 575,780 5,219,539 7,619,582 4,034,498
TOTAL PROVED 1,813,417 19,921,270 35,655,670 21,037,810
==========================================================================================================
</TABLE>

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. (Note: totals
from the various summaries may differ by a few to several units due to
truncation and/or roundoff.) Our 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 undeveloped
proved reserves.

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. These definitions are part
of this report and are included under the tab "Reserve Definitions." The
attached report provides a one-line summary of all of the individual wells
which were analyzed as part of this study under the tab entitled "Input
Listing."

A-1
<PAGE> 85
Mr. Kevin M. Fitzgerald
February 29, 1996
Page A-2

The calculation of the estimated future net revenue is based upon oil
prices, gas prices, operating costs and projected capital costs remaining
constant in future years. The oil prices utilized were based upon the actual
prices received in December 1995, adjusted for gravity and bonus. Gas prices
were also based on actual December 1995 gas sales. Operating costs were
provided by Mallon Oil Company. These costs were adjusted to reflect
non-recurring costs and represent average monthly expenses. The price and cost
information provided by Mallon Oil Company was not independently verified by
GeoQuest. Capital costs were included as required to account for planned
expenditures for workovers, new development wells and production facilities.
These costs were provided by Mallon and not independently verified.

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.
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 because 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
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 economic status. The reserves and
forecasts contained in this report are 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.
Value is highly dependent on prices, therefore, future production and revenues
may vary from the estimates included in this report.

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 on Mallon Oil Company receiving
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 obtained from 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.

A-2
<PAGE> 86
Mr. Kevin M. Fitzgerald
February 29, 1996
Page A-3

It was a pleasure 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-3
<PAGE> 87
[INSIDE BACK COVER]

STRATIGRAPHIC MAPS

Delaware Basin

San Juan Basin
<PAGE> 88
================================================================================

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 . . . . . . . . . . . . . 4
Cautionary Statement Regarding
Forward-Looking Statements . . . . . . . . 9

Risk Factors . . . . . . . . . . . . . . . . 9
Use of Proceeds . . . . . . . . . . . . . . . 14

Price Range of Common Stock . . . . . . . . . 15
Dividend Policy . . . . . . . . . . . . . . . 15
Capitalization . . . . . . . . . . . . . . . 16
Selected Consolidated Financial Data . . . . 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . 19
Business and Properties . . . . . . . . . . . 26
Management . . . . . . . . . . . . . . . . . 35
Principal Shareholders . . . . . . . . . . . 38
Transactions with Related Parties . . . . . . 40
Description of Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . 40
Underwriting . . . . . . . . . . . . . . . . 44
Legal Matters . . . . . . . . . . . . . . . . 45
Experts . . . . . . . . . . . . . . . . . . . 45
Available Information . . . . . . . . . . . . 45
Incorporation of Certain Documents by
Reference . . . . . . . . . . . . . . . . . . 46
Glossary of Terms . . . . . . . . . . . . . . 47
Index to Consolidated Financial Statements . F-1
Annex A . . . . . . . . . . . . . . . . . . . A-1
</TABLE>

================================================================================

[LOGO]

MALLON
RESOURCES
CORPORATION

1,800,000 SHARES

COMMON STOCK

----------

PROSPECTUS

----------

RODMAN & RENSHAW, INC.

, 1996
-----------

================================================================================
<PAGE> 89
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, and other then the Underwriter's
non-accountable expense allowance equal to 2.25% of the Offering, payable by
the Company in connection with the sale of Common Stock being registered (all
amounts are estimated except the SEC Registration Fee and the NASD Filing Fee).

<TABLE>
<S> <C>
SEC Registration Fee . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,300

National Association of Securities Dealers, Inc. Fee . . . . . . . . . 1,800

NASDAQ Listing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . 0

Blue Sky Qualification Fees and Expenses (including legal fees) . . . 12,000

Printing Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000

Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . 80,000

Auditors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . 60,000

Transfer Agent and Registrar Fees . . . . . . . . . . . . . . . . . . 1,000

Miscellaneous Expenses . . . . . . . . . . . . . . . . . . . . . . . . 20,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300,000
</TABLE>

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

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company's Bylaws and Restated Articles of Incorporation provide
that the Company shall, to the full extent permitted by the Colorado Business
Corporation Articles, as amended from time to time, indemnify all directors and
officers of the Company. Sections 7-109-101 to 7-109-110 of the Colorado
Business Corporation Act provide in part that a corporation shall have the
power to indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceedings
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Similar indemnity is authorized for such persons against expenses (including
attorneys' fees) actually and reasonably incurred in defense or settlement of
any threatened, pending or completed action or suit by or in the right of the
corporation, if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, and
provided further that (unless a court of competent jurisdiction otherwise
provides) such person shall not have been adjudged liable to the corporation.
Any such indemnification may be made only as authorized in each specific case
upon a determination by the shareholders or disinterested directors that
indemnification is proper because the indemnitee has met the applicable
standard of conduct. The indemnitee is presumed to be entitled to
indemnification and the Company has the burden of proof to overcome that
presumption. Where an officer or a director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director actually or
reasonably incurred.

II-1
<PAGE> 90
Additionally, the Restated Articles of Incorporation and Bylaws
provide for mandatory indemnification of directors to the fullest extent
permitted by Colorado law. This provision does not eliminate the liability of
a director (i) for a breach of the director's duty of loyalty to the Company or
its shareholders; (ii) for acts or omissions by the director not in good faith
or which involve intentional misconduct or a knowing violation of law; (iii)
for liability arising under Section 7-108-403 of the Colorado Business
Corporation Law (relating to distributions to shareholders in violation of the
Colorado Business Corporation Act); or (iv) for any transaction from which the
director derived an improper personal benefit.

Section 7 of the Underwriting Agreement (filed as Exhibit 1.1 hereto)
provides that the Underwriters will indemnify and hold harmless the Company and
each director, officer or controlling person of the Company from and against
any liability caused by any statement or omission in the Registration Statement
or Prospectus based on certain information furnished to the Company by the
Underwriters for use in the preparation thereof.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- --------------------
<S> <C>
1.1 Form of Underwriting Agreement between the Company and the Underwriters.
*3.01 Amended and Restated Articles of Incorporation of the Company . . . . . . . . . . . . . . (1)
*3.02 Bylaws of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
*3.03 Statement of Designations -- Series A Preferred Stock . . . . . . . . . . . . . . . . . . (2)
*3.04 Statement of Designations -- Series B Preferred Stock . . . . . . . . . . . . . . . . . . (5)
5.1 Form of Opinion of Holme Roberts & Owen LLC as to the legality of
issuance of the Company's Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . .

Material Contracts
*10.58 Bank One -- Loan Agreement dated March 20, 1996 . . . . . . . . . . . . . . . . . . . . . (6)
*10.63 Bank One -- Amendment One . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
*10.64 Bank One -- Amendment Two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
10.65 Repurchase and Sale Agreement on Series A Preferred Stock . . . . . . . . . . . . . . . .

Executive Compensation Plans and Arrangements
*10.1.3 Equity Participation Plan, amended November 2, 1990 . . . . . . . . . . . . . . . . . . . (3)
*10.1.4 Stock Compensation Plan for Outside Directors . . . . . . . . . . . . . . . . . . . . . . (4)

Consents
23.1 Consent of Price Waterhouse LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.2 Consent of Holme Roberts & Owen LLC (See Exhibit 5.1) . . . . . . . . . . . . . . . . . .
23.3 Consent of Schlumberger/GeoQuest Reservoir Technologies, Inc. . . . . . . . . . . . . . .
24. Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
----
</TABLE>

- ------------
* The exhibit numbers are the exhibit numbers assigned in the previous
filings with the Securities and Exchange Commission, which are identified
in the notes below.
1. Incorporated by reference from Mallon Resources Corporation Exhibits to
Registration Statement on Form S-4 (SEC File No. 33-23076) filed on August
15, 1988.
2. Incorporated by reference from Mallon Resources Corporation (Commission
File No. 0-17267) Form 8-K filed on January 8, 1990.
3. Incorporated by reference from Mallon Resources Corporation (Commission
File No. 0-17267) Form 10-K for fiscal year ended December 31, 1990.
4. Incorporated by reference from Mallon Resources Corporation Exhibits to
Registration Statement on Form S-8 (SEC File No. 33-39635) filed on March
28, 1991.
5. Incorporated by reference from Mallon Resources Corporation (Commission
File No. 0-17267) Form 8-K filed on August 24, 1995.
6. Incorporated by reference from Mallon Resources Corporation (Commission
File No. 0-17267) Form 8-K filed on March 20, 1996.
7. Incorporated by reference from Mallon Resources Corporation (Commission
File No. 0-17267) Form 8-K filed on August 15, 1996.

II-2
<PAGE> 91
(b) Financial Statement Schedules

None

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions, are inapplicable and therefore have been omitted or
the information required by the applicable schedule is included in the notes to
the financial statements.

ITEM 17. UNDERTAKINGS.

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

The undersigned registrant hereby undertakes that:

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

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

II-3
<PAGE> 92
SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN DENVER, COLORADO, ON
THIS 28TH DAY OF AUGUST, 1996.

MALLON RESOURCES CORPORATION

By: /s/ GEORGE O. MALLON, JR.
-------------------------
George O. Mallon, Jr.
President

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ GEORGE O. MALLON, JR. Chairman of the Board, Director and August 28, 1996
----------------------------------------- President (Principal Executive
George O. Mallon, Jr. Officer)

/s/ ROY K. ROSS Executive Vice President and Director August 28, 1996
-----------------------------------------
Roy K. Ross

/s/ KEVIN M. FITZGERALD Executive Vice President and Director August 28, 1996
-----------------------------------------
Kevin M. Fitzgerald

/s/ JAMES A. MCGOWEN Executive Vice President and Director August 28, 1996
-----------------------------------------
James A. McGowen

/s/ ALFONSO R. LOPEZ Treasurer (Principal Financial August 28, 1996
----------------------------------------- Officer)
Alfonso R. Lopez

/s/ CAROLENA F. CHAPMAN Controller (Principal Accounting August 28, 1996
----------------------------------------- Officer)
Carolena F. Chapman

* Director August 28, 1996
-----------------------------------------
Frank Douglass

* Director August 28, 1996
-----------------------------------------
Roger R. Mitchell

* Director August 28, 1996
-----------------------------------------
Francis J. Reinhardt, Jr.

* /s/ GEORGE O. MALLON, JR. August 28, 1996
-----------------------------------------
George O. Mallon, Jr.,
as Attorney-in-Fact
</TABLE>

II-4
<PAGE> 93
EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- --------------------
<S> <C>
1.1 Form of Underwriting Agreement between the Company and the Underwriters.
*3.01 Amended and Restated Articles of Incorporation of the Company . . . . . . . . . . . . . . . . . . . . . . . (1)
*3.02 Bylaws of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
*3.03 Statement of Designations -- Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
*3.04 Statement of Designations -- Series B Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (5)
5.1 Form of Opinion of Holme Roberts & Owen LLC as to the legality of
issuance of the Company's Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Material Contracts
*10.58 Bank One -- Loan Agreement dated March 20, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6)
*10.63 Bank One -- Amendment One . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
*10.64 Bank One -- Amendment Two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
10.65 Repurchase and Sale Agreement on Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .

Executive Compensation Plans and Arrangements
*10.1.3 Equity Participation Plan, amended November 2, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3)
*10.1.4 Stock Compensation Plan for Outside Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4)

Consents
23.1 Consent of Price Waterhouse LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.2 Consent of Holme Roberts & Owen LLC (See Exhibit 5.1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.3 Consent of GeoQuest Reservoir Technologies, Inc. . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . .
24. Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
----
</TABLE>

- ---------
* The exhibit numbers are the exhibit numbers assigned in the previous
filings with the Securities and Exchange Commission, which are identified
in the notes below.
1. Incorporated by reference from Mallon Resources Corporation Exhibits to
Registration Statement on Form S-4 (SEC File No. 33-23076) filed on August
15, 1988.
2. Incorporated by reference from Mallon Resources Corporation (Commission
File No. 0-17267) Form 8-K filed on January 8, 1990.
3. Incorporated by reference from Mallon Resources Corporation (Commission
File No. 0-17267) Form 10-K for fiscal year ended December 31, 1990.
4. Incorporated by reference from Mallon Resources Corporation Exhibits to
Registration Statement on Form S-8 (SEC File No. 33-39635) filed on March
28, 1991.
5. Incorporated by reference from Mallon Resources Corporation (Commission
File No. 0-17267) Form 8-K filed on August 24, 1995.
6. Incorporated by reference from Mallon Resources Corporation (Commission
File No. 0-17267) Form 8-K filed on March 20, 1996.
7. Incorporated by reference from Mallon Resources Corporation (Commission
File No. 0-17267) Form 8-K filed on August 15, 1996.

<PAGE> 1
EXHIBIT 1.1

________ Shares

MALLON RESOURCES CORPORATION

Common Stock

UNDERWRITING AGREEMENT

September ___, 1996

Rodman & Renshaw, Inc.
Two World Financial Center
225 Liberty St., 30th Floor
New York, New York 10281

On behalf of the Several
Underwriters named in
Schedule I attached hereto.

Ladies and Gentlemen:

Mallon Resources Corporation , a Colorado corporation (the "Company")
proposes to sell to you and the other underwriters named in Schedule I attached
hereto (the "Underwriters"), for whom you are acting as the Representative,
________ shares (the "Firm Shares") of the Company's Common Stock, par value
$0.01 per share (the "Common Stock") to be issued and sold by the Company. In
addition, the Company proposes to grant to the Underwriters an option to
purchase up to an additional _______ shares (the "Option Shares"), of Common
Stock for the purpose of covering overallotments in connection with the sale of
the Firm Shares. The Firm Shares and the Option Shares are together called the
"Shares."

1. Sale and Purchase of the Shares. On the basis of the
representations, warranties and agreements contained in, and subject to the
terms and conditions of, this Agreement:

(a) The Company agrees to issue and sell the Firm Shares
to the several Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase at the purchase price per share
of Common Stock of $_____ (the "Initial Price"), the aggregate number
of Firm Shares set forth opposite such Underwriter's name in Schedule
I attached hereto.

(b) The Company grants to the several Underwriters an
option to purchase up to an additional _______ shares at the Initial
Price. Pursuant to such option, the Company agrees to issue and sell
the Option Shares to the Several Underwriters, and each of the
<PAGE> 2
Underwriters agrees, severally and not jointly, to purchase at the
Initial Price the same percentage (adjusted by the Representative to
eliminate fractions) of the total number of Option Shares to be
purchased by the Underwriters as such Underwriter is purchasing of the
Firm Shares. Such option may be exercised only to cover
over-allotments in the sales of the Firm Shares by the Underwriters
and may be exercised in whole or in part at any time on or before
12:00 noon, New York City time, on the business day before the Firm
Shares Closing Date (as defined below) and from time-to-time
thereafter within 30 days after the date of this Agreement, upon
verbal or telephonic notice by the Representative to the Company
setting forth the number of Option Shares to be purchased and the time
and date (if other than the Firm Shares Closing Date) of such
purchase.

2. Delivery and Payment. Delivery by the Company of the Firm
Shares to the Representative for the respective accounts of the Underwriters,
and payment of the purchase price by certified or official bank check or checks
payable in New York Clearing House (next day) funds to the Company, shall take
place at the offices of Rodman & Renshaw, Inc., at Two World Financial Center,
225 Liberty St., 30th Floor, New York, New York, 10281, at 10:00 a.m., New York
City time, on the third business day following the date on which the public
offering of the Shares commences (unless such date is postponed in accordance
with the provisions of Section 10(b)), or at such time and place on such other
date, not later than 10 business days after the date of this Agreement, as
shall be agreed upon by the Company and the Representative (such time and date
of delivery and payment are called the "Firm Shares Closing Date"). The public
offering of the Shares shall be deemed to have commenced at the time, which is
the earlier of (a) the time, after the Registration Statement (as defined in
Section 4 below) becomes effective, of the release by you for publication of
the first newspaper advertisement which is subsequently published relating to
the Shares or (b) the time, after the Registration Statement becomes effective,
when the Shares are first released by you for offering by the Underwriters or
dealers by letter, facsimile transmission or telegram.

In the event the option with respect to the Option Shares is
exercised, delivery by the Company of the Option Shares to the Representative
for the respective accounts of the Underwriters, and payment of the purchase
price by certified or official bank check or checks payable in New York,
Clearing House (next day) funds to the Company shall take place at the offices
of Rodman & Renshaw, Inc. specified above at the time and on the date (which
may be the same date as, but in no event shall be earlier than, the Firm Shares
Closing Date) specified in the notice referred to in Section 1(b) (such time
and date of delivery and payment is called the "Option Shares Closing Date").
The Firm Shares Closing Date and the Option Shares Closing Date are called,
individually, a "Closing Date" and, together, the "Closing Dates."

Certificates evidencing the Shares shall be registered in such names
and shall be in such denominations as the Representative shall request at least
two full business days before the Firm Shares Closing Date or the Option Shares
Closing Date, as the case may be, and shall be made available to the
Representative for checking and packaging, at such place as is designated by
the

2
<PAGE> 3
Representative, on the full business day before the Firm Shares Closing Date or
the Option Shares Closing Date, as the case may be.

The documents to be delivered at each Closing Date by or on behalf of
the parties hereto, including the cross receipt for the Shares and any
additional documents requested by the Underwriters, will be delivered at the
offices of Vinson & Elkins L.L.P., 2300 First City Tower, 1001 Fannin, Houston,
Texas 77002 (the "Closing Location"). A meeting will be held at the Closing
Location at 2:00 p.m., Houston time, on the New York Business Day next
preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. "New York Business Day" shall mean each
Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated by law
or executive order to close.

3. Public Offering. The Company understands that the
Underwriters propose to make a public offering of the Shares, as set forth in
and pursuant to the Prospectus (as defined in Section 4 below), as soon after
the effective date of the Registration Statement and the date of this Agreement
as the Representative deems advisable. The Company hereby confirms that the
Underwriters and dealers have been authorized to distribute or cause to be
distributed each preliminary prospectus and are authorized to distribute the
Prospectus (as from time to time amended or supplemented if the Company
furnishes amendments or supplements thereto to the Underwriters).

4. Representations and Warranties of the Company.

The Company represents and warrants to, and agrees with, the
several Underwriters that:

(i) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration
statement, and may have filed one or more amendments thereto,
on Form S-2 (Registration No. 333-______), including in such
registration statement and each such amendment a related
preliminary prospectus (a "Preliminary Prospectus"), for the
registration of the Shares and the Option Shares, in
conformity with the requirements of the Securities Act of
1933, as amended (the "Act"). In addition, the Company has
filed or will promptly file a further amendment to such
registration statement, in the form heretofore delivered to
you. Other than a registration statement, if any, increasing
the size of the offering (a "Rule 462(b) Registration
Statement"), filed pursuant to Rule 462(b) under the Act,
which became effective upon filing, no other document with
respect to the registration statement referred to above has
heretofore been filed with the Commission. As used in this
Agreement, the term "Registration Statement" means such
registration statement and the Rule 462(b) Registration
Statement, if any, as amended, on file with the Commission at
the time such registration statement becomes effective
(including the prospectus, financial statements, exhibits and
all other documents filed as a part

3
<PAGE> 4
thereof or incorporated by reference directly or indirectly
therein), provided that such Registration Statement, at the
time it becomes effective, may omit such information as is
permitted to be omitted from the Registration Statement when
it becomes effective pursuant to Rule 430A of the General
Rules and Regulations promulgated under the Act (the
"Regulations"), which information ("Rule 430 Information")
shall be deemed to be included in such Registration Statement
when a final prospectus is filed with the Commission in
accordance with Rules 430A and 424(b)(1) or (4) of the
Regulations; the term "Preliminary Prospectus" means each
prospectus included in the Registration Statement, or any
amendments thereto, before it becomes effective under the Act,
the form of prospectus omitting Rule 430A Information included
in the Registration Statement when it becomes effective, if
applicable (the "Rule 430A Prospectus"), and any prospectus
filed by the Company with your consent pursuant to Rule 424(a)
of the Regulations; and the term "Prospectus" means the final
prospectus included as part of the Registration Statement,
except that if the prospectus relating to the securities
covered by the Registration Statement in the form first filed
on behalf of the Company with the Commission pursuant to Rule
424(b) of the Regulations shall differ from such final
prospectus, the term "Prospectus" shall mean the prospectus as
filed pursuant to Rule 424(b) from and after the date on which
it shall have first been used.

(ii) When the Registration Statement becomes
effective, and at all times subsequent thereto to and
including the Closing Dates and during such longer period as
the Prospectus may be required to be delivered in connection
with sales by the Underwriters or a dealer, and during such
longer period until any post-effective amendment thereto shall
become effective, the Registration Statement (and any
post-effective amendment thereto) and the Prospectus (as
amended or as supplemented if the Company shall have filed
with the Commission any amendment or supplement to the
Registration Statement or the Prospectus) will contain all
statements which are required to be stated therein in
accordance with the Act and the Regulations, will comply with
the Act and the Regulations, and will not contain any untrue
statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading, and no event will have
occurred which should have been set forth in an amendment or
supplement to the Registration Statement or the Prospectus
which has not then been set forth in such an amendment or
supplement; if a Rule 430A Prospectus is included in the
Registration Statement at the time it becomes effective, the
Prospectus filed pursuant to Rules 430A and 424(b)(1) or (4)
will contain all Rule 430A Information: and each Preliminary
Prospectus, as of the date filed with the Commission, did not
include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading;
except that no representation or warranty is made in this
Section 4(a)(ii) with respect to statements or omissions made
in reliance upon and in conformity with written information
furnished to the Company as stated in Section 7(b) with
respect

4
<PAGE> 5
to any Underwriter by or on behalf of such Underwriter through
the Representative expressly for inclusion in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or
any amendment or supplement thereto.

(iii) Neither the Commission nor the "blue sky" or
securities authority of any jurisdiction have issued an order
(a "Stop Order") suspending the effectiveness of the
Registration Statement, preventing or suspending the use of
any Preliminary Prospectus, the Prospectus, the Registration
Statement, or any amendment or supplement thereto, refusing to
permit the effectiveness of the Registration Statement or
suspending the registration or qualification of the Firm
Shares or the Option Shares, nor has any of such authorities
instituted or, to the knowledge of the Company, threatened to
institute any proceedings with respect to a Stop Order.

(iv) Any contract, agreement, instrument, lease or
license required to be described in the Registration Statement
or the Prospectus has been properly described therein. Any
contract agreement, instrument, lease or license required to
be filed as an exhibit to the Registration Statement has been
filed with the Commission as an exhibit to or has been
incorporated as an exhibit by reference into the Registration
Statement.

(v) The Company has no subsidiary or subsidiaries
and does not control, directly or indirectly, any corporation,
partnership, joint venture, association or other business
organization, except for those set forth on Schedule II hereto
(each such corporation singly a "Subsidiary" and collectively
the "Subsidiaries"). The Company and each Subsidiary is a
corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation,
with full corporate power and authority and all necessary
consents, authorizations, approvals, orders, licenses,
certificates and permits of and from, and declarations and
filings with, all federal, state, foreign, local and other
governmental authorities and all courts and other tribunals,
to own, lease, license and use its properties and assets and
to carry on its business as now being conducted and in the
manner described in the Prospectus, except where such failure
would not have a material adverse effect on the Company and
the Subsidiaries. Each of the Company and each Subsidiary has
been duly qualified to do business and is in good standing in
each jurisdiction in which its respective ownership, leasing,
licensing or character, location or use of property and assets
or the conduct of its respective business makes such
qualification necessary, except where the failure to so
qualify would not have a material adverse effect on the
Company and the Subsidiaries.

(vi) The Company has an authorized capitalization
as set forth in the Prospectus, and all of the issued shares
of capital stock of the Company have been duly and validly
authorized and issued, fully paid and nonassessable, without
any personal liability attaching to the ownership thereof,
have not been issued and are not

5
<PAGE> 6
owned or held in violation of any preemptive rights of
shareholders, optionholders, warrantholders or other persons.
The Company owns all of the shares of capital stock of the
Subsidiaries, free and clear of all liens, claims, security
interests, restrictions, stockholders' agreements, voting
trusts and any other encumbrances whatsoever, except as
described in the Prospectus. There is no commitment, plan,
preemptive right or arrangement to issue, and no outstanding
option, warrant or other right calling for the issuance of,
shares of capital stock of the Company or any of the
Subsidiaries or any security or other instrument which by its
terms is convertible into, exercisable for or exchangeable for
capital stock of the Company or any of the Subsidiaries,
except as described in the Prospectus. There is outstanding
no security or other instrument which by its terms is
convertible into or exchangeable for capital stock of the
Company or any of the Subsidiaries, except as described in the
Prospectus.

(vii) The consolidated financial statements of the
Company included in the Registration Statement and the
Prospectus fairly present in all material respects, with
respect to the Company, the consolidated financial position,
the consolidated results of operations and the other
information purported to be shown therein at the respective
dates and for the respective periods to which they apply.
Such financial statements have been prepared in accordance
with generally accepted accounting principles consistently
applied throughout the periods involved, are correct and
complete and are in accordance with the books and records of
the Company. The accountants whose reports on the audited
financial statements are filed with the Commission as a part
of the Registration Statement are, and during the periods
covered by their reports included in the Registration
Statement and the Prospectus were, independent certified
public accountants with respect to the Company within the
meaning of the Act and the Regulations. No other financial
statements are required by Form S-2 or otherwise to be
included in the Registration Statement or the Prospectus.
There has at no time been a material adverse change in the
financial condition, results of operations, business,
properties, assets, liabilities, or future prospects of the
Company or any of the Subsidiaries from the latest information
set forth in the Registration Statement or the Prospectus.

(viii) There is no litigation, arbitration, claim,
governmental or other proceeding (formal or informal) or
investigation before any court or before any public body or
board pending, or, to the knowledge of the Company, threatened
or in prospect (or any basis therefor) with respect to the
Company or any of the Subsidiaries, or any of their respective
operations, business, properties or assets, except as may be
properly described in the Prospectus or such as individually
or in the aggregate do not now have and could not reasonably
be expected in the future to have a material adverse effect
upon the operations, business, properties, assets or financial
condition of the Company or any of the Subsidiaries. Neither
the Company nor any of the Subsidiaries is involved in any
labor dispute nor, to the knowledge of

6
<PAGE> 7
the Company, is such dispute threatened, which dispute could
reasonably be expected to have a material adverse effect upon
the operations, business, properties, assets, stockholder's
equity, results of operations or financial condition of the
Company or any of the Subsidiaries, as applicable ("Material
Adverse Effect"). Neither the Company nor any of the
Subsidiaries is in violation of, or in default with respect
to, any law, rule, regulation, order, judgment or decree which
could reasonably be expected to have a material adverse effect
on the Company or any of the Subsidiaries; nor is the Company
or any of the Subsidiaries required to take any action in
order to avoid any such violation or default with respect
thereto.

(ix) Except as described in the Prospectus, the
Company and each of the Subsidiaries have (1) good and
indefeasible title to all its interests in its oil and gas
properties, title investigations having been carried out by or
on behalf of such person in accordance with good practice in
the oil and gas industry in the areas in which the Company
operate and each of the Subsidiaries and (2) good and
indefeasible title to all other real property and good and
marketable title to all other material properties and assets
described in the Prospectus as owned by the Company or any of
the Subsidiaries and valid, subsisting and enforceable leases
for all of the properties and assets, real or personal,
described in the Prospectus as leased by them, in each case
free and clear of any security interests, mortgages, pledges,
liens, encumbrances or charges of any kind, other than those
described in the Prospectus and those that could not,
individually or in the aggregate, have a Material Adverse
Effect.

(x) Except as described in the Prospectus, as of
the date hereof, (i) all royalties, rentals, deposits and
other amounts due on the oil and gas properties of the Company
and each of the Subsidiaries have been properly and timely
paid, and no proceeds from the sale or production attributable
to the oil and gas properties of the Company or any of the
Subsidiaries are currently being held in suspense by any
purchaser thereof, except where such amounts due could not,
singly or in the aggregate, have a Material Adverse Effect and
(ii) there are no claims under take-or-pay contracts pursuant
to which natural gas purchasers have any make-up rights
affecting the interest of the Company or any of the
Subsidiaries in its oil and gas properties, except where such
claims could not, singly or in the aggregate, have a Material
Adverse Effect.

(xi) As of the date hereof, the aggregate
undiscounted monetary liability of the Company and each of the
Subsidiaries for petroleum taken or received under any
operating or gas balancing and storage agreement relating to
its oil and gas properties that permits any person to receive
any portion of the interest of the Company or any of the
Subsidiaries in any petroleum or to receive cash or other
payments to balance any disproportionate allocation of
petroleum could not, singly or in the aggregate, have a
Material Adverse Effect.

7
<PAGE> 8
(xii) The Company and each of the Subsidiaries, and
to the knowledge of the Company, any other party, is not now
and is not expected by the Company to be in violation or
breach of, or in default with respect to, complying with any
term, obligation or provision of any contract, agreement,
instrument, lease, license, indenture, mortgage, deed of
trust, note, arrangement or understanding which is material to
the Company or any of the Subsidiaries and no event has
occurred which with notice or lapse of time or both would
constitute such a default, and each such contract, agreement,
instrument, lease, license, indenture, mortgage, deed of
trust, note, arrangement or understanding is in full force and
is the legal, valid and binding obligation of the parties
thereto and is enforceable as to the Company, each of the
Subsidiaries and, to the knowledge of the Company, each other
party thereto, in accordance with its terms, subject to
applicable bankruptcy, insolvency and other laws affecting the
enforceability of creditor's rights generally and the effects
of general principles of equity. The Company and each of the
Subsidiaries enjoys peaceful and undisturbed possession under
all property leases and licenses under which it is operating,
the loss of any of which would not have a Material Adverse
Effect. Neither the Company nor any of the Subsidiaries is in
violation or breach of, or in default with respect to, any
term of its certificate of incorporation (or other charter
document) or by-laws or of any franchise, license, permit,
judgment, decree, order, statute, rule or regulation, which
breach or default of such franchise, license, permit,
judgment, decree, order, statute, rule or regulation could
reasonably be expected to have a Material Adverse Effect.

(xiii) The Company and the Subsidiaries have filed
all federal, state, local and foreign tax returns which are
required to be filed through the date hereof, or have received
extensions thereof, and have paid all taxes shown on such
returns and all assessments received by them to the extent
that the same are material and have become due.

(xiv) None of the Company, any Subsidiary,
director, officer, agent, employee or other person associated
with or acting on behalf of the Company and the Subsidiaries
has, directly or indirectly: used any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity; made any unlawful
payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or
campaigns from corporate funds; violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended; or made any
bribe, rebate, payoff, influence payment, kickback or other
unlawful payment. No transaction has occurred between or
among the Company or the Subsidiaries and any officers or
directors or any affiliates or affiliates of any such officer
or director, except as described in the Prospectus.

(xv) The Company and each of the Subsidiaries (A)
are in compliance with any and all applicable federal, state
and local laws and regulations relating to the

8
<PAGE> 9
protection of human health and safety, the environment or
hazardous or toxic substances or waste, pollutants or
contaminants ("Environmental Laws"), (B) have received all
permits, licenses or other approvals required of it under
applicable Environmental Laws to conduct its business and (C)
are in compliance with all terms and conditions of any such
permit, license or approval, except for such noncompliance
with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals
that would not, singly or in the aggregate, have a Material
Adverse Effect. There has been no storage, disposal,
generation, transportation, handling or treatment of hazardous
substances or solid wastes by the Company or any of the
Subsidiaries (or to the knowledge of the Company, any of their
predecessors in interest) at, upon or from any of the property
now or previously owned or leased by the Company or any of the
Subsidiaries in violation of any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit or which
would require remedial action by the Company or any of the
Subsidiaries under any applicable law, ordinance, rule,
regulation, order, judgment, decree or permit, except for any
violation or remedial action which would not result in, or
which would not be reasonably likely to result in, singularly
or in the aggregate with all such violations and remedial
actions, a Material Adverse Effect; there has been no spill,
discharge, leak, emission, injection, escape, dumping or
release of any kind onto such property or into the environment
surrounding such property of any solid wastes or hazardous
substances due to or caused by the Company or any of the
Subsidiaries, except for any such spill, discharge, leak,
emission, injection, escape, dumping or release which would
not result in or would not be reasonably likely to result in,
singularly or in the aggregate with all such spills,
discharges, leaks, emissions, injections, escapes, dumpings
and releases, a Material Adverse Effect; and the terms
"hazardous substances" and "solid wastes" shall have the
meanings specified in any applicable local, state and federal
laws or regulations with respect to environmental protection;

(xvi) The Company and the Subsidiaries have all
requisite corporate power and authority to execute, deliver
and perform this Agreement. All necessary corporate
proceedings of the Company and the Subsidiaries have been duly
taken to authorize the execution, delivery and performance of
this Agreement. This Agreement has been duly authorized,
executed and delivered by the Company, is the legal, valid and
binding obligation of the Company and is enforceable as to the
Company in accordance with its terms, subject to applicable
bankruptcy, insolvency and other laws affecting the
enforceability of creditor's rights generally and the effects
of general principles of equity. No consent, authorization,
approval, order, license, certificate or permit of or from, or
declaration or filing with, any federal, state, local, foreign
or other governmental authority or any court or other tribunal
is required by the Company or the Subsidiaries for the
execution, delivery or performance by the Company of this
Agreement (except filings under the Act which

9
<PAGE> 10
have been or will be made before the applicable Closing Date
and such consents consisting only of consents under "blue sky"
or securities laws which have been obtained at or prior to the
date of this Agreement). No consent of any party to any
contract, agreement, instrument, lease, license, indenture,
mortgage, deed of trust, note, arrangement or understanding to
which the Company or the Subsidiaries is a party, or to which
any of their respective properties or assets are subject, is
required for the execution, delivery or performance of this
Agreement, and the execution, delivery and performance of this
Agreement will not violate, result in a breach of, conflict
with, accelerate the due date of any payments under, or (with
or without the giving of notice or the passage of time or
both) entitle any party to terminate or call a default under
any such contract, agreement, instrument, lease, license,
indenture, mortgage, deed of trust, note, arrangement or
understanding, or violate or result in a breach of any term of
the certificate of incorporation (or other charter document)
or by-laws of the Company or any of the Subsidiaries, or
violate, result in a breach of or conflict with any law, rule,
regulation, order, judgment or decree binding on the Company
or any of the Subsidiaries or to which any of their respective
operations, business, properties or assets are subject.

(xvii) The Shares have been duly and validly
authorized. The Firm Shares, when issued and delivered in
accordance with this Agreement, and the Option Shares, when
issued and delivered in accordance with this Agreement, will
be duly and validly issued, fully paid and nonassessable,
without any personal liability attaching to the ownership
thereof, and will not be issued in violation of any preemptive
rights of shareholders, optionholders, warrantholders and any
other persons and the Underwriters will receive good title to
the Firm Shares and the Option Shares purchased by them,
respectively, free and clear of all liens, security interests,
pledges, charges, encumbrances, shareholders' agreements and
voting trusts.

(xviii) All types and series of capital stock of the
Company, the Firm Shares and the Option Shares conform to all
statements relating thereto contained in the Registration
Statement or the Prospectus.

(xix) Subsequent to the respective dates as of
which information is given in the Registration Statement and
the Prospectus, and except as may otherwise be properly
described therein, there has not been any material adverse
change in the assets or properties, business or results of
operations or financial condition of the Company or the
Subsidiaries, whether or not arising from transactions in the
ordinary course of business; neither the Company nor the
Subsidiaries have sustained any material loss or interference
with its respective business or properties from fire,
explosion, earthquake, flood or other calamity, whether or not
covered by insurance; since the date of the latest balance
sheet included in the Registration Statement and the
Prospectus, except as reflected in the Registration Statement,
neither the

10
<PAGE> 11
Company nor the Subsidiaries, have undertaken any liability or
obligation, direct or contingent, except for liabilities or
obligations undertaken in the ordinary course of business; and
neither the Company nor the Subsidiaries have (A) issued any
securities or incurred any liability or obligation, primary or
contingent, for borrowed money, (B) entered into any
transaction not in the ordinary course of business or (C)
declared or paid any dividend or made any distribution on any
of its capital stock or redeemed, purchased or otherwise
acquired or agreed to redeem, purchase or otherwise acquire
any shares of its capital stock.

(xx) Neither the Company nor its Subsidiaries or
any of their respective officers, directors or affiliates (as
defined in the Regulations), have taken or will take, directly
or indirectly, prior to the termination of the underwriting
syndicate contemplated by this Agreement, any action designed
to stabilize or manipulate the price of any security of the
Company, or which has caused or resulted in, or which might in
the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any security of
the Company, to facilitate the sale or resale of any of the
Firm Shares or the Option Shares.

(xxi) The Company has obtained from each of its
executive officers and directors and principal shareholders,
their enforceable written agreement, in form and substance
satisfactory to counsel for the Underwriters, that for a
period of 180 days from the date on which the public offering
of the Shares commences they will not, without your prior
written consent, offer, pledge, sell, contract to sell, grant
any option for the sale of or otherwise dispose of, directly
or indirectly, any shares of Common Stock or other securities
of the Company (or any security or other instrument which by
its terms is convertible into, exercisable for or exchangeable
for shares of Common Stock or other securities of the Company,
including, without limitation, any shares of Common Stock
issuable under any employee stock options), beneficially owned
by them, except with respect to Shares being sold in
connection herewith or their being a beneficial owner of any
such Shares.

(xxii) The Company and each of the Subsidiaries are
not, and do not intend to conduct their business in a manner
in which it would be, an "investment company" as defined in
the Investment Company Act of 1940 (the "Investment Company
Act").

(xxiii) Price Waterhouse L.L.P., who have certified
certain financial statements of the Company, are independent
public accountants as required by the Act and the rules and
regulations of the Commission thereunder.

(xxiv) GeoQuest Reservoir Technologies, Inc. (the
"Engineering Consultants") are independent petroleum
engineers with respect to the Company.

11
<PAGE> 12
(xxv) No person or entity has the right to require
registration of shares of Common Stock or other securities of
the Company because of the filing or effectiveness of the
Registration Statement, other than such rights as described in
the Prospectus and which have been duly and effectively
waived.

(xxvi) Except as may be set forth in the Prospectus,
the Company has not incurred any liability for a fee,
commission or other compensation on account of the employment
of a broker or finder in connection with the transactions
contemplated by this Agreement.

(xxvii) No transaction has occurred between or among
the Company, the Subsidiaries or any of their officers or
directors or any affiliates of any such officers or directors
that is required to be described in and is not described in
the Registration Statement and the Prospectus.

(xxviii)The Common Stock, including the Shares, are
authorized for quotation on the Nasdaq National Market.

(xxix) Neither the Company nor any of the
Subsidiaries or any of their respective affiliates is
presently doing business with the government of Cuba or with
any person or affiliate located in Cuba. If, at any time
after the date that the Registration Statement is declared
effective with the Commission or with the Florida Department
of Banking and Finance (the "Florida Department"), whichever
date is later, and prior to the end of the period referred to
in the first clause of Section 4(ii) hereof, the Company
commences engaging in business with the government of Cuba or
with any person or affiliate located in Cuba, the Company will
so inform the Florida Department within ninety days after such
commencement of business and during the period referred to in
Section 4(ii) hereof will inform the Florida Department within
ninety days after any change occurs with respect to previously
reported information.

5. Conditions of the Underwriters Obligations. The obligations
of the Underwriters under this Agreement are several and not joint. The
respective obligations of the Underwriters to purchase the Shares are subject
to each of the following terms and conditions:

(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(a)(i) of this Agreement.

(b) No order preventing or suspending the use of any
preliminary prospectus or the Prospectus shall have been or shall be
in effect and no order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for such
purpose shall be pending before or threatened by the Commission, and
any requests for additional information

12
<PAGE> 13
on the part of the Commission (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied
with to the satisfaction of the Representative.

(c) The representations and warranties of the Company
contained in this Agreement and in the certificates delivered pursuant
to Section 5(d) shall be true and correct when made and on and as of
each Closing Date as if made on such date and the Company shall have
performed all covenants and agreements and satisfied all the
conditions contained in this Agreement required to be performed or
satisfied by it at or before such Closing Date.

(d) The Representative shall have received on each
Closing Date a certificate, addressed to the Representative and dated
such Closing Date, of the chief executive officer and the chief
financial officer of the Company to the effect that the persons
executing such certificate have carefully examined the Registration
Statement, the Prospectus and this Agreement and that the
representations and warranties of the Company in this Agreement are
true and correct on and as of such Closing Date with the same effect
as if made on such Closing Date and the Company has performed all
covenants and agreements and satisfied all conditions contained in
this Agreement required to be performed or satisfied by it at or prior
to such Closing Date.

(e) The Representative shall have received at the time
this Agreement is executed and on each Closing Date, signed letters
from Price Waterhouse, LLP, addressed to the Representative and dated,
respectively, the date of this Agreement and each such Closing Date,
in the form and scope reasonably satisfactory to the Representative,
with reproduced copies or signed counterparts thereof for each of the
Underwriters confirming that they are independent accountants within
the meaning of the Act and the Regulations, that the response to Item
10 of the Registration Statement is correct in so far as it relates to
them and stating in effect that:

(i) in their opinion the audited financial
statements and financial statement schedules included or
incorporated by reference in the Registration Statement and
the Prospectus (including the related schedules and notes) and
reported on by them comply as to form in all material respects
with the applicable accounting requirements of the Act, the
Exchange Act and the related published rules and regulations
thereunder;

(ii) On the basis of specified procedures as of a
specified date not more than five days prior to the date of
their letter (which procedures do not constitute an
examination made in accordance with generally accepted
accounting principles) and which include a reading of the
latest available unaudited interim consolidated financial
statements of the Company and the Subsidiaries, a reading of
the minutes of the meetings of the shareholders and directors
of the Company and inquiries of certain officials of the
Company and the Subsidiaries who have responsibility for
financial and accounting matters of the Company and the
Subsidiaries as to

13
<PAGE> 14
transactions and events subsequent to the date of the latest
audited financial statements, except as disclosed in the
Registration Statement and the Prospectus, nothing came to
their attention which caused them to believe that:

(A) the amounts in "Summary Financial
Data," and included or incorporated by reference in
the Registration Statement and the Prospectus do not
agree with the corresponding amounts in the audited
financial statements from which such amounts were
derived; or

(B) there were any decreases in net
sales, income before income taxes and net income or
any increases in long-term debt of the Company or any
decreases in the capital stock, working capital or
the shareholders' equity in the Company, as compared
with the amounts shown on the Company's audited
Balance Sheet for the fiscal year ended December 31,
1995 included in the Registration Statement or the
audited Statement of Operations, for such year; and

(iii) information of an accounting, financial or
statistical nature (which is limited to accounting, financial
or statistical information derived from the general accounting
records of the Company) set forth in the Registration
Statement and the Prospectus and reasonably specified by the
Representative agrees with the accounting records of the
Company.

References to the Registration Statement and the Prospectus in this
paragraph (e) are to such documents as amended and supplemented at the date of
such letter.

(f) The Engineering Consultants shall have delivered to
you on the date of this Agreement a letter (the "Reserve Letter") and
also on the Closing Date a letter dated the Closing Date, in each case
in form and substance reasonably satisfactory to you and substantially
in the form heretofore approved by you, stating, as of the date of
such letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified
information with respect to the oil and gas reserves is given or
incorporated in the Prospectus as of the date not more than five days
prior to the date of such letter), the conclusions and findings of
such firm with respect to the Company's oil and gas reserves.

(g) The Representative shall have received on each
Closing Date from Holme, Roberts and Owen, counsel for the Company, an
opinion, addressed to the Representative and dated such Closing Date,
and in form and scope satisfactory to counsel for the Underwriters,
with reproduced copies or signed counterparts thereof for each of the
Underwriters, to the effect that:

(i) The Company and each of the Subsidiaries is a
corporation duly organized, validly existing and in good
standing under the laws of the state of its

14
<PAGE> 15
incorporation, with full corporate power and authority to own,
lease, license and use its properties and assets and to
conduct its business in the manner described in the
Prospectus. The Company and each of the Subsidiaries has all
necessary consents, authorizations, approvals, orders,
certificates and permits of and from, and declarations and
filings with, all federal, state, foreign, local and other
governmental authorities and all courts and other tribunals,
to own, lease, license and use its properties and assets and
to conduct its business in the manner described in the
Prospectus. The Company has no subsidiary or subsidiaries and
does not control, directly or indirectly, any corporation,
partnership, joint venture, association or other business
organization, except for those set forth on Schedule II
hereto.

(ii) The Company and each of the Subsidiaries have
been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws
of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification or is subject to no material liability or
disability by reason of failure to be so qualified in any such
jurisdiction (such counsel being entitled to rely in respect
of the opinion in this clause upon opinions of local counsel
and in respect of matters of fact upon certificates of
officers of the Company or the Subsidiaries, provided that
such counsel shall state that they believe that both you and
they are justified in relying upon such opinions and
certificates);

(iii) The Company has authorized, issued and
outstanding capital stock as set forth in the "actual" column
of the capitalization table under the caption "Capitalization"
in the Prospectus. The certificates evidencing the shares are
in due and proper legal form. Each outstanding share of
Common Stock has been duly and validly authorized and issued
and is fully paid and nonassessable, without any personal
liability attaching to the ownership thereof, and has not been
issued and is not owned or held in violation of any preemptive
right of shareholders. The Company owns all of the shares of
capital stock of the Subsidiaries, except as disclosed in the
Prospectus, and to the knowledge of such counsel, such shares
are owned by the Company free and clear of all liens, claims,
security interests, restrictions, shareholders' agreements,
voting trusts and any other encumbrances whatsoever. There is
no commitment, plan or arrangement to issue, and no
outstanding option, warrant or other right calling for the
issuance of, any share of capital stock of the Company or any
security or other instrument which by its terms is convertible
into, exercisable for or exchangeable for capital stock of the
Company, except as described in the Prospectus. There is
outstanding no security or other instrument which by its terms
is convertible into, exercisable for or exchangeable for
capital stock of the Company or any of the Subsidiaries,
except as described in the Prospectus.

(iv) There is no litigation, arbitration, claim,
governmental or other proceeding (formal or informal) or
investigation before any court or before any

15
<PAGE> 16
public body or board pending, threatened or in prospect (or
any basis therefor) with respect to the Company, any of the
Subsidiaries or any of their respective operations,
businesses, properties, assets or financial condition except
as may be properly described in the Prospectus or such as
individually or in the aggregate do not now have and could not
reasonably be expected in the future to have a Material
Adverse Effect.

(v) Neither the Company nor any of the
Subsidiaries or any other party is now or is expected by the
Company to be in violation or breach of, or in default with
respect to, complying with any term, obligation or provision
of any contract, agreement, instrument, lease, license,
indenture, mortgage, deed of trust, note, arrangement or
understanding which is material to the Company and known to
such counsel, and to the knowledge of such counsel, no event
has occurred which with notice or lapse of time or both would
constitute such a default.

(vi) Neither the Company nor any of the
Subsidiaries is in violation or breach of, or in default with
respect to, any term of its certificate of incorporation (or
other charter document) or bylaws.

(vii) The Company has all requisite power and
authority to execute, deliver and perform this Agreement and
to issue and sell the Shares. All necessary corporate
proceedings of the Company have been taken to authorize the
execution, delivery and performance by the Company of this
Agreement. This Agreement has been duly authorized, executed
and delivered by the Company is the legal, valid and binding
obligation of the Company and (subject to applicable
bankruptcy, insolvency and other laws affecting the
enforceability of creditor's rights generally and the effects
of general principles of equity) is enforceable as to the
Company in accordance with its terms. No consent,
authorization, approval, order, license, certificate or permit
of or from, or declaration or filing with, any federal, state,
foreign, local or other governmental authority or any court or
other tribunal is required by the Company for the execution,
delivery or performance by the Company of this Agreement
(except filings under the Act which have been made prior to
the Closing Date and consents consisting only of consents
under "blue sky" or securities laws). No consent of any party
to any contract, agreement, instrument, lease, license,
indenture, mortgage, deed of trust, note, arrangement or
understanding to which the Company or any of the Subsidiaries
is a party, or to which any of their respective properties or
assets are subject, is required for the execution, delivery or
performance of this Agreement; and the execution, delivery and
performance of this Agreement will not violate, result in a
breach of, conflict with or (with or without the giving of
notice or the passage of time or both) entitle any party to
terminate or call a default under any such contract,
agreement, instrument, lease, license, indenture, mortgage,
deed of trust, note, arrangement or understanding, or violate
or result in a breach of any term of the certificate of
incorporation (or other charter document) or by-laws of the
Company

16
<PAGE> 17
or any of the Subsidiaries, or violate, result in a breach of,
or conflict with any law, rule, regulation, order, judgment,
or decree binding on the Company or any of the Subsidiaries or
to which any of their respective operations, businesses,
properties or assets are subject.

(viii) The Shares are duly and validly authorized.
Such opinion delivered at each of the Closing Dates shall
state that each Share, as the case may be, to be delivered on
that date is duly and validly issued, fully paid and
non-assessable, with no personal liability attaching to the
ownership thereof, and is not issued in violation of any
preemptive rights of shareholders, and the Underwriters have
received good title to the Shares purchased by them from the
Company for the consideration contemplated herein. The Common
Stock, all series of preferred stock and the Shares conform to
all statements relating thereto contained in the Registration
Statement or the Prospectus.

(ix) Any contract, agreement, instrument, lease or
license required to be described in the Registration Statement
or the Prospectus has been properly described therein. Any
contract, agreement, instrument, lease or license required to
be filed as an exhibit to the Registration Statement has been
filed with the Commission as an exhibit to or has been
incorporated as an exhibit by reference into the Registration
Statement.

(x) Insofar as statements in the Prospectus
purport to summarize the status of litigation or the
provisions of laws, rules, regulations, orders, judgments,
decrees, contracts agreements, instruments, leases or
licenses, such statements have been prepared or reviewed by
such counsel and to the knowledge of such counsel, accurately
reflect the status of such litigation and provisions purported
to be summarized and are correct in all material respects.

(xi) Neither the Company nor any of the
Subsidiaries is an "investment company" as defined in Section
3(a) of the Investment Company Act and, if the Company and the
Subsidiaries conduct their businesses as set forth in the
Prospectus, will not become an "investment company" and will
not be required to be registered under the Investment Company
Act.

(xii) No person or entity has the right to require
registration of shares of Common Stock or other securities of
the Company because of the filing or effectiveness of the
Registration Statement.

(xiii) The Registration Statement has become
effective under the Act. No Stop Order has been issued and no
proceedings for that purpose have been instituted or are
threatened, pending or contemplated.

17
<PAGE> 18
(xiv) The Registration Statement, any Rule 430A
Prospectus and the Prospectus, and any amendment or supplement
thereto (other than financial statements and other financial
data and schedules which are or should be contained in any
thereof, as to which such counsel need express no opinion),
comply as to form in all material respects with the
requirements of the Act and the Regulations. The conditions
for the use of Form S-2 have been satisfied with respect to
the Registration Statement.

(xv) Since the effective date of the Registration
Statement, no event has occurred which should have been set
forth in an amendment or supplement to the Registration
Statement or the Prospectus which has not been set forth in
such an amendment or supplement.

In addition, such counsel shall state that such counsel has
participated in the preparation of the Registration Statement and the
Prospectus and in conferences with officers and other representatives of the
Company, representatives of the Representative and representatives of the
independent accountants of the Company, at which conferences the contents of
the Registration Statement and the Prospectus and related matters were
discussed and, although such counsel has not independently verified and is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement and the Prospectus (except as specified in the foregoing opinion), on
the basis of the foregoing and relying as to materiality upon the
representations of executive officers of the Company after conferring with such
executive officers, no facts have come to the attention of such counsel which
lead such counsel to believe that the Registration Statement at the time it
became effective contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, except for the
financial statements and other financial and statistical data included therein
as to which counsel need express no opinion, as amended or supplemented on the
date thereof contained any untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.

In rendering their opinion as aforesaid, such counsel may
rely, as to matters of fact, to the extent such counsel deems proper, on
certificates of responsible officers of the Company, provided that executed
copies of such certificates are provided to the Representative.

(h) All proceedings taken in connection with the sale of
the Firm Shares and the Option Shares as herein contemplated shall be
satisfactory in form and substance to the Representative and its
counsel, and the Underwriters shall have received from Vinson &
Elkins, L.L.P., a favorable opinion, addressed to the Representative
and dated such Closing Date, with respect to such matters as the
Representative may reasonably request, and the Company shall have
furnished to Vinson & Elkins, L.L.P., such documents as they may
reasonably request for the purpose of enabling them to pass upon such
matters.

18
<PAGE> 19
(i) The Company shall not have sustained since the date
of the latest audited financial statements included in the Prospectus
any loss or interference with its business from fire, explosion, flood
or other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus, and
(ii) since the respective dates as of which information is given in
the Prospectus there shall not have been any change in the capital
stock, short-term debt or long-term debt of the Company or any change,
or any development involving a prospective change, in or affecting the
general affairs, management, financial position, stockholders' equity
or results of operations of the Company, otherwise than as set forth
or contemplated in the Prospectus, the effect of which, in any such
case described in Clause (i) or (ii), in the judgment of the
Representatives, makes it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares being delivered at
such Time of Delivery on the terms and in the manner contemplated in
the Prospectus.

(j) The Company has obtained and delivered to the
Underwriters executed copies of an agreement from each of its officers
and directors, substantially to the effect set forth in Subsection
6(a)(vii) hereof in form and substance satisfactory to you.

6. Covenants of the Company.

(a) The Company covenants and agrees as follows:

(i) The Company shall use its best efforts to
cause the Registration Statement to become effective as
promptly as possible. If the Registration Statement has
become or becomes effective with a form of prospectus omitting
Rule 430A information, or filing of the Prospectus is
otherwise required under Rule 424(b), the Company will file
the Prospectus, properly completed, pursuant to Rule 424(b)
within the time period prescribed and will provide evidence
satisfactory to you of such timely filing. The Company shall
notify you immediately, and confirm such notice in writing,
(A) when the Registration Statement and any post-effective
amendment thereto become effective, (B) of the receipt of any
comments from the Commission or the "blue sky" or securities
authority of any jurisdiction regarding the Registration
Statement, any posteffective amendment thereto, the Prospectus
or any amendment or supplement thereto and (C) of the receipt
of any notification with respect to a Stop Order. The Company
shall not file any amendment of the Registration Statement or
supplement to the Prospectus unless the Company has furnished
the Representative a copy for their review prior to filing and
shall not file any such proposed amendment or supplement to
which the Representative reasonably object. The Company shall
use its best efforts to prevent the issuance of any Stop Order
and, if issued, to obtain as soon as possible the withdrawal
thereof.

(ii) During the time when a prospectus relating to
the Shares is required to be delivered hereunder or under the
Act or the Regulations, comply so far as it is

19
<PAGE> 20
able with all requirements imposed upon it by the Act, as now
existing and as hereafter amended, and by the Regulations, as
from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Shares in
accordance with the provisions hereof and the Prospectus. If,
at any time when a prospectus relating to the Shares is
required to be delivered under the Act and the Regulations,
any event as a result of which the Prospectus as then amended
or supplemented would include any untrue statement of a
material fact or omit to state any material fact necessary to
make the statements therein in the light of the circumstances
under which they were made not misleading, or if it shall be
necessary to amend or supplement the Prospectus to comply with
the Act or the Regulations, the Company promptly shall prepare
and file with the Commission, subject to the third sentence of
paragraph (i) of this Section 6(a), an amendment or supplement
which shall correct such statement or omission or an amendment
which shall effect such compliance.

(iii) Prior to 10:00 a.m., New York City Time, on
the New York Business Day next succeeding the date of this
Agreement and from time to time, to furnish the Underwriters
with copies of the Prospectus in New York City in such
quantities as you may reasonably request. The Company shall
make generally available to its security holders and to the
Representative as soon as practicable, but not later than 45
days after the end of the 12-month period beginning at the end
of the fiscal quarter of the Company during which the
Effective Date (or 90 days if such 12-month period coincides
with the Company's fiscal year), an earnings statement (which
need not be audited) of the Company, covering such 12-month
period, which shall satisfy the provisions of Section 11(a) of
the Act or Rule 158 of the Regulations.

(iv) If the Company elects to rely upon Rule
462(b), the Company shall file a Rule 462(b) Registration
Statement with the Commission in compliance with Rule 462(b)
by 10:00 p.m., Washington, D.C. time, on the date of this
Agreement, and the Company shall at the time of filing either
pay to the Commission the filing fee for the Rule 462(b)
Registration Statement or give irrevocable instructions for
the payment of such fee pursuant to Rule ll l(b) under the
Act.

(v) The Company shall furnish to the
Representative and counsel for the Underwriters, without
charge, signed copies of the Registration Statement (including
all exhibits and amendments thereto) and to each other
Underwriter a copy of the Registration Statement (without
exhibits thereto) and all amendments thereof and, so long as
delivery of a prospectus by an Underwriter or dealer may be
required by the Act or the Regulations, as many copies of any
preliminary prospectus and the Prospectus and any amendments
thereof and supplements thereto as the Representative may
reasonably request.

20
<PAGE> 21
(vi) The Company shall cooperate with the
Representative and their counsel in endeavoring to qualify the
Shares for offer and sale under the laws of such jurisdictions
as the Representative may designate and shall maintain such
qualifications in effect so long as required for the
distribution of the Shares; provided, however, that the
Company shall not be required in connection therewith, as a
condition thereof, to qualify as a foreign corporation or to
execute a general consent to service of process in any
jurisdiction or subject itself to taxation as doing business
in any jurisdiction.

(vii) For a period of five years after the date of
this Agreement, the Company shall supply to the
Representative, and to each other Underwriter who may so
request in writing, copies of such financial statements and
other periodic and special reports as the Company may from
time to time distribute generally to the holders of any class
of its capital stock and to furnish to the Representative a
copy of each annual or other report it shall be required to
file with the Commission.

(viii) Without the prior written consent of the
Representative, for a period of 180 days from the date on
which a public offering of the Shares commences, the Company
shall not issue, sell or register with the Commission or
otherwise dispose of, directly or indirectly, any securities
of the Company (or any securities convertible into or
exercisable or exchangeable for securities of the Company),
except for the issuance of the Shares pursuant to the
Registration Statement or shares issuable upon exercise of
currently outstanding options and warrants issued by the
Company as of the date of this Agreement; and that it will
deliver to the Representative agreements of the Company's
officers and directors to the same effect.

(ix) On or before completion of this offering, the
Company shall make all filings required under applicable
securities laws and by the Nasdaq National Market.

(x) During a period of five years from the
effective date of the Registration Statement, to furnish to
you copies of all reports or other communications (financial
or other) furnished to stockholders, and to deliver to you (i)
as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission
or any national securities exchange on which any class of
securities of the Company is listed; and (ii) such additional
information concerning the business and financial condition of
the Company as you may from time to time reasonably request
(such financial statements to be on a consolidated basis to
the extent the accounts of the Company and its subsidiaries
are consolidated in reports furnished to its stockholders
generally or to the Commission).

(xi) To use the net proceeds received by it from
the sale of the Shares pursuant to this Agreement in the
manner specified in the Prospectus under the caption "Use of
Proceeds."

21
<PAGE> 22
(xii) To file with the Commission such reports on
Form SR as may be required by Rule 463 under the Act.

(xiii) Prior to each Closing Date and for a period
of 25 days thereafter, you shall be given reasonable written
prior notice of any press release or other direct or indirect
communication and of any press conference with respect to the
Company, the financial conditions, results of operations,
business, properties, assets, liabilities of the Company, or
this offering.

(b) The Company agrees to pay, or reimburse if paid by
the Representative, whether or not the transactions contemplated
hereby are consummated or this Agreement is terminated, all costs and
expenses relating to the registration and public offering of the
Shares including those relating to: (i) the preparation, printing,
filing and distribution of the Registration Statement including all
exhibits thereto, each preliminary prospectus, the Prospectus, all
amendments and supplements to the Registration Statement and the
Prospectus, and any documents required to be delivered with any
Preliminary Prospectus or the Prospectus, and the printing, filing and
distribution of the Agreement Among Underwriters, this Agreement and
related documents; (ii) the preparation and delivery of certificates
for the Shares to the Underwriters; (iii) the registration or
qualification of the Shares for offer and sale under the securities or
Blue Sky laws of the various jurisdictions referred to in Section
6(a)(v), including the fees and disbursements of counsel for the
Underwriters in connection with such registration and qualification
and the preparation, printing, distribution and shipment of
preliminary and supplementary Blue Sky memoranda; (iv) the furnishing
(including costs of shipping and mailing) to the Representative and to
the Underwriters of copies of each preliminary prospectus, the
Prospectus and all amendments or supplements to the Prospectus, and of
the several documents required by this Section to be so furnished, as
may be reasonably requested for use in connection with the offering
and sale of the Shares by the Underwriters or by dealers to whom
Shares may be sold; (v) the filing fees of the National Association of
Securities Dealers, Inc. in connection with its review of the terms of
the public offering; (vi) the furnishing (including costs of shipping
and mailing) to the Representative and to the Underwriters of copies
of all reports and information required by Section 6(a)(vi); (vii)
inclusion of the Shares for quotation on the Nasdaq National Market;
(viii) the cost and charges of any transfer agent or registration; and
(ix) all transfer taxes, if any, with respect to the sale and delivery
of the Shares by the Company to the Underwriters. In addition, the
Company will pay the Representative a nonaccountable expense allowance
aggregating 2.25% of the gross amount of funds raised by the offering
of the Shares. Except as otherwise contemplated by Section 9 hereof,
the Underwriters will pay their own counsel fees and expenses to the
extent not otherwise covered by clause (iii) above, and their own
travel and travel-related expenses in connection with the distribution
of the Shares.

22
<PAGE> 23
7. Indemnification.

(a) The Company agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable investigation,
legal and other expenses incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim
asserted), to which they, or any of them, may become subject under the
Act, the Exchange Act or other federal, state or foreign law or
regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus, the Registration Statement or
the Prospectus or any amendment thereof or supplement thereto, or
arise out of or are based upon any omission or alleged omission to
state therein such fact required to be stated therein or necessary to
make such statements therein not misleading. This indemnity agreement
will be in addition to any liability which the Company may otherwise
have.

(b) Each Underwriter agrees, severally and not jointly,
to indemnify and hold harmless the Company, each person, if any, who
controls the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, each director of the Company, and each
officer of the Company who signs the Registration Statement, to the
same extent as the foregoing indemnity from the Company to each
Underwriter, but only insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which was made in any
Preliminary Prospectus, any Rule 430A Prospectus, the Registration
Statement or the Prospectus, or any amendment thereof or supplement
thereto, which were made in reliance upon and in conformity with
information furnished in writing to the Company by the Representative
on behalf of any Underwriter for specific use therein; provided,
however, that the obligation of each Underwriter to indemnify the
Company (including any controlling person, director or officer
thereof) shall be limited to the excess of the net proceeds received
by such Underwriter from the offering of Shares and all expenses,
penalties and other damages incurred by such Underwriter by reason of
such untrue statement or omission or alleged untrue statement or
omission. For all purposes of this Agreement the amounts of the
selling concession and reallowance set forth in the Prospectus
constitute the only information furnished in writing by or on behalf
of any Underwriter expressly for inclusion in any Preliminary
Prospectus, any Rule 430A Prospectus, the Registration Statement or
the Prospectus or any amendment or supplement thereto.

(c) Any party that proposes to assert the right to be
indemnified under this Section will, promptly after receipt of notice
of commencement of any action, suit or proceeding against such party
in respect of which a claim is to be made against an indemnifying
party or parties under this Section, notify each such indemnifying
party of the commencement of such action, suit or proceeding,
enclosing a copy of all papers served. No

23
<PAGE> 24
indemnification provided for in Section 7(a) or 7(b) shall be
available to any party who shall fail to give notice as provided in
this Section 7(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and
was prejudiced by the failure to give such notice but the omission so
to notify such indemnifying party of any such action, suit or
proceeding shall not relieve it from any liability that it may have to
any indemnified party for contribution or otherwise than under this
Section. In case any such action, suit or proceeding shall be brought
against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be
entitled to participate in, and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party, and after notice from the indemnifying party
to such indemnified party of its election so to assume the defense
thereof and the approval by the indemnified party of such counsel, the
indemnifying party shall not be liable to such indemnified party for
any legal or other expenses, except as provided below and except for
the reasonable costs of investigation subsequently incurred by such
indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ its counsel in any
such action, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the employment of counsel
by such indemnified party has been authorized in writing by the
indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the
indemnifying parties and the indemnified party in the conduct of the
defense of such action (in which case the indemnifying parties shall
not have the right to direct the defense of such action on behalf of
the indemnified party) or (iii) the indemnifying parties shall not
have employed counsel to assume the defense of such action within a
reasonable time after notice of the commencement thereof, in each of
which cases the reasonable fees and expenses of counsel shall be at
the expense of the indemnifying parties. An indemnifying party shall
not be liable for any settlement of any action, suit, proceeding or
claim effected without its written consent.

8. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Sections 7(a) and (b) is due in accordance with its terms but for any reason is
held to be unavailable from the Company or the Underwriters, the Company and
the Underwriters shall contribute to the aggregate losses, claims, damages and
liabilities (including any investigation, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claims asserted, but after deducting any contribution
received by the Company from persons other than the Underwriters, such as
persons who control the Company within the meaning of the Act, officers of the
Company who signed the Registration Statement and directors of the Company, who
may also be liable for contribution) to which the Company and one or more of
the Underwriters may be subject in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares or, if such
allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party not having received notice as
provided in Section 7 hereof, in such proportion as is appropriate to

24
<PAGE> 25
reflect not only the relative benefits referred to above but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and
the Underwriters shall be deemed to be in the same proportion as (x) the total
proceeds from the Offering (net of underwriting discounts but before deducting
expenses) received by the Company from the sale of the Shares, as set forth in
the table on the cover page of the Prospectus (but not taking into account the
use of the proceeds of such sale of Shares by the Company), bear to (y) the
underwriting discount received by the Underwriters, as set forth in the table
on the cover page of the Prospectus. The relative fault of the Company and the
Underwriters shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact related to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 8, no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act shall have the same rights to contribution as
such Underwriter, and each person, if any, who controls the Company within the
meaning of the Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and
each director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (i) and (ii) in the immediately
preceding sentence of this Section 8. Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this Section, notify such party
or parties from whom contribution may be sought, but the omission so to notify
such party or parties from whom contribution may be sought shall not relieve
the party or parties from whom contribution may be sought from any other
obligation it or they may have hereunder or otherwise than under this Section.
No party shall be liable for contribution with respect to any action, suit,
proceeding or claim settled without its written consent. The Underwriters'
obligations to contribute pursuant to this Section 8 are several in proportion
to their respective underwriting commitments and not joint.

9. Termination. This Agreement may be terminated with respect to
the Shares to be purchased on any Closing Date by the Representative by
notifying the Company at any time prior to the purchase of the Shares:

(a) in the absolute discretion of the Representative at
or before any Closing Date: (i) if on or prior to such date, any
domestic or international event or act or occurrence has materially
disrupted, or in the opinion of the Representative will in the future
materially

25
<PAGE> 26
disrupt, the securities markets; (ii) if there has occurred any
outbreak or material escalation of hostilities or other calamity or
crisis the effect of which on the financial markets of the United
States is such as to make it, in the judgment of the Representative,
inadvisable to proceed with the Offering; (iii) if there shall be such
a material adverse change in, general financial, political or economic
conditions or the effect of international conditions on the financial
markets in the United States such as to make it, in the judgment of
the Representative, inadvisable or impracticable to market the Shares;
(iv) if trading in the Shares has been suspended by the Commission or
trading generally on the New York Stock Exchange, Inc., the American
Stock Exchange, Inc. or the Nasdaq National Market has been suspended
or limited, or minimum or maximum ranges for prices for securities
shall have been fixed, or maximum ranges for prices for securities
have been required, by said exchanges or by order of the Commission,
the National Association of Securities Dealers, Inc., or any other
governmental or regulatory authority; or (v) if a banking moratorium
has been declared by any state or federal authority, or

(b) at or before any Closing Date, if any of the
conditions specified in Section 5 shall not have been fulfilled when
and as required by this Agreement.

If this Agreement is terminated pursuant to any of its provisions, the
Company shall not be under any liability to any Underwriter, and no Underwriter
shall be under any liability to the Company, except that (y) if this Agreement
is terminated by the Representative or the Underwriters because of any failure,
refusal or inability on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company will reimburse the
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of their counsel) incurred by them in connection with the
proposed purchase and sale of the Shares or in contemplation of performing
their obligations hereunder and (z) no Underwriter who shall have failed or
refused to purchase the Shares agreed to be purchased by it under this
Agreement, without some reason sufficient hereunder to justify cancellation or
termination of its obligations under this Agreement, shall be relieved of
liability to the Company or to the other Underwriters for damages occasioned by
its failure or refusal.

10. Substitution of Underwriters. If one or more of the
Underwriters shall fail (other than for a reason sufficient to justify the
cancellation or termination of this Agreement under Section 9) to purchase on
any Closing Date the Shares agreed to be purchased on such Closing Date by such
Underwriter or Underwriters, the Representative may find one or more substitute
underwriters to purchase such Shares or make such other arrangements as the
Representative may deem advisable or one or more of the remaining Underwriters
may agree to purchase such Shares in such proportions as may be approved by the
Representative, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date:

(a) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall not exceed 10% of
the Shares that all the Underwriters are obligated

26
<PAGE> 27
to purchase on such Closing Date, then each of the nondefaulting
Underwriters shall be obligated to purchase such Shares on the terms
herein set forth in proportion to their respective obligations
hereunder; provided, that in no event shall the maximum number of
Shares that any Underwriter has agreed to purchase pursuant to Section
1 be increased pursuant to this Section 10 by more than one-ninth of
such number of Shares without the written consent of such Underwriter,
or

(b) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall exceed 10% of the
Shares that all the Underwriters are obligated to purchase on such
Closing Date, then the Company shall be entitled to an additional
business day within which it may, but is not obligated to, find one or
more substitute underwriters reasonably satisfactory to the
Representative to purchase such Shares upon the terms set forth in
this Agreement.

In any such case, either the Representative or the Company shall have
the right to postpone the applicable Closing Date for a period of not more than
five business days in order that necessary changes and arrangements (including
any necessary amendments or supplements to the Registration Statement or
Prospectus) may be effected by the Representative and the Company. If the
number of Shares to be purchased on such Closing Date by such defaulting
Underwriter or Underwriters shall exceed 10% of the Shares that all the
Underwriters are obligated to purchase on such Closing Date, and none of the
nondefaulting Underwriters or the Company shall make arrangements pursuant to
this Section within the period stated for the purchase of the Shares that the
defaulting Underwriters agreed to purchase, this Agreement shall terminate with
respect to the Shares to be purchased on such Closing Date without liability on
the part of any nondefaulting Underwriter to the Company and without liability
on the part of the Company, except in both cases as provided in Sections 6(b),
7, 8 and 9. The provisions of this Section shall not in any way affect the
liability of any defaulting Underwriter to the Company or the nondefaulting
Underwriters arising out of such default. A substitute underwriter hereunder
shall become an Underwriter for all purposes of this Agreement.

11. Miscellaneous. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its officers and
of the Underwriters set forth in or made pursuant to this Agreement shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of the officers, directors or
controlling persons referred to in Sections 7 and 8 hereof, and shall survive
delivery of and payment for the Shares. The provisions of Sections 6(b), 7, 8
and 9 shall survive the termination or cancellation of this Agreement.

This Agreement has been and is made for the benefit of the
Underwriters and the Company and their respective successors and assigns and,
to the extent expressed herein, for the benefit of persons controlling any of
the Underwriters, or the Company, and directors and officers of the Company,
and their respective successors and assigns, and no other person shall acquire
or have any

27
<PAGE> 28
right under or by virtue of this Agreement. The term "successors and assigns"
shall not include any purchaser of Shares from any Underwriter merely because
of such purchase.

All notices and communications hereunder shall be in writing and
mailed or delivered, or by telefax or telegraph if subsequently confirmed by
letter, (a) if to the Representative, to Rodman & Renshaw, Inc., Two World
Financial Center, 225 Liberty Street, 30th Floor, New York, New York 10281,
Attention: Peter Blum, Managing Director, telecopy: (212) 416-7439 and (b) if
to the Company, to the Company's agent for service as such agent's address
appears on the cover page of the Registration Statement.

This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without regard to principles of conflict of
laws.

This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.

All pronouns and any variations thereof shall be deemed to refer to
the masculine, feminine, or neuter, singular or plural, as the identity of the
person or persons or entity or entities require.

All section headings herein are for convenience of reference only and
are not part of this Agreement, and no construction or inference shall be
derived therefrom.

Please confirm that the foregoing correctly sets forth the agreement
among us.

Very truly yours,

MALLON RESOURCES CORPORATION

By:
------------------------------------
George O. Mallon, Jr.

Confirmed on behalf of itself and as the
Representative of the several Underwriters
named in Schedule I annexed hereto:

RODMAN & RENSHAW, INC.

By:
--------------------------------
Name: Peter H. Blum
Title: Managing Director

28
<PAGE> 29
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm
Shares to be
NAME OF UNDERWRITER Purchased
------------------- --------------------
<S> <C>
Rodman & Renshaw, Inc. . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . .
------------
</TABLE>

29
<PAGE> 30
SCHEDULE II

SUBSIDIARIES

Mallon Oil Company, a Colorado corporation
Laguna Gold Company, a Colorado corporation

<PAGE> 1
EXHIBIT 5.1

August 27, 1996

Mallon Resources Corporation
999 18th Street, Suite 1700
Denver, CO 80202

Re: Form S-2 Registration Statement

Gentlemen:

This firm has acted as counsel to Mallon Resources Corporation (the
"Company") in connection with the preparation and filing of its registration
statement on Form S-2 (the "Registration Statement") under the Securities Act
of 1933, as amended, covering the sale of an aggregate of 2,070,000 shares of
the Company's common stock, $.01 par value (the "Common Stock").

We have examined the Company's Restated Articles of Incorporation and
Bylaws and the record of its corporate proceedings with respect to the
Registration Statement and have made such other investigations as we have
deemed necessary in order to express the following opinion.

Based upon the foregoing, we are of the opinion that the Common Stock, when
sold and delivered as contemplated by the Registration Statement, will be
legally issued, fully paid and nonassessable.
<PAGE> 2
We hereby consent to all references to this firm in the Registration
Statement and all amendments to the Registration Statement. We further consent
to the use of this opinion as an exhibit to the Registration Statement.

Very truly yours,

HOLME ROBERTS & OWEN LLC

By /s/ THOMAS A. RICHARDSON
-----------------------------------
Thomas A. Richardson
Member

<PAGE> 1
EXHIBIT 10.65

SECURITIES REPURCHASE AND SALE AGREEMENT

THIS SECURITIES REPURCHASE AND SALE AGREEMENT (this "Agreement") is
entered into as of August 19, 1996, by and between Mallon Resources
Corporation, a Colorado corporation (the "Company") and Bank of America
National Trust and Savings Association, a national banking association
("Shareholder").

R E C I T A L S

A. Pursuant to a Stock Purchase Agreement dated as of
December 22, 1989 between the Company and Shareholder, Shareholder acquired
from the Company 1,100,918 shares of the Company's Series A Preferred Stock,
par value $0.01 per share ("Stock"). The Stock is convertible into 1,113,173
shares of Common Stock, par value $0.01 per share, of the Company.

B. Shareholder wishes to resell to the Company, and the
Company wishes to repurchase from Shareholder, the Stock on the terms and
subject to the conditions set forth below.

A G R E E M E N T

NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

SECTION 1
Authorization; Purchase and Sale of the Stock

1.1 Authorization. The Company has authorized the
repurchase of the Stock, and Shareholder has authorized the sale of the Stock
to the Company, on the terms and conditions set forth herein.

1.2 Purchase and Sale of the Stock. Upon the terms and
subject to the conditions contained herein and in reliance on the
representations and warranties set forth below, the Company agrees to
repurchase from Shareholder and Shareholder agrees to resell to the Company the
Stock.

1.3 Closing. The closing of the sale of the Stock (the
"Closing") shall occur at the offices of Bank of America Illinois located at
231 South LaSalle Street, Chicago, Illinois 60604, at 10:00 a.m. Central time
on such date after the date hereof (or at such other place) as the parties
hereto may reasonably designate, not later than November 15, 1996, provided,
however, that the Shareholder may unilaterally extend such date to no later
than December 31, 1996 (the "Closing Date"). At the Closing, Shareholder shall
deliver to the Company the certificate representing the Stock. In exchange the
Company shall deliver to Shareholder by wire transfer or check in immediately
available funds (the method of payment to be at Shareholder's option) the
amount of $1,881,262.37 plus the product of 1,113,173 times 25 percent times
the amount, if any, by which the gross offering price per share to the public
in any public offering of common stock of the Company registered under the
Securities Act of 1933 which becomes effective between the date hereof and
November 15, 1996 (the "Public Offering") exceeds $1.69. All amounts in the
immediately preceding sentence shall be adjusted for any stock splits, reverse
stock splits, or stock dividends of the common stock of the Company effected
between the date hereof and the Closing Date. At the Closing the Company shall
also pay to, or on behalf of, Shareholder all fees, costs and expenses of
Shareholder incurred under that certain Letter Agreement dated April 19, 1996,
as the same may be extended or renewed on substantially the same terms after
the date hereof ("Letter Agreement") with Carl H. Pforzheimer & Co.
("Pforzheimer"), but not to exceed $10,000, and shall pay Pforzheimer
$49,541.31, in lieu of the Placement Fee which it might have become entitled to
receive under the Letter Agreement, in each case upon receipt by Shareholder of
an acceptable release from Pforzheimer.
<PAGE> 2
SECTION 2
Representations and Warranties of the Company

Except as set forth on the Schedule of Exceptions attached
hereto, the Company represents and warrants to Shareholder as follows:

2.1 Organization. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Colorado, and has all requisite corporate power and corporate authority to
enter into this Agreement, to repurchase the Stock, and to carry out and
otherwise perform its obligations hereunder.

2.2 Authorization and Enforceability. The execution and
delivery of this Agreement by the Company and the consummation by the Company
of the transactions contemplated hereby have been duly authorized by the Board
of Directors of the Company, and no other corporate proceedings on the part of
the Company are necessary to authorize this Agreement or the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
the Company and constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except
to the extent that such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or other laws affecting the enforcement of
creditors' rights generally or by general equitable principles.

2.3 No Violation of Law. The Company's repurchase of the
Stock from Shareholder would not as of the date hereof, and will not as of the
Closing Date, constitute a violation of any provision of the corporation law of
the State of Colorado which regulates or restricts the repurchase by a
corporation of securities from its securityholders or distributions to such
securityholders, or any provision of federal securities law or regulation,
including without limitation Rule 10b-6 under the Securities Exchange Act of
1934. The repurchase of the Stock as contemplated by this Agreement is exempt
from the registration and prospectus delivery requirements of the Securities
Act of 1933 and from the permit or qualification requirements of all applicable
state securities laws, including without limitation the laws of the States of
Colorado and Illinois.

2.4 Litigation. There are no actions, suits or other
legal proceedings pending or, to the best knowledge of the Company, threatened,
against the Company that might have a material adverse effect on the Company,
or which might seek to restrain, enjoin, prevent or hinder the Company from
performing its obligations under this Agreement or the consummation of the
transactions contemplated hereby, and the Company is not aware of any facts
that might result in or form the basis for any such action, suit or other
proceeding.

2.5 Consents. All consents, qualifications, orders,
approvals or authorizations of, or filings with, any governmental authority
required in connection with the Company's execution, delivery and performance
of this Agreement, the repurchase of the Stock by the Company, and the
consummation of any other transaction contemplated on the part of the Company,
hereby have been duly obtained and are currently effective.

2.6 No Conflicts. The execution of this Agreement, the
repurchase of the Stock and the performance by the Company of the other
transactions contemplated hereby do not conflict with the terms of (a) the
Company's Articles of Incorporation or Bylaws, or (b) any mortgage, indenture,
contract, agreement, instrument, judgment, decree, order, statute, rule or
regulation to which the Company is subject unless such conflict has been
consented to or approved by the appropriate party or parties.

2.7 Disclosure. This Agreement and all other documents
or writings delivered to Shareholder or its counsel in connection herewith do
not contain any untrue statement of a material fact and do not omit to state a
material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances under which they are made.
<PAGE> 3
SECTION 3
Representations and Warranties of Shareholder

Shareholder represents and warrants to the Company as follows:

3.1 Ownership of Shares. Shareholder is the owner of all
right, title and interest in and to the Stock, free and clear of any and all
liens, encumbrances or security interests of any kind created by Shareholder
("Liens"). The delivery of the Stock to the Company pursuant to the terms of
this Agreement will transfer to the Company good, valid and marketable title
thereto, free and clear of any Liens, other than any that may have been created
by persons other than Shareholder. Except as set forth in this Agreement, no
person or entity has any agreement, contract, option, warrant or other right
entitling such party to purchase any of the Stock from Shareholder.

3.2 Authorization and Enforceability. This Agreement has
been duly executed and delivered by Shareholder and constitutes the legal,
valid and binding obligation of Shareholder, enforceable against it in
accordance with its terms, except to the extent that such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization or other laws
affecting the enforcement of creditors' rights generally or by general
equitable principles.

SECTION 4
Conditions Precedent to Shareholder's Obligations

The obligation of Shareholder to resell the Stock to the
Company on the Closing Date is subject to the timely fulfillment on or prior to
the Closing Date of the following conditions, any of which may be waived in
whole or in part by Shareholder and which if not waived shall relieve
Shareholder of its obligations to sell the Stock and permit Shareholder at its
option to terminate this Agreement without any liability or obligation on the
part of Shareholder to the Company, regardless of whether the failure of a
condition to be satisfied was due to the action of one or more of the Company
or a third party or parties:

4.1 Accuracy of Representations and Warranties. The
representations and warranties made or given by the Company in this Agreement
or in any written instrument delivered to Shareholder pursuant to this
Agreement shall be true, correct and complete in all material respects on and
as of the Closing Date as though such representations and warranties were made
and given on and as of the Closing Date.

4.2 Compliance with Agreement. The Company shall have
performed, satisfied and complied with all covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by it on
or prior to the Closing Date.

4.3 Compliance with State Laws. All registrations,
qualifications, permits and approvals required under applicable state
securities laws, if any, shall have been obtained for the sale of the Stock by
Shareholder and the repurchase thereof by the Company.

4.4 Proceedings and Documents. All corporate and other
proceedings and actions taken in connection with the transactions contemplated
hereby and all certificates, opinions, agreements, instruments and documents
mentioned herein or incident to any such transactions shall be reasonably
satisfactory in form and substance to Shareholder and its counsel.
<PAGE> 4
SECTION 5
Conditions Precedent to the Obligations of the Company

The obligation of the Company to repurchase the Stock on the
Closing Date is subject to the timely fulfillment on or prior to the Closing
Date of the following conditions, any of which may be waived in whole or in
part by the Company, and which if not waived shall relieve the Company of its
obligations to purchase the Stock, and permit the Company at its option to
terminate this Agreement without any liability or obligation on its part:

5.1 Accuracy of Representations and Warranties. The
representations and warranties made or given by Shareholder in this Agreement
or in any written instrument delivered to the Company pursuant to this
Agreement shall be true, correct and complete in all respects on and as of the
Closing Date as though such representations and warranties were made and given
on and as of the Closing Date.

5.2 Compliance with Agreement. Shareholder shall have
performed, satisfied and complied with all covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by it on
or prior to the Closing Date.

5.3 Adequate Offering Proceeds. The Company shall have
received from the Public Offering net proceeds of not less than $8,000,000.

SECTION 6
Company's Covenants

The Company covenants and agrees that until the Closing:

6.1 Corporate Rights and Facilities. The Company shall
maintain and preserve its corporate existence and all rights and licenses and
other authority adequate for the conduct of its business.

6.2 Taxes and Other Obligations. The Company shall (a)
file when due all tax returns and other reports which it is required to file,
pay when due all taxes, fees, assessments and other governmental charges
against it or upon its property, income and franchises, make all required
withholding and other tax deposits, and establish adequate reserves for the
payment of all such items and (b) pay when due all indebtedness owed by it and
perform and discharge in a timely manner all other obligations undertaken by
it.

6.3 Conduct of Business. The Company shall conduct its
business in accordance with all applicable provisions of federal, state and
local laws.

6.4 Loans, Investments, Secondary Liabilities. The
Company shall not (a) make, create, incur, assume or permit to exist any loans,
liabilities, advances, guarantees or investments to or on behalf of any other
person other than in the ordinary and normal course of its business.

6.5 Amendment of Articles or Bylaws. The Company shall
not amend its Articles of Incorporation or Bylaws in a manner that materially
impairs the rights, preferences or privileges of the Stock.

6.6 Use of Offering Proceeds. The Company shall use such
portion of the net proceeds of the Public Offering as is necessary to
repurchase the Stock in accordance with Section 1.3.

SECTION 7
Miscellaneous

7.1 Survival of Representations, Warranties and
Covenants. All representations, warranties and covenants made herein shall
survive the execution and delivery of this Agreement.
<PAGE> 5
7.2 Notices. All notices, requests, consents and other
communications required or permitted hereunder shall be in writing and shall be
hand-delivered, deposited prepaid for next-day delivery by Federal Express or
other similar overnight courier, or mailed first class postage prepaid,
registered or certified mail addressed as follows:

(a) If to Shareholder, c/o Bank of America Illinois
to: 231 South LaSalle Street
Chicago, Illinois 60604
Attention: Harold L. Rolfes, Jr.
Senior Vice President
and Managing Director
Fund Investment Group-
14th Floor

(b) If to the Mallon Resources Corporation
Company, to: 999 - 18th Street, Suite 1700
Denver, CO 80202
Attention: Roy K. Ross

Such notices, requests, consents and other communications shall for all
purposes of this Agreement be treated as being effective or having been given
(i) upon delivery, if delivered personally, (ii) if delivered by overnight
courier, twenty-four (24) hours after deposit, or (iii) if sent by mail, upon
the earlier of actual receipt or the third day after the same has been
deposited in a regularly maintained receptacle for the deposit of United States
mail, and postage prepaid and addressed as set forth above.

7.3 Fees and Expenses. Each party agrees to pay all fees
and expenses of any kind incurred by it in connection with the negotiation and
preparation of this Agreement and the other agreements and documents
contemplated hereby or referred to herein.

7.4 Attorneys Fees. If any action or proceeding is
brought by any party on, or with respect to, this Agreement, the transactions
referred to herein, or the interpretation, enforcement or breach hereof, the
prevailing party in such action shall be entitled to an award of all reasonable
costs of litigation, including, without limitation, attorneys' fees, to be paid
by the losing party, in such amount as may be determined by the court having
jurisdiction of the action.

7.5 Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.

7.6 Waiver and Amendment. No amendment, modification,
termination or waiver of any provision of this Agreement shall be effective
unless the same shall be in writing and signed by each party hereto, and then
any such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given.

7.7 Parties in Interest. All of the terms and provisions
of this Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto.

7.8 Choice of Law. It is the intention of the parties
that the laws of California shall govern the validity of this Agreement, the
construction of its terms and the interpretation of the rights and duties of
the parties. The Company hereby agrees that all actions or proceedings arising
hereunder, however initiated, shall, at the option of Shareholder, be litigated
in the appropriate federal, state or local court located in the City and County
<PAGE> 6
of San Francisco, California, and the Company hereby expressly consents to the
jurisdiction of such courts.

7.9 Indulgence Not a Waiver. No failure or delay on the
part of any party in the exercise of any right hereunder shall operate as a
waiver thereof, nor shall any one or more of such failures or delays constitute
a course of performance on which any other party may rely. All rights and
remedies existing hereunder are cumulative and not exclusive of any rights or
remedies otherwise available at law or in equity.

7.10 Entire Agreement. This Agreement embodies the entire
agreement and understanding of the parties hereto in respect of the subject
matter contained herein and therein. There are no restrictions, promises,
representations, warranties, covenants, or undertakings, other than those
expressly set forth or referred to herein. This Agreement supersedes all prior
negotiations, agreements and understandings among the parties with respect to
such subject matter.

7.11 Counterparts. This Agreement may be executed in one
or more counterparts with the same effect as if all parties hereto had signed
the same document. All counterparts so executed shall be deemed to be an
original, shall be construed together and shall constitute one agreement.

7.12 Alternative Disposition of the Stock. The parties
recognize that one or more conditions to the repurchase by the Company of the
Stock from the Shareholder under this Agreement may not be satisfied (and the
failure of such condition(s) may not be waived by the requisite party or
parties). Accordingly, they additionally agree as follows:

(a) Nothing in this Agreement shall restrict the
right of the Shareholder, at any time, acting either directly or through one or
more agents, to explore and discuss with one or more third parties possible
strategies for sale of the Stock to or through such agents or parties if the
Shareholder does not sell the Stock to the Company under this Agreement.

(b) At any time the Shareholder shall be free to
enter into one or more agreements or extensions or continuations of agreements
with one or more parties, which may include Pforzheimer, to effect one or more
sales of the type referred to in subsection (a) immediately above.

(c) If the Closing of the sale of the Stock by
the Shareholder to the Company does not occur on or before the Closing Date as
defined in Section 1.3, the Shareholder shall have no further obligation to
sell the Stock to the Company, and shall be free to offer and sell it to or
through any party.
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.

MALLON RESOURCES CORPORATION,
a Colorado corporation

By: /s/ GEORGE O. MALLON, JR.
---------------------------
Its: President
--------------------------

BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
a national banking association

By: /s/ HAROLD L. ROLFES, JR.
---------------------------
Harold L. Rolfes, Jr.
Its: Senior Vice President
<PAGE> 8
Schedule of Exceptions

None.

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-2 of our report dated April 12, 1996, except
as to the reverse stock split described in Note 1 which is as of August 28,
1996, relating to the financial statements of Mallon Resources Corporation,
which appears in such Prospectus. We also consent to the reference to us under
the heading "Experts" in such Prospectus.

/s/ PRICE WATERHOUSE LLP

PRICE WATERHOUSE LLP

August 28, 1996

<PAGE> 1
EXHIBIT 23.3

[GEOQUEST LETTERHEAD]

CONSENT

We hereby consent to all references to this Company in the Registration
Statement on Form S-2 covering the sale of Mallon Resources Corporation common
stock and all amendments to the Registration Statement.

GEOQUEST
RESERVOIR TECHNOLOGIES, INC.

By /s/ Eugene A. Pantella
--------------------------------
August 28, 1996 Name: Eugene A. Pantella
--------------------------
Title: Vice President, US
Operations
-------------------------

<PAGE> 1
EXHIBIT 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints George O. Mallon, Jr. and Roy K. Ross, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, in his name and on his behalf, to do any and all
acts and things and to execute any and all instruments which they and each of
them may deem necessary or advisable to enable Mallon Resources Corporation
(the "Company") to comply with the Securities Act of 1933, as amended (the
"Act"), and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the registration
under the Act of up to, and including 2,500,000 shares of Common Stock of the
Company (after a four to one reverse split), including power and authority to
sign his name in any and all capacities (including his capacity as a Director
and/or Officer of the Company) to a Registration Statement on Form S-2 or such
other form as may be appropriate, and to any and all amendments, including
post-effective amendments, to such Registration Statement, and to any and all
instruments or documents filed as part of or in connection with such
Registration Statement or any amendments thereto; and the undersigned hereby
ratifies and confirms all that said attorneys-in-fact and agents, or any of
them, shall lawfully do or cause to be done by virtue hereof.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GEORGE O. MALLON, JR. Chairman of the Board, Director and August 25, 1996
----------------------------------------- President (Principal Executive
George O. Mallon, Jr. Officer)

/s/ ROY K. ROSS Executive Vice President and Director August 25, 19966
-----------------------------------------
Roy K. Ross

/s/ KEVIN M. FITZGERALD Executive Vice President and Director August 25, 19966
-----------------------------------------
Kevin M. Fitzgerald

/s/ JAMES A. MCGOWEN Executive Vice President and Director August 25, 19966
-----------------------------------------
James A. McGowen

/s/ ALFONSO R. LOPEZ Treasurer (Chief Financial Officer) August 25, 19966
-----------------------------------------
Alfonso R. Lopez

/s/ CAROLENA F. CHAPMAN Controller (Chief Accounting Officer) August 25, 19966
-----------------------------------------
Carolena F. Chapman

/s/ FRANK DOUGLAS Director August 25, 19966
-----------------------------------------
Frank Douglass

/s/ ROGER R. MITCHELL Director August 25, 19966
-----------------------------------------
Roger R. Mitchell

/s/ FRANCIS J. REINHARDT, JR. Director August 25, 19966
-----------------------------------------
Francis J. Reinhardt, Jr.
</TABLE>