HOME STAKE OIL & GAS CO, 424B3, 1997-11-04

HOME STAKE OIL & GAS CO
424B3, 1997-11-04
OIL & GAS FIELD EXPLORATION SERVICES

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<PAGE>

Filed pursuant to Rule 424(b)(3)
SEC File No. 333-33989

[To be mailed to stockholders of The Home-Stake Oil & Gas Company only]

[HSOG LETTERHEAD APPEARS HERE]

November 4, 1997

To the Stockholders of The Home-Stake Oil & Gas Company:

Enclosed are a Notice of a Special Meeting of Stockholders, a Joint Proxy
Statement and Prospectus, and a Proxy for the Special Meeting of Stockholders
(the "Special Meeting") of The Home-Stake Oil & Gas Company ("HSOG") to be held
on December 11, 1997, at 9:00 a.m., in the offices of HSOG at 15 East 5th
Street, Suite 2800, Tulsa, Oklahoma.

At the Special Meeting you will be asked to consider and vote on a proposal
to approve and adopt a Merger Agreement between The Home-Stake Royalty
Corporation ("HSRC") and HSOG (the "Merger Agreement"), pursuant to which HSRC
will be merged with and into HSOG (the "Merger") and the Common Stock of HSOG
will be split on a 30-for-1 basis (the common stock resulting from such stock
split is hereinafter referred to as "New HSOG Common Stock"). The terms of the
Merger Agreement provide that holders of HSRC Common Stock (other than HSOG and
holders who have perfected their appraisal rights under Oklahoma law) will
receive 48.66 shares of New HSOG Common Stock for each share of HSRC Common
Stock owned as of the effective time of the Merger, and that holders of Common
Stock of HSOG will receive 30 shares of New HSOG Common Stock for each share of
Common Stock of HSOG owned as of the effective time of the Merger. The terms of
the Merger Agreement also provide that HSOG's Certificate of Incorporation will
be amended to increase the number of authorized shares of HSOG capital stock in
order to accomplish the Merger. Details of the proposal are set forth in the
accompanying Joint Proxy Statement and Prospectus, which you should read
carefully.

At the meeting, you will also be asked to approve certain changes to HSOG's
Certificate of Incorporation set forth in the accompanying Joint Proxy Statement
and Prospectus and to approve the HSOG 1997 Incentive Stock Plan.

After careful consideration, the Board of Directors of HSOG has determined
that the proposed Merger is fair to and in the best interests of HSOG and its
stockholders. Accordingly, the Board of Directors has unanimously approved the
Merger Agreement and recommends that all stockholders vote for its approval.
The Board of Directors has also determined that the proposed changes to HSOG's
Certificate of Incorporation and adoption of the HSOG 1997 Incentive Stock Plan
are in the best interests of HSOG and its stockholders and unanimously
recommends that all stockholders vote for the approval of such proposals.

IN ORDER THAT YOUR SHARES MAY BE REPRESENTED AT THE SPECIAL MEETING, YOU
ARE URGED TO PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IN
THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
If you attend the Special Meeting in person you may, if you wish, vote
personally on all matters brought before the Special Meeting even if you have
previously returned your Proxy. All stockholders are cordially invited to
attend the Special Meeting in person.

Sincerely,

/s/ ROBERT C. SIMPSON

Robert C. Simpson
Chairman of the Board, Chief Executive Officer and
President

YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
15 EAST 5TH STREET, SUITE 2800
TULSA, OKLAHOMA 74103

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 11, 1997

To the Stockholders of The Home-Stake Oil & Gas Company:

Notice is hereby given that a Special Meeting of Stockholders (the "Special
Meeting") of The Home-Stake Oil & Gas Company ("HSOG") will be held on December
11, 1997, at 9:00 a.m., in the offices of HSOG at 15 East 5th Street, Suite
2800, Tulsa, Oklahoma, for the following purposes:

1. To consider and vote on a proposal to approve and adopt an Agreement
of Merger dated as of August 14, 1997, as amended September 24, 1997
(the "Merger Agreement"), between HSOG and The Home-Stake Royalty
Corporation ("HSRC"), pursuant to which, among other things:

(a) HSRC will be merged with and into HSOG (the "Merger") with
HSOG to be the surviving corporation in the Merger;

(b) the Common Stock of HSOG will be split on a 30-for-1 basis
(the common stock resulting from such stock split is hereinafter
referred to as "New HSOG Common Stock");

(c) each stockholder of HSRC (other than HSOG and HSRC
stockholders who have perfected their appraisal rights under
Oklahoma law) will receive 48.66 shares of New HSOG Common Stock
for each share of HSRC Common Stock owned as of the effective
time of the Merger (which represents approximately 1.62 shares of
HSOG Common Stock prior to the stock split for each share of HSRC
Common Stock); and

(d) each stockholder of HSOG (other than HSRC and HSOG
stockholders who have perfected their appraisal rights under
Oklahoma law) will receive 30 shares of New HSOG Common Stock for
each share of Common Stock of HSOG owned as of the effective time
of the Merger.

A copy of the Merger Agreement is attached as Appendix A to the Joint
Proxy Statement and Prospectus. The terms of the Merger Agreement
also provide for the amendment of HSOG's Certificate of Incorporation
to increase the authorized capital stock in order to effect and
facilitate the Merger and stock split.

2. To consider and vote upon certain proposals to amend the HSOG
Certificate of Incorporation which are discussed in the accompanying
Joint Proxy Statement and Prospectus.

3. To consider and vote on a proposal to approve and adopt the HSOG 1997
Incentive Stock Plan.

4. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.

<PAGE>

Corporation Act have the right to dissent from the Merger and will be entitled
to file a petition in an Oklahoma district court to have their shares of HSOG
Common Stock appraised by such court and receive payment of the amount of "fair
value" of such shares as determined by such court. It is a condition to the
consummation of the Merger (unless waived by HSOG), that holders of not more
than 12% of the outstanding shares of Common Stock of HSOG or HSRC shall have
exercised their appraisal rights.

IN ORDER THAT YOUR SHARES MAY BE REPRESENTED AT THE SPECIAL MEETING, YOU
ARE URGED TO PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IN
THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
You are cordially invited to attend the Special Meeting in person. If you
attend the Special Meeting and desire to revoke your Proxy and vote in person,
you may do so. In any event, a Proxy may be revoked at any time before it is
voted.

By Order of the Board of Directors,

/s/ CHRIS K. CORCORAN

Tulsa, Oklahoma Chris K. Corcoran
November 4, 1997 Executive Vice President, Chief Financial
Officer, and Secretary
<PAGE>

[To be mailed to stockholders of The Home-Stake Royalty Corporation only]

[HSRC LETTERHEAD APPEARS HERE]

November 4, 1997

To the Stockholders of The Home-Stake Royalty Corporation:

Enclosed are a Notice of a Special Meeting of Stockholders, a Joint Proxy
Statement and Prospectus, and a Proxy for the Special Meeting of Stockholders
(the "Special Meeting") of The Home-Stake Royalty Corporation ("HSRC") to be
held on December 11, 1997, at 9:00 a.m., in the offices of HSRC at 15 East 5th
Street, Suite 2800, Tulsa, Oklahoma.

At the Special Meeting you will be asked to consider and vote on a proposal
to approve and adopt a Merger Agreement between The Home-Stake Oil & Gas Company
("HSOG") and HSRC (the "Merger Agreement"), pursuant to which, among other
things, HSRC will be merged with and into HSOG (the "Merger"). The terms of the
Merger Agreement provide that holders of HSRC Common Stock (other than HSOG and
holders who have perfected their appraisal rights under Oklahoma law) will
receive 48.66 shares of New HSOG Common Stock for each share of HSRC Common
Stock owned as of the effective time of the Merger. Details of the proposal are
set forth in the accompanying Joint Proxy Statement and Prospectus, which you
should read carefully.

After careful consideration, the Board of Directors of HSRC has determined
that the proposed Merger is fair to and in the best interests of HSRC and its
stockholders. Accordingly, the Board of Directors has unanimously approved the
Merger Agreement and recommends that all stockholders vote for its approval.

Sincerely,

/s/ ROBERT C. SIMPSON

Robert C. Simpson
Chairman of the Board, Chief Executive Officer and
President

YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY
<PAGE>

THE HOME-STAKE ROYALTY CORPORATION
15 EAST 5TH STREET, SUITE 2800
TULSA, OKLAHOMA 74103

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 11, 1997

To the Stockholders of The Home-Stake Royalty Corporation:

Notice is hereby given that a Special Meeting of Stockholders (the "Special
Meeting") of The Home-Stake Royalty Corporation ("HSRC") will be held on
December 11, 1997, at 9:00 a.m., in the offices of HSRC at 15 East 5th Street,
Suite 2800, Tulsa, Oklahoma, for the following purposes:

1. To consider and vote on a proposal to approve and adopt an Agreement
of Merger dated as of August 14, 1997, as amended September 24, 1997
(the "Merger Agreement"), between The Home-Stake Oil & Gas Company
("HSOG") and HSRC, pursuant to which, among other things:

(a) HSRC will be merged with and into HSOG (the "Merger") with
HSOG to be the surviving corporation; and

(b) each stockholder of HSRC (other than HSOG and HSRC
stockholders who have perfected their appraisal rights under
Oklahoma law) will receive 48.66 shares of New HSOG Common Stock
(HSOG Common Stock will be split on a 30-for-1 basis upon
effectiveness of the Merger) for each share of HSRC Common Stock
owned as of the effective time of the Merger (which represents
approximately 1.62 shares of HSOG Common Stock prior to the stock
split for each share of HSRC Common Stock).

A copy of the Merger Agreement is attached as Appendix A to the Joint
Proxy Statement and Prospectus.

2. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.

Only stockholders of record at the close of business on November 3, 1997,
are entitled to notice of and to vote at the Special Meeting or any adjournment
or postponement thereof. A list of HSRC stockholders entitled to vote at the
Special Meeting will be available for examination, for any purpose germane to
the Special Meeting, during ordinary business hours, at the offices of HSRC for
ten days prior to the Special Meeting and at the time and place of the Special
Meeting. HSRC stockholders who follow the procedures specified in Section 1091
of the Oklahoma General Corporation Act have the right to dissent from the
Merger and will be entitled to file a petition in an Oklahoma district court to
have their shares of HSRC Common Stock appraised by such court and receive
payment of the amount of "fair value" of such shares as determined by such
court. It is a condition to the consummation of the Merger (unless waived by
HSOG), that holders of not more than 12% of the outstanding shares of Common
Stock of HSOG or HSRC shall have exercised their appraisal rights.

IN ORDER THAT YOUR SHARES MAY BE REPRESENTED AT THE SPECIAL MEETING, YOU
ARE URGED TO PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IN
THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
You are cordially invited to attend the Special Meeting in person. If you
attend the Special Meeting and desire to revoke your Proxy and vote in person,
you may do so. In any event, a Proxy may be revoked at any time before it is
voted.

By Order of the Board of Directors,

/s/ CHRIS K. CORCORAN

Tulsa, Oklahoma Chris K. Corcoran
November 4, 1997 Executive Vice President, Chief Financial Officer
and Secretary
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
AND
THE HOME-STAKE ROYALTY CORPORATION

JOINT PROXY STATEMENT
FOR THE SPECIAL MEETINGS OF STOCKHOLDERS
TO BE HELD DECEMBER 11, 1997
____________________

THE HOME-STAKE OIL & GAS COMPANY
PROSPECTUS
____________________

This Joint Proxy Statement and Prospectus (this "Proxy
Statement/Prospectus") is furnished in connection with the solicitation of
proxies by the Boards of Directors of The Home-Stake Oil & Gas Company, an
Oklahoma corporation ("HSOG"), and The Home-Stake Royalty Corporation, an
Oklahoma corporation ("HSRC"), for use in connection with the Special Meeting of
Stockholders of HSOG (the "HSOG Meeting") and the Special Meeting of
Stockholders of HSRC (the "HSRC Meeting"), respectively, each of which is to be
held on December 11, 1997, or any adjournment or postponement thereof. At such
meetings, the stockholders of each of HSOG and HSRC will consider and vote upon
a proposal to approve and adopt an Agreement of Merger dated as of August 14,
1997, as amended September 24, 1997 (the "Merger Agreement"), between HSOG and
HSRC, pursuant to which, among other things, (i) HSRC will be merged with and
into HSOG (the "Merger") and (ii) the shares of Common Stock, $20.00 par value
per share, of HSOG ("HSOG Common Stock") will be split on a 30-for-1 basis (the
common stock resulting from such stock split is hereinafter referred to as "New
HSOG Common Stock"). As a result of the Merger, each of the then outstanding
shares of Common Stock, $40.00 par value per share, of HSRC ("HSRC Common
Stock") (other than shares held by HSOG which will be cancelled) will be
converted into the right to receive 48.66 shares of New HSOG Common Stock
(representing approximately 1.62 shares of HSOG Common Stock prior to the 30-
for-1 stock split for each share of HSRC Common Stock) (subject to appraisal
rights for dissenting HSRC stockholders) and each of the then outstanding shares
of HSOG Common Stock (other than shares held by HSRC which will be cancelled)
will be converted into the right to receive 30 shares of New HSOG Common Stock
(subject to appraisal rights for dissenting HSOG stockholders).

Also, the stockholders of HSOG will consider and vote upon proposals to
approve certain amendments to the HSOG Certificate of Incorporation and the HSOG
1997 Incentive Stock Plan, and the stockholders of both HSOG and HSRC will
transact such other business as may properly come before the meetings or any
adjournment or postponement thereof.

This Proxy Statement/Prospectus also constitutes a prospectus of HSOG with
respect to up to approximately 2,742,203 shares of New HSOG Common Stock to be
issued to the stockholders of HSRC pursuant to the Merger.

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK INHERENT TO THE
OIL AND GAS INDUSTRY. SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION
OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE MERGER.

This Proxy Statement/Prospectus and the accompanying forms of proxy are
first being mailed to the stockholders of HSOG and HSRC on or about November 4,
1997.
____________________

THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE MERGER 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 PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
____________________

The date of this Joint Proxy Statement and Prospectus is November 4, 1997.
<PAGE>

AVAILABLE INFORMATION

Each of HSOG and HSRC is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information are available for
inspection and copying at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at prescribed rates. In
addition, the Commission maintains a site on the World Wide Web that contains
reports, proxy and information statements and other information filed
electronically by HSOG and HSRC with the Commission which can be accessed over
the Internet at http://www.sec.gov.

HSOG has filed a Registration Statement on Form S-4 (together with any
amendments thereto, the "Registration Statement") with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of New HSOG Common Stock to be issued to the stockholders of HSRC in
connection with the Merger. This Proxy Statement/Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to HSOG and the New HSOG
Common Stock, reference is made to the Registration Statement, including the
exhibits filed as a part thereof. Statements contained in this Proxy
Statement/Prospectus regarding the provisions of any documents are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in all respects by such reference. The Registration
Statement and the exhibits filed as a part thereof are available for inspection
and copying as set forth above.

____________________

NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY
THIS PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY FROM A PERSON,
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF
AN OFFER OR PROXY SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES MADE UNDER THIS
PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF HSOG OR HSRC SINCE THE DATE OF
THIS PROXY STATEMENT/PROSPECTUS.
<PAGE>

TABLE OF CONTENTS

AVAILABLE INFORMATION.................................. 2
SUMMARY................................................ 4
RISK FACTORS........................................... 12
THE SPECIAL MEETINGS................................... 18
Matters to Be Considered at the
Special Meetings.............................. 18
Date, Place and Time............................. 19
Votes Required................................... 19
Voting of Proxies................................ 19
Revocability of Proxies.......................... 20
Record Date; Shares Entitled to Vote; Quorum..... 20
Solicitation of Proxies.......................... 20
Submission of Proposals for 1998 Annual
Meeting........................................ 20
THE MERGER............................................. 22
General 22
Background of and Reasons for the Merger......... 22
Determination of Exchange Ratio.................. 24
Opinions of Financial Advisor.................... 25
Conduct of the Business of HSOG After the
Merger 28
Accounting Treatment............................. 28
Federal Income Tax Consequences.................. 28
Interests of Certain Persons in the Merger....... 29
Appraisal Rights................................. 29
Restrictions on Resales by Affiliates of HSRC.... 32
Depletion Deductions............................. 32
THE MERGER AGREEMENT................................... 33
The Merger....................................... 33
The Stock Split.................................. 33
Exchange Procedures.............................. 33
Conditions....................................... 35
Amendment and Termination........................ 35
MARKET FOR HSOG COMMON STOCK
AND HSRC COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.......................... 36
HSOG............................................. 36
HSRC............................................. 36
DESCRIPTION OF HSOG
CAPITAL STOCK........................................ 37
HSOG Common Stock and
New HSOG Common Stock.......................... 38
HSOG Preferred Stock............................. 38
Certain Provisions and Arrangements
That May Have an Anti-Takeover Effect.......... 39
COMPARATIVE RIGHTS OF STOCKHOLDERS..................... 42
General 42
Number of Directors; Removal of
Directors; Filling Vacancies;
Qualifications................................. 43
Duration; Purposes............................... 43
Stockholder Action by Written
Consent; Special Meetings...................... 44
Amendments of the Certificate of
Incorporation and Bylaws....................... 44
"Blank Check" Preferred Stock.................... 45
Business Combinations............................ 46
Control Shares................................... 47
Appraisal Rights................................. 47
Limitation of Liability of Directors............. 47
Indemnification; Advancement of Expenses......... 48
Rights Agreement................................. 49
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................ 49
Management's Discussion and Analysis of
Financial Condition and Results of Operations
of HSOG........................................ 49
Management's Discussion and Analysis of
Financial Condition and Results of Operations
of HSRC........................................ 53
DESCRIPTION OF THE BUSINESS OF THE
HOME-STAKE COMPANIES................................. 57
General 57
Partnerships..................................... 57
Competition...................................... 58
Marketing........................................ 58
Seasonality...................................... 59
Regulation....................................... 59
Environmental Matters............................ 60
Properties of The Home-Stake Companies........... 61
Drilling Activity................................ 63
HSRC Operating Activities........................ 64
Producing Wells.................................. 64
Acreage 65
Proved Reserves.................................. 66
Oil and Gas Production, Sales Prices and
Production Costs............................... 68
Employees........................................ 69
Litigation....................................... 69
AMENDMENTS TO THE CERTIFICATE OF
INCORPORATION OF HSOG................................ 70
APPROVAL OF THE HSOG 1997 INCENTIVE
STOCK PLAN........................................... 78
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS; COMPENSATION AND OTHER INFORMA-
TION CONCERNING OFFICERS AND DIRECTORS............... 81
Security Ownership of Certain Beneficial
Owners of HSRC and HSOG........................ 81
Executive Officers of HSOG and HSRC.............. 82
Executive Compensation........................... 83
Certain Relationships and Related Transactions... 85
OTHER MATTERS.......................................... 86
LEGAL MATTERS.......................................... 86
EXPERTS................................................ 86
DEFINITION OF CERTAIN TERMS............................ 87
INDEX TO FINANCIAL INFORMATION......................... F-1
APPENDIX A--AGREEMENT OF MERGER....................... A-1
APPENDIX B--FAIRNESS OPINIONS OF
PRINCIPAL FINANCIAL SECURITIES, INC. ................ B-1
APPENDIX C--TEXT OF SECTION 1091 OF THE
OKLAHOMA GENERAL CORPORATION ACT
CONCERNING APPRAISAL RIGHTS OF
DISSENTING STOCKHOLDERS.............................. C-1
APPENDIX D--CERTIFICATE OF MERGER...................... D-1
APPENDIX E--PROPOSED AMENDMENTS TO THE
CERTIFICATE OF INCORPORATION OF HSOG................. E-1
APPENDIX F--HSOG 1997 INCENTIVE STOCK PLAN............. F-1
APPENDIX G--TEXT OF SECTIONS 1.159 AND 1.160
OF THE OKLAHOMA BUSINESS CORPORATION
ACT.................................................. G-1
<PAGE>

SUMMARY

The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement and Prospectus (this "Proxy Statement/Prospectus"). This
summary does not purport to be complete and is qualified in its entirety by
reference to the more detailed information contained elsewhere in this Proxy
Statement/Prospectus, the Appendices hereto and the documents referred to
herein. Stockholders are urged to review carefully this Proxy
Statement/Prospectus, the Merger Agreement attached as Appendix A and the other
appendices attached hereto. Terms used herein with their initial letters
capitalized are defined herein, which definitions are summarized under
"Definition of Certain Terms."

HSRC

The Home-Stake Royalty Corporation, an Oklahoma corporation, was formed in
1929 and, together with HSOG, is actively engaged in the acquisition,
exploration, development and production of oil and gas properties. HSRC serves
as operator of certain producing properties owned by HSRC and HSOG. HSRC's
principal executive offices are located at 15 East 5th Street, Suite 2800,
Tulsa, Oklahoma 74103, and its telephone number at such offices is (918) 583-
0178.

HSOG

The Home-Stake Oil & Gas Company, an Oklahoma corporation, was formed in 1917
and, together with HSRC, is actively engaged in the acquisition, exploration,
development and production of oil and gas properties. HSOG's principal
executive offices are located at 15 East 5th Street, Suite 2800, Tulsa, Oklahoma
74103, and its telephone number is (918) 583-0178.

SPECIAL MEETINGS

This Proxy Statement/Prospectus relates to the Special Meeting of Stockholders
of HSOG (the "HSOG Meeting") and the Special Meeting of Stockholders of HSRC
(the "HSRC Meeting"). At the meetings, the stockholders of each of HSOG and
HSRC will consider and vote upon proposals to approve and adopt the Merger
Agreement between HSOG and HSRC, pursuant to which, among other things, HSRC
will be merged with and into HSOG (the "Merger") and the Common Stock of HSOG
will be split on a 30-for-1 basis (the "Stock Split"). With respect to the HSOG
Meeting only, HSOG stockholders will consider and vote upon eight proposed
amendments to the HSOG Certificate of Incorporation and upon a proposal to
approve the HSOG 1997 Incentive Stock Plan. See "Summary--Amendments to the
HSOG Certificate of Incorporation" below for a complete list of the proposed
amendments to HSOG's Certificate of Incorporation.

The HSOG Meeting will be held on December 11, 1997, at 9:00 a.m., Tulsa, in
the offices of HSOG at 15 East 5th Street, Suite 2800, Tulsa, Oklahoma. The
record date for stockholders of HSOG entitled to notice of and to vote at the
HSOG Meeting is as of the close of business on September 30, 1997.

Voting rights for HSOG are vested in the holders of the Common Stock, $20.00
par value per share, of HSOG ("HSOG Common Stock"), with each share of HSOG
Common Stock entitled to one vote on each matter coming before the stockholders.
As of September 30, 1997, there were 89,509 shares of HSOG Common Stock
outstanding, held by approximately 200 holders of record.

-4-
<PAGE>

the affirmative vote of the holders of 66 2/3 percent of the outstanding shares
of HSOG Common Stock is required for the approval and adoption of Proposed
Amendments Nos. 3 and 4 (below) to the HSOG Certificate of Incorporation. See
"Amendments to the HSOG Certificate of Incorporation." In addition, the
affirmative vote of the holders of a majority of the shares of HSOG Common Stock
present or represented by proxy at the HSOG Meeting is required for approval of
the HSOG 1997 Incentive Stock Plan. HSRC, which owns approximately 33.9 percent
of the outstanding shares of HSOG Common Stock, intends to vote all such shares
of Common Stock in favor of the Merger, the amendments to the HSOG Certificate
of Incorporation and the approval of the HSOG 1997 Incentive Stock Plan. As of
September 30, 1997, directors and executive officers of HSOG and their
affiliates were beneficial owners of approximately 11.5 percent of the
outstanding shares of HSOG Common Stock. All such directors and executive
officers have indicated that they will vote in favor of the Merger, the
amendments to the HSOG Certificate of Incorporation and the adoption of the HSOG
1997 Incentive Stock Plan.

The HSRC Meeting will be held on December 11, 1997, at 9:00 a.m., in the
offices of HSRC at 15 East 5th Street, Suite 2800, Tulsa, Oklahoma. The record
date for stockholders of HSRC entitled to notice of and to vote at the HSRC
Meeting is as of the close of business on November 3, 1997.

Voting rights for HSRC are vested in the holders of the Common Stock, $40.00
par value per share, of HSRC ("HSRC Common Stock"), with each share entitled to
one vote on each matter coming before the stockholders. As of September 30,
1997, there were 69,808 shares of HSRC Common Stock outstanding held by
approximately 300 holders of record.

The affirmative vote of the holders of 66 2/3 percent of the outstanding
shares of HSRC Common Stock is required for the approval and adoption of the
Merger Agreement. HSOG, which owns approximately 19.3 percent of the outstanding
shares of HSRC Common Stock, intends to vote all such shares of Common Stock in
favor of the Merger. As of September 30, 1997, directors and executive officers
of HSRC and their affiliates were beneficial owners of approximately 20.7
percent of the outstanding shares of HSRC Common Stock. All such directors and
executive officers have indicated that they will vote in favor of the Merger.

THE MERGER

Conversion of HSRC Common Stock. Upon consummation of the transactions
contemplated by the Merger Agreement:

. HSRC will be merged with and into HSOG (the "Merger"), and

. Each issued and outstanding share of HSRC Common Stock (other than shares
held by HSOG, which will be cancelled, and by holders exercising their
dissenters' appraisal rights) will be converted into the right to receive
48.66 shares of New HSOG Common Stock.

The conversion of each share of HSRC Common Stock into the right to receive
48.66 shares of New HSOG Common Stock upon consummation of the Merger (the
"Exchange Ratio") represents approximately 1.62 shares of HSOG Common Stock
prior to the Stock Split for each share of HSRC Common Stock. Fractional shares
of New HSOG Common Stock will not be issued in connection with the Merger. Any
HSRC stockholder otherwise entitled to a fractional share will receive a whole
share of New HSOG Common Stock in lieu of such fractional share.

Split of HSOG Common Stock. The Merger Agreement provides for the split of
the shares of HSOG Common Stock on a 30-for-1 basis (the common stock resulting
from such split is referred to herein as "New HSOG Common Stock") as of the
effective time of the Merger. At such effective time, each issued and
outstanding share of HSOG Common Stock (other than shares held by HSRC, which

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will be cancelled, and any holders exercising their dissenters' appraisal
rights) will be converted into the right to receive 30 shares of New HSOG Common
Stock.

Increase in Authorized Shares of HSOG Capital Stock. Approval of the
Merger Agreement will also constitute approval of an amendment to the HSOG
Certificate of Incorporation (the "HSOG Certificate" and, as amended, the
"Amended HSOG Certificate") set forth in the Certificate of Merger (see Appendix
D to this Proxy Statement/Prospectus). The Certificate of Merger contains
provisions to (i) increase the number of authorized shares of HSOG's capital
stock to 14,000,000 shares, consisting of 12,000,000 shares of Common Stock, par
value $0.01 per share, and 2,000,000 shares of Preferred Stock, par value $1.00
per share, and (ii) effect the Stock Split. See "Risk Factors--Possible Effect
of Authorized Shares of HSOG Capital Stock" and "Description of HSOG Capital
Stock."

Reasons for the Merger. The Boards of Directors of HSOG and HSRC believe
that the Merger is advisable and in the best interests of the stockholders of
their respective companies. The principal reasons for the Merger are to (i)
consolidate HSRC's assets with the assets of HSOG to create a larger and more
financially secure entity, (ii) utilize the cash flow and borrowing capacity
generated by the consolidated assets for the further development of existing
properties and the acquisition of additional properties, (iii) create a single
entity that can access public capital markets to raise additional capital for
HSOG's business, and (iv) provide possibly greater liquidity to the holders of
HSOG Common Stock and HSRC Common Stock.

Recommendations of the Boards of Directors. The Boards of Directors of
HSOG and HSRC believe that the terms of the Merger are fair to and in the best
interests of their respective stockholders and each has, by unanimous vote,
approved the Merger Agreement and each unanimously recommends that its
stockholders vote FOR approval of the Merger Agreement. For a discussion of the
factors considered by the Boards of Directors in reaching their respective
decisions, see "The Merger--Background of and Reasons for the Merger."

Exchange Ratio. The Exchange Ratio was established by Principal Financial
Securities, Inc. ("Principal") based upon the relative estimated values of the
companies. The Boards of Directors believe that the Exchange Ratio represents a
fair allocation of the ownership of the surviving company among the current
stockholders of both companies. See "Risk Factors--Determination of Exchange
Ratio," "The Merger--Determination of Exchange Ratio" and "The Merger--Opinion
of Financial Advisor."

Opinions of Financial Advisor. Principal has delivered its written opinion
to each of the Board of Directors of HSOG and HSRC to the effect that, based
upon and subject to considerations and assumptions set forth therein and based
upon such other matters as Principal considered relevant, the consideration to
be received in the Merger by the stockholders of HSRC was, as of the date of its
opinion, fair to the disinterested stockholders of HSRC and HSOG (i.e.
stockholders who are not directors, officers or employees of HSRC or HSOG or
greater than 15% owners of HSRC Common Stock or HSOG Common Stock) from a
financial point of view. A copy of the full text of the written opinions of
Principal, which sets forth the assumptions made, procedures followed, matters
considered and limits of its review, are attached to this Proxy
Statement/Prospectus as Appendix B, and should be read carefully in their
entirety. See "The Merger--Opinion of Financial Advisor."

Interests of Certain Persons in the Merger. In considering the
recommendations of the Boards of Directors of HSOG and HSRC with respect to the
Merger Agreement and the transactions contemplated thereby, stockholders should
be aware that certain members of the management of HSOG and HSRC and the Boards
of Directors of HSOG and HSRC have certain interests in the Merger that are in
addition to the interests of stockholders of HSOG and HSRC generally. See "The
Merger--Interests of Certain Persons in the Merger."

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Conditions to the Merger. The obligations of HSOG and HSRC to consummate
the Merger are subject to obtaining requisite stockholder approvals and the
satisfaction of certain conditions, including (i) the absence of any injunction
prohibiting consummation of the Merger, (ii) holders of not more than 12% of the
outstanding shares of HSOG Common Stock or HSRC Common Stock shall have
exercised their appraisal rights under Oklahoma law (which condition may be
waived by HSOG), and (iii) the receipt of an opinion of counsel with respect to
the tax consequences of the Merger. See "The Merger Agreement--Conditions."

Effective Time of the Merger. The Merger will become effective at 5:00
o'clock p.m., Central Standard Time, on December 31, 1997 (the "Effective
Time"), in the event the requisite stockholder approvals have been obtained and
all other conditions to the Merger have been satisfied or waived.

Exchange of HSRC Certificates. Upon consummation of the Merger, each
holder (other than HSOG and stockholders who have exercised their dissenter's
appraisal rights under Oklahoma law) of a certificate or certificates
representing shares of HSRC Common Stock outstanding immediately prior to the
Merger will be entitled to receive 48.66 shares of New HSOG Common Stock for
each share of HSRC Common Stock. As soon as practicable after the Effective
Time, HSOG will cause to be mailed to each record holder of HSRC Common Stock as
of the Effective Time a letter of transmittal (the "HSRC Letter of Transmittal")
to be used to effect the exchange of certificates representing HSRC Common Stock
for certificates representing New HSOG Common Stock. If the Merger is approved
and consummated, each HSRC stockholder (other than those exercising their
appraisal rights) must surrender the certificate or certificates representing
such HSRC Common Stock, along with a properly completed and executed HSRC Letter
of Transmittal and any other required documents. Only then will such HSRC
stockholder be entitled to receive a certificate representing the whole number
of shares of New HSOG Common Stock to which such stockholder is entitled. HSRC
STOCKHOLDERS SHOULD NOT SURRENDER THEIR STOCK CERTIFICATES UNTIL THE HSRC LETTER
OF TRANSMITTAL IS RECEIVED AND THEN SHOULD SURRENDER THEIR STOCK CERTIFICATES
ONLY ACCOMPANIED BY A PROPERLY COMPLETED AND EXECUTED HSRC LETTER OF
TRANSMITTAL. See "The Merger Agreement--Exchange Procedures."

Exchange of HSOG Certificates. Upon consummation of the Merger and as a
result of the Stock Split, each holder (other than HSRC and stockholders who
have exercised their dissenter's appraisal rights under Oklahoma law) of a
certificate or certificates representing shares of HSOG Common Stock outstanding
immediately prior to the Merger will be entitled to receive 30 shares of New
HSOG Common Stock for each share of HSOG Common Stock. As soon as practicable
after the Effective Time, HSOG will cause to be mailed to each record holder of
HSOG Common Stock as of the Effective Time a letter of transmittal (the "HSOG
Letter of Transmittal") to be used to effect the exchange of certificates
representing HSOG Common Stock for certificates representing New HSOG Common
Stock. If the Merger is approved and consummated, each HSOG stockholder (other
than those exercising their appraisal rights) must surrender the certificate or
certificates representing such HSOG Common Stock, along with a properly
completed and executed HSOG Letter of Transmittal and any other required
documents. Only then will such HSOG stockholder be entitled to receive a
certificate representing the whole number of shares of New HSOG Common Stock to
which such stockholder is entitled. HSOG STOCKHOLDERS SHOULD NOT SURRENDER
THEIR STOCK CERTIFICATES UNTIL THE HSOG LETTER OF TRANSMITTAL IS RECEIVED AND
THEN SHOULD SURRENDER THEIR STOCK CERTIFICATES ONLY ACCOMPANIED BY A PROPERLY
COMPLETED AND EXECUTED HSOG LETTER OF TRANSMITTAL. See "The Merger Agreement--
Exchange Procedures."

Appraisal Rights. Holders of HSOG Common Stock and HSRC Common Stock are
entitled to appraisal rights in connection with the Merger. It is a condition
to the consummation of the Merger (which condition may be waived by HSOG), that
holders of not more than 12% of the outstanding shares of either HSOG Common
Stock or HSRC Common Stock shall have exercised their appraisal rights. See
"The Merger--Appraisal Rights" and "The Merger Agreement--Conditions."

Federal Income Tax Consequences. Conner & Winters, A Professional
Corporation, has rendered an opinion to each of HSOG and HSRC that the Merger
and Stock Split will qualify as reorganizations

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<PAGE>

under Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), and that the receipt of New HSOG Common Stock pursuant to the Merger
and/or Stock Split by HSOG and HSRC stockholders will generally not be subject
to federal income taxation. The opinion of Conner & Winters, A Professional
Corporation, however, represents only the best judgment of such counsel and is
not binding on the Internal Revenue Service. HSOG and HSRC stockholders should
consult their own tax advisors as to the particular consequences of the Merger
and Stock Split to them, including the application of federal, state, local and
foreign income and other tax laws. See "The Merger--Federal Income Tax
Consequences."

Accounting Treatment. The Merger will be accounted for as a purchase in
accordance with generally accepted accounting principles, with HSOG deemed to be
the purchased entity for accounting purposes. See "The Merger--Accounting
Treatment."

Resale Restrictions. All shares of New HSOG Common Stock received by HSRC
stockholders will be freely transferable, except shares received by persons who
are deemed to be "affiliates" or "underwriters" (as such term is defined under
the Securities Act) of HSRC prior to the Merger may be resold by them only in
certain permitted circumstances. An "affiliate" generally includes individuals
or entities that control, are controlled by or are under common control with,
another party and may include certain officers, directors and principal
stockholders of such party. See "The Merger--Restrictions on Resales by
Affiliates of HSRC."

Comparison of Rights of Security Holders. See "Comparative Rights of
Stockholders" for a discussion of the comparative rights of holders of HSOG
Common Stock, New HSOG Common Stock and HSRC Common Stock.

Nasdaq Listing. HSOG has filed an application for inclusion of the shares
of New HSOG Common Stock in the Nasdaq National Market. HSOG believes it will
satisfy the listing requirements for inclusion of New HSOG Common Stock in the
Nasdaq National Market upon consummation of the Merger and that the outstanding
shares of New HSOG Common Stock will be included in the Nasdaq National Market
upon or shortly after the consummation of the Merger. See "Risk Factors--No
Assurance of Public Market."

Comparative Per Share Data. The following table sets forth certain
comparative historical, unaudited pro forma and equivalent pro forma data with
respect to the book value per share, net income per share and cash dividends per
share for HSOG Common Stock and HSRC Common Stock, at the dates and for the
periods indicated. The "Prior to Merger" information for both HSOG and HSRC is
historical information of the companies. The "Assuming Merger" information as
of December 31, 1996, and for the year ended December 31, 1996, is pro forma
information giving effect to the Merger and the Stock Split presented (i) on a
per share basis based on the shares of New HSOG Common Stock to be outstanding
("Pro Forma") and (ii) on the basis of the number of shares of New HSOG Common
Stock into which each share of HSRC Common Stock will be converted, assuming an
Exchange Ratio of 48.66 ("Per Equivalent HSRC Share"). The Pro Forma and Per
Equivalent HSRC Share data have been included for comparative purposes only and
do not purport to be indicative of the financial results had the Merger occurred
on January 1, 1996.

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<PAGE>

Prior to Merger Assuming Merger(1)
------------------------- ---------------------
HSOG HSRC Pro Per Equivalent
Historical(2) Historical Forma HSRC Share
------------- ---------- ----- --------------
<S> <C> <C> <C> <C>

Book value(3):
As of June 30, 1997 $3.11 $171.72 $4.04 $196.59
As of December 31, 1996 2.80 157.88 N/A N/A

Net income:
Six months ended
June 30, 1997 0.35 15.63 0.30 14.60
Year ended December 31,
1996 0.54 26.42 0.47 22.87

Cash dividends:
Six months ended
June 30, 1997 0.03 1.80 0.04 1.95
Year ended December 31,
1996 0.08 4.50 0.09 4.38
</TABLE>
______________________

(1) Assumes that HSOG will issue 2,742,203 shares of New HSOG Common Stock for
all the outstanding shares of HSRC Common Stock (other than shares held by
HSOG which will be eliminated in the Merger) (i.e., 48.66 shares of New
HSOG Common Stock for each such share of HSRC Common Stock). For purposes
of calculating per share data, the Merger is assumed to be effective on
January 1, 1996 for purposes of income statement data and as of the date
presented for the purposes of the book value data.

(2) Adjusted to reflect the Stock Split (30-for-1) to be effected in connection
with the consummation of the Merger.

(3) Book value amounts are computed based upon the number of common shares
outstanding (or assumed to be outstanding for information giving effect to
the consummation of the Merger) at the end of the respective period
presented.

RISK FACTORS

See "Risk Factors" with respect to factors which should be considered in
evaluating the Merger.

AMENDMENTS TO THE HSOG CERTIFICATE OF INCORPORATION

HSOG stockholders will consider and vote upon the following eight proposals
to amend the HSOG Certificate. If approved by HSOG stockholders, the proposed
amendments will only become effective if the Merger is consummated. See
"Amendments to the Certificate of Incorporation of HSOG" for a more complete
discussion of the proposed amendments.

Proposed Amendment No. 1. The HSOG Certificate currently provides that
HSOG's corporate existence will terminate on March 12, 2007. The proposed
amendment to the HSOG Certificate provides that HSOG will have perpetual
existence.

Proposed Amendment No. 2. The HSOG Certificate currently limits the scope
of HSOG's business to the oil, gas and mineral business and related activities.
The proposed amendment to the HSOG Certificate provides that HSOG may engage in
any lawful activities for which corporations may be organized under the Oklahoma
General Corporation Act.

Proposed Amendment No. 3. The HSOG Certificate currently provides that the
HSOG Board of Directors shall consist of seven directors. The proposed
amendment to the HSOG Certificate

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provides that the HSOG Board shall consist of not less than three nor more than
15 directors, the exact number within such limits to be determined by a majority
vote of the directors.

The proposed amendment could be used by the HSOG Board as a measure to
deter or postpone an attempt to gain control of HSOG. In addition, the
provisions of the proposed amendment could also have the effect of discouraging
a third party from initiating a proxy contest, making a tender offer or
otherwise gaining control of HSOG even though such transaction could be
beneficial to HSOG and its stockholders. See "Amendments to the Certificate of
Incorporation of HSOG."

Proposed Amendment No. 4. The HSOG Certificate currently provides that any
merger, consolidation or sale of a substantial portion of the assets of HSOG, or
any change in the number of directors of HSOG set forth in the HSOG Certificate,
must be approved by the holders of at least 66 2/3 percent of the outstanding
shares of HSOG voting stock. The proposed amendment would eliminate the
provisions requiring the approval of the holders of at least 66 2/3 percent of
the outstanding shares of voting stock of HSOG to effect any such transaction or
change in number of directors. If the proposed amendment is approved by HSOG
stockholders, any transaction involving a merger, consolidation or sale of a
substantial part of the assets of HSOG, or any change to the HSOG Certificate
effecting the number of directors, will require the affirmative vote of the
holders of at least a majority of the outstanding shares of HSOG voting stock
unless the Business Combination Statute of the Oklahoma General Corporation Act
(discussed under "Description of HSOG Capital Stock--Certain Provisions and
Arrangements That May Have an Anti-Takeover Effect") is applicable to such
transaction.

Proposed Amendment No. 5. The proposed amendment to the HSOG Certificate
would limit personal liability of HSOG directors to HSOG or its stockholders for
monetary damages for certain acts or omissions in their capacities as directors
as allowed under Oklahoma law. The HSOG Certificate currently contains no such
provision.

Proposed Amendment No. 6. Currently, any changes to the HSOG Bylaws must
be approved by a vote of the stockholders of HSOG. The proposed amendment to
the HSOG Certificate would grant the power to the HSOG Board to adopt, repeal or
amend the Bylaws of HSOG. As provided by the Oklahoma General Corporation Act,
even if the proposed amendment to the HSOG Certificate is approved by HSOG
stockholders, HSOG stockholders will also retain the power to adopt, amend or
repeal the Bylaws of HSOG.

Proposed Amendment No. 7. The HSOG Certificate is currently silent on the
subject of indemnification of HSOG's directors, officers, employees and agents.
The proposed amendment to the HSOG Certificate provides that the HSOG Board may
indemnify and advance certain expenses to a director, officer, employee or agent
of HSOG to the maximum extent provided under the Oklahoma General Corporation
Act.

Proposed Amendment No. 8. There currently exists some uncertainty under
Oklahoma law as to the continued effectiveness of certain provisions of the
Oklahoma Business Corporation Act with respect to Oklahoma corporations like
HSOG which were incorporated prior to the enactment of the Oklahoma General
Corporation Act in 1986. The Oklahoma Business Corporation Act was repealed by
the enactment of the Oklahoma General Corporation Act. The proposed amendment
would clarify that HSOG shall be governed solely by the provisions of the
Oklahoma General Corporation Act.

APPROVAL OF THE HSOG 1997 INCENTIVE STOCK PLAN

HSOG's stockholders will consider and vote on a proposal to approve
the HSOG 1997 Incentive Stock Plan. The plan authorizes the grant of stock
options and shares of restricted stock to key employees, officers, directors and
consultants of HSOG. A total of 451,736 shares of New HSOG Common Stock has
initially been reserved for issuance under the plan. The number of shares of
New

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HSOG Common Stock reserved for issuance under the HSOG 1997 Incentive Stock Plan
will increase to an amount equal to 10% of the outstanding shares of New HSOG
Common Stock upon the issuance of any additional shares of such stock by HSOG
subsequent to the Merger (other than shares issued pursuant to the HSOG 1997
Incentive Stock Plan). See "Approval of the HSOG 1997 Incentive Stock Plan."

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<PAGE>

RISK FACTORS

The following factors should be considered carefully by the stockholders of
HSOG and HSRC in connection with voting upon the Merger.

EFFECTS OF THE MERGER

Management and the Board of Directors of both HSOG and HSRC believe that
the Merger will be in the best interests of stockholders of each company for the
reasons discussed under "The Merger--Background of and Reasons for the Merger."
However, there may be consequences of the Merger which could adversely affect
all or some of the stockholders of either company. These consequences include
the following:

. Reduction in Total Amount of Percentage Depletion Deductions. The
surviving company will not be entitled to claim the same amount of
deductions for statutory percentage depletion with respect to its oil
and gas production after the Merger as the individual companies
combined are currently entitled to claim. See "The Merger--Depletion
Deductions" for a discussion of the possible consequences of the loss
of depletion deductions in connection with the Merger.

. Adverse Impact of Merger on Working Capital of HSRC. On a pro forma
basis, at June 30, 1997, assuming the consummation of the Merger,
HSOG, as the surviving company, would have had a working capital
deficit of approximately $137,000. At June 30, 1997, HSRC had
positive working capital of approximately $794,000. The working
capital deficit of the surviving company after the Merger could
adversely affect its ability to fund its current operations and meet
other obligations. However, management of the companies believes that
HSOG will be able to adequately provide for its working capital needs
out of its cash flow and available borrowings under its credit
facilities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of HSOG--Financial Condition and
Liquidity."

Management of the companies does not believe that the foregoing consequences
will result in any materially adverse effect on the stockholders of the
companies by virtue of the Merger, but there can be no assurance that either
these or other presently unforeseen consequences of the Merger will not have a
materially adverse effect on the investments of the stockholders in the
companies.

LIMITATIONS OF THE OPINION OF FINANCIAL ADVISOR

In considering the opinion of Principal rendered on the fairness of the
consideration to be received by the stockholders of HSRC from a financial point
of view to the disinterested stockholders of HSOG and HSRC, stockholders of HSOG
and HSRC should carefully consider the following limitations on the scope of
such opinion:

. There is an inherent conflict of interest in Principal's evaluation of
the fairness, from a financial point of view, of the consideration to
be received in the Merger by HSRC stockholders on behalf of the
disinterested stockholders of both HSOG and HSRC.

. In rendering its fairness opinion, Principal relied on the accuracy
and completeness of certain financial and other information provided
by HSOG and HSRC with only limited independent verification of the
accuracy of such information. Any significant

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<PAGE>

inaccuracies in such information could have a material effect on the
results of the analyses performed by Principal in connection with its
opinion and its conclusions on the fairness of the Merger. See "The
Merger--Opinion of Financial Advisor."

. The fairness opinion of Principal is as of August 14, 1997, and
Principal is not obligated to update its opinion as of the date of
this Proxy Statement/Prospectus or at any time prior to consummation
of the Merger.

CONFLICT OF INTERESTS OF SPECIAL COMMITTEES TO THE HSOG AND HSRC BOARDS

Each member of the special committees of the Boards of Directors of HSOG
and HSRC appointed to consider the Merger proposal serves as a director of both
companies and owns shares of both HSOG Common Stock and HSRC Common Stock. As a
result, it could be construed that each member could have a conflict of interest
with respect to the stockholders of one company when considering the fairness of
the Merger to the stockholders of the other company. In addition, such members
could also be viewed as having a conflict of interest in the selection of
Principal as the financial advisor to the Boards of both companies with respect
to the proposed Merger. The Boards of Directors of HSOG and HSRC elected to
engage a single financial advisor to render a fairness opinion on behalf of both
Boards of Directors of HSOG and HSRC because of the similarities in the
operations and assets of the companies and the increased costs which would be
incurred by engaging two separate firms. Had a separate firm been engaged to
render an opinion on behalf of each company with respect to the Merger, it is
possible that one or both of such firms could have reached different conclusions
than that of Principal with respect to the fairness of the Merger from a
financial point of view to the disinterested stockholders of such company.

DETERMINATION OF EXCHANGE RATIO

In determining the appropriate Exchange Ratio for use in converting the
outstanding shares of HSRC Common Stock into New HSOG Common Stock in connection
with the Merger, Principal, the financial advisor, attempted to determine a fair
allocation of the post-Merger ownership of HSOG among the current stockholders
of HSOG and HSRC. This was done by estimating the approximate value of each
company and the contribution of its assets and operations to the combined
company. Management and the Boards of each company believe that the Exchange
Ratio has been established on a fair and equitable basis. Although the assets
and operations of the companies are very similar, HSOG has outstanding
indebtedness and a working capital deficit while HSRC has no outstanding
indebtedness and positive working capital. Because of the differences in the
companies, any change in the methodology or assumptions used to value the
respective companies for purposes of determining the Exchange Ratio could have
had a material effect on the Exchange Ratio which could, in turn, have a
material effect upon the value of the post-Merger investment in HSOG by the
stockholders. See "The Merger--Determination of Exchange Ratio."

RISKS INHERENT IN OIL AND GAS INDUSTRY

The nature and extent of the principal business and activities of HSOG and
HSRC are not expected to significantly change as a result of the Merger.
Nevertheless, stockholders of each company should be aware of the types of risks
expected to be encountered by HSOG as the surviving corporation in connection
with its oil and gas exploration, production, operating and marketing
activities. The more significant of these risks are summarized below:

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<PAGE>

. Volatility of Oil and Gas Prices. HSOG's revenues, profitability and
future rate of growth are substantially dependent upon prevailing prices
for natural gas, oil and condensate. Historically, natural gas and oil
prices and markets have been volatile, and they are likely to continue to
be volatile in the future. Prices for oil and natural gas are subject to
wide fluctuations in response to market uncertainty, changes in supply and
demand and a variety of additional factors, all of which are beyond HSOG's
control. These factors may include political conditions in oil producing
regions, including the Middle East, the domestic and foreign supply of oil
and natural gas, the level of consumer demand, overall economic conditions,
weather conditions and the price and availability of alternative fuels. A
substantial or extended decline in oil and natural gas prices could have a
material adverse effect on HSOG's financial position, results of
operations, quantities of oil and gas reserves that may be economically
produced and access to capital. In addition, the marketability of HSOG's
production depends upon a number of factors beyond HSOG's control,
including the availability and capacity of gathering, transportation and
processing facilities, the effect of federal and state regulation of
production and transportation, general economic conditions, changes in
supply due to drilling by other producers and changes in demand. See
"Description of the Business of The Home-Stake Companies--Marketing."

. Acquisition Risks. HSOG has in the past acquired and intends to continue
to acquire producing oil and gas properties. Although HSOG performs a
review of the properties it acquires that it believes is consistent with
industry practice, such reviews are inherently incomplete. Even an in-
depth review of all properties and records may not necessarily reveal
existing or potential problems, nor will it permit a buyer to become
sufficiently familiar with the properties to assess fully their
deficiencies, liabilities and capabilities. Inspections may not always be
performed on every well, and potential environmental problems are not
necessarily observable even when an inspection is undertaken.

. Risk of Oil and Gas Operations. HSOG's operations are subject to all the
risks typically associated with the operation and development of oil and
gas properties and the drilling of oil and gas wells. Drilling activities
carry the risk that no commercial production will be obtained. The cost of
drilling, completing and operating wells is often uncertain, and drilling
and/or production may be curtailed, delayed or cancelled as a result of
many factors. HSOG's operations are also subject to a number of additional
risks, including, but not limited to, uncontrollable flows of oil, natural
gas, brine or well fluids into the environment (including groundwater
contamination), fires, explosions, and other risks, any of which could
result in substantial losses to HSOG. HSOG's business is also subject to
environmental hazards such as oil spills, gas leaks, ruptures and
discharges of toxic gases, which could expose HSOG to substantial liability
due to pollution and other environmental damage. In accordance with
customary industry practice, HSOG maintains insurance against some, but not
all, potential risks. There can be no assurance that such insurance will
be adequate to cover any loss or exposure for liability, or that such
insurance will continue to be available on terms acceptable to HSOG.

. Environmental Concerns and Government Regulation. HSOG's business is
subject to a variety of federal, state and local government regulations,
including regulations concerning the prevention of waste, the discharge of
materials into the environment, the conservation of natural gas and oil,
pollution, permits for drilling operations, drilling bonds, reports
concerning operations, the spacing of wells, the unitization and pooling of
properties, the clean-up of well sites, and various other matters,
including taxes. Such laws and regulations have increased the costs of
planning, designing, drilling, installing, operating and abandoning oil and
gas wells and other facilities. Moreover, the laws and regulations
protecting the environment have become more stringent in recent years and
such trend is likely to continue. In some circumstances such environmental
laws and regulations may impose"strict liability," rendering a person
liable for

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<PAGE>

environmental damage without regard to negligence or fault on the part of
such person. In addition, HSOG may be exposed to liability for the conduct
of operations or conditions caused by others or for its acts which were in
compliance with all applicable laws at the time such acts were performed.
There is no assurance that laws and regulations enacted in the future will
not adversely affect HSOG's operations. See "Description of the Business of
The Home-Stake Companies--Regulation."

. Reliance on Estimates of Proved Reserves; Depletion of Reserves. There are
numerous uncertainties inherent in estimating quantities of proved reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the producer.
The reserve data set forth in this Proxy Statement/Prospectus represent
only estimates of HSOG's and HSRC's engineers. Oil and gas reserve
engineering is a subjective process of estimating underground accumulations
of oil and gas that cannot be measured in an exact way, and estimates by
other engineers might differ from those included herein. The accuracy of
any reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. The estimates of
future net revenues from proved reserves of HSOG and HSRC are based upon
various assumptions, including those prescribed by the Securities and
Exchange Commission. Actual future production, oil and gas prices,
revenues, taxes, capital expenditures and operating expenses may vary
substantially from those assumed in making the estimates, and HSOG's and
HSRC's reserves may be subject to upward or downward revision.

HSOG's future performance is dependent upon its ability to find or acquire
additional oil and gas reserves that are economically recoverable. Unless
HSOG successfully replaces the reserves that it produces, HSOG's reserves
will decline, resulting eventually in a decrease in oil and gas production
and lower revenues and cash flow from operations.

. Business Risks. HSOG must continually acquire and explore for and develop
new oil and gas reserves to replace those being depleted by production.
Without the successful acquisition or drilling of reserves, HSOG's assets,
properties and revenues will decline. Oil and gas exploration and
development activities are subject to numerous risks, including the risk
that no commercially productive oil or gas reservoirs will be encountered.
The cost of drilling, completing and operating wells may exceed initial
estimates. HSOG's operations may be curtailed, delayed or cancelled as a
result of the lack of adequate capital resources and other factors, some of
which are not within HSOG's control, such as title problems, weather
conditions, compliance with governmental requirements, mechanical
difficulties and shortages or delays in the delivery of equipment. New gas
wells may be shut-in for lack of a market until a gas pipeline or gathering
system with available capacity is extended into the area. In addition,
HSOG's properties may be susceptible to hydrocarbon drainage from
production by other operators on adjacent properties.

. Competition. HSOG operates in a highly competitive environment. In
seeking to acquire desirable oil and gas properties and in marketing its
oil and gas production, HSOG faces intense competition from both major and
independent oil and gas companies, as well as from numerous individuals and
marketers. Many of these competitors have financial and other resources
substantially in excess of those available to HSOG. See "Description of
the Business of The Home-Stake Companies--Competition."

NO ASSURANCE OF PUBLIC MARKET

HSOG Common Stock has historically traded only sporadically and there has
been no public trading market for such shares. Although HSOG has applied for
inclusion of the New HSOG Common

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Stock on the Nasdaq National Market, there can be no assurance that such
inclusion will occur or that an adequate trading market for New HSOG Common
Stock will develop or be sustained after such inclusion. HSOG, as the surviving
corporation after the Merger, must satisfy the initial listing standards for
inclusion on the Nasdaq National Market which include the following: (i) net
tangible assets of at least $6 million; (ii) pretax income in the latest fiscal
year, or in two of the last three fiscal years, of at least $1,000,000; (iii) at
least 400 public holders of New HSOG Common Stock; (iv) at least 1,100,000
publicly held shares of New HSOG Common Stock; (v) a market value of publicly
held shares of at least $8 million; (vi) a minimum bid price of $5 per share;
and (vii) three registered and active market makers for its securities.
Furthermore, HSOG will be required to meet certain standards for continued
inclusion on the Nasdaq National Market. There is no assurance that HSOG will
meet these continued listing requirements in the future. If New HSOG Common
Stock fails to be maintained on the Nasdaq National Market, such failure would
have an adverse effect on the liquidity of the New HSOG Common Stock and, as a
result, on the market price thereof.

POSSIBLE EFFECT OF AUTHORIZED SHARES OF HSOG CAPITAL STOCK

Upon consummation of the Merger, there will be approximately 7,500,000
shares of authorized but unissued shares of New HSOG Common Stock and 2,000,000
shares of Preferred Stock having such designations, rights and preferences as
may be determined from time to time by the Board of Directors of HSOG. The Board
of Directors is empowered to issue Preferred Stock, without stockholder
approval, with dividend, liquidation, conversion, voting or other rights that
could adversely affect the voting power or other rights of the holders of New
HSOG Common Stock. The Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of HSOG. The shares of authorized but unissued New HSOG Common Stock and
Preferred Stock might also be considered as having the effect of discouraging an
attempt by another person, through the acquisition of a substantial number of
outstanding shares of New HSOG Common Stock or Preferred Stock, to acquire
control of HSOG with a view of imposing a merger, sale of all or any part of
HSOG's assets or a similar transaction, since the issuance of additional shares
could be used to dilute the stock ownership and voting power held by such
person. Any transaction which may be so discouraged or avoided could be a
transaction that HSOG's stockholders might consider to be in their best
interests, although it should be noted that the Board of Directors of HSOG has a
fiduciary duty to act in the best interests of HSOG's stockholders. See
"Description of HSOG Capital Stock--Certain Provisions and Arrangements That May
Have an Anti-Takeover Effect."

The authorized but unissued shares of New HSOG Common Stock and Preferred
Stock would be available for issuance by the Board of Directors without further
stockholder approval (subject to Oklahoma law) to take advantage of future
opportunities for the issuance of common stock or preferred stock to improve
HSOG's capital structure, in connection with possible acquisitions, in
connection with employee benefit plans and for other corporate purposes. See
"Description of HSOG Capital Stock--HSOG Common Stock and New HSOG Common Stock"
and "--HSOG Preferred Stock."

FORWARD-LOOKING STATEMENTS

There are a number of statements in this Proxy Statement/Prospectus which
address activities, events or developments which HSOG expects or anticipates
will or may occur in the future, including such things as future capital
expenditures (including the amount and nature thereof), wells to be drilled, the
effects of natural gas and oil regulation, acquisitions of assets, production of
natural gas and oil reserves, expansion and growth of HSOG's businesses and
operations and other such matters. These statements are based on certain
assumptions and analyses made by HSOG in light of its experience and its
perception of historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate under the
circumstances. However, whether actual results and developments will conform
with HSOG's expectations and predictions is subject to a number of risks

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and uncertainties, including the risk factors discussed in this section; general
economic, market or business conditions; the business opportunities (or lack
thereof) that may be presented to and pursued by HSOG; changes in laws or
regulations and other factors, most of which are beyond the control of HSOG.
Consequently, all of the forward-looking statements made in this Proxy
Statement/Prospectus are qualified by these cautionary statements and there can
be no assurance that the actual results or developments anticipated by HSOG will
be realized or, even if substantially realized, that they will have the expected
consequences to or effects on HSOG or its business or operations. HSOG does not
undertake to update, revise or correct forward looking statements.

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THE SPECIAL MEETINGS

MATTERS TO BE CONSIDERED AT THE SPECIAL MEETINGS

HSOG Special Meeting. At the HSOG Meeting, holders of HSOG Common Stock
will consider and vote upon the following proposals:

(1) To approve and adopt the Merger Agreement between HSOG and HSRC,
pursuant to which, among other things, (a) HSRC will be merged with and
into HSOG with HSOG to be the surviving corporation in the Merger, (b) the
Common Stock of HSOG will be split on a 30-for-1 basis, (c) each
stockholder of HSRC (other than HSOG and stockholders who have exercised
their appraisal rights) will receive 48.66 shares of New HSOG Common Stock
for each share of HSRC Common Stock owned as of the effective time of the
Merger, and (d) each stockholder of HSOG (other than HSRC and stockholders
who have exercised their appraisal rights) will receive 30 shares of New
HSOG Common Stock for each share of HSOG Common Stock owned as of the
effective time of the Merger. In addition, the terms of the Merger
Agreement also provide for the amendment of HSOG's certificate of
incorporation to increase the authorized capital stock of HSOG in order to
effect the Merger and the Stock Split.

(2) To approve eight proposed amendments to the HSOG Certificate of
Incorporation. See "Amendments to the Certificate of Incorporation of HSOG"
for a discussion of each of the proposed amendments to the Certificate of
Incorporation of HSOG.

(3) To approve the HSOG 1997 Incentive Stock Plan.

HSOG stockholders will also transact any other business as may properly be
brought before the HSOG Meeting or any adjournment or postponement thereof.

HSRC Special Meeting. At the HSRC Meeting, holders of HSRC Common Stock
will consider and vote upon the proposal to approve and adopt the Merger
Agreement between HSOG and HSRC, pursuant to which, among other things, (a) HSRC
will be merged with and into HSOG with HSOG to be the surviving corporation in
the Merger, (b) the Common Stock of HSOG will be split on a 30-for-1 basis, (c)
each stockholder of HSRC (other than HSOG and stockholders who have exercised
their appraisal rights) will receive 48.66 shares of New HSOG Common Stock for
each share of HSRC Common Stock owned as of the effective time of the Merger,
and (d) each stockholder of HSOG (other than HSRC and stockholders who have
exercised their appraisal rights) will receive 30 shares of New HSOG Common
Stock for each share of HSOG Common Stock owned as of the effective time of the
Merger.

HSRC stockholders will also transact any other business as may properly be
brought before the HSRC Meeting or any adjournment or postponement thereof.

EACH OF THE BOARDS OF DIRECTORS OF HSOG AND HSRC UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND RECOMMENDS THAT ITS STOCKHOLDERS VOTE FOR THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE MERGER. See "The Merger--Background of
and Reasons for the Merger." THE BOARD OF DIRECTORS OF HSOG FURTHER RECOMMENDS
THAT ITS STOCKHOLDERS APPROVE ALL OF THE AMENDMENTS TO THE HSOG CERTIFICATE.

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DATE, PLACE AND TIME

The HSOG Meeting is to be held in the offices of HSOG at 15 East 5th
Street, Suite 2800, Tulsa, Oklahoma, at 9:00 a.m., Tulsa, Oklahoma time, on
December 11, 1997, or at any adjournment or postponement thereof, for the
purposes set forth herein and in the accompanying Notice of Special Meeting of
Stockholders being delivered to HSOG stockholders. The HSRC Meeting is to be
held in the offices of HSRC at 15 East 5th Street, Suite 2800, Tulsa, Oklahoma
at 9:00 a.m., Tulsa time, on December 11, 1997, or at any adjournment or
postponement thereof, for the purposes set forth herein and in the accompanying
Notice of Special Meeting of Stockholders being delivered to HSRC Stockholders.

VOTES REQUIRED

The affirmative vote of the holders of 66 2/3 percent of the outstanding
shares of HSOG Common Stock is required for the approval and adoption of the
Merger Agreement. The affirmative vote of the holders of a majority of the
outstanding shares of HSOG Common Stock is required for the approval and
adoption of Proposed Amendments Nos. 1, 2 and 5 through 8 to the HSOG
Certificate of Incorporation and the affirmative vote of the holders of 66 2/3
percent of the outstanding shares of HSOG Common Stock is required for the
approval and adoption of Proposed Amendments Nos. 3 and 4 to the HSOG
Certificate of Incorporation. See "Amendments to the HSOG Certificate of
Incorporation." In addition, the holders of a majority of the shares of HSOG
Common Stock present or represented by proxy at the HSOG Meeting is required to
approve the HSOG 1997 Incentive Stock Plan. HSRC, which owns approximately 33.9
percent of the outstanding shares of HSOG Common Stock, intends to vote all such
shares of Common Stock in favor of approval of the Merger Agreement and the
amendments to the HSOG Certificate. As of September 30, 1997, directors and
executive officers of HSOG and their affiliates beneficially owned approximately
11.5 percent of the outstanding shares of HSOG Common Stock. The directors and
executive officers of HSOG have indicated that they intend to vote their shares
of HSOG Common Stock in favor of approval of the Merger Agreement and the
amendments to the HSOG Certificate.

The affirmative vote of the holders of 66 2/3 percent of the outstanding
shares of HSRC Common Stock is required for the approval and adoption of the
Merger Agreement. HSOG, which owns approximately 19.3 percent of the
outstanding shares of HSRC Common Stock, intends to vote all such shares of
Common Stock in favor of approval of the Merger Agreement. As of September 30,
1997, directors and executive officers of HSRC and their affiliates beneficially
owned approximately 20.7 percent of the outstanding shares of HSRC Common Stock.
The directors and executive officers of HSRC have indicated that they intend to
vote their shares of HSRC Common Stock in favor of approval of the Merger
Agreement.

VOTING OF PROXIES

Shares of HSOG Common Stock or HSRC Common Stock, as the case may be,
represented by properly executed proxies received at or prior to the HSOG and
HSRC Meetings, will be voted at the appropriate Meeting in the manner specified
by the holders of such shares. Properly executed proxies which do not contain
voting instructions will be voted FOR approval and adoption of the Merger
Agreement and, with respect to HSOG stockholders only, FOR approval of the
amendments to the HSOG Certificate and approval of the HSOG 1997 Incentive Stock
Plan. Abstentions from voting and broker non-votes will be counted for purposes
of determining the presence or absence of a quorum for the transaction of
business at the HSOG Meeting and HSRC Meeting. Abstentions from voting will be
included in the determination of whether the required number of affirmative
votes are received on each of the proposals submitted to the stockholders for a
vote and, therefore, will have the same effect as a vote against the proposal.
Broker non-votes as to a particular proposal will not be considered as

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present and entitled to vote with respect to such proposal. As a result, a
broker non-vote will have no effect on the approval of the HSOG 1997 Incentive
Stock Plan, but will have the same effect as a vote against the Merger and
against the amendments to the HSOG Certificate.

If any other matters are properly presented at either the HSOG Meeting or
the HSRC Meeting for consideration, the person or persons named in the relevant
form of proxy enclosed herewith and acting thereunder will have discretion to
vote on such matters in accordance with their best judgment, unless the proxy
indicates otherwise. Neither HSOG nor HSRC has any knowledge of any matters to
be presented at the HSOG Meeting or the HSRC Meeting, as the case may be, other
than those matters referred to and described herein.

REVOCABILITY OF PROXIES

The grant of a proxy on the enclosed HSOG or HSRC form of proxy does not
preclude a stockholder from voting in person or otherwise revoking a proxy.
Attendance at the relevant meeting will not in and of itself constitute
revocation of a proxy. A stockholder may revoke a proxy at any time prior to
its exercise by delivering to Chris K. Corcoran, Executive Vice President, Chief
Financial Officer and Secretary of HSOG and HSRC, 15 East 5th Street, Suite
2800, Tulsa, Oklahoma 74103, a duly executed revocation or a proxy bearing a
later date or by voting in person at the appropriate meeting.

RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM

Only holders of record of HSOG Common Stock at the close of business on
November 3, 1997, will be entitled to receive notice of and to vote at the HSOG
Meeting. At September 30, 1997, HSOG had outstanding 89,509 shares of HSOG
Common Stock. Each share of HSOG Common Stock is entitled to one vote on each
matter on which the respective holders of such shares are entitled to vote. The
presence in person or by proxy of the holders of a majority of the outstanding
shares of HSOG Common Stock will constitute a quorum for the HSOG Meeting.

Only holders of record of HSRC Common Stock at the close of business on
November 3, 1997, will be entitled to receive notice of and to vote at the HSRC
Meeting. At September 30, 1997, HSRC had outstanding 69,808 shares of HSRC
Common Stock. Each share of HSRC Common Stock is entitled to one vote on each
matter on which the respective holders of such shares are entitled to vote. The
presence in person or by proxy of the holders of a majority of the outstanding
shares of HSRC Common Stock will constitute a quorum for the HSRC Meeting.

SOLICITATION OF PROXIES

Each of HSOG and HSRC will bear the cost of the solicitation of proxies
from its own stockholders, except that HSOG and HSRC will share equally the cost
of printing and mailing this Proxy Statement/Prospectus. In addition to
solicitation by mail, the directors, officers and employees of each company may
solicit proxies from stockholders of such company by telephone or telegram or in
person. Such persons will not be additionally compensated, but will be
reimbursed for reasonable out-of-pocket expenses incurred in connection with
such solicitation. Arrangements will also be made with brokerage firms,
nominees, fiduciaries and other custodians, for the forwarding of solicitation
materials to the beneficial owners of shares held of record by such persons, and
HSOG and HSRC will reimburse such persons for their reasonable out-of-pocket
expenses in connection therewith.

SUBMISSION OF PROPOSALS FOR 1998 ANNUAL MEETING

Any stockholder proposal to be presented at the 1998 Annual Meeting of
Stockholders of HSOG should be directed to The Home-Stake Oil & Gas Company, 15
E. 5th Street, Suite 2800, Tulsa,

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Oklahoma 74103, Attention: Chris K. Corcoran, Corporate Secretary, and must be
received by HSOG on or before December 18, 1997. All such proposals must comply
with Rule 14a-8 promulgated by the Commission under the Exchange Act.

Should the Merger of HSRC with and into HSOG not be consummated, then any
HSRC stockholder desiring to submit a proposal to be considered at the 1998
Annual Meeting of Stockholders of HSRC should direct such proposal to The Home-
Stake Royalty Corporation, 15 E. 5th Street, Suite 2800, Tulsa, Oklahoma 74103,
Attention: Chris K. Corcoran, Corporate Secretary, and such proposal must be
received by HSRC on or before December 18, 1997. All such proposals must comply
with Rule 14a-8 promulgated by the Commission under the Exchange Act.

STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS

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THE MERGER

GENERAL

The Merger Agreement provides for a business combination between HSOG and
HSRC in which HSRC will be merged with and into HSOG and the holders of HSRC
Common Stock will be issued shares of New HSOG Common Stock. The transaction
will be accounted for as a purchase for accounting purposes and as a
reorganization for federal income tax purposes. The discussion in this Proxy
Statement/Prospectus of the Merger and the description of the Merger's principal
terms are subject to and qualified in their entirety by reference to the Merger
Agreement, a copy of which is attached to this Proxy Statement/Prospectus as
Appendix A and which is incorporated herein by reference.

BACKGROUND OF AND REASONS FOR THE MERGER

BACKGROUND. Over the past 40 years, HSOG and HSRC have been operated as
essentially a single company. See "Description of Businesses of The Home-Stake
Companies--General." For most of this period, the companies have split
administrative costs evenly and have generally participated jointly in
acquisition and exploration activities on an equal basis; however, as discussed
below, the differences in the financial condition and liquidity of the two
companies resulted in a change in the participation arrangement between the
companies effective January 1, 1996, whereby HSRC's participation interest in
new drilling ventures, acquisitions and other investments is 60% and HSOG's
participation interest therein is 40%. The companies share the same employees
and the same persons comprise the Board of Directors of each company. There are
approximately 200 record holders of HSOG Common Stock and approximately 300
record holders of HSRC Common Stock, with approximately 90 persons owning shares
in both companies.

The Boards of Directors of HSOG and HSRC have considered a merger of the
companies a number of times over the past years, beginning in 1969. In 1969,
and again in each of 1984, 1989 and 1991, the Boards concluded that the costs of
the transaction would outweigh the potential benefits that would be received.
Of particular concern in each case was the effect of the loss of statutory
depletion deductions for federal income tax purposes. Currently, each company
is able to claim statutory depletion deductions with respect to its crude oil
production of up to 1,000 barrels per day (or up to an aggregate of 2,000
barrels per day for both companies combined). A merger would result in the
combined company being able to claim such deductions with respect to only 1,000
barrels per day. See "The Merger--Depletion Deductions."

In late 1994, the Boards of Directors of HSOG and HSRC again considered the
advisability of a merger of the companies. Based primarily on the same reasons
that the Boards of HSOG and HSRC are currently proposing the approval of the
Merger (see "-- Reasons for the Merger" below), in early 1995 the Boards
approved a proposed merger of HSRC with and into HSOG pursuant to which HSRC
stockholders would receive, in effect, 1.65 shares of HSOG Common Stock for each
share of HSRC Common Stock they held. The merger proposal was presented to and
approved by the stockholders of each company; however, stockholders holding
approximately 20% and 15% of the outstanding shares of HSOG Common Stock and
HSRC Common Stock, respectively, exercised their dissenters' appraisal rights
with respect to the merger proposal. The percentage of dissenting shares
exceeded one of the conditions to the proposed merger and the Boards of
Directors of the companies decided not to waive this condition because each
company would have had to incur a substantial amount of additional indebtedness
to purchase the shares of those stockholders perfecting their dissenters'
appraisal rights. At such time, each company had recently financed a
significant acquisition of oil and gas properties and it was believed that
incurring the additional indebtedness required to effect the purchase of the
dissenting stockholders' shares was not in the best interests of the companies
as it could limit each

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company's ability to participate in future acquisitions or other business
opportunities. Accordingly, the proposed Merger was never consummated.

For the reasons discussed below, in May 1997, the Boards of Directors of
HSOG and HSRC decided to again consider the advisability of merging the
companies. At a joint meeting held May 19, 1997, officers of the companies were
instructed to solicit bids from potential financial advisors. Subsequently, at
a joint meeting held on June 23, 1997, each of the Boards appointed a special
committee of its members to consider and report to the Board regarding the
Merger proposal. The special committee appointed by the HSOG Board is comprised
of Messrs. Simpson, McCain and Grindstaff, while the HSRC special committee is
comprised of Messrs. Allegood, Gutman and Morris. At this joint meeting, the
special committees agreed that Principal would be engaged as a financial advisor
to review the Merger proposal, assist in developing the Exchange Ratio and
report on the fairness of the Merger to the stockholders of both companies.

Principal presented its report to the special committees on August 14,
1997, and met with each of the committees. See "--Opinion of Financial Advisor"
below. The Boards then met jointly after such presentation, at which time each
committee recommended to its Board that the Merger be approved on the terms
proposed. The report and fairness opinion of Principal was also presented to
the Boards at that meeting. Based on the recommendations of their respective
special committees and the opinion of Principal, the Boards unanimously approved
the Merger proposal and directed that the proposal be presented to their
respective stockholders at the Special Meetings of HSOG and HSRC with the
recommendation that they vote FOR the proposal.

REASONS FOR THE MERGER

Notwithstanding HSOG's and HSRC's joint operations, HSOG has historically
had higher outstanding indebtedness and debt to equity ratio than HSRC. The
greater resultant cash flow experienced by HSRC generally has created an
increasing imbalance between the respective debt to equity ratios of the
companies, often making it more difficult for HSOG to fund its share of new
drilling ventures and property acquisitions. As a result of the imbalance in
the financial conditions of the companies, effective January 1, 1996, HSOG's
participation interest in joint activities with HSRC was reduced by the Boards
of Directors of the companies from 50% to 40%. As the companies attempt to
increase their business activity in the near future, management of the companies
expects that HSOG's difficulties in "keeping up" with HSRC could force the
Boards to further change the participation arrangement regarding the joint
activities of the companies in order not to hold HSRC back from the
opportunities that are expected to be presented to it in the future. The Boards
of Directors of the companies believe that the Merger would alleviate this
awkward situation because a single entity would allow management to be
substantially more focused on the types and magnitudes of the prospects that are
considered, since each prospect would no longer have to be reviewed from the
perspective of two separate and somewhat different companies from the standpoint
of their respective financial conditions and capabilities.

As the oil and gas industry continues its consolidation, management of HSOG
and HSRC expects that its experience and the history and tradition of the
companies will result in an increasing number and variety of potential
acquisition and operational opportunities. In order to take maximum advantage
of these opportunities, the companies will probably require increased financing
capabilities. Management believes that by combining the assets and operations
of the companies and effecting an increased public float of its equity
securities, the surviving company will have greater access to the capital
markets, thus improving its prospects of obtaining the financing it may desire
or require to carry out its business plan to the fullest extent possible.

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The common stock of each of the companies has been registered under the
Exchange Act, and, as a consequence, the companies are required to submit
periodic reports to the Securities and Exchange Commission and otherwise operate
within the requirements and restrictions that are applicable to "public"
companies. Nevertheless, due to the relatively low number of stockholders and,
in particular, low number of outstanding shares of each company, there has been
no established public trading market and very little trading in the common stock
of either company. Management of the companies has received numerous inquiries
in recent years from stockholders regarding the prospects of increasing the
liquidity of the stock. It is believed by the Boards that the increased
stockholder base and number of outstanding shares that will result from the
Merger, as well as the expected trading of the stock on the Nasdaq National
Market, will result in a significant increase in the liquidity of the stock,
although there can be no assurance that there will be sufficient public float or
trading activity to ensure that the market value of the stock will be comparable
to the values of the stock of other publicly traded oil and gas companies which
are comparable to the surviving company from the standpoint of assets base
and/or cash flow.

In addition to the foregoing reasons for the Merger, the Boards and the
special committees also took into account the transactional costs of the Merger
and the ongoing costs, specifically the decrease in the total amount of the
statutory depletion allowance deductions the surviving company will be able to
claim for federal income tax purposes compared to the total amount claimed by
the companies previously. See "The Merger--Depletion Deductions." Each of the
Boards has determined that even considering these immediate and ongoing costs,
the potential benefits of the Merger outweigh those costs and the Merger is in
the best interests of the stockholders of both companies. The Merger proposal
was approved unanimously by the Board of each company and each Board recommends
that its stockholders vote in favor of the Merger.

DETERMINATION OF EXCHANGE RATIO

The assets of HSOG and HSRC consist primarily of working interests in
producing oil and gas leases, although each company does own mineral or royalty
interests, certain of which are producing and others of which are undeveloped.
In addition, each company owns a portion of the outstanding stock of the other
company. The principal difference between the companies is that the HSOG has
outstanding indebtedness, while HSRC is debt free. The objective in determining
the Exchange Ratio was to assure the stockholders of each company received a
fair percentage of the outstanding shares of the surviving company after the
Merger is consummated.

The Exchange Ratio was based upon a recommendation by Principal of a fair
ratio of the relative values of the companies and presented to the special
committee of each Board. The Exchange Ratio was then calculated utilizing
Principal's relative value recommendation and accounting for the cancellation of
cross-owned shares. The Exchange Ratio was then approved and adopted by the
Board of Directors of each Company upon recommendation of the respective special
committee. For purposes of establishing the Exchange Ratio in order to
determine the proportional ownership of HSOG upon consummation of the Merger by
the respective stockholders of HSOG and HSRC, an estimated value for each
company was calculated utilizing consistent procedures which took into
consideration the assets and liabilities of each company, as well as the value
of the cross-owned shares of common stock held by each company in the other
company. A primary factor utilized to value the companies was the relative
estimated values of each company's oil and gas reserves. The estimated values
of the oil and gas reserves were based on an analysis of the future cash flows
to be generated from those reserves and of recent acquisitions of oil and gas
reserves. The estimated value of the oil and gas reserves of the companies was
then determined based upon consideration of all relevant factors applied
consistently to each company.

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After establishing a value for each company's oil and gas reserves, the
following additional adjustments were made for purposes of establishing the
relative estimated values of each company:

(a) the estimated value for each company was adjusted by its
respective working capital balances and reduced for any outstanding long-
term debt as of June 30, 1997; and

(b) the estimated value for each company was increased by the
estimated value of each company's respective ownership interests in certain
non-producing mineral interests as of June 30, 1997, based on an appraisal
(discussed below) prepared on behalf of the Boards of Directors of both
companies.

After the preceding adjustments were made, further adjustments were made to
the estimated values to reflect the cross-ownership of common stock of each
company by the other company. The estimated value of each company was increased
by such company's ownership percentage of the other company and then reduced by
the other company's ownership percentage of the subject company. Since the
adjustments are inter-dependent, the calculation was repeated numerous times to
arrive at a static value for the adjustment.

Based on the valuation analysis of the companies as indicated above, it was
determined that ownership of HSOG upon consummation of the Merger should be
allocated approximately 60.7% to the stockholders of HSRC and approximately
39.3% to the stockholders of HSOG. This allocation resulted in an Exchange
Ratio of 1.622 shares of HSOG Common Stock (or 48.66 shares of New HSOG Common
Stock after the effect of the 30-for-1 stock split) for each share of HSRC
Common Stock.

In July 1997, the Boards of Directors of both companies engaged Harry
Tucei, a certified petroleum geologist and former officer of the companies, to
perform an appraisal of each company's non-producing mineral interests. Mr.
Tucei had previously performed such appraisals from time to time during his
employment with the companies from 1956 through 1993 and as a special consultant
in 1994. No limitations were placed on the scope of Mr. Tucei's appraisal. Mr.
Tucei appraised the mineral interests of both companies by multiplying an
estimated lease bonus value per acre times the number of non-producing acres in
which each company owned a mineral interest. In determining the estimated lease
bonus values utilized in the appraisal, Mr. Tucei reviewed and analyzed (i) the
lease bonuses per acre which had recently been paid in the localities of the
companies' mineral interests; (ii) the geological basins underlying the
companies' mineral acreage (including the depths and productiveness of such
geologic formations); and (iii) the amount of leasing and drilling activity
(including the results of such drilling activity) in the areas surrounding the
mineral acreage. Based on his review and analysis of the above factors, Mr.
Tucei then utilized his professional judgment to determine an estimated lease
bonus per acre on a state-by-state basis. In the determination of the estimated
lease bonus values utilized in the appraisal, Mr. Tucei necessarily made
qualitative judgments as to the significance and relevance of each of the above
factors and analysis performed. Pursuant to Mr. Tucei's appraisal, HSOG's non-
producing mineral interests were appraised at approximately $1,786,800 as of
June 30, 1997, and HSRC's nonproducing mineral interests were appraised at
approximately $2,379,700 as of June 30, 1997. Mr. Tucei received a consulting
fee of approximately $2,500 for his services. Mr. Tucei owns 70 shares of HSOG
Common Stock and 112 shares of HSRC Common Stock. The appraised values were
utilized solely for the purpose of estimating the relative values of the
companies with respect to each other in the determination of the Exchange Ratio.

OPINIONS OF FINANCIAL ADVISOR

On August 14, 1997, Principal delivered in writing and reviewed the key
elements of its analyses underpinning its opinions that, as of such date, the
consideration to be received in the Merger by the stockholders of HSRC was fair
to the disinterested stockholders of HSRC and HSOG from a

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financial point of view. For purposes of the opinions, the term "disinterested
stockholders" means holders of each of HSRC's and HSOG's one class of publicly
traded common stock other than (1) directors, officers and employees of HSRC and
HSOG and (2) any holder of 15% or more of the outstanding shares of common stock
of either HSRC and HSOG. The full text of Principal's written opinions, which
contain a description of the assumptions made, the matters considered by
Principal and the limits of its review, are attached to this Proxy
Statement/Prospectus as Appendix B. Stockholders of HSRC and HSOG are urged to
read the opinions carefully in their entirety, especially with regard to the
assumptions made and matters considered by Principal. Principal is representing
both HSRC and HSOG in the Merger. The following is a summary of selected
analyses performed by Principal (the "Principal Report") in connection with its
opinions.

In connection with its opinions, Principal, among other things, (i)
analyzed certain publicly available financial statements and reports regarding
HSRC and HSOG; (ii) analyzed certain internal financial statements and other
financial and operating data (including 1997 and 1998 financial budgets)
concerning HSRC and HSOG prepared by management; (iii) reviewed certain reserve
information provided by HSRC and HSOG relating to their respective oil and gas
properties; (iv) reviewed the trading activity and the prices for sales for
which information was available with respect to a limited number of trades of
the common stock of HSRC and HSOG; (v) compared the historical and projected
financial performance of HSRC and HSOG; (vi) reviewed the financial terms, to
the extent publicly available, of certain comparable oil and gas transactions;
(vii) reviewed the draft of the Merger Agreement and related documents; (viii)
discussed with management of HSRC and HSOG the operations of and future business
prospects for HSOG after the Merger and the anticipated financial consequences
of the Merger to HSRC and HSOG; and (ix) performed such other analyses and
provided such other services as it deemed appropriate.

Principal relied on the accuracy and completeness of the information and
financial data provided to it by HSRC and HSOG, and its opinions are based upon
such information. Principal inquired into the reliability of such information
and financial data only to the limited extent necessary to provide a reasonable
basis for its opinions, recognizing that it rendered only an informed opinion
and not an appraisal or certification of value. With respect to the financial
budgets and reserve information prepared by management of HSRC and HSOG,
Principal assumed that they have been reasonably prepared on bases reflecting
the best currently available estimates and judgments of the future financial
operations of HSRC and HSOG. Because Principal relied on the accuracy and
completeness of the information and financial data provided by HSRC and HSOG
with only limited independent verification thereof in rendering its opinions,
any significant inaccuracies in the information or data provided could have a
material effect on the results of the analyses performed by Principal in
connection with its opinions and the conclusions thereof.

In connection with its opinions, Principal arrived at relative values for
HSRC and HSOG using three methodologies: a comparable reserve acquisitions
analysis, a discounted cash flow analysis and a relative contribution analysis.
These methodologies are discussed below.

Comparable Reserve Acquisitions Analysis. In calculating the relative
values of The Home-Stake Companies' oil and gas reserves, Principal examined
comparable oil and gas reserve acquisition transactions that occurred during
1994, 1995, 1996 and the first quarter of 1997 in the mid-continent, on-shore
Gulf Coast and Rocky Mountain regions of the United States as reported by John
S. Herold, Inc., an independent petroleum research company that tracks such
data. There were 147 such transactions that occurred during the aforementioned
periods with a mean purchase price of $4.78 per barrel of oil equivalent
reserves. Principal then specifically examined the transactions that occurred
during 1996 and the first quarter of 1997. There were 64 transactions during
such period with a mean purchase price of $4.85 per barrel of oil equivalent.
Principal applied a multiple of $4.85 per barrel of oil equivalent to the
companies' proved reserves which were provided to Principal by the companies.

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Principal then adjusted the resulting values to account for certain assets and
liabilities of the companies that were not included as part of such analysis and
then adjusted the resulting values for cross-ownership between the companies.
Based on this analysis, Principal calculated a sharing ratio for the combined
companies of 39.1% for the stockholders of HSOG and 60.9% for the stockholders
of HSRC.

Discounted Cash Flow Analysis. Principal performed a discounted cash flow
("DCF") analysis utilizing the present value of the future cash flows of The
Home-Stake Companies' proved reserves as of June 30, 1997, based on reserve
reports provided to Principal by management. In addition, representatives of
Principal met with management to discuss the companies' current and projected
operations. In developing its DCF analysis, Principal took the pre-tax cash
flow (defined as pre-tax income plus non-cash expenses less required capital
expenditures) that the companies were expected to generate throughout the life
of the reserves (as presented to Principal in the reserve reports provided by
management) and discounted the cash flows to a present value using a 10%
discount rate. Principal then adjusted the resulting values to account for
certain assets and liabilities of the companies that were not included as part
of such analysis and then adjusted the resulting values for cross-ownership
between the companies. Based on this analysis, Principal calculated a sharing
ratio for the combined companies of 38.9% for the stockholders of HSOG and 61.1%
for the stockholders of HSRC.

Relative Contribution Analysis. Principal and management projected 1998
financial results for HSOG and HSRC utilizing engineering reports and certain
assumptions provided by management. Principal then compared the projected
results of the two companies and adjusted for cross-ownership between the
companies. Principal then examined the relative contribution of the projected
revenues, operating cash flow, net income and after tax cash flow of each
company to the combined entity. Based on this analysis, Principal calculated a
sharing ratio for the combined companies of 40% for the stockholders of HSOG and
60% for the stockholders of HSRC.

In summary, the three methodologies suggested the proportional ownership of
the combined companies by HSOG stockholders ranging from a high of 40% to a low
of 38.9%, and, alternatively, by HSRC stockholders ranging from a high of 61.1%
to a low of 60%. The Exchange Ratio approved and adopted by the Board of
Directors of each of HSOG and HSRC represents the arithmetic average of the
results of the three methodologies.

The discussion of the Principal Report set forth above summarizes the
material elements of Principal's presentation to the Special Committee of the
Board of Directors of HSRC and to the Special Committee of the Board of
Directors of HSOG on August 14, 1997. Principal believes that its analyses must
be considered as a whole and that selecting portions of such analyses, without
considering all analyses, would create an incomplete view of the processes
underlying the analyses set forth in the Principal Report and its fairness
opinions. The fact that any specific analysis has been referred to in the
summary above is not meant to indicate that such analysis was given greater
weight than any other analysis.

In rendering its fairness opinions, Principal applied its judgment to a
variety of complex analyses and assumptions. Principal may have given various
analyses more or less weight than other analyses, and may have deemed various
assumptions more or less probable than other assumptions. The assumptions made,
and the judgments applied, by Principal in rendering its opinions are not
readily susceptible to description beyond that set forth in the written text of
such fairness opinions.

In developing its view of the consideration to be received in the Merger,
Principal assumed that, because of common practices used in the oil and gas
industry to evaluate assets, the methodologies described above provided a
reasonable and consistent basis for determining the relative values for HSRC and
HSOG.

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The engagement letters between each of HSRC and HSOG and Principal provide
that Principal is to receive a fee in the amount of $37,500 from each company
(an aggregate of $75,000), 50% of which was paid upon execution of the letter
and the remaining 50% of which was paid upon delivery of the written fairness
opinions. HSRC and HSOG also have agreed to reimburse Principal for its
reasonable out-of-pocket expenses, including fees and expenses of counsel, and
to indemnify Principal and its affiliates against certain claims, losses,
liabilities and expenses in connection with its services as financial advisor,
including those arising under the federal securities laws.

Principal, an investment banking firm headquartered in Dallas, Texas,
engages in, among other things, the valuation of businesses and their securities
in connection with mergers and acquisitions, leveraged buy-outs, negotiated
underwritings, private placements of debt and equity and for corporate and
estate purposes. The predecessor of Principal has acted as an investment
advisor to the Board of Directors of each of HSOG and HSRC with respect to an
unsolicited tender offer for the companies' outstanding securities in 1993.

CONDUCT OF THE BUSINESS OF HSOG AFTER THE MERGER

It is anticipated that after the Merger, HSOG will conduct its business in
the same manner as HSOG and HSRC jointly conducted their business prior to the
Merger. See "Description of the Business of The Home-Stake Companies."

ACCOUNTING TREATMENT

The Merger will be accounted for as a purchase in accordance with generally
accepted accounting principles, with HSOG deemed to be the purchased entity for
accounting purposes. Under the purchase method of accounting, the cost of the
assets and liabilities acquired is allocated based upon their fair value, with
the operations of the acquired entity included with those of the acquiring
entity from date of acquisition. For information regarding the accounting
consequences of the Merger, see "Unaudited Pro Forma Financial Statements".

FEDERAL INCOME TAX CONSEQUENCES

The following is a summary of the material federal income tax consequences
applicable to holders of HSRC Common Stock and HSOG Common Stock who receive New
HSOG Common Stock pursuant to either the Merger or the Stock Split and is based
upon current provisions of the Code, existing regulations thereunder and current
administrative rulings and court decisions, all of which are subject to changes
which may or may not be applied retroactively. Conner & Winters, A Professional
Corporation, has expressed its opinion that this summary, insofar as it relates
to matters of law and legal conclusions, is accurate in all material respects.
This summary discusses only certain federal income tax consequences to citizens
or residents of the United States and domestic corporations and partnerships
which hold HSRC Common Stock or HSOG Common Stock as a capital asset. It does
not discuss the tax consequences that might be relevant to holders of HSRC
Common Stock or HSOG Common Stock entitled to special treatment under federal
income tax laws (such as individual retirement accounts and other tax deferred
accounts, life insurance companies, and tax exempt organizations).

In the opinion of Conner & Winters, A Professional Corporation, the Merger
and the Stock Split will qualify as reorganizations under Section 368(a) of the
Code ("Reorganizations"). No ruling from the Internal Revenue Service has been
or will be sought as to such qualification. Such opinion is based upon, among
other things, certain factual assumptions as to which counsel will require
representations of HSOG and HSRC for purposes of rendering its opinion as of the
closing date of the Merger.

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If the Merger and the Stock Split qualify as Reorganizations, a HSRC or
HSOG stockholder whose HSRC Common Stock or HSOG Common Stock is converted into
the right to receive solely New HSOG Common Stock pursuant to the Merger or
Stock Split will not be subject to federal income tax by reason of the Merger or
the Stock Split and that stockholder's tax basis in the New HSOG Common Stock
received will be the same as such stockholder's tax basis in the HSRC Common
Stock or HSOG Common Stock exchanged therefor.

In general, HSRC or HSOG stockholders who exercise their appraisal rights
will be treated as having received their payment of cash in redemption of their
stock. Each such stockholder will realize gain or loss equal to the amount his
or her redemption proceeds exceeds or is exceeded by his or her adjusted federal
income tax basis in the shares of HSRC Common Stock or HSOG Common Stock
redeemed. Such gain or loss will be a capital gain or loss if the shares
redeemed are held by such stockholder as a capital asset.

Treasury Regulations require that each HSRC and HSOG stockholder who
receives shares of New HSOG Common Stock (or cash in the event of an exercise of
appraisal rights) in connection with the Merger or the Stock Split must
incorporate into his or her income tax return for the taxable year in which the
Merger and the Stock Split take place a statement of all facts pertinent
thereto, including (i) a statement of the cost or other basis of his or her HSRC
or HSOG Common Stock and (ii) a statement of the amount of New HSOG Common Stock
or cash received. Treasury Regulations further require that HSRC and HSOG
stockholders maintain permanent records with respect to the Merger or the Stock
Split, as appropriate.

Neither HSRC nor HSOG will recognize any gain or loss by reason of the
Merger or the Stock Split if the Merger and the Stock Split qualify as
Reorganizations.

THE FOREGOING IS ONLY A GENERAL DESCRIPTION OF THE MATERIAL FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER AND THE STOCK SPLIT TO HSRC AND HSOG STOCKHOLDERS
UNDER CURRENT LAW, WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF
EACH HSRC OR HSOG STOCKHOLDER'S TAX SITUATION AND STATUS. ACCORDINGLY, ALL HSRC
AND HSOG STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT
TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER AND THE
STOCK SPLIT.

INTERESTS OF CERTAIN PERSONS IN THE MERGER

In considering the recommendation of the Boards of Directors of HSOG and
HSRC with respect to the Merger Agreement and the transactions contemplated
thereby, stockholders should be aware that certain members of the management of
HSOG and HSRC and the Boards of Directors of HSOG and HSRC have certain
interests in the Merger that are in addition to the interests of stockholders of
HSOG and HSRC generally.

The Board of Directors of HSOG has adopted the HSOG 1997 Incentive Stock
Plan, subject to the approval of HSOG stockholders and consummation of the
Merger. If the Stock Plan is approved and the Merger is consummated, HSOG's
directors and executive officers will be eligible under the plan to receive
awards of options to purchase shares of New HSOG Common Stock or shares of
restricted stock. See "Approval of the HSOG 1997 Incentive Stock Plan."

APPRAISAL RIGHTS

Under Section 1091 of the Oklahoma General Corporation Act ("Section
1091"), holders of shares of either HSOG Common Stock or HSRC Common Stock
("Shares") may demand an appraisal

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of the fair value of their Shares and payment in cash in lieu of accepting the
shares of New HSOG Common Stock issuable to them in connection with the Merger.
Section 1091 is reprinted in its entirety as Appendix C to this Proxy
Statement/Prospectus. All references to a "stockholder" in Section 1091 and this
summary thereof are to the record holder of Shares as to which appraisal rights
are asserted. A person having a beneficial interest in Shares that are held of
record in the name of another person, such as a broker or nominee and who
desires to exercise appraisal rights, must act promptly to cause the record
holder to follow properly the steps summarized below and in a timely manner to
perfect the appraisal rights the beneficial owner may have.

HSOG and HSRC must each notify their respective stockholders, not less than
20 days prior to their respective Special Meeting, that appraisal rights are
available and provide each such stockholder a copy of Section 1091 (this Proxy
Statement/Prospectus constitutes such notice). Stockholders of record who
desire to exercise their appraisal rights must: (i) hold Shares on the date of
making a demand for appraisal, (ii) continuously hold Shares through the
Effective Time, (iii) deliver, prior to the Special Meeting, a written demand
for appraisal to HSOG or HSRC, as appropriate, at 15 East 5th Street, Suite
2800, Tulsa, Oklahoma 74103, Attention: Chris K. Corcoran, Executive Vice
President, Chief Financial Officer and Secretary, and (iv) otherwise satisfy all
of the following conditions. Although a stockholder must not have voted in
favor of the Merger, Section 1091 does not require that a stockholder vote
against the Merger in order to preserve his or her appraisal rights.

If the Merger is approved by the respective stockholders of both HSOG and
HSRC, HSOG must, within 10 days after the Effective Time of the Merger, notify
each dissenting stockholder who has provided written demand to the respective
company as noted above and has not voted in favor of or consented to the Merger
that the Merger has become effective.

Within 120 days after the Effective Time, HSOG or any stockholder who has
satisfied the foregoing conditions and is otherwise entitled to appraisal rights
under Section 1091 may file a petition in an Oklahoma district court with proper
venue ("Oklahoma District Court") demanding a determination of the value of
Shares. HSOG does not intend to file a petition or initiate any negotiations
with respect to the fair value of these Shares. Accordingly, stockholders who
wish to properly exercise appraisal rights should regard it as their obligation
to initiate all necessary action with respect to the perfection of their
appraisal rights within the time periods prescribed in Section 1091.

Only a holder of record of Shares is entitled to assert appraisal rights
for Shares registered in that holder's name. The demand should be executed by
or for the holder of record, fully and correctly, as the holder's name appears
on the holder's stock certificates. If Shares are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, execution of
the demand should be made in that capacity, and if Shares are owned of record by
more than one person, as in a joint tenancy or tenancy in common, the demand
should be executed by or for all joint owners. An authorized agent, including
one of two or more joint owners, may execute the demand for appraisal for a
holder of record; however, the agent must identify the record owner or owners
and expressly disclose the fact that, in executing the demand, the agent is
acting as authorized agent for the record owner.

A record holder, such as a broker, who holds Shares as nominee for the
beneficial owner thereof may exercise the holder's right of appraisal with
respect to Shares held for all or less than all of those beneficial owners. In
that case, the written demand should set forth the number of Shares covered by
it. Where no number of shares is expressly mentioned, the demand will be
presumed to cover all shares outstanding in the name of the applicable record
owner.

Within 120 days after the Effective Time, any stockholder who has complied
with the requirements for exercise of appraisal rights, as discussed above, is
entitled, upon written request, to receive from HSOG a statement setting forth
the aggregate number of Shares with respect to which

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demands for appraisal have been made and the aggregate number of holders of
those Shares. This statement must be mailed within 10 days after the written
request therefore has been received by HSOG, or within 10 days after the
expiration of the period for delivery of demands for appraisal, whichever is
later.

If a petition for appraisal is timely filed, after a hearing on the
petition, the Oklahoma District Court will determine the stockholders entitled
to appraisal rights and will appraise Shares owned by those stockholders,
determining "fair value" exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value.
Simple or compound interest may be paid. The judicial determination of the "fair
value" of Shares is required to be based on all relevant factors involving the
value of a company, including market value, asset value, dividends, earnings
prospects, the nature of the enterprise and any other factors which could be
ascertained as of the date of the Merger which aid in determining the value of
such corporation. The presiding Oklahoma District Court shall direct payment of
the fair value of Shares by HSOG to stockholders entitled thereto.

Stockholders considering exercising their rights of appraisal should bear
in mind that the fair value of their Shares determined under Section 1091 could
be more than, the same as or less than the value of the shares of New HSOG
Common Stock they would receive if they did not seek appraisal of their Shares.
The costs of the appraisal proceeding may be determined by the Oklahoma District
Court and taxed against the parties as the Oklahoma District Court deems
equitable in the circumstances. Upon application of a dissenting stockholder,
the Oklahoma District Court may order all or a portion of the expenses of
experts incurred by any dissenting stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of such experts, be charged pro rata against the value of all
Shares entitled to appraisal.

Any stockholder who has duly demanded appraisal in compliance with Section
1091 will not, after the Effective Time, be entitled to vote Shares subject to
such demand for any purpose or to receive payment of dividends or other
distributions on such Shares, except for dividends or distributions payable to
stockholders of record at a date prior to the Effective Time.

If any stockholder who demands appraisal of his or her Shares under Section
1091 fails to perfect, or effectively withdraws or loses, his or her right to
appraisal, the Shares of that holder will be converted into the right to receive
shares of New HSOG Common Stock in accordance with the terms of the Merger
Agreement, without any interest thereon. A stockholder will fail to perfect,
and will effectively lose his or her right to appraisal, if no petition for
appraisal is filed within 120 days after the Effective Time or if the
stockholder delivers to HSOG a written withdrawal of his or her demand for an
appraisal, except that any attempt to withdraw made more than 60 days after the
Effective Time requires the written approval of HSOG. Furthermore, no appraisal
proceeding in the Oklahoma District Court will be dismissed as to any
stockholder without the approval of the Court, which approval may be conditioned
upon terms that the Court deems just.

Dissenting stockholders who elect to exercise appraisal rights and receive
cash for their Shares may be subject to federal and/or state income tax on any
gain resulting from the transaction. See "The Merger--Federal Income Tax
Consequences" above. It is a condition to the consummation of the Merger
(unless waived by HSOG), that holders of no more than 12% of the outstanding
shares of HSOG or HSRC Common Stock exercise appraisal rights pursuant to
Section 1091. See "The Merger Agreement--Conditions."

Reference is made to Appendix C to this Proxy Statement/Prospectus for the
complete text of the provisions of Section 1091 relating to the appraisal rights
of dissenting HSOG and HSRC stockholders. The statements made in this summary
are qualified in their entirety by reference to such

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Appendix C. THE PROVISIONS OF SECTION 1091 ARE TECHNICAL IN NATURE AND COMPLEX.
IT IS SUGGESTED THAT ANY STOCKHOLDER WHO DESIRES TO AVAIL HIMSELF OR HERSELF OF
HIS OR HER RIGHT TO DISSENT CONSULT INDEPENDENT LEGAL COUNSEL BECAUSE FAILURE TO
COMPLY STRICTLY WITH THE PROVISIONS OF SECTION 1091 MAY PRECLUDE THE EXERCISE OF
HIS OR HER APPRAISAL RIGHTS.

RESTRICTIONS ON RESALES BY AFFILIATES OF HSRC

All shares of New HSOG Common Stock received by HSRC stockholders in the
Merger will be freely transferable, except that shares of New HSOG Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of HSRC prior to the Merger may be resold by them only
in transactions permitted by the resale provisions of Rule 145 promulgated under
the Securities Act (or Rule 144 in the case of such persons who become
affiliates of HSOG) or as otherwise permitted under the Securities Act. Persons
who may be deemed to be affiliates of HSRC or HSOG generally include individuals
or entities that control, are controlled by, or are under common control with,
such party and may include certain officers and directors of such party as well
as principal stockholders of such party.

DEPLETION DEDUCTIONS

Under the Code, independent producers are allowed a deduction for federal
income tax purposes for statutory depletion on eligible production of up to
1,000 "barrels of oil equivalent per day" (hereinafter, "BOEPD"). This
deduction is generally calculated to be 15 percent of gross revenues from each
qualified property, subject to several limitations, and may be taken in amounts
that exceed the tax basis of the related property. During the first six months
of 1997, HSOG and HSRC had approximately 2,100 BOEPD of combined qualified
production.

In the event the Merger is consummated, HSOG, as the surviving
corporation, will be limited to the statutory depletion deductions on the first
1,000 BOEPD of eligible production and lose the otherwise allowable statutory
depletion deduction on approximately 1,000 BOEPD qualifying production which
resulted from having the two separate corporations (i.e., the 1,000 BOEPD
attributable to HSRC will be lost). If HSOG and HSRC had been merged effective
January 1, 1996, there would have been approximately a $178,000 increase in the
amount of income taxes paid by HSOG and HSRC. In addition, there would have
been a decrease in the amount of allowable statutory depletion carryforwards
available to offset future income tax. The exact annual income tax effect of
this lost depletion deduction is difficult to quantify due to the complexities
of the Code related to statutory depletion and the interaction of this deduction
and other provisions of the Code, such as the alternative minimum tax. Assuming
no available statutory depletion carryforwards or other offsets, a price of $19
per barrel of oil and a 34 percent effective statutory corporate tax rate, the
annual income tax effect of a loss of 1,000 BOEPD of qualifying production for
purposes of the statutory depletion deduction would be approximately $354,000.

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THE MERGER AGREEMENT

The following is a brief summary of all material provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference. This summary is
qualified in its entirety by reference to the full text of the Merger Agreement.

THE MERGER

Pursuant to the Merger Agreement, at the Effective Time, HSRC will be
merged with and into HSOG. Upon consummation of the Merger, the separate
existence of HSRC will cease and HSOG, as the surviving corporation in the
Merger, will continue its corporate existence under the laws of the State of
Oklahoma. The Amended HSOG Certificate will become the Certificate of
Incorporation of HSOG. See "Comparative Rights of Stockholders." The directors
and officers of HSOG at the Effective Time of the Merger will remain as the
directors and officers of HSOG after the Merger.

Upon the satisfaction or waiver of all conditions to the Merger, and
provided that the Merger Agreement has not been terminated or abandoned, HSOG
and HSRC will cause a Certificate of Merger, a copy of which is attached as
Appendix D to this Proxy Statement/Prospectus, to be executed, acknowledged and
filed with the Secretary of State of the State of Oklahoma as provided in
Section 1081 of the Oklahoma General Corporation Act. The time at which the
Merger becomes effective is referred to as the "Effective Time" or the
"Effective Time of the Merger."

THE STOCK SPLIT

Pursuant to the amendment of the HSOG Certificate called for by the Merger
Agreement, at the Effective Time the authorized shares of HSOG Common Stock will
be increased from 100,000 shares to 12,000,000 shares, par value $.01 per share,
and the outstanding shares of HSOG Common Stock (other than those held by HSRC
or in the treasury of HSOG) will be split on a 30-for-1 basis (the "Stock
Split"). The HSOG common stock issued pursuant to the Stock Split is herein
referred to as "New HSOG Common Stock."

EXCHANGE PROCEDURES

Exchange of HSRC Certificates. As promptly as practicable after the
Effective Time of the Merger, HSOG shall cause its transfer agent or such other
agent, acting in the capacity of exchange agent (the "Exchange Agent"), to mail
to each holder of record of HSRC Common Stock at the Effective Time of the
Merger a letter of transmittal, together with instructions and a return envelope
(collectively, the "HSRC Letter of Transmittal") to facilitate the exchange of
such holder's certificates, formerly representing shares of HSRC Common Stock,
for a certificate representing the shares of New HSOG Common Stock such holder
is entitled to receive in the Merger. HSRC STOCKHOLDERS SHOULD NOT SEND IN
THEIR CERTIFICATES UNTIL THEY RECEIVE A HSRC LETTER OF TRANSMITTAL.

Upon receipt of the HSRC Letter of Transmittal, the holder of record of
HSRC Common Stock should complete the HSRC Letter of Transmittal in accordance
with the instructions provided and deliver the HSRC Letter of Transmittal,
together with all stock certificates formerly representing shares of HSRC Common
Stock to the Exchange Agent in the return envelope provided. Provided the
Exchange Agent shall have received the certificates and related documentation
completed in proper form, as soon as practicable after the Effective Time of the
Merger, the Exchange Agent will mail to the holder of such HSRC Common Stock a
certificate for the shares of New HSOG Common Stock to which the holder is
entitled. No certificates for New HSOG Common Stock will be delivered to a
holder of record of HSRC Common Stock unless and until such holder shall have
delivered to the Exchange Agent in

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accordance with the HSRC Letter of Transmittal, all certificates formerly
representing the shares of HSRC Common Stock held by such holder or, if
applicable, such documentation and security in respect of lost, stolen or
destroyed certificates as is required by the Exchange Agent or HSOG. No
fractional shares of New HSOG Common Stock will be issued in connection with the
Merger. In lieu of any fractional shares, any holder of HSRC Common Stock who
would otherwise be entitled to a fractional share of New HSOG Common Stock will,
upon surrender of his or her HSRC certificate, receive a whole share of New HSOG
Common Stock.

After the Effective Time of the Merger, there will be no further transfers
on HSRC's stock transfer books of the shares of HSRC Common Stock issued and
outstanding immediately prior to the Effective Time of the Merger. If
certificates representing shares of HSRC Common Stock should be presented to
HSRC after the Effective Time of the Merger, they will be cancelled and
exchanged as described above. If a holder of HSRC Common Stock has transferred
ownership of such HSRC Common Stock but the transfer is not registered in the
stock transfer records of HSRC as of the Effective Time of the Merger, a
certificate representing the number of shares of New HSOG Common Stock may be
issued to the transferee if the HSRC certificate, when presented for exchange,
is accompanied by all documents required to evidence and effect such transfer
and to evidence that any applicable stock transfer taxes have been paid.

If a certificate formerly representing HSRC Common Stock shall have been
lost, stolen or destroyed, the Exchange Agent will deliver a certificate
representing the shares of New HSOG Common Stock issuable pursuant to the Merger
with respect to such lost, stolen or destroyed certificate only upon receipt of
an affidavit as to such loss, theft or destruction, appropriate evidence as to
ownership of such certificate by the claimant and, if required by HSOG, the
posting of a bond in such reasonable amount as HSOG may direct as indemnity
against any claim that may be subsequently made against HSOG with respect to
such lost, stolen or destroyed certificate.

No dividends or other distributions with respect to New HSOG Common Stock
issued with respect to shares of HSRC Common Stock in the Merger will be made
until the holder of HSRC Common Stock entitled thereto surrenders his or her
HSRC certificate for exchange as described above. Upon such surrender, such
surrendering holder (i) will be paid dividends or other distributions having a
record date after the Effective Time of the Merger but on or prior to the date
of surrender and a payment date on or prior to such date of surrender with
respect to the shares of New HSOG Common Stock such holder is entitled to
receive (less, if applicable, any withholding taxes that may be required with
respect thereto) and (ii) will be entitled to receive, on the payment date, any
dividends or other distributions having a record date after the Effective Time
of the Merger but on or prior to the date of such surrender and a payment date
after such date of surrender which are payable with respect to the shares of New
HSOG Common Stock such holder is entitled to receive (less, if applicable, any
withholding taxes that may be required with respect thereto).

Exchange of HSOG Certificates. As promptly as practicable after the
Effective Time of the Merger, the Exchange Agent will mail to each holder of
record of HSOG Common Stock at the Effective Time of the Merger a letter of
transmittal, together with instructions and a return envelope (collectively, the
"HSOG Letter of Transmittal") to facilitate the exchange of such holder's
certificates, formerly representing shares of HSOG Common Stock, for a
certificate representing the shares of New HSOG Common Stock such holder is
entitled as a result of the Stock Split. HSOG STOCKHOLDERS SHOULD NOT SEND IN
THEIR CERTIFICATES UNTIL THEY RECEIVE A HSOG LETTER OF TRANSMITTAL.

Upon receipt of the HSOG Letter of Transmittal, the holder of record of
HSOG Common Stock should complete the HSOG Letter of Transmittal in accordance
with the instructions provided and deliver the HSOG Letter of Transmittal,
together with all stock certificates formerly representing shares of HSOG Common
Stock to the Exchange Agent in the return envelope provided. Provided the

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<PAGE>

Exchange Agent shall have received the certificates and related documentation
completed in proper form, as soon as practicable after the Effective Time of the
Merger, the Exchange Agent will mail to the holder of such HSOG Common Stock a
certificate for the shares of New HSOG Common Stock to which the holder is
entitled. No certificates for New HSOG Common Stock will be delivered to a
holder of record of HSOG Common Stock unless and until such holder shall have
delivered to the Exchange Agent in accordance with the HSOG Letter of
Transmittal, all certificates formerly representing the shares of HSOG Common
Stock held by such holder or, if applicable, such documentation and security in
respect of lost, stolen or destroyed certificates as is required by the Exchange
Agent or HSOG.

If a certificate formerly representing HSOG Common Stock shall have been
lost, stolen or destroyed, the Exchange Agent will deliver a certificate
representing the shares of New HSOG Common Stock issuable pursuant to the Stock
Split with respect to such lost, stolen or destroyed certificate only upon
receipt of an affidavit as to such loss, theft or destruction, appropriate
evidence as to ownership of such certificate by the claimant and, if required by
HSOG, the posting of a bond in such reasonable amount as HSOG may direct as
indemnity against any claim that may be subsequently made against HSOG with
respect to such lost, stolen or destroyed certificate.

CONDITIONS

The respective obligations of HSOG and HSRC to consummate the Merger are
subject to the approval and adoption of the Merger Agreement by the holders of
66 2/3 percent of the outstanding shares of each of HSOG Common Stock and HSRC
Common Stock and the satisfaction of the following conditions: (i) no court,
arbitrator or governmental body, agency or official shall have issued any order,
and there shall not be any statute, rule or regulation, restraining or
prohibiting the consummation of the Merger; (ii) all actions by or in respect of
or filings with any governmental body, agency, official or authority required to
permit the consummation of the Merger having been obtained; (iii) HSOG and HSRC
shall each have received a written opinion from Principal that the Merger is
fair, from a financial point of view, to the stockholders of HSOG and HSRC,
respectively, and such opinion shall not have been withdrawn; and (iv) HSOG and
HSRC shall have each received a written opinion of Conner & Winters, A
Professional Corporation, to the effect that the Merger will be treated as a
reorganization under Section 368(a) of the Code and the regulations thereunder.
The obligation of HSOG to consummate the Merger is further subject to the
condition (unless waived by HSOG) that holders of not more than 12% of the
outstanding shares of HSOG Common Stock or HSRC Common Stock shall have
exercised their dissenters' appraisal rights.

AMENDMENT AND TERMINATION

Notwithstanding approval by the stockholders of HSOG and HSRC, the Boards
of Directors of HSOG and HSRC may amend the Merger Agreement at any time prior
to the filing of the Certificate of Merger so long as any such amendment does
not alter (i) the amount of New HSOG Common Stock to be received by a HSOG or
HSRC stockholder, (ii) the amendments to the HSOG Certificate set forth in the
Certificate of Merger or (iii) any term or condition of the Merger Agreement,
the alteration of which would adversely affect HSOG or HSRC stockholders.
Further, notwithstanding such approval, the Boards of Directors of either HSOG
or HSRC may terminate the Merger Agreement at any time prior to such filing.

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<PAGE>

MARKET FOR HSOG COMMON STOCK AND HSRC COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
HSOG

Market Prices. As of September 30, 1997, HSOG had approximately 200
holders of record of its Common Stock. HSOG Common Stock is listed in the "pink
sheets" published by the National Quotation Bureau. Historically, the "pink
sheets" have generally identified firms acting as market makers for HSOG Common
Stock but, to the Company's knowledge, did not set forth bid and ask quotations
for such stock. Trades in the stock are sporadic or limited and, accordingly,
there is no established public trading market for HSOG Common Stock.

Dividends. The following table sets forth the per share amount of cash
dividends declared and paid on HSOG Common Stock during the periods indicated.

<TABLE>
<CAPTION>
Cash Dividends
Declared and Paid
Per Share of
Year Ended December 31, Common Stock
----------------------- -----------------

<S> <C>
1995: First Quarter $1.00
Second Quarter 1.00
Third Quarter .75
Fourth Quarter .75
1996: First Quarter $ .75
Second Quarter .75
Third Quarter .50
Fourth Quarter .50
1997: First Quarter $ .50
Second Quarter .50
Third Quarter .50

</TABLE>

HSOG has historically paid quarterly cash dividends to its stockholders.
HSOG's Board of Directors has adopted a policy to pay quarterly dividends on
HSOG Common Stock, dependent on numerous factors,including future earnings,
anticipated capital requirements, the financial condition and prospects of HSOG,
and other factors HSOG's Board may deem relevant. Upon consummation of the
Merger, HSOG's Board of Directors plans to continue a policy to pay quarterly
dividends on the New HSOG Common Stock, dependent on the same considerations.
In addition, future dividends may be restricted pursuant to the terms of the
loan agreement between HSOG and NationsBank, N.A. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Management's
Discussion and Analysis of Financial Conditions and Results of Operations of
HSOG--Financial Condition and Liquidity" below for a description of these
restrictions.

HSRC

Market Prices. As of September 30, 1997, HSRC had approximately 300
holders of record of its Common Stock. HSRC Common Stock is listed in the "pink
sheets" published by the National Quotation

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<PAGE>

Bureau. Historically, the "pink sheets" have generally identified the firms
acting as market makers for HSRC Common Stock but, to the Company's knowledge,
did not set forth bid and ask quotations for such stock. Trades in the stock
are sporadic or limited and, accordingly, there is no established public trading
market for HSRC Common Stock.

Dividends. The following table sets forth the per share amount of cash
dividends declared and paid on HSRC Common Stock during the periods indicated.

<TABLE>
<CAPTION>
Cash Dividends
Declared and Paid
Per Share of
Year Ended December 31, Common Stock
----------------------- -----------------

<S> <C>
1995: First Quarter $ 1.50
Second Quarter 1.50
Third Quarter 1.35
Fourth Quarter 1.35

1996: First Quarter $ 1.35
Second Quarter 1.35
Third Quarter .90
Fourth Quarter .90

1997: First Quarter $ .90
Second Quarter .90
Third Quarter .90
</TABLE>

HSRC has historically paid quarterly cash dividends to its stockholders.
HSRC's Board of Directors has adopted a policy to pay quarterly dividends on
HSRC Common Stock, dependent on numerous factors, including future earnings,
anticipated capital requirements, the financial condition and prospects of HSRC
and such other factors as the Board of Directors may deem relevant. In
addition, future dividends may be restricted pursuant to the terms of the loan
agreement between HSRC and NationsBank, N.A. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Management's
Discussion and Analysis of Financial Condition and Results of Operations of
HSRC--Financial Condition and Liquidity" below for a description of these
restrictions. If the Merger is consummated, HSRC stockholders (other than HSOG
and stockholders who exercise their appraisal rights) will receive shares of New
HSOG Common Stock and will be entitled to receive, if, as, and when declared by
the Board of Directors of HSOG, dividends on such stock. See the discussion
under "Market For HSOG Common Stock and HSRC Common Stock and Related
Stockholder Matters--HSOG" above for the anticipated dividend policy of HSOG
after the Merger.

DESCRIPTION OF HSOG CAPITAL STOCK

The authorized capital stock of HSOG currently consists of 100,000 shares
of HSOG Common Stock, $20 par value per share, and 200,000 shares of Preferred
Stock, $1.00 par value per share ("HSOG Preferred Stock"). After the Merger,
the authorized capital stock of HSOG will consist of 12,000,000 shares of New
HSOG Common Stock, $.01 par value per share, and 2,000,000 shares of HSOG
Preferred Stock, $1.00 par value per share. No class of capital stock of HSOG
entitles (or, after the Merger, will entitle) the holder thereof to any
preemptive rights to purchase or subscribe for shares of any class or any other
securities.

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<PAGE>

The following description of the capital stock of HSOG is subject to the
provisions of HSOG's Certificate of Incorporation as currently in effect (the
"HSOG Certificate") and as amended in connection with the Merger (the "Amended
HSOG Certificate") and bylaws as currently in effect (the "HSOG Bylaws"). For a
more complete description of the HSOG Certificate, Amended HSOG Certificate and
HSOG Bylaws, reference is made to the full text of the HSOG Certificate and the
HSOG Bylaws and to the amendment to the HSOG Certificate which is set forth in
the Certificate of Merger, a copy of which is attached as Appendix D to this
Proxy Statement/Prospectus.

HSOG COMMON STOCK AND NEW HSOG COMMON STOCK. All issued and outstanding
shares of HSOG Common Stock are validly issued, fully paid and nonassessable,
and the shares of New HSOG Common Stock to be issued in the Merger, when issued
pursuant to the Merger Agreement, will be validly issued, fully paid and
nonassessable. The holders of either HSOG Common Stock or New HSOG Common Stock
are entitled to one vote for each share held on all matters submitted to a vote
of common stockholders, including the election of directors. Neither HSOG
Common Stock nor New HSOG Common Stock has cumulative voting rights. Each share
of either HSOG Common Stock or New HSOG Common Stock is entitled to participate
equally in dividends, as and when declared by the HSOG Board of Directors out of
funds legally available therefor, and in the distribution of assets in the event
of liquidation, subject in all cases to any prior rights of outstanding shares
of HSOG Preferred Stock or New HSOG Preferred Stock. Neither shares of HSOG
Common Stock nor shares of New HSOG Common Stock have preemptive or conversion
rights, redemption rights or sinking fund provisions.

Upon consummation of the Merger there will be approximately 7,500,000
shares of authorized but unissued shares of New HSOG Common Stock. Management
of HSOG believes that the ability of the HSOG Board to issue additional shares
of New HSOG Common Stock provides HSOG with flexibility in structuring possible
future financings and acquisitions and in meeting other corporate needs that
might arise. Although the HSOG Board has no intention at the present time of
doing so, it could issue additional shares of New HSOG Common Stock that could
impede the completion of a merger, tender offer or other takeover attempt. See
"Risk Factors--Authorized But Unissued Shares of New HSOG Common Stock" and "--
Certain Provisions and Arrangements That May Have an Anti-Takeover Effect"
below.

HSOG PREFERRED STOCK. Pursuant to the HSOG Certificate, HSOG is authorized
to issue up to 200,000 shares of HSOG Preferred Stock, and the HSOG Board of
Directors by resolution may establish one or more series of HSOG Preferred Stock
having the number of shares, designations, relative voting rights, dividend
rights, liquidation and other rights, preferences and limitations that the HSOG
Board of Directors fixes without any stockholder approval. Pursuant to the
Amended HSOG Certificate, the authorized shares of HSOG Preferred Stock will be
increased to 2,000,000 shares. The issuance of HSOG Preferred Stock may
adversely affect the rights of the holders of HSOG Common Stock or New HSOG
Common Stock. As of the date of this Proxy Statement/Prospectus, no shares of
HSOG Preferred Stock have been issued and no series of HSOG Preferred Stock has
been designated by the HSOG Board of Directors.

Management of HSOG believes that the ability of the HSOG Board to issue one
or more series of HSOG Preferred Stock provides HSOG with flexibility in
structuring possible future financings and acquisitions and in meeting other
corporate needs that might arise. Although the HSOG Board has no intention at
the present time of doing so, it could issue a series of HSOG Preferred Stock
that could, depending on the terms of such series, impede the completion of a
merger, tender offer or other takeover attempt. See "--Certain Provisions and
Arrangements That May Have an Anti-Takeover Effect" below.

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<PAGE>

CERTAIN PROVISIONS AND ARRANGEMENTS THAT MAY HAVE AN ANTI-TAKEOVER EFFECT

Certain provisions of the HSOG Certificate and Bylaws may have an anti-
takeover effect in that they could prevent, discourage or delay a change in
control of HSOG. Certain arrangements and provisions of the Oklahoma General
Corporation Act may also have a similar effect. The following summary briefly
describes certain of these provisions and arrangements. The summary is not
intended to be complete and is qualified in its entirety by reference to the
document or provision of the Oklahoma General Corporation Act which is the
subject of the description. As noted below, most of the provisions or
arrangements that may have an anti-takeover effect currently apply to HSOG and
HSRC due to provisions in the HSOG and HSRC certificates of incorporation and
bylaws and outstanding arrangements. See "Comparative Rights of Stockholders."

Classified Board

The HSOG Bylaws provide for the Board of Directors of HSOG to be
divided into three classes, with members of each class serving staggered
three-year terms. The Oklahoma General Corporation Act provides that
members of a classified Board of Directors can only be removed by the
stockholders for cause absent a provision in a corporation's certificate of
incorporation to the contrary. The HSOG Certificate does not contain such
a provision, and thus, the HSOG stockholders must have cause in order to
remove a member of the HSOG Board of Directors. The HSRC Bylaws similarly
provide for classified Boards of Directors for HSRC. See "Comparative
Rights of Stockholders--Number of Directors; Removal of Directors; Filling
Vacancies; Qualifications."

Stockholder Action

The HSOG Certificate provides that stockholders may only take action
without a meeting by obtaining the written consent of all stockholders
entitled to vote on such action. Absent obtaining such unanimous written
consent, stockholder action will require a meeting of stockholders which
will allow all stockholders to receive prior notice of proposed action and
to discuss and vote on such action. The HSRC Certificate contains similar
provisions requiring unanimous written consent to stockholder action
without a meeting. See "Comparative Rights of Stockholders--Stockholder
Action by Written Consent; Special Meetings."

Common Stock

Upon consummation of the Merger there will be approximately 7,500,000
shares of authorized but unissued shares of New HSOG Common Stock. The
authorized but unissued shares of New HSOG Common Stock could be used by
incumbent management to make more difficult a change in control of HSOG.
Under certain circumstances, such shares could be used to create voting
impediments or to frustrate persons seeking to effect a takeover or
otherwise gain control of HSOG. The shares of authorized but unissued New
HSOG Common Stock might also be considered as having the effect of
discouraging an attempt by another person, through the acquisition of a
substantial number of shares of New HSOG Common Stock, to acquire control
of HSOG with a view of imposing a merger, sale of all or any part of HSOG's
assets or a similar transaction, since the issuance of additional shares
could be used to dilute the stock ownership and voting power held by such
person. Any transaction which may be so discouraged or avoided could be a
transaction that HSOG's stockholders might consider to be in their best
interests, although it should be noted that the Board of Directors of HSOG
has a fiduciary duty to act in the best interests of HSOG's stockholders.

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<PAGE>

Preferred Stock

The Amended HSOG Certificate authorizes up to 2,000,000 shares of
undesignated HSOG Preferred Stock. HSOG Preferred Stock may be issued from
time to time in one or more series, and the HSOG Board of Directors,
without further approval of the stockholders, is authorized to fix and
state the designation, powers, preferences and other rights of the shares
and each series of HSOG Preferred Stock. One of the effects of the
existence of the authorized but unissued HSOG Preferred Stock may be to
enable the HSOG Board of Directors to render more difficult or discourage
an attempt to obtain control of HSOG by means of a merger, tender offer,
proxy contest or otherwise, and thereby protect the continuity of HSOG's
management. For example, if in the exercise of its fiduciary obligations
the HSOG Board of Directors were to determine that a takeover proposal was
not in HSOG's best interest, HSOG Preferred Stock could be issued by the
HSOG Board of Directors without stockholder approval in a transaction or
transactions that might prevent or render more difficult or costly the
completion of the takeover transaction by diluting the voting or other
rights of the proposed acquiror or insurgent stockholder or stockholder
group, by creating a substantial voting block in institutional or other
hands that might undertake to support the position of the incumbent HSOG
Board of Directors, by effecting an acquisition that might complicate or
preclude the takeover, or otherwise. In this regard, the HSOG Board of
Directors could issue, in one or more series, HSOG Preferred Stock
entitling holders to vote separately as a class on any proposed merger or
consolidation, to convert HSOG Preferred Stock into a larger number of
shares of HSOG Common Stock or other securities, to demand redemption at a
specified price under prescribed circumstances related to a change in
control, or to exercise other rights designed to impede a takeover. The
issuance of shares of HSOG Preferred Stock pursuant to the HSOG Board's
authority described above could decrease the amount of earnings and assets
available for distribution to holders of HSOG Common Stock, and adversely
affect the rights and powers, including voting rights, of such holders and
may have the effect of delaying, deferring or preventing a change in
control of HSOG. The HSOG and HSRC Certificates authorize classes of
undesignated Preferred Stock that could have the anti-takeover effects
noted above. See "--HSOG Preferred Stock" and "Comparative Rights of
Stockholders--'Blank Check' Preferred Stock."

Business Combination Statute

Upon consummation of the Merger, HSOG will likely become subject to
provisions (the "Business Combination Statute") of the Oklahoma General
Corporation Act that may have the effect of preventing, discouraging or
delaying a change in control of HSOG. The restrictions of the Business
Combination Statute are applicable to any Oklahoma corporation that has a
class of stock listed on the NASDAQ National Market. The Business
Combination Statute generally prohibits certain business combinations
between a corporation and any person who has acquired 15% or more of the
voting stock of the corporation (an "interested shareholder") for a period
of three years from the date such shareholder became an interested
shareholder, unless such interested shareholder (i) prior to becoming an
interested shareholder, obtained the approval of the board of directors of
either the business combination or the transaction that resulted in such
person becoming an interested shareholder, (ii) acquired at least 85% of
the outstanding shares of voting stock of the corporation (excluding shares
owned by persons who are directors, officers and by certain employee stock
plans) in the same transaction in which the interested shareholder became
an interested shareholder or (iii) if on or subsequent to the date the
interested shareholder became an interested shareholder, the business
combination is approved by the board of directors and is authorized at a
meeting of stockholders by the affirmative vote of at least two-thirds of
the voting stock that is not owned by the interested shareholder. See
"Comparative Rights of Stockholders--Business Combinations."

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<PAGE>

HSOG and HSRC are currently not subject to the Business Combination
Statute. However, the HSOG and HSRC Certificates provide that any merger,
consolidation, sale of a substantial portion of assets, dissolution or
other reorganization or business combination requires the approval of the
holders of at least 66 2/3 percent of stock entitled to vote thereon. The
HSOG Board has proposed an amendment to the HSOG Certificate to eliminate
the 66 2/3 percent vote and, if such amendment is approved by the HSOG
stockholders, such transactions may be approved by the affirmative vote of
holders of at least a majority of the outstanding shares entitled to vote
on such issues so long as the Business Combination Statute is not
applicable to such a transaction. See "Comparative Rights of Stockholders-
-Business Combinations" and "Amendments to the Certificate of Incorporation
of HSOG."

Control Shares Provisions

Certain provisions of the HSOG Certificate limit the right of any
person or group of persons that acquires (except in limited circumstances
such as mergers) voting power with respect to one-fifth or more of certain
corporations' shares to vote such shares unless granted voting rights by
the holders of a majority of the votes entitled to be cast excluding
"interested shares." If the approval of voting power for the shares is
obtained, additional stockholder approvals are required when a stockholder
acquires the power to vote one-third or more and a majority or more of the
voting power of the corporation's shares. In the absence of such approval,
the additional shares acquired by the stockholder may not be voted until
the expiration of three years after the date of a vote of stockholders
failing to approve the voting power of such shares. The HSRC Certificate
contains provisions which are identical to the HSOG Certificate. See
"Comparative Rights of Stockholders--Control Shares."

Rights Agreement

Both HSOG and HSRC currently have in place identical Rights
Agreements. It is currently contemplated that HSOG's Rights Agreement will
continue after the Merger. Pursuant to the Rights Agreement dated May 29,
1991, as amended April 15, 1992 and February 10, 1995 (the "Rights
Agreement"), between HSOG and The Fourth National Bank of Tulsa (now
NationsBank, N.A.), in the event that beneficial control of 15% or more of
New HSOG Common Stock is acquired by a person or group, the stockholders of
HSOG, other than such person or group, will have the right to acquire, for
each share of New HSOG Common Stock which they hold, one additional share
of New HSOG Common Stock at a price equal to one-half of the then current
market price per share. In the event HSOG does not have a sufficient
number of authorized shares available to issue the shares necessary to
satisfy those stockholders exercising their rights under the Rights
Agreement, HSOG's Board of Directors is authorized to take other action,
including causing HSOG to issue stockholder rights to acquire other types
of securities in lieu of New HSOG Common Stock. See "Comparative Rights of
Stockholders--Rights Agreement."

Change in Control Severance Plan

HSOG has a plan in place which is designed to provide severance
payments in the event that all or substantially all of the assets or stock
of HSOG are acquired by another unrelated party and, if by reason of such
acquisition, an eligible employee's employment with HSOG terminates and no
reasonable alternative employment by the acquiring entity is offered. HSRC
has a substantially similar plan in place. The Merger will not trigger the
change in control provisions of the severance plan of HSOG or of HSRC. It
is currently contemplated that the HSOG severance plan will continue after
the Merger. See "Security Ownership of Certain Beneficial Owners;
Compensation and Other Information Concerning Officers and Directors--
Change in Control Severance Plans."

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<PAGE>

Employment Contract

Robert C. Simpson has an employment agreement to serve as Chief
Executive Officer, President and Treasurer of HSOG and HSRC which renews
automatically on an annual basis. The agreement provides that Mr. Simpson
is entitled to receive certain payments in the event of his termination or
constructive termination during or after a change in control of HSOG or
HSRC. The Merger will not trigger the change in control provisions of Mr.
Simpson's employment agreement. Subsequent to the Merger, HSOG will become
obligated for 100% of Mr. Simpson's salary and other benefits under the
employment agreement. See "Security Ownership of Certain Beneficial
Owners; Compensation and Other Information Concerning Officers and
Directors--Employment Contracts."

The provisions described above might be deemed to make HSOG less attractive
as a candidate for acquisition by another company than would otherwise be the
case in the absence of such provisions. As a result, HSOG stockholders may be
deprived of opportunities to sell some or all of their shares at prices that
represent a premium over prevailing market prices in a takeover context. The
provisions described above may also make it more difficult for HSOG stockholders
to replace the HSOG Board of Directors or management, even if the holders of a
majority of the New HSOG Common Stock should believe that such replacement is in
the interests of HSOG. As a result, such provisions may tend to perpetuate the
incumbent HSOG Board of Directors and management.

COMPARATIVE RIGHTS OF STOCKHOLDERS

GENERAL

As a result of the Merger, holders of HSRC Common Stock (other than holders
who exercise their appraisal rights) will become holders of New HSOG Common
Stock and holders of HSOG Common Stock (other than holders who exercise their
appraisal rights) will have their shares converted into shares of New HSOG
Common Stock. The rights of holders of HSOG Common Stock and HSRC Common Stock
are substantially the same because HSOG and HSRC are both Oklahoma corporations
and because the HSOG Certificate and the HSOG Bylaws contain provisions that are
virtually identical to those found in HSRC's Certificate of Incorporation as
currently in effect (the "HSRC Certificate") and HSRC's bylaws as currently in
effect (the "HSRC Bylaws"). The rights of all holders of New HSOG Common Stock
will be governed by the Amended HSOG Certificate and the HSOG Bylaws.

The following is a summary of the material rights of holders of New HSOG
Common Stock and the differences between those rights and the rights of holders
of HSRC Common Stock. Because both HSRC and HSOG are organized and exist under,
and are subject to, the corporate laws of Oklahoma and because the HSOG
Certificate and HSOG Bylaws are substantially similar to the HSRC Certificate
and HSRC Bylaws, there are relatively few differences between the rights of
holders of New HSOG Common Stock after consummation of the Merger and the rights
of holders of HSRC Common Stock. The HSOG Board has submitted several proposed
amendments to the HSOG Certificate for approval by the HSOG stockholders at the
HSOG Meeting. The proposed amendments, if approved by HSOG stockholders, will
only become effective if the Merger is consummated. Stockholders of HSOG and
HSRC should carefully review the discussion under "Amendments to the Certificate
of Incorporation of HSOG" in this Proxy Statement/Prospectus for complete
description of the proposed amendments and the effects thereof. For a more
complete description of the following rights and differences, reference is made
to the full text of the HSOG Certificate, the Amended HSOG Certificate, the HSOG
Bylaws, the HSRC Certificate and the HSRC Bylaws.

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<PAGE>

NUMBER OF DIRECTORS; REMOVAL OF DIRECTORS;
FILLING VACANCIES; QUALIFICATIONS

HSOG. The HSOG Certificate HSRC. The HSRC Certificate also
provides that there will be seven provides that there will be seven
directors of HSOG. Any change in directors. Any change in the number
the number of directors requires of directors requires the amendment
the amendment of the Certificate, of the Certificate, which requires a
which requires the approval of stockholder vote.
holders of at least 66 2/3 percent
of the outstanding voting stock.
The HSOG Board has submitted a
proposed amendment to the HSOG
Certificate which provides that
the HSOG Board shall consist of
no less than three nor more than
15 directors, the exact number
within such limits to be
determined by the HSOG Board.
See "Amendments to the
Certificate of Incorporation of
HSOG."

Stockholders of HSOG may remove Stockholders of HSRC have rights
a director or the entire HSOG identical to the rights of stockholders
Board, only with cause, at any of HSOG with respect to the removal of
time upon the affirmative vote of directors.
holders of a majority of all the
then outstanding shares of stock
entitled to vote generally in the
election of directors.

The HSOG Bylaws provide that The provisions of the HSRC Bylaws
any vacancies occurring in the relating to the filling of vacancies
HSOG Board or any directorship to in the Board of Directors are
be filled by reason of an increase substantially identical to the
in the number of directors may be provisions contained in the HSOG
filled by the affirmative vote of Bylaws.
a majority of the directors. A
director elected to fill a
vacancy created by the resignation
or termination of a director will
serve the remainder of the
unexpired term vacated.

The HSOG Bylaws require The HSRC Bylaws also require
directors to be stockholders. directors to be stockholders.

DURATION; PURPOSES

HSOG. The HSOG Certificate HSRC. The HSRC Certificate limits
limits the duration of HSOG's the duration of HSRC's existence to
existence to March 12, 2007. February 6, 2018.
The predecessor of the Oklahoma
General Corporation Act required
that corporations limit the
duration of their existence in
their certificates of
incorporation to no more than 50
years, subject to extension by
the approval of the stockholders.
The HSOG Board has submitted a
proposed amendment to the HSOG
Certificate which provides that
HSOG shall have perpetual
existence. See "Amendments to
the Certificate of Incorporation
of HSOG."

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<PAGE>

The HSOG Certificate contains The HSRC Certificate contains purpose
purpose provisions that are provisions that are basically identical to
basically limited to the oil, gas those of the HSOG Certificate.
and mineral business and related
activities. The HSOG Board has
submitted a proposed amendment to
the HSOG Certificate which
provides that the purpose of HSOG
is to engage in any lawful act or
activity for which corporations
may be organized under the
Oklahoma General Corporation Act.
Specification of corporate
purposes is not required by the
Oklahoma General Corporation Act.
See "Amendments to the
Certificate of Incorporation of
HSOG."

STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS

HSOG. The HSOG Certificate HSRC. The HSRC Certificate also
provides that action by allows stockholder action without a
stockholders of HSOG may be taken meeting only by the unanimous written
without a meeting of the consent of those entitled to vote.
stockholders only upon the
unanimous written consent of
those entitled to vote thereon.

The HSOG Bylaws provide that The HSRC Bylaws contain provisions
special stockholder meetings may identical to those of HSOG with
be called by the President, a respect to special stockholder
Vice President (in the meetings.
President's absence), the Board
of Directors or the holders of a
majority of the outstanding stock.

AMENDMENTS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS

HSOG. Amendments to the HSRC. The HSRC Certificate and HSRC
provisions of the HSOG Bylaws may be amended in the same manner
Certificate related to a change as provided in the HSOG Certificate and
in the number of directors and HSOG Bylaws, respectively.
the approval of certain
extraordinary business
transactions require the approval
of holders of at least 66 2/3
percent of stock entitled to vote
thereon. See "--Business
Combinations" below. The other
provisions of the HSOG
Certificate may be amended by
approval of the holders of a
majority of the outstanding stock
of HSOG entitled to vote thereon.
The HSOG Bylaws may be amended by
the holders of a majority of the
stock present in person or by
proxy at a meeting of
stockholders. The HSOG Board has
submitted a proposed amendment to
the HSOG Certificate which
eliminates the required approval
of the holders of at least 66 2/3
percent of the outstanding voting
stock for certain extraordinary
business transactions. If the
proposed amendment to the HSOG
Certificate is approved, the HSOG
Certificate may be

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<PAGE>

amended by the approval of the
holders of a majority of the
outstanding stock of HSOG entitled
to vote thereon. See "Amendments
to the Certificate of Incorporation
of HSOG."

"BLANK CHECK" PREFERRED STOCK

HSOG. The HSOG Certificate HSRC. The HSRC Certificate
authorizes the HSOG Board to issue, authorizes the HSRC Board to issue,
without stockholder approval, HSOG without stockholder approval, HSRC
Preferred Stock, par value $1.00 per Preferred Stock, par value $1.00 per
share, in one or more series, and to share, in one or more series, and to
establish the number of shares of establish the number of shares of
each such series and to fix the each such series, and to fix the
designations, powers, preferences designations, powers, preferences and
and rights of the shares of each rights of the shares of each series
such series and any qualifications, and any qualifications, limitations
limitations or restrictions thereof. or restrictions thereof.
See "Description of HSOG Capital
Stock-- HSOG Preferred Stock."

Under the Amended HSOG Certificate, Under the HSRC Certificate, there are
there are 2,000,000 authorized 200,000 authorized shares of HSRC
shares of HSOG Preferred Stock. Preferred Stock.

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<PAGE>

BUSINESS COMBINATIONS

HSOG. The HSOG Certificate provides HSRC. The HSRC Certificate contains
that any merger, consolidation, sale the same voting requirements as the
of a substantial portion of assets, HSOG Certificate with respect to the
dissolution or other reorganization approval by stockholders of any
or business combination requires the merger, consolidation, sale of a
approval of the holders of at least substantial portion of assets,
66 2/3 percent of stock entitled to dissolution or other reorganization
vote thereon. The HSOG Board has or business combination.
submitted a proposed amendment to
the HSOG Certificate which would not
require any "supermajority" vote of
the stockholders to approve a merger
or other form of business
combination. Consequently, such
transactions may be approved by the
affirmative vote of holders of at
least a majority of the outstanding
shares entitled to vote on such
issues unless the Business
Combination Statute (discussed
below) is applicable to such
transaction.

HSOG is not subject to the Business HSRC is not subject to the Business
Combination Statute, as such statute Combination Statute, as such statute
does not apply to corporations with does not apply to corporations with
fewer than 1,000 stockholders or fewer than 1,000 stockholders or
whose shares are not listed on a whose shares are not listed on a
national securities exchange or national securities exchange or
authorized for quotation on an authorized for quotation on an
inter-dealer quotation system of a inter-dealer quotation system of a
registered national securities registered national securities
association. Upon consummation of association.
the Merger, it is contemplated that
the New HSOG Common Stock will be
listed on the NASDAQ National
Market. In such case, HSOG and its
stockholders will become subject to
the provisions of the "Business
Combination Statute" of the Oklahoma
General Corporation Act. These
provisions may have the effect of
preventing, discouraging or delaying
a change in control of HSOG. See
"Description of HSOG Capital
Stock--Certain Provisions and
Arrangements That May Have an
Anti-Takeover Effect" for a
discussion of the provisions of the
Business Combination Statute.

Under certain circumstances, the Business Combination Statute, as described
above, may make it difficult for a person who would be an "interested
stockholder" to effect various business combinations with a corporation for a
three-year period. The provisions of the Business Combination Statute may
encourage companies interested in acquiring HSOG to negotiate in advance with
the HSOG Board, since the stockholder approval requirement would be avoided if a
majority of the directors then in office approve either the business combination
or the transaction that results in the stockholder becoming an interested
stockholder.

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<PAGE>

CONTROL SHARES

HSOG. The HSOG Certificate HSRC. The HSRC Certificate contains
contains certain control shares provisions which are identical to the
provisions that restrict, except control shares provisions of the HSOG
in limited circumstances such as Certificate.
mergers, the right to vote shares
acquired by a person or group
equaling or exceeding certain
threshold amounts. See
"Description of HSOG Capital
Stock--Certain Provisions and
Arrangements that May Have an
Anti-Takeover Effect" for a
discussion of the control shares
provisions.

APPRAISAL RIGHTS

HSOG AND HSRC. Under Section 1091 of the Oklahoma General Corporation Act
stockholders generally have the right to demand and receive payment for the fair
value of their stock in connection with certain mergers and consolidations;
provided, however, no such appraisal rights are available with respect to shares
of any class or series of stock listed on a national securities exchange or held
of record by more than 2,000 stockholders. HSOG and HSRC are Oklahoma
corporations and are subject to Section 1091. Neither HSOG Common Stock nor
HSRC Common Stock is traded on a national securities exchange or held of record
by more than 2,000 stockholders; thus, HSOG and HSRC stockholders currently have
appraisal rights in connection with certain mergers and consolidations and
specifically with respect to the Merger. After the Merger is consummated, HSOG
stockholders (including former HSRC stockholders) will continue to have
appraisal rights available to them with respect to the New HSOG Common Stock
until such time, if ever, that such shares are listed on a national securities
exchange or held of record by more than 2,000 stockholders. See "The Merger--
Appraisal Rights."

In addition, as discussed in greater detail under "Amendment to the
Certificate of Incorporation of HSOG" and "Proposed Amendment No. 8" thereunder,
the stockholders of HSOG may have the right to exercise dissenters' appraisal
rights under the "old" Oklahoma Business Corporation Act with respect to certain
actions (i) deemed to have an adverse affect on a class of stockholders, (ii)
reducing the number of directors or (iii) changing or altering the corporate
purpose. The Oklahoma General Corporation Act does not specifically provide for
appraisal rights for such actions. The Board of Directors has submitted a
proposed amendment to the HSOG Certificate that HSOG be governed by the Oklahoma
General Corporation Act, which, if adopted, would eliminate any possible
appraisal rights existing under the old Oklahoma Business Corporation Act. See
"Amendments to the Certificate of Incorporation of HSOG."

LIMITATION OF LIABILITY OF DIRECTORS

HSOG. The HSOG Certificate does HSRC. The HSRC Certificate does not
not contain a limitation on contain a limitation on director
director liability for monetary liability for monetary damages for a
damages for a breach of fiduciary breach of fiduciary duty as permitted
duty. The HSOG Board has by Oklahoma law.
submitted a proposed amendment to
the HSOG Certificate which
provides, as permitted by
Oklahoma law, that a director
will not be personally liable to
HSOG or its stockholders for
monetary damages for breach of
fiduciary duty as a director,
except for liability (a) for any
breach of

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<PAGE>

the director's duty of loyalty to
HSOG or its stockholders, (b) for
acts or omissions not in good faith
or that involve intentional
misconduct or a knowing violation
of law, (c) under Section 1053 of
the Oklahoma General Corporation
Act (which concerns unlawful
payments of dividends, stock
purchases or redemptions) or (d)
for any transaction from which the
director derived an improper
personal benefit. See
"Amendments to the Certificate of
Incorporation of HSOG."

INDEMNIFICATION; ADVANCEMENT OF EXPENSES

HSOG. The HSOG Bylaws require HSRC. The HSRC Bylaws contain
HSOG to indemnify officers, provisions relating to the indemnification
directors, employees and agents of directors, officers, employees and
for actions taken in good faith agents and the advancement of expenses
and in a manner they reasonably that are substantially similar to the
believed to be in, or not opposed provisions in the HSOG Bylaws.
to, the best interests of the
corporation, and with respect to
any criminal action, which they
had no reasonable cause to
believe was unlawful. The HSOG
Bylaws provide that HSOG may
advance expenses of defense (upon
receipt of a written undertaking
to reimburse the corporation if
indemnification is not appropriate)
and must reimburse a successful
defendant for expenses, including
attorneys' fees, actually and
reasonably incurred. The HSOG
Bylaws permit HSOG to purchase
and maintain liability insurance
for its directors and officers.
The HSOG Bylaws provide that
indemnification may not be made
for any claim, issue or matter as
to which a person has been
adjudged by a court of competent
jurisdiction, after exhaustion of
all appeals therefrom, to be
liable to HSOG, unless and only
to the extent such court
determines that the person is
entitled to indemnity for such
expenses, despite the adjudication
of liability, as the court deems
proper. The HSOG Bylaws provide
that the indemnification rights
are not exclusive of any other
right to which a person seeking
indemnification may be entitled
under any law, bylaw, agreement,
vote of stockholders or
disinterested directors or
otherwise. The HSOG Board has
submitted a proposed amendment to
the HSOG Certificate which
provides that HSOG may, as
determined by the HSOG Board,
indemnify and advance expenses to
a director, officer, employee or
agent to the maximum extent
permitted by Section 1031 of the
Oklahoma General

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<PAGE>

Corporation Act (discussed under
"Amendments to the Certificate
of Incorporation of HSOG"). The
provisions of Section 1031 are
substantially similar to the
provisions currently contained in
the HSOG Bylaws. See "Amendments
to the Certificate of
Incorporation of HSOG."

RIGHTS AGREEMENT

HSOG AND HSRC. Both HSOG and HSRC currently have in place an identical
Rights Agreement It is currently contemplated that HSOG's Rights Agreement will
continue after the Merger. Accordingly, there will be no change to the rights
of the stockholders of HSOG and HSRC under the respective Rights Agreement after
the Merger. See "Description of HSOG Capital Stock--Certain Provisions and
Arrangements That May Have an Anti-Takeover Effect" for a description of the
HSOG Rights Agreement.

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

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

The following discussion should be read in conjunction with HSOG's
financial statements and notes thereto included elsewhere herein.

Results of Operations

Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.

Net income for the first six months increased $432,002 from $509,661 in
1996 to $941,663 in 1997. The principal reasons for this increase are as
follows:

Oil sales decreased 1% ($26,746) as a result of a decrease in production
volumes of 7,518 barrels, partially offset by an increase in the average price
of oil from $19.00 per barrel in 1996 to $20.04 per barrel in 1997. The
decrease in production volumes was primarily a result of property dispositions
during 1996 and early 1997.

Gas sales increased $266,197 (24%) due to an increase in the average gas
price per mcf from $1.92 in 1996 to $2.43 in 1997, partially offset by a
decrease in production volumes from 584,244 Mcf in 1996 to 571,364 Mcf in 1997.

Lease rentals and bonuses increased $33,363 due to higher leasing activity
with respect to HSOG's mineral interests in 1997 than in 1996.

Interest income increased $3,762 from 1996 primarily as a result of greater
excess funds available for investment.

Gain on sales of assets increased $96,843 in 1997 following HSOG's sale of
its interest in the N.E. Alden Field. There were no comparable sales in 1996.

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<PAGE>

Income from equity affiliates increased $50,095 in 1997. HSOG's principal
equity investee, HSRC, reported net income of $1,091,138 in 1997 and $764,270 in
the same period of 1996. In addition, HSOG's ownership in HSRC increased from
17.1% to 19.3% in November 1996.

Other income was $12,650 higher due to additional "administrative overhead"
being collected from joint interest owners on HSOG operated wells and $9,500
received from the purchaser of the N.E. Alden field properties for HSOG's
operation of the properties while the purchaser satisfied certain title
requirements.

Lease operating expenses decreased $258,349 (25%) from 1996. This decrease
is principally attributable to environmental remediation expenses in 1996
associated with a waterflood property in which HSOG has a 9% working interest,
coupled with an insurance reimbursement in 1997 of certain of such costs of
approximately $145,250

Dry hole costs increased $228,996 in 1997 due to a greater incidence of dry
holes. In 1996, there were 3 dry holes (.16 net) drilled at an average gross
cost of $288,200 per well; in 1997, there were 6 dry holes (.61 net) drilled at
an average gross cost of $451,000 per well.

Condemned and abandoned property expense increased $46,110. 1996 expense
was a net credit of $5,075, primarily the result of salvage credits of $12,488
received on a property abandoned during the first quarter. 1997 expense was
also higher due to the abandonment of acreage costs associated with six dry
holes in 1997, compared to two in 1996.

General and administrative expense increased $70,085 (15%). This increase
is primarily associated with the addition of certain full-time and contract
employees in late 1996 and early 1997. Such personnel were added in
anticipation of an increase in HSOG's exploration activities.

Interest expense decreased $92,366 in 1997, reflecting HSOG's lower average
borrowings.

Year Ended December 31,1996 Compared to Year Ended December 31, 1995.

Net income for 1996 increased 236% from $428,185 in 1995 to $1,437,674 in
1996. The factors contributing to this increase are as follows:

Oil sales increased $1,060,434 (29%) primarily as a result of an increase
in the average sales price per barrel from $16.17 in 1995 to $20.19 in 1996,
coupled with an increase in production of 7,447 barrels. The increase in
production was contributed by producing properties HSOG acquired in 1995 and
1996, along with new drilling in 1996.

Gas sales increased 36% ($631,085) as a result of an increase in the
average sales price from $1.41 per Mcf in 1995 to $2.00 per Mcf in 1996,
partially offset by a 4% decrease in production.

Interest income increased $7,004 primarily as a result of more excess funds
available for investment.

Gains on sales of assets increased 155% ($102,695) in 1996. HSOG had two
major property sales in 1996. In November, HSOG sold its interest in a
Montgomery County, Texas field at a gain of $140,730. In December, HSOG sold
its interest in 55 small, marginal properties at a small gain.

Income from equity affiliates increased by $165,455. In 1996, HSOG's
principal equity investee, HSRC, reported net income of $1,844,161 compared to
$620,835 in 1995.

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<PAGE>

Lease operating expenses increased $850,865 (54%) due primarily to non-
recurring costs incurred in the settlement of claims by surface owners and the
remediation of saltwater contamination on a property in which HSOG owns a 9%
working interest. Excluding this property, lease operating expenses increased
$281,889. This increase was associated with properties HSOG acquired during 1995
and 1996, for which there are not comparable period-costs in the two years. In
December 1996 and March 1997, HSOG sold several marginal properties that
incurred high operating costs. The properties sold incurred lease operating
expenses in 1996 of $229,140.

Production taxes increased $194,674 as a result of the higher oil and gas
sales described above.

Dry hole costs decreased 40% ($71,825) in 1996. In 1996 there were 5 dry
holes drilled (.36 net) at an average cost of $292,725 per net well; in 1995
there were 5 dry holes (.63 net) drilled at an average cost of $280,400 per net
well.

Condemned and abandoned property expense decreased $31,225 (38%). 1996
expense includes salvage credits of $12,488 received on a property abandoned
during the first quarter. 1995 expense was unusually high due to the non-
recurring abandonment of acreage costs associated with three dry holes, coupled
with the expiration of leases on certain non-producing acreage owned by HSOG.

General and administrative expense decreased $272,345 (26%) in 1996.
General and administrative expense incurred in 1995 included approximately
$139,600 related to HSOG's unsuccessful proposed merger with HSRC. The 1996
expense includes a credit in the amount of $82,500, representing the
reimbursement of legal expenses from HSOG's Directors' and Officers' liability
insurance carrier. This amount was received in settlement of a suit HSOG and
HSRC brought against the carrier for recovery of certain costs incurred by HSOG
in the successful defense of HSOG's directors in a lawsuit commenced in 1991.

HSOG's effective tax rate varies significantly from year to year, due
principally to the significant effects of statutory depletion which is largely
independent of pre-tax income. In addition, a portion of net income each year
is attributable to HSOG's equity income from HSRC, for which there is no
corresponding income tax provision required. For additional information
attributable to each of these factors see Note 4 to the Consolidated Financial
Statements on page F-23.

FINANCIAL CONDITION AND LIQUIDITY

HSOG's operating activities have traditionally been self-financed through
internally generated cash flows. The principal uses of cash flows have been to
fund HSOG's exploration and production activities and for the payment of
dividends to stockholders. The use of borrowed funds has generally been limited
to the acquisition of producing oil and gas properties where future revenues
from such purchases are expected to fund the debt.

In 1996, HSOG spent $481,000 for exploration and development activities and
$217,000 on acquisitions. HSOG has budgeted $1.0 million for exploration and
development activities in 1997. HSOG has expended approximately $496,000 for
such activities through June 30, 1997, and has current commitments of
approximately $1.2 million for the remainder of 1997 and into 1998.

HSOG's working capital deficit at June 30, 1997, was approximately
$930,000. Since the beginning of 1997, product prices for oil and natural gas
decreased approximately 20% and 45%, respectively. Despite these decreases in
product prices, HSOG expects to finance its working capital deficit and budgeted
1997 exploration and development activities from internally generated cash
flows. In addition, HSOG maintains a line of credit described below which
extends into 1998.

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<PAGE>

HSOG's outstanding bank note is due May 1, 1999. Principal payments under
the note are $114,110 per month, plus interest. The outstanding indebtedness
accrues interest at bank prime less one-half of one percent and is secured by
certain of HSOG's producing properties. In addition, HSOG has a revolving line
of credit with a bank in the amount of $500,000 which expires May 1, 1998.
Borrowings under the line of credit will bear interest at bank prime less one
percent, payable monthly. At June 30, 1997, there were no borrowings under the
line of credit, however, HSOG has issued letters of credit in the amount of
$60,000 which is guaranteed by this line. HSOG pays a commitment fee of one-half
of one percent ( 1/2%) per annum on the unused portion of the line.

In 1996, HSOG aggressively applied cash flows to the retirement of its bank
loans. Payments of principal on the loans were $1,825,783, which was $456,463
over the required amount. HSOG has continued this policy in 1997 by paying
$912,880 in excess of the required monthly payments through June 30, 1997.
Based on the outstanding balance at June 30, 1997, and assuming no additional
payments in excess of the required monthly payments, the bank loan will be fully
retired on April 30, 1999.

In connection with HSOG's bank loans and credit facility, there are certain
covenants which require, among other things, that HSOG maintain (i) a ratio of
cash flow (defined in the loan agreement to be income before income taxes plus
all depreciation, depletion and amortization and condemned and abandoned
property expense) to current maturities of long-term debt of more than 1.4 to
1.0, (ii) a ratio of total liabilities to stockholders' equity of not more than
1.4 to 1.0, and (iii) a minimum net worth of not less than $6,000,000. In
addition, HSOG's annual cash dividends are limited to the lesser of $365,000 or
net income. No waiver by the bank will be required under the terms of HSOG's
bank loan in order to consummate the Merger.

In 1996, HSOG's average direct operating costs per barrel of oil equivalent
increased 51% to $9.31. This increase is primarily due to non-recurring costs
incurred in the settlement of claims by surface owners and the remediation of
saltwater contamination on a property in which HSOG owns a 9% working interest.
Excluding this property, the average direct operating costs per barrel of oil
equivalent for HSOG was $7.19. In December 1996 and March 1997, HSOG sold
several marginal properties that incurred high operating costs; also excluding
these properties, direct operating costs per barrel of oil equivalent would have
been $6.69.

Average direct operating costs per barrel of oil equivalent are dependent
upon several factors, including principally the nature of a company's
operations. For example, gas properties are generally more economical to
operate than oil properties. Likewise, oil wells in a form of primary recovery
(flowing or pumping) are more economical to operate than oil wells in a form of
secondary recovery, such as waterfloods. HSOG has large interests in three
waterflood or water-drive operations. These properties contributed
approximately 46% of the total working interest barrels of oil equivalent
production in 1996, but were responsible for approximately 74% of the direct
operating costs. Excluding these waterflood properties, HSOG's direct operating
costs per barrel of oil equivalent in 1996 was $4.52.

HSOG believes it will fully realize its deferred tax assets and,
accordingly, no valuation allowances have been provided. In management's
opinion, the deferred tax assets will be realized as reductions in future income
taxes payable or by utilizing available tax planning strategies. Uncertainties
that may affect the ultimate realization of these assets include future product
prices, costs and tax rates. Therefore, HSOG will periodically review these
factors and determine whether a valuation allowance has become necessary.

Upon consummation of the Merger, it is likely that HSOG's effective tax
rate will increase as a result of the anticipated increase in income resulting
from the combined operations of HSOG and

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HSRC and the loss of HSRC's statutory depletion deduction for federal income tax
purposes. The exact annual income tax effect of the lost depletion deduction is
difficult to quantify due to the complexities of the Code related to statutory
depletion and the interaction of this deduction and other provisions of the
Code, such as the alternative minimum tax. See "Risk Factors--Effects of the
Merger" and "The Merger--Depletion Deductions."

HSOG does not engage, nor does it expect to engage, in any hedging or other
similar transactions which are intended to manage risks relating to movements in
oil and natural gas prices.

Inflation

In recent years inflation has not had a significant impact on HSOG's
operations or financial conditions. The general economic pressures limiting oil
and gas prices in recent years have generally been accompanied by corresponding
downward pressure on costs to develop and operate oil and gas properties as well
as the costs of drilling and completing wells. The impact of inflation on HSOG
in the future will depend on the relative increases, if any, in the selling
price of oil and gas and in HSOG's operating, development and drilling costs.

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

The following discussion should be read in conjunction with HSRC's
financial statements and notes thereto included elsewhere herein.

Results of Operations

Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996

Net income for the first six months increased $326,868 from $764,270 in
1996 to $1,091,138 in 1997. The principal reasons for this increase are as
follows:

Oil sales decreased $3,998 as a result of a decrease in production volumes
of 6,859 barrels, partially offset by an increase in the average price of oil
from $18.96 per barrel in 1996 to $20.06 per barrel in 1997. The decrease in
production volumes was primarily a result of property dispositions during 1996
and early 1997.

Gas sales increased $332,422 (28%) due to an increase in the average gas
price per Mcf from $1.94 in 1996 to $2.44 in 1997, coupled with an increase in
production volumes from 614,133 Mcf in 1996 to 624,695 Mcf in 1997.

Lease rentals and bonuses increased $38,026 due to higher leasing activity
in 1997 than in 1996.

Interest income decreased $11,632 from 1996, which included a $11,400
discount related to the prepayment of certain production taxes in the state of
Montana.

Gain on sales of assets increased $96,940 in 1997 following HSRC's sale of
its interest in the N.E. Alden Field. There were no comparable sales in 1996.

Income from equity affiliates increased $136,426 in 1997. HSRC's principal
equity investee, HSOG, reported net income of $941,663 in 1997 and $509,661 in
the same period of 1996. In addition, HSRC's ownership in HSOG increased from
31.7% to 33.9% in November 1996.

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Lease operating expenses decreased $258,137 (25%) from 1996. This decrease
is principally attributable to environmental remediation expenses in 1996
associated with a waterflood property in which HSRC has a 9% working interest,
coupled with an insurance reimbursement in 1997 of certain of such costs of
approximately $145,250

Dry hole costs increased $324,327 in 1997 due to a greater incidence of dry
holes. In 1996 there were 3 dry holes (.18 net) drilled at an average gross
cost of $257,900 per well; in 1997 there were 6 dry holes (.86 net) drilled at
an average gross cost of $431,100 per well.

Condemned and abandoned property expense increased $51,596. 1996 expense
was a net credit of $5,081, primarily the result of salvage credits of $12,488
received on a property abandoned during the first quarter. 1997 expense was
also higher due to the abandonment of acreage costs associated with six dry
holes in 1997, compared to two in 1996.

General and administrative expense increased $71,303 (15%). This increase
is primarily associated with the addition of certain full-time and contract
employees in late 1996 and early 1997. Such personnel were added in
anticipation of an increase in HSRC's exploration activities.

Interest expense decreased $99,611 in 1997, reflecting HSRC's lower average
borrowings.

Year ended December 31, 1996 Compared to Year Ended December 31, 1995

Net income for 1996 increased 197% from $620,835 in 1995 to $1,844,161 in
1996. The factors contributing to this increase are as follows:

Oil sales increased $1,117,808 (30%) primarily as a result of an increase
in the average sales price per barrel from $16.15 in 1995 to $20.16 in 1996,
coupled with an increase in production of 9,799 barrels. The increase in
production was contributed by producing properties HSOG acquired in 1995 and
1996, along with new drilling in 1996.

Gas sales increased 37% ($678,099) as a result of an increase in the
average sales price from $1.41 per Mcf in 1995 to $2.02 per Mcf in 1996,
partially offset by a 4% decrease in production.

Interest income increased $12,488 primarily as a result of more excess
funds available for investment.

Gains on sales of assets increased 152% ($101,628) in 1996. HSRC had two
major property sales in 1996. In November, HSRC sold its interest in a
Montgomery County, Texas field at a gain of $140,730. In December, HSRC sold
its interest in 60 small, marginal properties at a small gain.

Income from equity affiliates increased by $270,371. In 1996, HSRC's
principal equity investee, HSOG, reported net income of $1,437,674 compared to
$428,185 in 1995.

Lease operating expenses increased $851,457 (53%) due primarily to non-
recurring costs incurred in the settlement of claims by surface owners and the
remediation of saltwater contamination on a property in which HSRC owns a 9%
working interest. Excluding this property, lease operating expenses increased
$282,426. This increase was associated with properties HSRC acquired during 1995
and 1996, for which there are not comparable period-costs in the two years. In
December 1996 and March 1997, HSRC sold several marginal properties that
incurred high operating costs. The properties sold incurred lease operating
expenses in 1996 of $233,039.

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<PAGE>

Production taxes increased 31% ($149,602) as a result of the higher oil and
gas sales described above.

Dry hole costs decreased 25% ($44,686) in 1996. In 1996 there were 5 dry
holes drilled (.45 net) at an average cost of $293,300 per net well; in 1995
there were 5 dry holes (.63 net) drilled at an average cost of $280,400 per net
well.

Condemned and abandoned property expense decreased $26,775 (32%). 1996
expense includes salvage credits of $12,488 received on a property abandoned
during the first quarter. 1995 expense was unusually high due to the non-
recurring abandonment of acreage costs associated with three dry holes, coupled
with the expiration of leases on certain non-producing acreage owned by HSRC.

General and administrative expense decreased $275,566 (26%) in 1996.
General and administrative expense incurred in 1995 included approximately
$139,600 related to HSRC's unsuccessful proposed merger into HSOG. 1996 expense
includes a credit in the amount of $82,500, representing the reimbursement of
legal expenses from HSRC's Directors' and Officers' liability insurance carrier.
This amount was received in settlement of a suit HSRC and HSOG brought against
the carrier for recovery of certain costs incurred by HSRC in the successful
defense of HSRC's directors in a lawsuit commenced in 1991.

Interest expense decreased 21% ($66,222) due to the decreases in HSRC's
borrowings in 1996.

HSRC's effective tax rate varies significantly from year to year, due
principally to the significant effects of statutory depletion which is largely
independent of pre-tax income. In addition, a portion of net income each year
is attributable to HSRC's equity income from HSOG, for which there is no
corresponding income tax provision required. For additional information
attributable to each of the factors see Note 4 to the Consolidated Financial
Statements on page F-40.

Financial Condition and Liquidity

HSRC's operating activities have traditionally been self-financed through
internally generated cash flows. The principal uses of cash flows have been to
fund HSRC's exploration and production activities and for the payment of
dividends to stockholders. The use of borrowed funds has generally been limited
to the acquisition of producing oil and gas properties where future revenues
from such purchases are expected to fund the debt.

In 1996, HSRC spent $625,000 for exploration and development activities and
$327,000 on acquisitions. HSRC has budgeted $1.7 million for exploration and
development activities in 1997. HSRC has expended approximately $816,000 for
such activities through June 30, 1997, and has commitments of approximately $1.5
million for the remainder of 1997 and into 1998.

HSRC's working capital at June 30, 1997, was approximately $794,000
compared to a working capital deficit of approximately $218,000 at December 31,
1996. During 1996 and the first two quarters of 1997, HSRC aggressively applied
cash flows to the retirement of its bank loans. As a result, HSRC fully retired
its outstanding bank loans on May 31, 1997.

HSRC maintains a revolving line of credit with a bank in the amount of
$700,000 which expires May 1, 1998. Borrowings under the line of credit bear
interest at bank prime less one percent, payable monthly. There were no
outstanding borrowings under the line of credit at June 30, 1997, however,

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HSRC has issued a letter of credit in the amount of $60,000 which is guaranteed
by this line. HSRC pays a commitment fee of one-half of one percent ( 1/2%) per
annum on the unused portion of the line.

Product prices for oil and natural gas have decreased approximately 20% and
45%, respectively, since the beginning of 1997. Despite the price reductions,
HSRC expects to finance its anticipated 1997 operations and budgeted exploration
and development activities from cash flows from operations.

In connection with HSRC's credit facility, there are certain covenants
which require, among other things, that HSRC maintain (i) a ratio of cash flow
(defined in the loan agreement to be income before income taxes plus all
depreciation, depletion and amortization and condemned and abandoned property
expense) to current maturities of long-term debt of more than 1.5 to 1.0, (ii) a
ratio of total liabilities to stockholders' equity of not more than 1.0 to 1.0,
and (iii) a minimum net worth of not less than $9,000,000. In addition, HSRC's
annual cash dividends are limited to the lesser of $425,000 or net income.

In 1996, HSRC's average direct operating costs per barrel of oil equivalent
increased 47% to $9.03. This increase is primarily due to non-recurring costs
incurred in the settlement of claims by surface owners and the remediation of
saltwater contamination on a property in which HSRC owns a 9% working interest.
Excluding this property, the average direct operating costs per barrel of oil
equivalent for HSRC was $6.93. In December 1996 and March 1997, HSRC sold, at a
gain, several marginal properties that incurred high operating costs; also
excluding these properties, direct operating costs per barrel of oil equivalent
would have been $6.42.

Average direct operating costs per barrel of oil equivalent are dependent
upon several factors, including principally the nature of a company's
operations. For example, gas properties are generally more economical to
operate than oil properties. Likewise, oil wells in a form of primary recovery
(flowing or pumping) are more economical to operate than oil wells in a form of
secondary recovery, such as waterfloods. HSRC has large interests in three
waterflood or water-drive operations. These properties contributed
approximately 46% of the total working interest barrels of oil equivalent
production in 1996, but were responsible for approximately 74% of the direct
operating costs. Excluding these waterflood properties, HSRC's direct operating
costs per barrel of oil equivalent in 1996 was $4.52.

HSRC believes it will fully realize its deferred tax assets and,
accordingly, no valuation allowances have been provided. In management's
opinion, the deferred tax assets will be realized as reductions in future
income taxes payable or by utilizing available tax planning strategies.
Uncertainties that may affect the ultimate realization of these assets include
future product prices, costs and tax rates. Therefore, HSRC will periodically
review these factors and determine whether a valuation allowance has become
necessary.

HSRC does not engage, nor does it expect to engage, in any hedging or other
similar transactions which are intended to manage risks relating to movements in
oil and natural gas prices.

Inflation

In recent years inflation has not had a significant impact on HSRC's
operations or financial conditions. The general economic pressures limiting oil
and gas prices in recent years have generally been accompanied by corresponding
downward pressure on costs to develop and operate oil and gas properties as well
as the costs of drilling and completing wells. The impact of inflation on HSRC
in the future will depend on the relative increases, if any, in the selling
price of oil and gas and in HSRC's operating, development and drilling costs.

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DESCRIPTION OF THE BUSINESS OF THE HOME-STAKE COMPANIES

GENERAL

HSOG and HSRC (referred to together herein as "The Home-Stake Companies")
are actively engaged in the acquisition, exploration, development and production
of oil and gas properties. Their principal geographic operating areas lie
within the states of Oklahoma, Montana, Wyoming, Louisiana, Texas and New
Mexico.

HSOG and HSRC were incorporated in the State of Oklahoma in 1917 and 1929,
respectively. Since its incorporation, HSRC has been under common management
with HSOG. The Home-Stake Companies' principal business activity from the dates
of their incorporation through the early 1950's was the acquisition and leasing
of oil and gas mineral interests. Accordingly, The Home-Stake Companies'
revenues were primarily from their royalty interests in oil and gas production
and from the mineral interests in properties leased to others. Beginning in the
1950's, The Home-Stake Companies began to actively participate as working
interest partners primarily in wells being drilled by other industry partners.
The Home-Stake Companies also originated and participated in the drilling of a
few of their own prospects and discovered several significant oil fields in
south central Kansas.

Since the latter part of the 1950's, HSOG has participated in the
acquisition and drilling of oil and gas properties jointly with HSRC. Since
that time, The Home-Stake Companies have operated in most respects as a single
entity. The Home-Stake Companies jointly participate in the acquisition of
mineral and leasehold interests and in exploration and development activities
performed on jointly owned properties. Each company generally owns equal
interests in the oil and gas properties, however such interests do vary.
Effective January 1, 1996, the participation arrangement between the companies
was changed such that HSOG's participation interest in property acquisitions,
new drilling ventures and other investments is 40% (it was previously 50%) and
HSRC's participation interest therein is 60%. Only HSRC serves as operator of
certain producing properties owned by The Home-Stake Companies (although,
because general and administrative costs incurred are shared equally by HSOG and
HSRC, HSOG is allocated 50% of the operating fee revenues received by HSRC).
HSRC currently operates 52 producing wells.

In the mid-1970's, The Home-Stake Companies revised their business
strategies to pursue programs to increase their revenues generated from the
ownership of working interests in oil and gas properties relative to their
revenues generated from royalty interests (resulting from the ownership and
leasing of oil and gas mineral interests). The Home-Stake Companies increased
their relative investments in drilling ventures developed and sold by other
industry partners and in the oil and gas properties that they acquired. In
1977, HSOG and HSRC received approximately 70% and 75% of their respective
revenues from royalty interests; whereas, in 1996, approximately 26% and 27% of
their respective revenues were from royalty interests.

At December 31, 1996, HSOG had estimated proved reserves of 8,501,078 Mcf
of natural gas and 2,383,955 barrels of oil, and HSRC had estimated proved
reserves of 8,835,929 Mcf of natural gas and 2,432,711 barrels of oil. Natural
gas reserves constituted approximately 37% of HSOG's reserves and 38% of HSRC's
reserves based on an "oil equivalent" basis (converting each six Mcf of natural
gas to a barrel of oil, representing the estimated relative energy content of
oil and natural gas).

PARTNERSHIPS

The Home-Stake Companies serve as general partners of H-S Royalty, Ltd., an
Oklahoma limited partnership (the "Partnership"), formed in 1982. The
Partnership was formed by The Home-Stake

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<PAGE>

Companies for the purpose of distributing to their stockholders a 3/16th royalty
interest in certain jointly owned mineral interests in properties, which were
nonproducing at the time of the formation of the Partnership, located in ten
states. In addition, the Partnership was formed to allow the stockholders of The
Home-Stake Companies to realize a portion of the direct economic benefits that
result from the commercial production and sale of oil and gas, as well as the
maximization of certain income tax benefits attributable to oil and gas
producing activities. In connection with the administration of the Partnership,
each of The Home-Stake Companies receives a monthly administrative management
fee of $250. If the Merger is consummated, HSOG will serve as sole general
partner and receive a monthly administrative management fee of $500.

COMPETITION

The business of acquiring and developing desirable oil and gas properties
is highly competitive. In seeking to obtain desirable producing properties, new
leases and exploration prospects, The Home-Stake Companies face competition from
both major and independent oil and gas companies, as well as from numerous
individuals and income and drilling programs. Many of these competitors have
financial and other resources substantially in excess of those available to The
Home-Stake Companies.

There is also extensive competition in locating markets for gas produced by
The Home-Stake Companies. Increases in worldwide energy production capability
and decreases in energy consumption as a result of conservation efforts have
brought about substantial surpluses in energy supplies in recent years. This,
in turn, has resulted in substantial competition for markets historically served
by domestic natural gas sources both with alternate sources of energy, such as
residual fuel oil, and among domestic gas suppliers. As a result, there have
been reductions in oil prices, widespread curtailment of gas productions and
delays in producing and marketing gas after it is discovered. Changes in
government regulations relating to the production, transportation and marketing
of natural gas have also resulted in significant changes in the historical
marketing patterns of the industry. Generally, these changes have resulted in
the abandonment by many pipelines of long-term contracts for the purchase of
natural gas, the development by gas producers of their own marketing programs to
take advantage of new regulations requiring pipelines to transport gas for
regulated fees, and an increasing tendency to rely on short-term sales contracts
priced at spot market prices.

In light of these developments, many producers, including The Home-Stake
Companies, have accepted oil prices that are lower than those previously
prevailing in order to sell their production. Also, gas prices, which were once
effectively determined by government regulations, are now influenced largely by
the effects of competition. Competitors in this market include other producers,
gas pipelines and their affiliated marketing companies, independent marketers,
and providers of alternate energy supplies, such as residual fuel oil.

MARKETING

The Home-Stake Companies' gas production from properties in which they own
working interests is sold primarily on the spot market with a variety of
purchasers, including intrastate and interstate pipeline companies, their
marketing affiliates, independent marketing companies and other companies who
have the ability to move gas under firm transportation agreements. Gas produced
from properties in which The Home-Stake Companies own royalty interests is
marketed and sold by owners of the leasehold interests in such properties.

Substantially all of The Home-Stake Companies' crude oil and condensate
production is sold at posted prices under short-term contracts, as is customary
in the industry.

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SEASONALITY

The results of operations of The Home-Stake Companies are subject to
seasonal fluctuations in the price for natural gas. Natural gas prices have
been generally higher in the fourth and first quarters. Due to these seasonal
fluctuations, results of operations for individual quarterly periods may not be
indicative of results which may be realized on an annual basis.

REGULATION

General

The oil and gas industry is extensively regulated by federal, state and
local authorities. Legislation affecting the oil and gas industry is under
constant review for amendment or expansion. Numerous departments and agencies,
both federal and state, have issued rules and regulations binding on the oil and
gas industry and its individual members, some of which carry substantial
penalties for the failure to comply. The regulatory burden on the oil and gas
industry increases its cost of doing business and, consequently, affects its
profitability. Inasmuch as such laws and regulations are frequently amended or
reinterpreted, The Home-Stake Companies are unable to predict the future cost or
impact of complying with such regulations.

Exploration and Production

Exploration and production operations of The Home-Stake Companies are
subject to various types of regulation at the federal, state and local levels.
Such regulation includes requiring permits for the drilling of wells,
maintaining bonding requirements in order to drill or operate wells, and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled and the
plugging and abandoning of wells. The Home-Stake Companies' operations are also
subject to various conservation matters. These include the regulation of the
size of drilling and spacing units or proration units and the density of wells
which may be drilled and the unitization or pooling of oil and gas properties.
In this regard, some states allow the forced pooling or integration of tracts to
facilitate exploration while other states rely on voluntary pooling of lands and
leases. State conservation laws also establish maximum rates of production from
oil and gas wells, generally prohibit the venting or flaring of gas and impose
certain requirements regarding the ratability of production. In addition, Texas
and Oklahoma have adopted laws and regulations placing limits on gas production
that attempt to match production with market demand. The effect of these laws
and regulations is to limit the amounts of oil and gas The Home-Stake Companies
can produce from their wells, and to limit the number of wells or the locations
at which The Home-Stake Companies can drill.

Sales and Transportation

Federal legislation and regulatory controls have historically affected the
price of the gas produced by The Home-Stake Companies and the manner in which
such production is marketed. However, due to the deregulation provisions of the
Natural Gas Policy Act of 1978, the Natural Gas Wellhead Decontrol Act of 1989
and regulations promulgated by the Federal Energy Regulatory Commission
("FERC"), the price of virtually all gas produced by producers not affiliated
with interstate pipelines has been deregulated. As a result, most of The Home-
Stake Companies' gas production is no longer subject to price regulation. Gas
which has been removed from price regulation is subject only to that price
contractually agreed upon between the producer and purchaser. Market determined
prices for deregulated natural gas fluctuate in response to market pressures.

The FERC regulates interstate natural gas transportation rates and service
conditions, which affects the marketing of gas produced by The Home-Stake
Companies, as well as the revenues received from sales of such production.
Since the mid-1980s, the FERC has issued a series of orders, culminating in
Order Nos. 636, 636-A and 636-B ("Order 636"), that have significantly altered
the

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marketing and transportation of gas. Order 636 mandates a fundamental
restructuring of interstate pipelines sales and transportation service,
including the unbundling by interstate pipelines of the sales, transportation,
storage and other components of the city-gate sales services such pipelines
previously performed. One of the FERC's purposes in issuing the orders is to
increase competition within all phases of the gas industry. Order 636 and
subsequent FERC orders on rehearing have been appealed and are pending judicial
review. Because the orders may be modified as a result of the appeals, it is
difficult to predict the ultimate impact of the orders on The Home-Stake
Companies and their gas marketing efforts. Generally, Order 636 has eliminated
or substantially reduced the interstate pipelines' traditional role as
wholesalers of natural gas and has substantially increased competition and
volatility in natural gas markets. While significant regulatory uncertainty
remains, Order 636 may ultimately enhance the ability of producers such as The
Home-Stake Companies to market and transport their gas directly to end-users and
local distribution companies, although it may also subject producers to greater
competition and the more restrictive pipeline imbalance tolerances and greater
associated penalties for violation of such tolerances.

Sales of oil and natural gas liquids by The Home-Stake Companies are not
regulated and are made at market prices. The price The Home-Stake Companies
receive from the sale of these products is affected by the cost of transporting
the products to market. Effective as of January 1, 1995, the FERC implemented
regulations establishing an indexing system for transportation rates for oil
pipelines, which, generally, would index such rates to inflation, subject to
certain conditions and limitations. These regulations could increase the cost
of transporting oil and natural gas liquids by pipeline, although the most
recent adjustment generally decreased rates. These regulations are subject to
pending petitions for judicial review. The Home-Stake Companies are not able to
predict with certainty what effect, if any, these regulations will have on their
operations, however, the regulations may, over time, tend to increase
transportation costs or reduce wellhead prices for oil and natural gas liquids.

Operational Hazards and Insurance

The operations of The Home-Stake Companies are subject to all risks
inherent in the exploration for, and development and production of, oil and
natural gas, including such natural hazards as blowouts, cratering and fires,
which could result in damage or injury to, or destruction of, drilling rigs and
equipment, formations, producing facilities or other property, or could result
in personal injury, loss of life or pollution of the environment. Any such
event could result in substantial cost to The Home-Stake Companies which could
have a material adverse effect upon the financial condition of each of The Home-
Stake Companies to the extent it is not fully insured against such risk. Each
of HSOG and HSRC carries insurance against certain of these risks but, in
accordance with standard industry practice, is not fully insured for all risks,
either because such insurance is unavailable or because it elects not to obtain
insurance coverage because of cost. Although such operational risks and hazards
may to some extent be minimized, no combination of experience, knowledge and
scientific evaluation can eliminate the risk of investment or assure a profit to
any company engaged in oil and gas operations.

ENVIRONMENTAL MATTERS

Operations of The Home-Stake Companies are subject to numerous and
constantly changing federal, state and local laws and regulations governing the
discharge of materials into the environment or otherwise relating to
environmental protection. These laws and regulations may require the
acquisition of certain permits, restrict or prohibit the types, quantities and
concentration of substances that can be released into the environment in
connection with drilling and production, restrict or prohibit drilling
activities that could impact wetlands, endangered or threatened species or other
protected natural resources and impose substantial liabilities for pollution
resulting from The Home-Stake Companies' operations. Such laws and regulations
may substantially increase the cost of exploring for, developing or producing
oil and gas and may prevent or delay the commencement or continuation of a given
project. In the opinion of The Home-Stake Companies' management, The Home-Stake
Companies are in substantial compliance with current applicable environmental
laws and regulations and it is not anticipated that The Home-Stake Companies
will be required in the near future to expend

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amounts that are material in the aggregate to their overall operations by reason
of environmental laws and regulations. Nevertheless, changes in existing
environmental laws and regulations or in the interpretations thereof could have
a significant impact on the operating costs of The Home-Stake Companies, as well
as the oil and gas industry in general. For instance, legislation has been
proposed in Congress from time to time that would reclassify certain oil and gas
production wastes as "hazardous wastes," which reclassification would make
exploration and production wastes subject to much more stringent and costly
handling, disposal and clean-up requirements. State initiatives to further
regulate the disposal of oil and gas wastes and naturally occurring radioactive
materials are also pending in certain states and these various initiatives could
have a similar impact on The Home-Stake Companies.

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
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or the site where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. Persons who are or were responsible for releases of hazardous substances
found at the site and persons who are or were responsible for releases of
hazardous substances under CERCLA may be subject to joint and several liability
for the costs of cleaning up the hazardous substances that have been released
into the environment and for damages to natural resources, 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 hazardous substances
released into the environment. The Home-Stake Companies are only able to
directly control the operation of those wells with respect to which HSRC acts as
operator. Notwithstanding The Home-Stake Companies' lack of control over wells
operated by others, the failure of an operator of a well in which The Home-Stake
Companies own a working interest to comply with applicable environmental
regulations may, in certain circumstances, be attributed to The Home-Stake
Companies. As of the date of this Proxy Statement/Prospectus, The Home-Stake
Companies have no material commitments for capital expenditures to comply with
existing environmental requirements.

PROPERTIES OF THE HOME-STAKE COMPANIES

HSOG owns interests in 1,363 producing properties, including both non-
operated working interests and royalty interests, located in 16 states, and HSRC
owns interests in 1,442 producing properties, including both operated and non-
operated working interests and royalty interests, located in 16 states. (For
further details regarding these properties see "--Producing Wells" below.) Each
of The Home-Stake Companies is engaged in leasing of its minerals as well as the
exploration, production and sale of natural gas, condensate and crude oil from
its properties.

Each of The Home-Stake Companies has an extensive ownership of nonproducing
perpetual minerals located in 16 states, including North Dakota, Oklahoma,
Michigan, Montana, Mississippi and Texas. Such ownership at June 30, 1997,
comprises 3,037 properties covering 40,329 net acres with respect to HSOG and
3,204 properties covering 52,805 net acres with respect to HSRC. The Home-Stake
Companies may from time-to-time participate in exploration activities on certain
of their respective properties but generally lease them to others, retaining a
royalty interest in whatever production may be derived therefrom, thereby
eliminating the risk in the exploration of such properties. At the present
time, there are approximately 45 (829 net acres) and 50 (1,152 net acres)
properties leased to others by HSOG and HSRC, respectively.

In addition, HSOG and HSRC own leasehold interests in 121 (2,544 net acres)
and 121 (2,672) net acres) nonproducing properties, respectively. These
properties have varying lease terms, with most expiring in the next five years.
These leasehold interests are located in eleven states, including Oklahoma and
Montana.

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Current Activities

The Home-Stake Companies' exploration and development activities generally
have been located in the states of Oklahoma (Anadarko Basin), Montana and Texas.
In 1996, the majority of The Home-Stake Companies' activities were located in
Gaines County, Texas, as well as Comanche and Caddo Counties, Oklahoma. Most
recent drilling has been developmental in nature (85% in 1996 and 88% in 1995)
on both oil and gas properties. In 1996, there were 5 oil wells and 14 gas
wells drilled; in 1995 there were 3 oil wells and 15 gas wells drilled.

The Home-Stake Companies' drilling activities in 1997 continue to be
primarily developmental in nature. Through June 30, 1997, there have been 11
(1.21 net) development wells and 3 (.75 net) exploratory wells drilled,
resulting in 1 (.02 net) oil well, 7 (.46 net) gas wells and 6 (1.48 net) dry
holes. The Home-Stake Companies are presently committed to participate in the
drilling or completion of 17 (1.07 net to HSOG and 1.32 net to HSRC) wells in
1997. HSRC expects to operate seven of these wells. In 1997, The Home-Stake
Companies contracted with three consulting geologists for the right of first
refusal on developmental prospects the consultants are developing in the Permian
Basin and South Central Oklahoma. The primary area of focus during the next 12
to 18 months will be developmental drilling on The Home-Stake Companies'
Oklahoma acreage and in the Permian Basin. In addition, The Home-Stake Companies
plan to continue to pursue exploratory oil and gas prospects in the Anadarko and
Arkoma Basins in Oklahoma.

The Home-Stake Companies are active in the property acquisition market. In
1996, The Home-Stake Companies reviewed 68 property sales packages and submitted
bids on four of these packages, containing eight groups of properties. They
were successful in acquiring one group of properties. Through July 31, 1997,
The Home-Stake Companies have reviewed over 30 sales packages.

During 1995, HSOG and HSRC each acquired approximately 220 net acres of
leases in the Lodgepole "play" in North Dakota at a cost of $85,000 to each
company. The Lodgepole area is generating a great deal of interest in the oil
and gas industry and it is expected that new drilling will commence in this
area. In February 1996, The Home-Stake Companies executed permits to allow 3-D
seismic work on certain of these leases. There are no present plans by The
Home-Stake Companies to initiate exploration in this area in the near future;
however, it is the intention of each company to participate with its leased
acreage in wells proposed by others.

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DRILLING ACTIVITY

During the periods indicated, HSOG and HSRC drilled or participated in the
drilling of the following exploratory and development wells:

<TABLE>
<CAPTION>
HSOG DRILLING ACTIVITY

YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ----------- -----------
Gross Net Gross Net Gross Net
----- --- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
EXPLORATORY:
Productive...... 1 .15 0 .00 0 .00
Non-Productive.. 2 .19 2 .44 2 .09
-- --- -- ---- -- ----
Total......... 3 .34 2 .44 2 .09
== === == ==== == ====
DEVELOPMENT:
Productive...... 13 .20 13 .41 10 1.21
Non-Productive.. 3 .41 3 .19 1 .25
-- --- -- ---- -- ----
Total......... 16 .61 16 .60 11 1.46
== === == ==== == ====
TOTAL:
Productive...... 14 .35 13 .41 10 1.21
Non-Productive.. 5 .60 5 .63 3 .34
-- --- -- ---- -- ----
Total......... 19 .95 18 1.04 13 1.55
== === == ==== == ====
</TABLE>

HSRC DRILLING ACTIVITY

YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
EXPLORATORY:
Productive...... 1 .17 0 .00 0 .00
Non-Productive.. 2 .29 2 .44 2 .09
-- ---- -- ---- -- ----
Total......... 3 .46 2 .44 2 .09
== ==== == ==== == ====
DEVELOPMENT:
Productive...... 13 .26 13 .41 10 1.21
Non-Productive.. 3 .48 3 .19 1 .25
-- ---- -- ---- -- ----
Total......... 16 .74 16 .60 11 1.46
== ==== == ==== == ====
TOTAL:
Productive...... 14 .43 13 .41 10 1.21
Non-Productive.. 5 .77 5 .63 3 .34
-- ---- -- ---- -- ----
Total......... 19 1.20 18 1.04 13 1.55
== ==== == ==== == ====
</TABLE>
The above well information excludes wells in which either or both of The
Home-Stake Companies own only a royalty or mineral interest.

At December 31, 1996, The Home-Stake Companies were participating in the
drilling of six (.62 net) development wells. As of the date of this Proxy
Statement/Prospectus, two wells (.49 net) were determined to be non-productive
and four (.13 net) were successfully completed as producing gas wells.

-63-
<PAGE>

HSRC OPERATING ACTIVITIES

As noted previously, only HSRC serves as operator of oil and gas properties
in which The Home-Stake Companies have operations. HSRC operates 52 producing
wells and 7 service wells located in 10 separate fields, which includes 2
waterfloods consisting of 9 producing wells and 3 service wells. In addition,
each of HSOG and HSRC have non-operating working interest ownership in
approximately 254 other properties.

HSRC operates wells in two fields in Dawson County, Montana--the Glendive
Field and the Gas City Field. The operations in the Glendive Field consist of
15 producing wells and four saltwater disposal wells. The Gas City Field is
unitized for secondary recovery operations and consists of nine producing wells
and three water injection wells. Production is primarily from the Red River
formation of Ordovician age in both of these fields.

Operations in the Golden Trend Field in Grady and McClain counties in
Oklahoma consist of 16 producing wells completed in four formations of
Pennsylvanian and Ordovician age rock.

Northwestern Oklahoma operations consist of five producing wells in the
Vici Field in Ellis County. Production is from Pennsylvanian age rock.

HSRC operates a producing field in the West Cement Field in Caddo County,
Oklahoma. At present, there is one producing well completed in the Medrano
formation of Pennsylvania age rock.

Operations in the Anadarko Basin of Eastern Oklahoma consist of five
producing gas wells located in the Hartshorne South and Kinta Fields in Latimer
County and the Ti North and Ashland Fields in Pittsburg County.

HSRC also operates one well in the Champmon Strawn Field in Gaines County,
Texas.

PRODUCING WELLS

The following table sets forth certain information relating to HSOG's and
HSRC's producing wells at December 31, 1996. The table also sets forth
information relating to the producing wells on a pro forma pooled basis assuming
consummation of the Merger as of December 31, 1996. Because each of HSOG and
HSRC owns the mineral interests in numerous producing properties, it does not
have current information on the numbers of wells drilled by the owners of the
leasehold interests for these properties. Accordingly, HSOG and HSRC keep track
of their respective royalty interests on a property-by-property basis rather
than well-by-well basis. Net wells refers to the total number of wells in which
HSOG or HSRC, as appropriate, has an interest, multiplied by HSOG's or HSRC's,
as appropriate, working interest percentage in the wells.

-64-
<PAGE>

<TABLE>
<CAPTION>
PRODUCING WELLS AS OF DECEMBER 31, 1996

HSOG HSRC PRO FORMA
--------- --------- ----------
<S> <C> <C> <C>
Gross - Working Interests:
- -------------------------
Oil................................. 126 122 126
Gas................................. 187 190 190
Net - Working Interests:
- -----------------------
Oil................................. 18 18 36
Gas................................. 10 10 20
Gross - Royalty Interests:
- -------------------------
Oil................................. 609 676 709
Gas................................. 435 449 453
Net - Royalty Interests:
- -----------------------
Oil................................. --/(1)/ --/(1)/ --/(1)/
Gas................................. --/(1)/ --/(1)/ --/(1)/
</TABLE>

- ---------------------
/(1)/ The term "net wells" is not applicable to a royalty interest since neither
HSOG nor HSRC has a working interest in the applicable well.

ACREAGE

As previously noted, at December 31, 1996, HSOG owned an interest in 1,363,
producing properties, including royalty interests on 1,056 properties
(comprising approximately 11,837 net acres) and working interests in 307
properties (comprising 6,945 net acres); and HSRC owned an interest in 1,442
producing properties, including royalty interests on 1,136 properties
(comprising approximately 15,102 net acres) and working interests in 306
properties (comprising 7,278 net acres). The following table sets forth gross
and net oil and gas leasehold acreage for HSOG, HSRC and HSOG on a pro forma
basis (assuming consummation of the Merger) as of December 31, 1996.

-65-
<PAGE>

ACREAGE AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>

HSOG HSRC PRO FORMA
------- --------- ---------
GROSS - DEVELOPED:
<S> <C> <C> <C>
Leasehold........... 70,350 70,350 70,350
Mineral............. 277,406 285,800 292,207
GROSS - UNDEVELOPED:
Leasehold........... 23,924 23,924 23,924
Mineral............. 596,167 632,613 643,367
------- --------- ---------
Total 967,847 1,015,687 1,029,851
======= ========= =========

NET - DEVELOPED:
Leasehold........... 7,265 7,476 14,741
Mineral............. 12,324 15,689 28,013
NET - UNDEVELOPED:
Leasehold........... 2,947 3,198 6,145
Mineral............. 40,426 52,886 93,312
------- --------- ---------
Total 62,962 79,249 142,211
======= ========= =========
</TABLE>

PROVED RESERVES

The following tables reflect the estimated proved reserves and proved
developed producing reserves, future net revenues and the present value of
future net revenues from such reserves of HSOG and HSRC at June 30, 1997, as
prepared by HSOG and HSRC. The reserve estimates with respect to certain of
HSOG's and HSRC's properties, covering approximately 75% and 71% of the present
value of future net revenues from the proved reserves of HSOG and HSRC,
respectively, at June 30, 1997, were reviewed by Lee Keeling and Associates,
Inc. The quantities of HSOG's or HSRC's, as appropriate, proved reserves of oil
and natural gas presented below include only those amounts which HSOG or HSRC
reasonably expects to recover in the future from known oil and gas reservoirs
under existing economic and operating conditions. Proved developed producing
reserves are limited to those quantities which are recoverable commercially at
current prices and costs, under existing regulatory practices and with existing
technology. Accordingly, any changes in prices, operating and developmental
costs, regulations, technology or other factors could significantly increase or
decrease estimates of HSOG's or HSRC's proved developed producing reserves.
HSOG's or HSRC's, as appropriate, proved undeveloped reserves (which are
included in proved reserves) include only those quantities which HSOG or HSRC
reasonably expects to recover from the drilling of new wells based on geological
evidence from directly offsetting wells. The risks of recovering these reserves
are higher from both geological and mechanical perspectives than the risks of
recovering developed reserves. The estimates of HSOG's and HSRC's proved
reserves do not include proved undeveloped reserves attributable to HSOG's or
HSRC's royalty interests (this information is not available to HSOG or HSRC) or
outside operated working interests (quantities are not considered material to
either HSOG's or HSRC's proved reserves). Furthermore, the reserve estimates do
not include reserves whose estimates of recoverability are less precise,
commonly referred to as "probable" or "possible" reserves. Neither HSOG nor
HSRC has reserves outside the continental United States.

-66-
<PAGE>

HSOG

OIL AND GAS RESERVES AT JUNE 30, 1997
-------------------------------------

<TABLE>
<CAPTION>
Standardized
Present Value Measure of
Oil Gas Future Net of Future Net Discounted Future
(Bbls) (Mcf) Revenues Revenues /(1)/ Net Cash Flows/(2)/
---------- ---------- ----------- -------------- -------------------

<S> <C> <C> <C> <C> <C>
Proved Reserves 2,082,335 7,267,083 $30,713,410 $16,763,826 $12,576,702

Proved developed
producing reserves 2,040,137 5,950,996 $27,468,867 $16,094,303 n/a
</TABLE>

HSRC

OIL AND GAS RESERVES AT JUNE 30, 1997
-------------------------------------

<S> <C> <C> <C> <C> <C>
Proved Reserves 2,096,956 7,785,762 $32,122,084 $17,775,240 $13,269,583

Proved developed
producing reserves 2,054,758 6,469,675 $28,877,541 $17,105,717 n/a
</TABLE>

__________________

/(1)/ Present value of future net revenues before deducting the impact
of federal and state income taxes (discounted at 10%).

/(2)/ The difference between present value of future net revenues and
the standardized measure of discounted future net cash flows is the
present value of estimated income taxes applicable to future net
cash flows.

The future net revenues are determined by using estimated quantities of
proved reserves and proved developed producing reserves and the periods in which
they are expected to be developed and produced based on economic conditions at
June 30, 1997. The estimated future revenues from production are based on the
actual prices in effect at June 30, 1997, except where fixed and determinable
price escalations are provided by contract. The resulting estimated future
gross revenues are reduced by estimated future costs to develop and produce the
proved reserves based on cost levels at June 30, 1997, but not for debt service,
general and administrative expense and income taxes. The present value of
future net revenues shown above should not be construed as the current market
value, or the market value as of June 30, 1997, of the estimated oil and gas
reserves attributable to HSOG's or HSRC's properties. For additional
information concerning the discounted future net revenues to be derived from
these reserves and the disclosure of the standardized measure information in
accordance with the provisions of Statement of Financial Accounting Standards
No. 69, see "Supplementary Information on Oil and Gas Producing Activities
(unaudited)" at pages F-25 and F-42 herein.

-67-
<PAGE>

The reserve data set forth in this Proxy Statement/Prospectus represents
only estimates. Reserve engineering is a subjective process of estimating
underground accumulations of crude oil and natural gas that cannot be measured
in an exact manner. The accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation and
judgment. As a result, estimates of different engineers often vary. In
addition, results of drilling, testing and production subsequent to the date of
an estimate may justify revision of such estimate. Accordingly, reserve
estimates often differ from the quantities of crude oil and natural gas that are
ultimately recovered. The meaningfulness of such estimates is highly dependent
upon the accuracy of the assumptions upon which they were based.

OIL AND GAS PRODUCTION, SALES PRICES AND PRODUCTION COSTS

The following table sets forth certain information regarding the production
of oil and natural gas, average sales prices and, for properties in which the
companies own a working interest, average production costs (including production
taxes and transportation charges) for HSOG, HSRC and pro forma HSOG (assuming
the consummation of the Merger as of January 1, 1995) for the periods indicated.

PRODUCTION, PRICES AND PRODUCTION COSTS

ROYALTY INTERESTS
-----------------
<TABLE>
<CAPTION>

HSOG HSRC PRO FORMA
-------- -------- ---------
Oil Production (Bbls):
<S> <C> <C> <C>
1996.......................... 52,994 57,137 110,131
1995.......................... 61,035 64,500 125,535
1994.......................... 53,590 58,137 n/a
Average Sales Prices (per Bbl):
1996.......................... $ 20.37 $ 20.13 $ 20.24
1995.......................... 16.64 16.51 16.58
1994.......................... 15.19 15.03 n/a
Gas Production (Mcf):
1996.......................... 355,214 393,114 748,328
1995.......................... 326,558 372,291 698,849
1994.......................... 309,286 370,678 n/a
Average Sales Prices (per Mcf):
1996.......................... $ 2.06 $ 2.12 $ 2.09
1995.......................... 1.45 1.48 1.47
1994.......................... 1.78 1.81 n/a
</TABLE>

-68-
<PAGE>

WORKING INTERESTS
-----------------

HSOG HSRC PRO FORMA
-------- ---------- -------------
Oil Production (Bbls):
<S> <C> <C> <C>
1996.......... 180,752 182,388 363,140
1995.......... 165,264 165,221 330,485
1994.......... 129,350 129,684 n/a
Average Sales Price (per Bbl):
1996.......... $ 20.14 $ 20.16 $ 20.15
1995.......... 16.00 16.01 16.00
1994.......... 14.68 14.69 n/a
Gas Production (Mcf):
1996.......... 833,093 864,916 1,698,009
1995.......... 911,127 942,016 1,853,143
1994.......... 907,518 927,881 n/a
Average Sales Price (per Mcf):
1996.......... $ 1.97 $ 1.97 $ 1.97
1995.......... 1.39 1.39 1.39
1994.......... 1.62 1.63 n/a
Average direct operating costs per barrel of oil equivalent(1):
1996.......... $ 9.31 $ 9.03 $ 9.17
1995.......... 6.17 6.13 6.15
1994.......... 5.39 5.22 n/a
</TABLE>

___________________

/(1)/ Barrels of oil equivalent are determined using the ratio of six
Mcf of gas to one barrel of crude oil, condensate or natural gas
liquids.

EMPLOYEES

At September 30, 1997, HSOG employed 16 persons whose functions are
associated with management, operations and mineral management, engineering,
geology, land and gas contract administration, accounting and financial
planning, and administration and data processing. Each employee holds an
identical position with HSRC and is considered to spend one-half of his or her
time on HSOG's business and one-half of his or her time on HSRC's business.
Accordingly, HSOG pays one-half of the compensation to its employees and HSRC
pays the other one-half. Also at September 30, 1997, the Company had placed
three consulting geologists on retainer for 1997 to develop oil and gas
prospects for the Company. The Home-Stake Companies consider their relations
with their employees to be excellent.

LITIGATION

The Home-Stake Companies are involved in various lawsuits arising in the
ordinary course of business. While the outcome of any such lawsuits against The
Home-Stake Companies cannot be predicted with certainty,

-69-
<PAGE>

management does not expect these matters to have a material effect on the
financial position or the results of operations of either HSOG or HSRC or of
HSOG subsequent to the Merger.

AMENDMENTS TO THE CERTIFICATE OF INCORPORATION OF HSOG

HSOG was incorporated in 1917 and the HSOG Certificate and Bylaws have been
amended many times over the years on a somewhat piecemeal basis in an attempt to
meet more modern corporate circumstances as they arise. In connection with its
review of the Merger, the HSOG Board also reviewed the current provisions of the
HSOG Certificate in an effort to determine whether any provisions should be
amended to better meet the needs of operating the surviving company after the
Merger as a larger single public company. Based on its review, the HSOG Board
has proposed the following amendments to the HSOG Certificate. The amendments
to the HSOG Certificate, if approved, will only become effective if the Merger
is consummated.

DISSENTERS' RIGHTS

In a 1992 decision, the Oklahoma Court of Appeals held that certain
dissenters' rights of shareholders of corporations formed under the Oklahoma
Business Corporation Act survived the 1986 enactment of the Oklahoma General
Corporation Act. See the discussion under "Proposed Amendment No. 8" below.
------------------------
Under prior law, stockholders were provided dissenters' rights with respect to
any amendment to a corporation's certificate of incorporation (i) having an
adverse effect on a class of stockholders, (ii) reducing the number of directors
or (iii) changing or altering the corporate purposes. Accordingly, it is
possible that the proposed amendments to the HSOG Certificate create a right to
exercise dissenters' appraisal rights separate from those available with respect
to the Merger (see "The Merger--Appraisal Rights"). Decisions of the Oklahoma
Court of Appeals do not have a binding precedential effect and the Company
believes the decision is wrong and that no dissenters' rights exist with respect
to the proposed amendments to the HSOG Certificate. However, in order to assure
the validity of the adoption of the proposed amendments to the HSOG Certificate,
HSOG is providing dissenters' rights to its stockholders in connection with
these proposals. It is uncertain, if dissenters' rights under the Oklahoma
Business Corporation Act were found to survive the adoption of the Oklahoma
General Corporation Act, whether they should be exercised pursuant to the
Oklahoma Business Corporation Act or the Oklahoma General Corporation Act. In
this regard, HSOG will permit the exercise of dissenters' rights in connection
with the proposed amendments to the HSOG Certificate by compliance with either
Section 1091 of the Oklahoma General Corporation Act or Sections 1.159 and 1.160
of the repealed Oklahoma Business Corporation Act. A summary of the procedure
to exercise dissenters' appraisal rights under Section 1091 of the Oklahoma
General Corporation Act is set forth under "The Merger--Appraisal Rights" and
Section 1091 is reprinted in its entirety as Appendix C to this Proxy
Statement/Prospectus. Sections 1.159 and 1.160 of the Oklahoma Business
Corporation Act which set forth the procedure for exercising dissenters' rights
under such act are set forth in their entirety as Appendix G to this Proxy
Statement/Prospectus.

PROPOSED AMENDMENT NO. 1
------------------------

PROPOSAL TO PROVIDE FOR
PERPETUAL CORPORATE EXISTENCE
(ITEM 2A ON HSOG PROXY CARD)

The Board of Directors of HSOG has approved and recommends that the
stockholders of HSOG approve an amendment to the HSOG Certificate to provide
that HSOG shall have perpetual existence ("Proposed Amendment No. 1"). Article
Three of the HSOG Certificate limits the duration of HSOG's existence to March
12, 2007. Proposed Amendment No. 1 to Article Three of the HSOG Certificate
currently is set forth in Appendix E to this Proxy Statement/Prospectus.

-70-
<PAGE>

The predecessor of the Oklahoma General Corporation Act required
corporations to limit the duration of their existence in their certificates of
incorporation to no more than 50 years, subject to extension by the approval of
the stockholders. The Oklahoma General Corporation Act does not require a
corporation to limit its existence and, unless there is a provision limiting the
duration of a corporation to a specific date, the corporation has perpetual
existence. The Board of Directors of HSOG has determined that it is inefficient
to continue to require HSOG's stockholders to vote to extend the duration of
HSOG's existence.

If Proposed Amendment No. 1 to the HSOG Certificate is approved by HSOG
stockholders, the approval of the holders of a majority of the outstanding
voting stock of HSOG prior to March 12, 2007 will not be necessary to extend the
duration of HSOG's existence past such date. Providing for perpetual existence
does not mean that the existence of HSOG may never be terminated and the
corporation dissolved. Under the Oklahoma General Corporation Act, HSOG may be
dissolved at any time upon (i) the adoption of a resolution by the Board of
Directors that HSOG should be dissolved and the approval of such resolution by
the holders of a majority of the outstanding voting stock of HSOG or (ii) by the
stockholders, without the action of directors, upon the written consent of the
holders of all the shares of outstanding voting stock of HSOG.

Adoption of Proposed Amendment No. 1 will require the affirmative vote of
the holders of a majority of the outstanding shares of the HSOG Common Stock.
THE BOARD OF DIRECTORS OF HSOG RECOMMENDS THAT HSOG STOCKHOLDERS VOTE "FOR"
PROPOSED AMENDMENT NO. 1 TO THE HSOG CERTIFICATE.

PROPOSED AMENDMENT NO. 2
------------------------

PROPOSAL TO EXPAND THE
BUSINESS PURPOSE OF HSOG
(ITEM 2B ON HSOG PROXY CARD)

The Board of Directors of HSOG has approved and recommends that the
stockholders of HSOG approve an amendment to the HSOG Certificate to provide
that the purpose of HSOG is to engage in any lawful act or activity for which
corporations may be organized under the Oklahoma General Corporation Act
("Proposed Amendment No. 2"). The provisions of Article Four of the HSOG
Certificate currently limit the scope of the purpose and activities of HSOG to
the oil, gas and mineral business and related activities. Proposed Amendment
No. 2 to Article Four is set forth in Appendix E to this Proxy
Statement/Prospectus.

The Oklahoma General Corporation Act provides that a corporation may set
forth in its certificate of incorporation that the purpose of the corporation is
to engage in any lawful act or activity for which corporations may be organized
under the general corporation law of Oklahoma and, by such statement, all lawful
acts and activities shall be within the purposes of the corporation. HSOG's
Board believes that business opportunities could arise from time to time outside
the oil and gas arena, in which event the limited purpose clause currently
contained in the HSOG Certificate would preclude HSOG's participation in such
opportunity even though it would be in the best interests of HSOG and its
stockholders. The Board believes the proposed amendment will provide HSOG with
more flexibility in pursuing any such opportunities should they arise. The HSOG
Board has no intention to engage in any business or activities other than the
oil and gas business at the present time.

Adoption of Proposed Amendment No. 2 will require the affirmative vote of
the holders of a majority of the outstanding shares of HSOG Common Stock. THE
BOARD OF DIRECTORS OF HSOG RECOMMENDS THAT HSOG STOCKHOLDERS VOTE "FOR" PROPOSED
AMENDMENT NO. 2 TO THE HSOG CERTIFICATE.

-71-
<PAGE>

PROPOSED AMENDMENT NO. 3
------------------------

PROPOSAL CONCERNING ESTABLISHMENT
OF THE NUMBER OF DIRECTORS
(ITEM 2C ON HSOG PROXY CARD)

The Board of Directors of HSOG has approved and recommends that the
stockholders of HSOG approve an amendment to HSOG's Certificate to provide that
the Board shall consist of not less than three directors nor more than 15, the
exact number within such limits to be determined by a majority vote of the
directors ("Proposed Amendment No. 3"). In addition, Proposed Amendment No. 3
provides that until otherwise so determined by the directors, the Board of
Directors of HSOG shall consist of seven directors (which is the current number
of directors on HSOG's Board). To accomplish the proposed amendment, Article
Eight of the HSOG Certificate will be amended as set forth in Appendix E to this
Proxy Statement/Prospectus.

The HSOG Certificate currently provides that there shall be seven
directors. Accordingly, in order to effect a change in the number of directors
it is necessary to amend the HSOG Certificate by obtaining approval of the
holders of a majority of HSOG's outstanding voting stock. The HSOG Board
believes the current provision setting forth the number of directors is too
inflexible and cumbersome in the event there should be a desired change in the
number of directors. The proposed amendment would allow the Board to add a
qualified candidate or candidates without first having to obtain stockholder
approval of an amendment to HSOG's Certificate. Any director added as a result
of Board action pursuant to the proposed amendment would still be subject to
election by the stockholders in order for such director to continue to serve as
such upon the expiration of his or her term (which term could be for a period of
three years due to the Board's classification into three classes with each class
serving staggered three-year terms). In addition, under the current HSOG
Certificate, should a vacancy occur in HSOG's Board and a qualified individual
could not be found on a timely basis, the HSOG Certificate may have to be
amended to reduce the number of directors. The HSOG Board believes the
potential risks of personal liability has made it more difficult for public
companies to find otherwise qualified individuals who are willing to accept a
position as a director. Also, the HSOG Board previously experienced difficulty
in finding qualified persons to fill Board vacancies because of an unwillingness
of such persons to serve as directors as a result of HSOG's pending litigation
in connection with prior attempts to gain control of HSOG and HSRC.
Accordingly, the HSOG Board deems it desirable to provide as much flexibility as
possible with respect to the number of directors and to avoid the cumbersome
process of having to amend the HSOG Certificate (which requires a vote of
stockholders) anytime there should be a desired change in the number of
directors.

Proposed Amendment No. 3 could be used by the HSOG Board as a measure to
deter or postpone an attempt to gain control of HSOG. HSOG's Bylaws provide for
the division of HSOG's Board into three classes, with members of each class
serving staggered three-year terms. Generally, two annual meetings of
stockholders, instead of one, would be required to effect a change in the
majority of the HSOG Board. In the event stockholders, or a stockholder who has
obtained control of HSOG through the acquisition of a substantial number of
shares of HSOG Common Stock or Preferred Stock, successfully elect a different
slate of directors than that supported by incumbent directors, the incumbent
directors, constituting a majority of directors, could, without stockholder
action, increase the number of directors and fill such positions with
individuals selected by the Board. Such action could possibly further postpone
changing the composition and control of HSOG's Board for an additional year.
The provisions of Proposed Amendment No. 3 could also have the effect of
discouraging a third party from initiating a proxy contest, making a tender
offer or otherwise attempting to gain control of HSOG even though such a
transaction could be beneficial to HSOG and its stockholders, although it should
be noted that holders of a majority of the shares of outstanding voting stock
could effect an amendment to HSOG's Certificate to eliminate the provisions of
the proposed amendment.

Adoption of Proposed Amendment No. 3 will require the affirmative vote of
the holders of at least 66 2/3% of the outstanding shares of HSOG Common Stock.
THE BOARD OF DIRECTORS OF HSOG

-72-
<PAGE>

RECOMMENDS THAT HSOG STOCKHOLDERS VOTE "FOR" PROPOSED AMENDMENT NO. 3 TO HSOG'S
CERTIFICATE.

PROPOSED AMENDMENT NO. 4
------------------------

PROPOSAL ELIMINATING SUPERMAJORITY VOTE FOR APPROVAL OF
ANY MERGER, CONSOLIDATION OR SALE OF SUBSTANTIAL PORTION
OF ASSETS OF HSOG OR TO CHANGE THE NUMBER OF DIRECTORS
(ITEM 2D ON HSOG PROXY CARD)

The Board of Directors of HSOG has approved and recommends that the
stockholders of HSOG approve an amendment to the HSOG Certificate which would
eliminate the provisions of Article Nine of the HSOG Certificate requiring the
affirmative vote of holders of at least 66 2/3 percent of the outstanding shares
of HSOG's voting stock in order to approve and effect any merger, consolidation
or sale of a substantial portion of the assets of HSOG, or to change the number
of directors set forth in Article Eight of the HSOG Certificate. The provisions
of current Article Nine of the HSOG Certificate are set forth in Appendix E to
this Proxy Statement/Prospectus.

Article Nine of the HSOG Certificate was first adopted by the stockholders
of HSOG primarily in response to an attempted hostile takeover attempt. The
provisions were intended to encourage any person or group who might seek to
acquire control of HSOG to negotiate with the Board as the Board's
recommendation of any such proposed transaction would likely be necessary in
order to obtain the approval of HSOG stockholders. By increasing the likelihood
of Board participation in the negotiations concerning any such transaction, the
HSOG Board believed that the short and long-term interests of HSOG's
stockholders could best be safeguarded. Article Nine of the HSOG Certificate
was subsequently amended in 1994 to require the approval of holders of at least
66 2/3 percent of HSOG's outstanding voting stock to change the provisions for
the number of directors set forth in the HSOG Certificate in order to prevent
any person or group seeking to gain control of HSOG from obtaining control of
the HSOG Board by amending the HSOG Certificate upon obtaining the approval of
HSOG stockholders only holding a majority of HSOG's outstanding voting stock.

In connection with its review of the proposed Merger, the HSOG Board
considered the benefits of the provisions of Article Nine against the
possibility that the public market might disfavor such supermajority voting
requirements and, thus, discount the value of the shares of New HSOG Common
Stock after the Merger. After such consideration, the HSOG Board determined
that the control shares provisions of the HSOG Certificate and Business
Combination Statute under the Oklahoma General Corporation Act, together with
certain other provisions of the HSOG Certificate and HSOG Bylaws, provided
sufficient protection that persons or groups attempting to gain control of HSOG
would likely be forced to negotiate with the HSOG Board in order to effect any
transaction with HSOG or its stockholders. (See "Description of HSOG Capital
Stock--Certain Provisions and Arrangements That May Have an Anti-Takeover
Effect"). Accordingly, the HSOG Board believes that sufficient safeguards exist
to protect the investment interests of the HSOG stockholders even if Article
Nine is eliminated.

The effect of the elimination of Article Nine of the HSOG Certificate is
that any merger, consolidation or sale of a substantial portion of the assets of
HSOG would require the approval of the holders of a majority, rather than 66 2/3
percent, of the outstanding shares of HSOG voting stock. As discussed above
under Proposed Amendment No. 3, the proposed amendment to Article Eight of the
HSOG Certificate would authorize the HSOG Board to set the number of directors
without obtaining stockholder approval. Should Proposed Amendment No. 3 be
approved by HSOG stockholders but not Proposed Amendment No. 4, the approval of
HSOG stockholders would no longer be necessary to effect a change by the HSOG
Board in the number of directors.

-73-
<PAGE>

Approval of Proposed Amendment No. 4 requires the affirmative vote of
holders of at least 66 2/3 percent of the outstanding shares of HSOG Common
Stock. THE BOARD OF DIRECTORS OF HSOG RECOMMENDS THAT HSOG STOCKHOLDERS VOTE
"FOR" PROPOSED AMENDMENT NO. 4 TO THE HSOG CERTIFICATE.

PROPOSED AMENDMENT NO. 5
------------------------

PROPOSAL REGARDING PERSONAL
LIABILITY OF DIRECTORS
(ITEM 2E ON HSOG PROXY CARD)

The Board of Directors of HSOG has approved and recommends that the
stockholders of HSOG approve the amendment of the HSOG Certificate to adopt a
new Article Nine which, to the extent permitted by Oklahoma law, would limit the
personal liability of the directors of HSOG to the company or its stockholders
for monetary damages for certain acts or omissions in their capacities as
directors ("Proposed Amendment No. 5"). As permitted under the Oklahoma General
Corporation Act, new Article Nine provides that a director will not be
personally liable for monetary damages for a breach of fiduciary duty as a
director, except for liability (a) for any breach of the director's duty of
loyalty to HSOG or its stockholders, (b) for acts or omissions not in good faith
or that involve a knowing violation of law, (c) under Section 1053 of the
Oklahoma General Corporation Act (which concerns unlawful payments of dividends,
stock purchases or redemptions) or (d) for any transaction from which the
director derived an improper personal benefit. The full text of Proposed
Amendment No. 5 is set forth in Appendix E to this Proxy Statement/Prospectus.

Directors of public corporations may be subject to substantial potential
liability for actions taken or omitted by them as directors and to significant
expense in defending their conduct. For many years, Oklahoma has recognized the
importance of allowing Oklahoma corporations to provide protection against the
risk to directors' personal resources that could arise out of their service as
directors. The Oklahoma General Corporation Act both permits and, in certain
instances, requires corporations to provide indemnification for directors and
officers in certain situations. The Oklahoma General Corporation Act also
specifically permits a corporation to obtain directors' and officers' liability
insurance, including coverage for certain liabilities against which the
corporation cannot provide indemnification under the Oklahoma General
Corporation Act.

Oklahoma law now specifically permits a corporation to limit the personal
liability of directors to the corporation or its stockholders for damages for
certain acts or omissions by so providing in such corporation's certificate of
incorporation. The purpose of Proposed Amendment No. 5 and the reason it is
being recommended to HSOG stockholders is to enhance HSOG's ability to continue
to attract and retain qualified individuals to serve as directors. Potential
risks of personal liability may deter qualified individuals from continuing, or
accepting, a position as a director of HSOG unless adequate insurance or other
protection is available. By precluding personal liability for certain acts and
omissions, Proposed Amendment No. 5 would supplement the indemnification rights
of directors under the HSOG Bylaws and, if adopted as discussed below at
Proposed Amendment No. 7, under proposed Article Thirteen of the HSOG
Certificate. The HSOG Board believes that the adoption of Proposed Amendment
No. 5 will assist HSOG in attracting and retaining qualified directors. It is
not, however, being proposed in response to any specific resignation, threat of
resignation, or refusal to serve by any Board member or potential Board member,
nor is it being proposed in response to any currently pending or threatened
lawsuit or claim against a director.

In addition, the HSOG Board believes that adoption of Proposed Amendment
No. 5 will permit the directors to exercise their business judgment more freely
by reducing their concern over potential litigation with respect to their
decisions. However, the HSOG Board also believes that the diligence exercised
by directors stems primarily from their desire to act in the best interests of
HSOG and its stockholders, rather than fear of monetary damage awards.
Consequently, the HSOG Board believes that the level of scrutiny and care
exercised by directors will not be lessened by the adoption of Proposed
Amendment No. 5.

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Adoption of Proposed Amendment No. 5 would limit the remedies available to
a shareholder seeking to challenge a decision of the Board of Directors, even if
such a decision were grossly negligent, unless the decision fell within one of
the specific categories excepted from coverage described above. Although
equitable remedies such as injunction and rescission would continue to be
available in such cases, the proposed amendment may nevertheless reduce the
likelihood of derivative litigation against directors and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
certain acts or omissions, even though such an action, if successful, might
otherwise have benefitted HSOG and its stockholders.

Proposed Amendment No. 5 does not eliminate or change a directors'
fiduciary duty and, as indicated above, it would not limit the availability of
equitable remedies such as injunction or rescission based on a director's breach
of those duties. Furthermore, Proposed Amendment No. 5 would not apply to
claims against a director arising out of actions taken in his or her capacity as
an officer of the Company (if he or she is also an officer), and would not limit
or affect the stockholders' ability to seek and obtain relief under any other
law, including the federal securities laws.

HSOG stockholders should note that because the HSOG's directors may benefit
from the added protection Proposed Amendment No. 5 provides, the directors have
a personal interest in its adoption. However, the Board of Directors of HSOG
believes that Proposed Amendment No. 5 is in the best interests of HSOG and its
stockholders and therefore recommends its adoption.

Adoption of Proposed Amendment No. 5 will require the affirmative vote of
the holders of a majority of the outstanding shares of HSOG Common Stock. THE
BOARD OF DIRECTORS OF HSOG RECOMMENDS THAT HSOG STOCKHOLDERS VOTE "FOR" PROPOSED
AMENDMENT NO. 5 TO THE HSOG CERTIFICATE.

PROPOSED AMENDMENT NO. 6
------------------------

PROPOSAL TO AUTHORIZE THE HSOG BOARD
TO AMEND BYLAWS WITHOUT STOCKHOLDER APPROVAL
(ITEM 2F ON HSOG PROXY CARD)

The Board of Directors has approved and recommends that the stockholders of
HSOG approve the amendment of the HSOG Certificate to adopt a new Article
Twelve, which would grant the HSOG Board of Directors the power to adopt, amend
or repeal the Bylaws of HSOG ("Proposed Amendment No. 6"). The full text of
Proposed Amendment No. 6 is set forth in Appendix E to this Proxy
Statement/Prospectus.

Under the Oklahoma General Corporation Act, any corporation, in its
certificate of incorporation, may confer the power to adopt, amend or repeal the
bylaws upon the directors. The HSOG Certificate does not, however, confer the
power to adopt, amend or repeal the Bylaws upon the directors. In addition, the
HSOG Bylaws provide that only stockholders of HSOG may amend the HSOG Bylaws.
As a result, any change to the provisions of the Bylaws requires such change to
be submitted to the HSOG stockholders for their vote. The HSOG Board believes
that granting directors the right to amend the Bylaws will allow the Board to
make changes it deems appropriate from time to time in order to meet the
company's changing circumstances without first having to go through the
cumbersome process of obtaining stockholder approval. If the Proposed Amendment
No. 6 is approved by HSOG stockholders, the HSOG Board will be authorized,
notwithstanding the provision in the HSOG Bylaws, to amend the Bylaws, and the
Board intends to amend the Bylaws to delete the existing provision therein
granting the sole power to amend the HSOG Bylaws to the HSOG stockholders.

If the Proposed Amendment No. 6 is approved by HSOG stockholders, the
Oklahoma General Corporation Act provides that HSOG stockholders still retain
the power to also adopt, amend or repeal the HSOG Bylaws. By providing the HSOG
Board with the power to adopt, amend or repeal the HSOG Bylaws, however, the
HSOG Board could, without stockholder approval, amend the Bylaws in a manner
adversely affecting the rights of stockholders.

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Adoption of Proposed Amendment No. 6 will require the affirmative vote of
the holders of a majority of the outstanding shares of HSOG Common Stock. THE
BOARD OF DIRECTORS OF HSOG RECOMMENDS THAT HSOG STOCKHOLDERS VOTE "FOR" PROPOSED
AMENDMENT NO. 6 TO THE HSOG CERTIFICATE.

PROPOSED AMENDMENT NO. 7
------------------------

PROPOSAL REGARDING INDEMNIFICATION
(ITEM 2G ON PROXY CARD)

The Board of Directors of HSOG has approved and recommends that the
stockholders of HSOG approve the amendment of HSOG's Certificate to adopt a new
Article Thirteen dealing with the indemnification of directors, officers,
employees or agents ("Proposed Amendment No. 7"). Proposed Amendment No. 7
provides that the HSOG Board may indemnify and advance expenses to a director,
officer, employee or agent to the maximum extent permitted by Section 1031 of
the Oklahoma General Corporation Act. The full text of Proposed Amendment No. 7
is set forth in Appendix E to this Proxy Statement/Prospectus.

The HSOG Certificate is currently silent on the subject of indemnification.
Oklahoma law, however, does provide for circumstances in which indemnification
is permitted as well as circumstances in which indemnification is required.
Section 1031 of the Oklahoma General Corporation Act ("Section 1031") permits a
corporation to indemnify officers, directors, employees and agents for actions
taken in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the corporation, and with respect to any
criminal action, which they had no reasonable cause to believe was unlawful.
Section 1031 provides that a corporation may advance expenses of defense (upon
receipt of a written undertaking to reimburse the corporation if indemnification
is not appropriate) and must reimburse a successful defendant for expenses,
including attorneys' fees, actually and reasonably incurred. Section 1031
provides that indemnification may not be made for any claim, issue or matter as
to which a person has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable to the corporation, unless and
only to the extent a court determines that the person is entitled to indemnity
for such expenses, despite the adjudication of liability, as the court deems
proper.

The indemnification under Section 1031 is not exclusive of any other right
to which a person seeking indemnification may be entitled under any law, bylaw,
insurance, agreement, vote of stockholders or disinterested directors or
otherwise. In addition, Section 1031 provides that a corporation may purchase
and maintain insurance on behalf of any director, officer, employee or agent of
the corporation against any liability incurred in such capacity, or arising out
of his or her status as such, whether or not the corporation would have the
power to indemnify against such liability under the provisions of Section 1031.

The HSOG Bylaws currently contain provisions dealing with indemnification
that are substantially similar to Section 1031 and Proposed Amendment No. 7.
The most notable difference is that the HSOG Bylaws provide that the Board of
Directors shall authorize such indemnification that Section 1031 states that
corporations may provide. Proposed Amendment No. 7 tracks the language of
Section 1031 allowing the HSOG Board the discretion as to whom indemnification
would be allowed (except in the circumstances Section 1031 requires mandatory
indemnification for expenses incurred upon the successful defense of an action
as discussed above).

While the HSOG Bylaws currently provide for indemnification of directors,
officers, employees and agents of HSOG, the HSOG Board believes that the
indemnification provisions are of sufficient importance that they should also be
provided for in the HSOG Certificate. In today's climate of prolific
litigation, the HSOG Board believes that directors and officers serve in partial
reliance upon such indemnification protection. Proposed Amendment No. 7 is
intended to afford additional protection to the reasonable expectations of
directors and officers concerning indemnification and to further enhance HSOG's
ability to retain and recruit qualified directors and officers.

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HSOG stockholders should note that because HSOG's directors may benefit
from the protection of Proposed Amendment No. 7, the directors have a personal
interest in its adoption. However, the HSOG Board believes that Proposed
Amendment No. 7 is in the best interests of HSOG and its stockholders.

The adoption of Proposed Amendment No. 7 will require the affirmative vote
of the holders of a majority of the outstanding shares of HSOG Common Stock.
THE BOARD OF DIRECTORS OF HSOG RECOMMEND THAT HSOG STOCKHOLDERS VOTE "FOR"
PROPOSED AMENDMENT NO. 7 TO THE HSOG CERTIFICATE.

PROPOSED AMENDMENT NO. 8
------------------------

PROPOSAL FOR HSOG TO BE GOVERNED
BY OKLAHOMA GENERAL CORPORATION ACT
(ITEM 2H ON HSOG PROXY CARD)

The Board of Directors of HSOG has approved and recommends that the
stockholders of HSOG approve an amendment to the HSOG Certificate to adopt a new
Article Fourteen which provides that the Oklahoma General Corporation Act shall
govern HSOG and the rights and liabilities of its constituents ("Proposed
Amendment No. 8"). The text of Proposed Amendment No. 8 is set forth in
Appendix E to this Proxy Statement/Prospectus.

HSOG was formed prior to the enactment of the Oklahoma General Corporation
Act in 1986. The old Oklahoma Business Corporation Act (the "Old Act") was
repealed with the adoption of the Oklahoma General Corporation Act. Section
1002 of the Oklahoma General Corporation Act specifically provides that such Act
shall be applicable to every corporation incorporated prior to its enactment or
thereafter. However, in a decision handed down in 1992, the Oklahoma Court of
Appeals relied on a savings provision included in the new Oklahoma General
Corporation Act (which was adopted verbatim from the Delaware General
Corporation Law) to determine that certain dissenters' rights granted by the Old
Act survived the enactment of the Oklahoma General Corporation Act with respect
to a corporation formed prior to its enactment.

The decision by the Oklahoma Court of Appeals, which decision has only
persuasive authority, has created uncertainty with respect to the continued
existence of certain stockholder rights and limitations on corporate activities
provided under the Old Act that do not exist under the Oklahoma General
Corporation Act. Corporate activities allowed under the Oklahoma General
Corporation Act that were prohibited or not permitted under the Old Act include
(i) permitting corporate loans to officers and employees, (ii) permitting stock
to be sold for a promissory note, (iii) permitting stock repurchases and
dividends out of any surplus as opposed to only earned surplus, and (iv)
permitting stock options to be granted without stockholder approval. Also,
under the Old Act stockholders had dissenters' rights which are not available
under the Oklahoma General Corporation Act with respect to (i) any amendment to
the certificate of incorporation having an adverse effect on a class of
stockholders, reducing the number of directors or changing or altering the
corporate purposes, or (ii) the sale of substantially all of the assets of the
corporation.

The purpose of the Proposed Amendment No. 8 is to eliminate any uncertainty
with respect to the law governing HSOG. Adoption of Proposed Amendment No. 8
would make it clear, in light of the 1992 Oklahoma Court of Appeals decision,
that HSOG shall be governed by the Oklahoma General Corporation Act. While it
is not certain that stockholders have a valid claim to certain rights accruing
under the Old Act, adoption of the Proposed Amendment No. 8 would eliminate such
rights, including the right to dissent with respect to certain amendments to the
HSOG Certificate or the sale of substantially all the assets of HSOG.

Adoption of Proposed Amendment No. 8 will require the affirmative vote of
the holders of a majority of the outstanding shares of HSOG Common Stock. THE
BOARD OF DIRECTORS OF HSOG RECOMMENDS THAT HSOG STOCKHOLDERS VOTE "FOR" PROPOSED
AMENDMENT NO. 8 TO THE HSOG CERTIFICATE.

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APPROVAL OF THE HSOG 1997 INCENTIVE STOCK PLAN

The Board of Directors of HSOG has adopted the HSOG 1997 Incentive Stock
Plan (the "Stock Plan") and has ordered it to be submitted to the HSOG
stockholders for their consideration and approval at the HSOG Meeting. If
approved by HSOG Stockholders, the Stock Plan will only become effective if the
Merger is consummated. A copy of the Stock Plan is attached to this Proxy
Statement/Prospectus as Appendix F, and the following summary is qualified in
its entirety by reference to Appendix F.

General. The Stock Plan is intended to provide those persons selected to
participate in such plan additional incentive to promote the long-term success
of HSOG, to enable such persons to acquire an equity interest in HSOG, and to
enable HSOG to attract and retain individuals instrumental in contributing to
its success. Officers, key employees and directors, as well as other such
employees or consultants as the Board of Directors selects, are eligible to
receive grants and awards under the Stock Plan.

The total amount of New HSOG Common Stock initially authorized and reserved
for issuance under the Stock Plan is 451,736 shares (such number is based on the
estimated number of shares to be outstanding after consummation of the Merger).
However, the number of shares reserved for issuance under the Stock Plan shall
automatically increase as necessary so that, when added to the number of shares
subject to stock options granted or restricted stock awarded under the Stock
Plan, such number equals 10% of the issued and outstanding New HSOG Common Stock
(excluding outstanding shares of New HSOG Common Stock issued under the Stock
Plan). No awards have been granted under the Stock Plan.

The Stock Plan is administered by the HSOG Board of Directors. In the
course of administering the Stock Plan, the HSOG Board of Directors is
authorized to construe and interpret the Stock Plan and to adopt such rules,
regulations, guidelines, subplans, and procedures for carrying out the Stock
Plan as it deems necessary. In addition, the HSOG Board of Directors is
authorized to identify plan participants, determine the types and amounts of
awards to be granted, establish the terms, conditions, and provisions of awards,
prescribe forms of award agreements, establish, amend, and rescind rules and
regulations relating to the Stock Plan, and make all other determinations which
may be necessary or advisable for the administration of the Stock Plan. The
HSOG Board of Directors has not made a determination as to the number of
employees currently eligible for consideration as participants in the Stock
Plan.

Summary of Awards. The Stock Plan authorizes the grant of stock options
and award of restricted stock. Generally, awards under the Stock Plan will be
granted for no consideration other than prior and future services. Awards under
the Stock Plan do not preclude any salary, incentive, or performance plan
awards, payments under a Company retirement plan, or other benefits that may be
otherwise payable or distributable to any participant, or to such participant's
dependents or beneficiaries under any other plan or policy of HSOG or otherwise.
To the extent permitted by law, awards under the Stock Plan may be made alone,
in combination with, or in substitution for, any other award under the Stock
Plan or other HSOG plan.

Stock options granted to participants pursuant to the Stock Plan may, at
the discretion of the HSOG Board, be incentive stock options ("ISOs"), within
the meaning of Section 422 of the Internal Revenue Code, or non-qualified stock
options. ISOs, however, may only be awarded to employees of HSOG. The exercise
price of an ISO may not be less than the fair market value of the New HSOG
Common Stock on the date of grant (or 110% of such fair market value in the case
of ISOs granted to employees who own more than 10% of the combined voting power
of all classes of stock of HSOG). In the case of non-qualified stock options,
the exercise price shall be as determined by the HSOG Board in its sole
discretion, except that such price shall not be less than 50% of the fair market
value of the New HSOG Common Stock on the date of grant.

Stock options granted pursuant to the Stock Plan are exercisable in whole
or in part at such time or times as may be determined by the HSOG Board of
Directors, except that ISOs may not be exercised after the expiration of 10
years from the date granted (or 5 years in the case of ISOs granted to employees
who own

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more than 10 percent of the combined voting power of all classes of stock of
HSOG). Generally, stock options may be exercised by the payment of cash, stock,
promissory notes, the withholding of shares otherwise issuable upon exercise or
a combination thereof. With respect to options granted to employees and non-
employee directors of HSOG, the stock option agreement may provide for the
automatic grant of "reload options" to replace any shares of New HSOG Common
Stock delivered to HSOG to pay any required withholding tax with respect to the
exercise of a stock option. Such reload options would entitle a participant to
purchase a number of shares of New HSOG Common Stock equal to the number of
shares so delivered to HSOG for payment of the withholding tax at an exercise
price equal to the fair market value of the New HSOG Common Stock at the time of
delivery. A participant may defer the receipt of shares of New HSOG Common Stock
issuable to such participant upon exercise of a non-qualified stock option
pursuant to a written election delivered to the HSOG no later than six months
before the date of exercise. The shares otherwise deliverable to a participant
electing to defer the receipt thereof will be delivered to HSOG for the benefit
of such participant and credited to a bookkeeping account. Any dividends or
other distributions with respect to the deferred shares will be credited to the
participant's account. The deferral may be revoked by delivery of a written
notice of revocation.

Transferability and Changes Affecting Stock. Awards are not transferable
other than by will, the laws of descent and distribution or other applicable
law; provided, however, awards (other than ISOs) may be transferable to members
of an optionee's immediate family (or a trust for an optionee and/or his or her
family members) or charitable institutions with the consent of the Board of
Directors of HSOG. In the event of a merger, consolidation, reorganization,
recapitalization, stock split, or stock dividend, or a combination or
reclassification of shares, the number of shares of New HSOG Common Stock
reserved under the Stock Plan, the number of shares covered by outstanding stock
options and restricted stock, and the exercise prices of outstanding options
shall be adjusted proportionately. In the event of a change in control of HSOG,
as defined in the Stock Plan, all outstanding awards under the Stock Plan become
free of all restrictions, fully vested and exercisable; provided, however, with
respect to all outstanding stock options, HSOG shall have the right to acquire
any or all outstanding options for which the value of the shares covered
thereby, as established by the change in control, is greater than the exercise
price by paying the excess of such value established by the change in control
over the exercise price.

Amendment to and Termination of the Stock Plan. The HSOG Board of
Directors may amend, modify, suspend, discontinue, or terminate the Stock Plan
without the consent of stockholders or participants; provided, however, the
Board may not (i) increase the maximum number of shares reserved for issuance
under the Plan, except with stockholder approval, (ii) decrease the exercise
price of any option previously granted or (iii) delegate the administration of
the Stock Plan to any committee. The Stock Plan will terminate on a date
selected by the HSOG Board of Directors in its sole discretion.

Federal Income Tax Consequences. An optionee will not realize income for
federal income tax purposes, and HSOG will not be entitled to any deduction, on
the grant of an option under the Stock Plan. Generally, at the time of exercise
of a non-qualified option, an optionee will realize ordinary income for federal
income tax purposes in an amount equal to the excess, if any, of the fair market
value of the shares acquired on the date of exercise over the exercise price.
Any ordinary income realized by an optionee on the exercise of a non-qualified
option (or upon the disqualification of an incentive stock option, as discussed
below) will constitute "wages" for income tax withholding purposes. HSOG will
be entitled to a deduction, as of the date of exercise of an option, in an
amount equal to the ordinary income realized by the optionee. An optionee who
exercises a non-qualified option will have a basis, for federal income tax
purposes, in the shares so acquired equal to the fair market value of such
shares on the date of exercise.

Under the Plan, an optionee who is granted a non-qualified stock option may
elect to defer the receipt of a portion of the shares of New HSOG Common Stock
deliverable upon the exercise of the option. An optionee who makes such an
election in accordance with the procedures established in the Stock Plan and by
the Board of Directors will recognize no gain for federal income purposes at the
time of exercise. Upon such

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"deferred exercise," the optionee will receive that number of shares of New HSOG
Common Stock which equals the number of shares delivered in payment of the
exercise price and will assume a tax basis in such shares equal to his or her
tax basis in the delivered shares. The optionee will realize and recognize
ordinary income, and HSOG will be entitled to a deduction, in the amount of the
value of the deferred shares when they are actually delivered to the optionee in
accordance with the optionee's deferral election. Any distributions made to the
optionee in respect to the deferred shares will be taxed to the optionee as
compensation income at the time of such distributions and the amount of such
distributions will be deductible by HSOG.

The exercise of an ISO will not result in the recognition of ordinary
income or gain by the optionee and will not entitle HSOG to a deduction for
wages paid. The difference between the exercise price for a share of New HSOG
Common Stock under an ISO and the fair market value of such share on the date of
exercise will constitute an item of tax preference under the Alternative Maximum
Tax and therefore may result in a tax liability for an exercising optionee. An
optionee who exercises an ISO will have a basis, for federal income tax
purposes, in the shares so acquired equal to the exercise price for such shares.

To continue to qualify for the tax treatment set forth above, an optionee
who exercises an ISO must hold the New HSOG Common Stock so acquired for at
least two years after the date of grant of such option and at least one year
after the date of exercise. Failure to adhere to such holding period
requirements will result in the retroactive disqualification of an option as an
ISO with respect to the shares disposed of prematurely.

If an optionee uses previously acquired New HSOG Common Stock to pay the
exercise price of an option, the new shares so acquired will continue to have
the same status as the old shares used in the acquisition to the extent of the
number of old shares exchanged. Thus, the optionee's basis in such newly-
acquired shares will be equal to his basis in, and his holding period will
include the holding period for, the shares exchanged. Payment of the exercise
price by delivery of previously acquired stock generally postpones the
realization of any taxable capital gain on the unrealized appreciation of the
tendered shares. Any shares which are received in excess of the number of old
shares exchanged will be subject to the regular rules described above upon the
exercise of an option as if the exercise price for such shares is zero.

Unless an election is made under Section 83(b) of the Code, participants
who receive restricted stock awards will recognize taxable income as of the
earlier of the date on which the restrictions on the restricted stock lapse or
the stock is first transferable in the amount of the fair market value of the
New HSOG Common Stock at that time. Recipients of restricted stock may elect
under Section 83(b) of the Code to report as taxable income in the year of the
restricted stock award an amount of ordinary income equal to the fair market
value (without regard to the restrictions) of the stock at that time. If such
an election is made, the recipient making the election is not required
thereafter to report any further compensation income upon becoming vested in the
stock covered by the election. HSOG will be entitled to a deduction to the
extent and in the year that ordinary income is recognized by the recipient.
Dividends paid on restricted stock awarded under the Stock Plan will be treated
as additional compensation before the restrictions lapse, but are treated as
true dividends after the restrictions lapse (or after a Section 83(b) election).
Such dividends paid before the restrictions lapse (or before a Section 83(b)
election) will be deductible by HSOG.

If a plan participant forfeits the New HSOG Common Stock received pursuant
to a restricted stock award, he or she will not recognize any loss or deduction
(even with respect to income previously recognized as a result of a Section
83(b) election). Participants will recognize a gain or loss upon the
disposition of their stock equal to the difference between (1) the amount
realized on such disposition and (2) the ordinary income recognized with respect
to such stock. The gain or loss will be recognized as long term, mid term or
short term depending on whether the stock was held for more than 18 months,
between 12 and 18 months or 12 months or less, respectively.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS;
COMPENSATION AND OTHER INFORMATION CONCERNING
OFFICERS AND DIRECTORS

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF HSRC AND HSOG

The following table sets forth certain information as of September 30,
1997, and assuming consummation of the Merger, relating to the beneficial
ownership of HSRC Common Stock, HSOG Common Stock and New HSOG Common Stock,
respectively, by (i) any person known to HSRC or HSOG to own beneficially 5% or
more of the outstanding shares of HSRC Common Stock, HSOG Common Stock or New
HSOG Common Stock, (ii) each director of HSRC and HSOG, (iii) each of the
executive officers named in the Executive Compensation Table below, and (iv) all
current executive officers and directors of HSRC and HSOG as a group. Except as
otherwise indicated, each of the beneficial owners named below is believed by
HSRC or HSOG, as the case may be, to possess sole voting and investment power
with respect to such shares.

<TABLE>
<CAPTION>
HSRC HSOG
------------------------- ---------------------------------------------------
Prior to Merger Prior to Merger After the Merger(1)
------------------------- ------------------------- ------------------------
Number Percentage Number Percentage Number Percentage
Beneficial Owners of Shares of Shares of Shares of Shares of Shares of Shares
- ----------------- ----------- ---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
L. W. Allegood 2,267/(2)/ 3.2 1,859/(2)/ 2.1 166,083 3.7
Chris K. Corcoran 10/(2)/ * 5/(2)/ * 637 *
Larry F. Grindstaff 37/(2)/ * 18/(2)/ * 2,341 *
Ronald O. Gutman 1,118/(2)/ 1.6 696/(2)/ * 75,282 1.7
Joseph J. McCain, Jr. 44/(2)/ * 77/(2)/ * 4,452 *
I. Wistar Morris 9,338/(2)(3)/ 13.4 5,009/(2)(3)/ 5.6 604,658/(3)/ 13.4
Robert C. Simpson 1,696/(2)(4)/ 2.4 2,581/(2)(4)/ 2.9 159,960/(4)/ 3.5
The Home-Stake
Royalty Corporation/(5)/ 0 0 30,337 33.9 0 0
Howard E. Gray 1 * 1 * 79 *
The Home-Stake Oil &
Gas Company/(6)/ 13,456 19.3 0 0 0 0
Helen G. Trippet/(7)/ 5,003 7.2 8,500 9.5 498,447 11.0
All executive officers
and directors as a
group (10 persons) 27,989/(8)/ 40.0 40,590/(9)/ 45.4 1,014,774 22.5
</TABLE>

- ------------
* Less than one percent.

/(1)/ Reflects ownership of New HSOG Common Stock after consummation of the
Merger and Stock Split assuming no dissenters' appraisal rights are
exercised by stockholders of HSOG or HSRC.

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/(2)/ Excludes 13,456 shares of HSRC Common Stock held of record by HSOG
which such person as a director of HSOG may be deemed to share
investment and voting power with respect thereto with the other
directors of HSOG and 30,337 shares of HSOG Common Stock held of
record by HSRC which such person as a director of HSRC may be deemed
to share investment and voting power with respect thereto with the
other directors of HSRC.

/(3)/ Includes 2,796 shares of HSRC Common Stock and 2,909 shares of HSOG
Common Stock held by Mr. Morris' wife, three shares of HSOG Common
Stock held by or for Mr. Morris' children, 250 shares of HSOG Common
Stock over which Mr. Morris maintains investment power but no voting
power with respect thereto, 223,324 shares of New HSOG Common Stock
to be held by Mr. Morris' wife, 90 shares of New HSOG Common Stock to
be held by or for Mr. Morris' children and 7,500 shares of New HSOG
Common Stock over which Mr. Morris maintains investment power but no
voting power with respect thereto.

/(4)/ Includes 635 shares of HSRC Common Stock and 575 shares of HSOG
Common Stock owned by Mr. Simpson's wife; 540 shares of HSRC Common
Stock and 836 shares of HSOG Common Stock held by Mr. Simpson's
dependent children; and 48,150 shares of New HSOG Common Stock to be
owned by Mr. Simpson's wife and 51,538 shares of New HSOG Common
Stock to be held by Mr. Simpson's dependent children upon
consummation of the Merger.

/(5)/ The stockholder's address is 15 East 5th Street, Suite 2800, Tulsa,
Oklahoma 74103. The directors of HSRC each share investment and
voting power with respect to the shares of HSOG Common Stock
beneficially owned by HSRC.

/(6)/ The stockholder's address is 15 East 5th Street, Suite 2800, Tulsa,
Oklahoma 74103. The directors of HSOG each share investment and
voting power with respect to the shares of HSRC Common Stock
beneficially owned by HSOG.

/(7)/ The stockholder's address is 4632 South Victor, Tulsa, Oklahoma
74105.

/(8)/ Includes 14,533 shares of HSRC Common Stock owned by all executive
officers and directors of HSRC as a group and 13,456 shares of HSRC
Common Stock held of record by HSOG and beneficially owned by the
directors of HSOG, who are also the directors of HSRC, as a group.
The shares held by HSOG will be cancelled upon consummation of the
Merger.

/(9)/ Includes 10,253 shares of HSOG Common Stock owned by all executive
officers and directors of HSOG as a group and 30,337 shares of HSOG
Common Stock held of record by HSRC and beneficially owned by the
directors of HSRC, who are also the directors of HSOG, as a group.
The shares held by HSRC will be cancelled upon consummation of the
Merger.

EXECUTIVE OFFICERS OF HSOG AND HSRC

Each executive officer of HSOG also serves as the same executive officer of
HSRC. The following table sets forth certain information regarding the
executive officers of HSOG and HSRC. Officers are elected annually by the
respective Board of Directors of HSOG and HSRC and serve at their discretion.

-82-
<PAGE>

Name Age Position
---- --- --------
Robert C. Simpson 55 Chairman of the Board, Chief Executive
Officer, President and Treasurer
Chris K. Corcoran 46 Executive Vice President, Chief Financial
Officer and Secretary
Howard E. Gray 58 Vice President of Operations
Gary W. Fisher 48 Vice President of Administration and
Information Systems
Barbara C. Long 42 Vice President. Land

Mr. Robert C. Simpson joined HSOG and HSRC in 1976, was elected Vice
President in 1977, and served as Executive Vice President from 1980 until his
election as President of both companies in 1984. He became Chief Executive
Officer and Treasurer of HSOG and HSRC on January 1, 1990. He has served as a
director of both HSOG and HSRC since 1975 and as Chairman of the Board since
1992. Mr. Simpson received a Bachelor of Mechanical Engineering degree from
Cornell University in 1965 and is a Professional Engineer in the states of
Georgia and Oklahoma.

Mr. Corcoran is a certified public accountant and joined HSOG and HSRC in
1981 as Manager of Finance. In 1988, he was elected Vice President and Chief
Financial Officer of the companies and in 1989 he also assumed the duties of
corporate Secretary. Mr. Corcoran was elected as a director of HSOG and HSRC in
1992 and promoted to Executive Vice President in 1993. Prior to joining the
companies, he was employed as an audit manager for Arthur Young & Company (now
Ernst & Young LLP), a national accounting firm, where he dealt with clients in
the oil and gas industry. Mr. Corcoran received Bachelors degrees in Accounting
and Business Administration from Northeastern State College in 1973.

Mr. Gray joined HSOG and HSRC in 1990 as Engineering Manager and was
promoted to Vice President of Operations in 1994. Prior to joining the
companies, he held various drilling, production and reservoir engineering
positions with major oil companies. Mr. Gray graduated in 1961 from Central
State University in Edmond, Oklahoma with a B.S. Degree in Mathematics and
Physics.

Mr. Fisher joined HSOG and HSRC as Manager - Data Processing in 1980 and
was elected Vice President, Administration and Information Systems in 1991.
Prior to joining HSOG and HSRC, Mr. Fisher was a programmer with a Tulsa
consulting firm and had previously worked several years in the banking industry.
Mr. Fisher received a Bachelors degree in Business Management from Langston
University in 1991.

Mrs. Long joined the Company in 1984 as Manager of the Land Department. In
August 1996, she was elected Vice President, Land. Mrs. Long was previously
employed as Landman Supervisor of Energy Leasing, Inc. in Fort Smith, Arkansas.

EXECUTIVE COMPENSATION

Each of HSOG and HSRC pays one-half of the aggregate salary of the
executive officers of such company, who also serve as executive officers of the
other company. The following table sets forth the aggregate amount of all cash
compensation paid or accrued by HSOG and HSRC during the years ended December
31, 1996, 1995 and 1994 to their Chief Executive Officer and to each of their
most highly compensated executive officers whose aggregate compensation from
HSOG and HSRC during 1996 exceeded $100,000:

-83-
<PAGE>

<TABLE>
<CAPTION>
Other Annual
Name of Individual Principal Position Year Salary ($) Bonus ($) Compensation/(1)/
- -------------------- ------------------------ ---- ---------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Robert C. Simpson Chief Executive 1996 163,265 39,590 9,000
Officer, 1995 155,004 54,073 9,000
President and Treasurer 1994 150,004 16,254 9,000

Chris K. Corcoran Executive Vice 1996 103,352 18,230 7,834
President, Chief 1995 96,344 26,449 7,123
Financial Officer and 1994 92,400 21,468 7,096
Secretary

Howard E. Gray Vice President of 1996 96,779 18,910 7,444
Operations 1995 85,835 25,867 6,442
1994 77,936 20,570 6,061

</TABLE>

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

/(1)/ Consists of employer contributions to the 401(k) Plan on behalf of the
named individuals. Does not include non-cash compensation or benefits
provided by HSOG and HSRC to any of the foregoing during fiscal 1996. The
cost to HSOG and HSRC of such non-cash compensation was less than ten
percent of the cash compensation reported above for any of the named
persons.

Change in Control Severance Plans

In 1992, the Boards of Directors of HSOG and HSRC adopted The Home-Stake
Oil & Gas Company Change in Control Severance Plan and The Home-Stake Royalty
Corporation Change in Control Severance Plan, respectively (together, the
"Severance Plans"). The Severance Plans are designed to provide severance
payments in the event that all or substantially all of the assets or stock of
HSOG or HSRC, as the case may be, are acquired by another party and, if by
reason of such acquisition, an eligible employee's employment with HSOG or HSRC
terminates and no reasonable alternative employment by the acquiring entity is
offered. An "eligible employee" is an employee of HSOG or HSRC, as the case may
be, who is receiving salary for personal services rendered to HSOG or HSRC, as
the case may be, or who would be receiving such remuneration except for a leave
of absence.

Under the Severance Plans, an eligible employee will not be entitled to
severance pay after a change in control of HSOG or HSRC, as the case may be, if
the acquiring entity offers him or her a salary greater than or equal to 75% of
his or her salary with HSOG or HSRC, as the case may be, immediately prior to
the change in control (exclusive of benefits) and such offer is either (i) at a
location less than 50 miles from the location of his or her employment with HSOG
or HSRC, as the case may be, or (ii) he or she receives a reasonable transfer
allowance.

Eligible employees who have been employed by HSOG or HSRC, as the case may
be, for less than 5 years will be entitled to two weeks salary for each year of
service as severance pay under the Severance Plans. Eligible employees who have
been employed by HSOG or HSRC, as the case may be, for five years or more will
be entitled to three weeks of salary for each year of service as severance pay.
Department managers identified in the Severance Plans will receive, in addition
to the severance payment based on the years of service, one year's compensation
as part of the severance payment. The minimum payment under each of the
Severance Plans is one month's salary and the maximum payment is the lesser of
(i) three years' salary or (ii) $1.00 less than the amount which would result in
a significant excise tax under the so-called "excess parachute payment"

-84-
<PAGE>

provisions of the Internal Revenue Code of 1986, as amended. The Merger will
not constitute a change in control under the Severance Plans.

Employment Contracts

Robert C. Simpson has an employment agreement to serve as Chief Executive
Officer, President and Treasurer of HSOG and HSRC. The agreement continues
until terminated in accordance with its terms and conditions. Pursuant to the
terms of such agreement, Mr. Simpson currently receives an annual base salary of
not less than $140,000 together with other normal and customary executive
officer benefits. Each of HSOG and HSRC is responsible for one-half of such
annual base salary and benefits. The agreement provides that in the event of
termination or constructive termination (due to a material reduction in
functions, duties or responsibilities or a decrease in the base salary or in
other benefits) of Mr. Simpson's employment for any reason other than his
voluntary termination or termination for due cause, he will be entitled to
receive (1) a cash payment equal to his base salary for one year, (2) a pro rata
portion of any bonus due in respect of the calendar year in which the
termination or constructive termination occurs, and (3) an amount equal to the
lesser of $12,000 or fifty percent (50%) of his annual bonus due in respect of
the calendar year in which the termination or constructive termination occurs.
In the event of a constructive termination during or after a change in control
of HSOG and/or HSRC, Mr. Simpson will also be entitled to receive an additional
cash payment equal to his base salary for one year from the date of the
constructive termination. None of the other executive officers of HSOG or HSRC
has any arrangement or understanding with any person with respect to any future
employment by HSOG or HSRC. The Merger will not effect the change in control
provisions of the employment agreement. Subsequent to the Merger, HSOG will
become obligated for 100% of Mr. Simpson's salary and other benefits under the
employment agreement.

Director Compensation

Each non-employee director of HSOG receives a fee of $500 for attending
each regular or special meeting of the Board of Directors and $250 for
participating in any meeting of the Board held by telephone conference. The
Board of Directors of HSOG had a total of eight meetings (five by telephone
conference) in 1996. Further, each director was reimbursed by HSOG for his
expenses incurred in connection with his service on the Board of Directors and
any committee thereof.

Each non-employee director of HSRC receives a fee of $500 for attending
each regular or special meeting of the Board of Directors and $250 for
participating in any meeting of the Board held by telephone conference. The
Board of Directors of HSRC had a total of eight meetings (five by telephone
conference) in 1996. Further, each director was reimbursed by HSRC for his
expenses incurred in connection with his service on the Board of Directors and
any committee thereof.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

HSOG and HSRC are under common management and both companies frequently
participate jointly in the acquisition of mineral and leasehold interests and in
exploration and development activities. Each company generally owns an equal
interest in the oil and gas properties in which they jointly participate,
however such interests may vary. Only HSRC, however, serves as operator on
properties that are not operated by outside parties. In accordance with oil and
gas industry practice, the oil and gas ventures in which both companies
participate are considered to be joint, but separate. For those properties
operated by outside parties, each of HSOG and HSRC is generally billed
separately for its share of operating and drilling costs and separately
reimburse the operator for those costs. For properties operated by HSRC, HSOG
is billed for such costs monthly.

-85-
<PAGE>

Payroll costs for personnel of HSOG are paid by HSRC and HSOG reimburses
HSRC for its one-half share of such costs. For substantially all other general
and administrative costs, each Company separately pays for its one-half share.

For the years ended December 31, 1996 and 1995, HSRC paid or billed, as
indicated, HSOG the following amounts:
<TABLE>
<CAPTION>
1996 1995
-------- --------

<S> <C> <C>
Paid: Oil and gas sales, net of production taxes.. $451,941 $231,235

Billed: Property and equipment...................... 82,838 337,076
Lease operating expenses.................... 818,886 693,033
Payroll costs............................... 494,243 455,331
</TABLE>

All revenues and expenses described above are paid by the respective
company in cash on a monthly basis.

OTHER MATTERS

The HSOG and HSRC Boards of Directors have no knowledge of any business to
be presented for consideration at the HSOG Meeting or the HSRC Meeting,
respectively, other than as described in this Proxy Statement/Prospectus.
Should any such other matters properly come before such Meetings or any
adjournments or postponements thereof, the persons named in the accompanying
forms of proxy will have discretionary authority to vote the shares represented
thereby in accordance with their best judgment on such other matters and with
respect to matters incident to the conduct of such Meetings.

LEGAL MATTERS

The validity of the shares of New HSOG Common Stock to be issued in
connection with the Merger and Stock Split and the federal income tax
consequences in connection with the Merger and Stock Split will be passed upon
for HSOG and HSRC by Conner & Winters, A Professional Corporation, Tulsa,
Oklahoma ("Conner & Winters"). Joseph J. McCain, Jr., a director of HSOG and
HSRC, is a stockholder and director of Conner & Winters.

EXPERTS

The consolidated financial statements of HSOG and HSRC at December 31, 1996
and 1995 and for each of the two years in the period ended December 31, 1996,
included in this Proxy Statement/Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports appearing elsewhere herein, and are included in reliance upon such
reports given upon the authority of said firm as experts in accounting and
auditing.

Information appearing in this Proxy Statement/Prospectus regarding HSOG's
and HSRC's estimated oil and gas reserves and the present value of future net
revenues therefrom is based, to the extent described herein, upon estimates of
such reserves and present values reviewed by Lee Keeling and Associates, Inc.,
independent petroleum engineers. Such information has been so included herein in
reliance upon the authority of such firm as experts in petroleum engineering.

-86-
<PAGE>

DEFINITION OF CERTAIN TERMS

When used in this Proxy Statement/Prospectus, the following terms have the
meanings indicated below.

"Amended HSOG Certificate" means the Certificate of Incorporation of HSOG,
as amended in connection with the Merger.

"Bbl" means one stock tank barrel, or 42 U.S. gallons liquid volume (used
herein in reference to crude oil or other liquid hydrocarbons).

"Bcf" means one billion cubic feet.

"Business Combination Statute" means the provisions of the Business
Combination Statute of the Oklahoma General Corporation Act that may have the
effect of preventing, discouraging or delaying a change in control of HSOG.

"Certificate of Merger" is the document filed with the Secretary of State
of the State of Oklahoma to effectuate the Merger.

"Code" means the Internal Revenue Code of 1986, as amended.

"Commission" means the Securities and Exchange Commission.

"Effective Time" or "Effective Time of the Merger" is the time the Merger
is effective, which will be 5:00 o'clock p.m., Central Standard Time, on
December 31, 1997.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Exchange Ratio" means the 48.66 shares of New HSOG Common Stock into which
each share of HSRC Common Stock outstanding immediately prior to the Merger will
be converted by virtue of the Merger. In some instances the Exchange Ratio is
stated to be 1.622 which is the number of shares of old HSOG Common Stock into
which each share of HSRC Common Stock outstanding immediately prior to the
Merger would be converted by virtue of the Merger if the Stock Split were not
effected by the Merger.

"FERC" means the Federal Energy Regulatory Commission.

"HSOG" means The Home-Stake Oil & Gas Company, an Oklahoma corporation.

"HSOG Bylaws" means the bylaws of HSOG, as currently in effect.

"HSOG Certificate" means the Certificate of Incorporation of HSOG, as
currently in effect.

"HSOG Common Stock" means the common stock of HSOG, $20 par value per
share, prior to the Stock Split.

"HSOG Letter of Transmittal" means the letter of transmittal to be used to
effect the exchange of certificates representing HSOG Common Stock for
certificates representing New HSOG Common Stock. A copy of the HSOG Letter of
Transmittal will be mailed to each record holder of HSOG Common Stock entitled
to receive New HSOG Common Stock in exchange therefor as soon as practicable
after the Effective Time.

-87-
<PAGE>

"HSOG Meeting" means the Special Meeting of Stockholders of HSOG to be held
on December 11, 1997, at 9:00 a.m., Tulsa, Oklahoma time, at 15 East 5th Street,
Suite 2800, Tulsa, Oklahoma, or any adjournment or postponement thereof.

"HSOG Preferred Stock" means the preferred stock, $1.00 par value per
share, of HSOG.

"HSRC" means The Home-Stake Royalty Corporation, an Oklahoma corporation.

"HSRC Bylaws" means the bylaws of HSRC, as currently in effect.

"HSRC Certificate" means the Certificate of Incorporation of HSRC, as
currently in effect.

"HSRC Common Stock" means the common stock, $40.00 par value per share, of
HSRC.

"HSRC Letter of Transmittal" means the letter of transmittal to be used to
effect the exchange of certificates representing HSRC Common Stock for
certificates representing New HSOG Common Stock. A copy of the HSRC Letter of
Transmittal will be mailed to each record holder of HSRC Common Stock entitled
to receive New HSOG Common Stock in exchange therefor as soon as practicable
after the Effective Time.

"HSRC Meeting" means the Special Meeting of Stockholders of HSRC to be held
on December 11, 1997, at 9:00 a.m., Tulsa, Oklahoma time, at 15 East 5th Street,
Suite 2800, Tulsa, Oklahoma, or any adjournment or postponement thereof.

"Mcf" means one thousand cubic feet.

"Merger" means the merger of HSRC with and into HSOG pursuant to the Merger
Agreement.

"Merger Agreement" means that certain Agreement of Merger dated as of
August 14, 1997, between HSOG and HSRC, as amended September 24, 1997.

"New HSOG Common Stock" means the common stock of HSOG, $.01 par value per
share, after the Stock Split.

"Oklahoma District Court" means an Oklahoma district court with proper
venue in connection with a valid exercise of appraisal rights.

"Partnership" means H-S Royalty, Ltd., an Oklahoma limited partnership.

"Present Value of Estimated Future Net Revenues" means the estimate of the
future net revenues from oil and gas reserves, at a particular date, after
deducting estimated production and ad valorem taxes, future capital costs and
operating expenses, but before deducting federal income taxes. The future net
revenues are then discounted at an annual rate of 10% to determine their
"present value." Estimates are made based on constant oil and natural gas
prices and operating expenses as of the date of the reserve information.

"Proxy Statement/Prospectus" means this Joint Proxy Statement and
Prospectus.

"Registration Statement" means the Registration Statement on Form S-4 filed
by HSOG with the Commission with respect to the shares of New HSOG Common Stock
to be issued in the Merger. This Proxy Statement/Prospectus forms a part of
such Registration Statement.

"Reorganizations" mean reorganizations within the meaning of Section 368(a)
of the Code.

-88-
<PAGE>

"Section 1091" means Section 1091 of the Oklahoma General Corporation Act
with respect to dissenters' appraisal rights.

"Securities Act" means the Securities Act of 1933, as amended.

"Severance Plans" means The Home-Stake Oil & Gas Company Change in Control
Severance Plan and The Home-Stake Royalty Corporation Change in Control
Severance Plan together.

"Stock Plan" means the HSOG 1997 Incentive Stock Plan.

"Stock Split" means the split of the shares of the common stock of HSOG on
a 30-for-1 basis in connection with the Merger.

"The Home-Stake Companies" means HSOG and HSRC together.

-89-
<PAGE>

INDEX TO FINANCIAL STATEMENTS

Page
----
UNAUDITED PRO FORMA FINANCIAL STATEMENTS:

Unaudited Pro Forma Balance Sheet as of June 30, 1997.................... F-4
Unaudited Pro Forma Statement of Operations for the six months
ended June 30, 1997................................................... F-5

Unaudited Pro Forma Statement of Operations for the year
ended December 31, 1996............................................... F-6

Notes to Unaudited Pro Forma Financial Statements........................ F-7

THE HOME-STAKE OIL & GAS COMPANY:

Unaudited Condensed Balance Sheets as of June 30, 1997 and
December 31, 1996..................................................... F-10
Unaudited Condensed Statements of Income and Accumulated Deficit
for the six months ended June 30, 1997 and 1996....................... F-11
Unaudited Condensed Statements of Cash Flows for the six months
ended June 30, 1997 and 1996.......................................... F-12
Notes to Condensed Financial Statements.................................. F-13

Report of Independent Auditors........................................... F-14
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-15
Consolidated Statements of Income and Accumulated Deficit for the years
ended December 31, 1996 and 1995...................................... F-16
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995...................................... F-17
Notes to Consolidated Financial Statements............................... F-18
Supplementary Information of Oil and Gas Producing Activities for the
years ended December 31, 1996 and 1995 (unaudited).................... F-25

F-1
<PAGE>

INDEX TO FINANCIAL STATEMENTS

Page
----
THE HOME-STAKE ROYALTY CORPORATION:

Unaudited Condensed Balance Sheets as of June 30, 1997 and
December 31, 1996..................................................... F-28
Unaudited Condensed Statements of Income and Retained Earnings
for the six months ended June 30, 1997 and 1996....................... F-29
Unaudited Condensed Statements of Cash Flows for the six months
ended June 30, 1997 and 1996.......................................... F-30
Notes to Condensed Financial Statements.................................. F-31

Report of Independent Auditors........................................... F-32
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-33
Consolidated Statements of Income and Retained Earnings for the years
ended December 31, 1996 and 1995...................................... F-34
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995...................................... F-35
Notes to Consolidated Financial Statements............................... F-36
Supplementary Information of Oil and Gas Producing Activities for the
years ended December 31, 1996 and 1995 (unaudited).................... F-43

F-2
<PAGE>

UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The accompanying unaudited pro forma financial statements have been prepared to
illustrate the effects of the proposed merger between HSOG and HSRC ("the
Companies").

The unaudited pro forma balance sheet as of June 30, 1997 gives effect to the
merger as if it had occurred on that date. The unaudited pro forma statements
of operations for the six months ended June 30, 1997 and the year ended December
31, 1996 give effect to the merger as if it had occurred on January 1, 1996.

The historical balances for HSOG and HSRC included in these pro forma financial
statements agree to the audited and unaudited financial statements for the
Companies included hereafter. The pro forma financial statements are based on
information available at the current time and reflect adjustments and
assumptions deemed by Management to be appropriate. These pro forma statements
are not intended to be indicative of the actual results of operations or
financial position had the transactions occurred as of the dates indicated
above, nor do they purport to indicate operating results or financial position
which may be attained in the future. Future results may vary significantly from
the results reflected in the unaudited pro forma statements of operations due to
oil and gas production fluctuations, changes in product prices, future
acquisitions and divestitures, future exploration and development activities and
other factors.

The unaudited pro forma financial information should be read in conjunction with
the historical financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".

F-3
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1997

ASSETS

<TABLE>
<CAPTION>
Historical
------------------------- Pro Forma
HSRC HSOG Adjustments Pro Forma
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $ 727,181 $ 268,583 $ 995,764
Accounts receivable.............................. 707,408 533,141 1,240,549
Receivable from affiliate........................ 17,679 - (17,679) (b) -
Prepaid expenses................................. 168,272 76,425 244,697
----------- ----------- ------------ -----------
Total current assets........................... 1,620,540 878,149 (17,679) 2,481,010

INVESTMENTS........................................ 3,699,162 2,773,028 (3,699,162) (a)
(2,773,028) (c) -

PROPERTY AND EQUIPMENT, AT COST:
Producing oil and gas leases..................... 19,856,940 19,369,915 (9,165,877) (a) 30,060,978
Producing royalty interests...................... 2,835,905 3,006,408 (584,527) (a) 5,257,786
Nonproducing oil and gas properties.............. 938,636 766,389 1,213,255 (a) 2,918,280
Office equipment and other....................... 510,446 510,419 (456,973) (a) 563,892
----------- ----------- ------------ -----------
24,141,927 23,653,131 (8,994,122) 38,800,936
Less accumulated depreciation, and amortization.. 15,716,548 15,467,581 (15,467,581) (a) 15,716,548
----------- ----------- ------------ -----------
Net property and equipment..................... 8,425,379 8,185,550 6,473,459 23,084,388

OTHER ASSETS....................................... 24,119 23,327 47,446
----------- ----------- ------------ -----------
$13,769,200 $11,860,054 $ (16,410) $25,612,844
=========== =========== ============ ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued liabilities......... $ 602,247 $ 320,631 $ 922,878
Dividends declared............................... 62,827 - 62,827
Payable to affiliate............................. - 17,679 (17,679) (b) -
Income taxes payable............................. 137,738 79,156 216,894
Bonus payable.................................... 24,200 21,800 46,000
Current notes payable............................ 0 1,369,320 1,369,320
----------- ----------- ------------ -----------
Total current liabilities...................... 827,012 1,808,586 (17,679) 2,617,919
LONG-TERM NOTE PAYABLE............................. 0 1,141,100 1,141,100
DEFERRED INCOME TAXES.............................. 955,006 551,798 2,116,450 (a) 3,623,254
STOCKHOLDERS' EQUITY:
Preferred stock
Common stock..................................... 4,000,000 2,000,000 (606,740) (a)
(538,240) (c)
(1,417,500) (d)
(3,392,346) (e) 45,174
------------
Additional paid-in capital....................... 6,000,000 8,055,613 1,051,561 (a)
(2,234,788) (c)
(3,430,681) (d)
3,392,346 (e) 12,834,051
------------
Retained earnings (deficit)...................... 5,351,346 (213,026) 213,026 (a) 5,351,346
----------- ----------- ------------ -----------
15,351,346 9,842,587 (6,963,362) 18,230,571
Less treasury shares............................. 3,364,164 1,484,017 (4,848,181) (d) -
----------- ----------- ------------ -----------
Total stockholders' equity..................... 11,987,182 8,358,570 (2,115,181) 18,230,571
----------- ----------- ------------ -----------
$13,769,200 $11,860,054 $ (16,410) $25,612,844
=========== =========== ============ ===========
</TABLE>

See accompanying notes to unaudited pro forma financial statements.

F-4
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997

<TABLE>
<CAPTION>
Historical
------------------------ Pro Forma
HSRC HSOG Adjustments Pro Forma
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES:
Oil Sales................................. $ 2,294,048 $2,230,920 $4,524,968
Gas sales................................. 1,525,891 1,389,533 2,915,424
Lease bonuses and rentals................. 49,378 40,826 90,204
Interest and dividends.................... 19,617 13,800 33,417
Gains on sales of assets.................. 99,708 99,708 199,416
Income from equity affiliates............. 271,139 165,989 (437,128) (f) -
Other..................................... 91,827 86,877 178,704
----------- ---------- --------- ----------
4,351,608 4,027,653 (437,128) 7,942,133

COSTS AND EXPENSES:
Lease operating expenses.................. 778,957 773,376 1,552,333
Production taxes.......................... 306,053 300,135 606,188
Depreciation, depletion and amortization.. 676,166 634,015 (128,388) (g)
411,027 (h) 1,592,820
Dry hole costs............................ 370,747 275,114 645,861
Condemned and abandoned properties........ 46,515 34,671 81,186
General and administrative expense........ 539,933 536,840 1,076,773
Interest expense.......................... 36,086 145,918 182,004
Property, franchise and other taxes....... 87,197 71,203 158,400
----------- ---------- --------- ----------
2,841,654 2,771,272 (282,639) 5,895,565
----------- ---------- --------- ----------

INCOME BEFORE PROVISION FOR INCOME TAXES.... 1,509,954 1,256,381 (719,767) 2,046,568

PROVISION FOR INCOME TAXES
Current................................... 237,010 155,486 97,700 (i) 490,196
Deferred.................................. 181,806 159,232 (154,357) (i) 186,681
----------- ---------- --------- ----------
418,816 314,718 (56,657) 676,877
----------- ---------- --------- ----------

NET INCOME.................................. $1,091,1387 $ 941,663 $(663,110) $1,369,691
=========== ========== ========= ==========

SHARES OUTSTANDING.......................... 69,808 89,509 4,517,363
----------- ---------- ==========

NET INCOME PER SHARE........................ $ 15.63 $ 10.52 $ .30
=========== ========== ==========
</TABLE>

See accompanying notes to unaudited pro forma financial statements

F-5
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
Historical
---------------------- Pro Forma
HSRC HSOG Adjustments Pro Forma
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Oil Sales................................. $4,827,826 $4,719,835 $ 9,547,661
Gas sales................................. 2,536,078 2,374,423 4,910,501
Lease bonuses and rentals................. 23,294 17,300 40,594
Interest and dividends.................... 65,446 27,114 92,560
Gains on sales of assets.................. 168,664 169,139 337,803
Income (loss) from equity affiliates...... 389,972 263,294 (672,893) (f) (19,627)
Other..................................... 202,184 170,969 373,153
---------- ---------- ----------- -----------
8,213,464 7,742,074 (672,893) 15,282,645

COSTS AND EXPENSES:
Lease operating expenses.................. 2,444,121 2,432,956 4,877,077
Production taxes.......................... 631,600 657,788 1,289,388
Depreciation, depletion and amortization.. 1,351,335 1,284,669 (249,336) (g)
768,049 (h) 3,154,717
Dry hole costs............................ 131,975 105,381 237,356
Condemned and abandoned properties........ 55,668 50,354 106,022
General and administrative expense........ 781,480 773,330 1,554,810
Interest expense.......................... 249,692 452,493 702,185
Property, franchise and other taxes....... 110,736 102,313 213,049
---------- ---------- ----------- -----------
5,756,607 5,859,284 518,713 12,134,604
---------- ---------- ----------- -----------

INCOME BEFORE PROVISION FOR INCOME TAXES.... 2,456,857 1,882,790 (1,191,606) 3,148,041

PROVISION FOR INCOME TAXES
Current................................... 327,634 123,717 81,444 (i) 532,795
Deferred.................................. 285,062 321,399 (121,146) (i) 485,315
---------- ---------- ----------- -----------
612,696 445,116 (39,702) 1,018,110
---------- ---------- ----------- -----------

NET INCOME.................................. $1,844,161 $1,437,674 $(1,151,904) $ 2,129,931
========== ========== =========== ===========

SHARES OUTSTANDING.......................... 69,808 89,509 4,517,363
========== ========== ===========

NET INCOME PER SHARE........................ $ 26.42 $ 16.06 $ .47
========== ========== ===========
</TABLE>

See accompanying notes to unaudited pro forma financial statements.

F-6
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
--------------------------------
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The pro forma financial statements have been prepared on the purchase method of
accounting, with HSOG deemed to be the purchased entity, even though the merged
companies will adopt the name of HSOG. In accordance with the Merger Agreement,
holders of Common Stock of HSOG will receive 30 shares of New HSOG Common Stock
for each share of stock currently held, holders of HSRC Common Stock will
receive 48.66 shares of New HSOG Common Stock for each share of stock currently
held, and all treasury shares and shares owned by each company in the other will
be canceled. The historical earnings per share do no reflect the additional
shares issued in the merger.

NOTE 2 - PRO FORMA ADJUSTMENTS

Pro Forma Balance Sheet
-----------------------

The accompanying unaudited pro forma balance sheet as of June 30, 1997 has been
prepared as if the proposed merger had occurred on that date and includes the
following adjustments:

(a) Adjust assets and liabilities under the purchase method of accounting as
follows:

Since there is no established public trading market for the Companies' common
stock, the purchase price was determined based upon the fair values of HSOG's
assets and liabilities. The current assets and liabilities and long-term note
payable of HSOG were valued at historical cost, which approximates fair value.
The fair values of property and equipment were based on (i) the estimated
future discounted net cash flows of HSOG's producing oil and gas properties,
after giving effect to deferred income taxes, (ii) an independent appraisal of
HSOG's nonproducing minerals, and (iii) historical cost of nonproducing oil
and gas leases and office equipment and other, which approximates fair value.
No oil and gas properties were deemed to have been impaired pursuant to
Statement of Financial Accounting Standards No. 121 and no goodwill will be
recorded in connection with this transaction.

F-7
<PAGE>

The preliminary allocation of the purchase price of HSOG included in the pro
forma balance sheet at June 30, 1997 is summarized as follows:

<TABLE>
<S> <C>
Current assets......................... $ 878,149

Property and equipment:

Producing oil and gas leases......... 10,204,038

Producing royalty interests.......... 2,421,881

Nonproducing oil and gas properties.. 1,979,644

Office equipment and other........... 53,446

Other assets........................... 23,327

Current liabilities.................... (1,808,586)

Long-term debt......................... (1,141,100)

Deferred income taxes.................. (2,668,248)
-----------

$ 9,942,551
===========
</TABLE>

(b) Eliminate the inter-company receivable / payable between the Companies.

(d) Cancellation of the treasury stock owned by each company.

(e) Reclassification to the change in par value of the common stock to $.01 per
share, based on resulting shares issued and outstanding following the merger
and stock split.

Pro Forma Statements of Operations
----------------------------------

The accompanying unaudited pro forma statements of operations for the six months
ended June 30, 1997 and for the year ended December 31, 1996 have been prepared
as if the proposed merger had occurred on January 1, 1996. Such statements
include the following adjustments:

(f) Eliminate the income from equity affiliates associated with the stock each
company owns in the other.

(g) Eliminate the amortization of the excess of the investment of each company
in the underlying equity in net assets of the other.

(h) Estimated adjustment to depreciation, depletion and amortization expense
attributable to the stepped-up basis in producing oil and gas properties.

(i) Estimated provision for income taxes attributable to the pro forma merger of
the Companies.

F-8
<PAGE>

NOTE 3 - PROVISION FOR INCOME TAXES

The pro forma adjustments related to the provisions for income tax differ
significantly from the "expected" provisions due principally to the unusual
nature of the necessary income tax adjustments associated with the proposed
merger. These adjustments include the loss of certain allowable statutory
depletion deductions by the merged entity that are currently available to each
of the Companies separately. For the periods presented, the increase in current
income tax expense associated with the loss of such deductions is largely offset
by the effects of the alternative minimum tax credit carryforwards available to
offset current and future income taxes. The other significant income tax
adjustment relates to the recognition of deferred income tax credits associated
with the stepped-up basis in the producing oil and gas properties resulting from
the proposed merger.

F-9
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)

ASSETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 268,583 $ 350,772
Accounts receivable.......................................... 533,141 1,089,063
Prepaid expenses............................................. 76,425 133,213
----------- -----------
Total current assets...................................... 878,149 1,573,048

INVESTMENTS (NOTE 2)........................................... 2,773,028 2,733,595

PROPERTY AND EQUIPMENT, AT COST:............................... 23,653,131 24,804,033
Less accumulated depreciation, depletion and amortization.. 15,467,581 16,201,676
----------- -----------
Net property and equipment............................. 8,185,550 8,602,357

OTHER ASSETS................................................... 23,327 23,327
----------- -----------
$11,860,054 $12,932,327
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued liabilities..................... $ 320,631 $ 827,272
Payable to affiliate......................................... 17,679 66,213
Income taxes payable......................................... 79,156 15,971
Bonus payable................................................ 21,800 15,929
Current note payable (Note 3)................................ 1,369,320 1,369,320
----------- -----------
Total current liabilities................................. 1,808,586 2,294,705

LONG-TERM NOTE PAYABLE (NOTE 3)................................ 1,141,100 2,738,640

DEFERRED INCOME TAXES.......................................... 551,798 392,566
CONTINGENCIES (NOTE 4)

STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value -
200,000 shares authorized; none issued
Common stock, $20 par value -
100,000 shares authorized and issued....................... 2,000,000 2,000,000
Additional paid-in capital................................... 8,055,613 8,055,613
Accumulated Deficit.......................................... (213,026) (1,065,180)
----------- -----------
9,842,587 8,990,433
Less treasury stock, at cost - 10,491 shares................. 1,484,017 1,484,017
----------- -----------
Total stockholders' equity................................ 8,358,570 7,506,416
----------- -----------
$11,860,054 $12,932,327
=========== ===========
</TABLE>

See accompanying notes.

F-10
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
CONDENSED STATEMENTS OF INCOME
AND ACCUMULATED DEFICIT
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Oil sales...................................................... $ 2,230,920 $ 2,257,666
Gas sales...................................................... 1,389,533 1,123,336
Lease bonuses and rentals...................................... 40,826 7,463
Interest and dividends......................................... 13,800 10,038
Gain on sales of assets........................................ 99,708 2,865
Income from equity affiliates.................................. 165,989 115,894
Other.......................................................... 86,877 74,227
----------- -----------
4,027,653 3,591,489

COSTS AND EXPENSES:
Lease operating expenses....................................... 773,376 1,031,725
Production taxes............................................... 300,135 322,690
Depreciation, depletion and amortization....................... 634,015 674,706
Dry hole costs................................................. 275,114 46,118
Condemned and abandoned properties............................. 34,671 (5,075)
General and administrative expense............................. 536,840 466,755
Interest expense............................................... 145,918 238,284
Property, franchise and other taxes............................ 71,203 57,237
----------- -----------
2,771,272 2,832,440
----------- -----------

INCOME BEFORE PROVISION FOR INCOME TAXES......................... 1,256,381 759,049

PROVISION FOR INCOME TAXES:
Current........................................................ 155,486 54,700
Deferred....................................................... 159,232 194,688
----------- -----------
314,718 249,388
----------- -----------

NET INCOME....................................................... 941,663 509,661

ACCUMULATED DEFICIT AT BEGINNING OF PERIOD....................... (1,065,180) (2,279,081)

CASH DIVIDENDS ($1.00 PER SHARE - 1997, $1.50 PER SHARE - 1996).. (89,509) (134,264)
----------- -----------

ACCUMULATED DEFICIT AT END OF PERIOD............................. $ (213,026) $(1,903,684)
=========== ===========

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING............. 89,509 89,509
====== ======

NET INCOME PER SHARE............................................. $10.52 $ 5.69
====== ======
</TABLE>

See accompanying notes.

F-11
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Oil and gas sales, net of production taxes........ $ 3,465,269 $2,971,266
Lease bonuses and rentals......................... 40,826 7,463
Interest and dividends............................ 13,800 10,038
Other............................................. 86,877 74,227
----------- ----------
3,606,772 3,062,994

Cash paid to suppliers and employees.............. 1,308,479 1,583,240
Interest paid..................................... 145,918 238,284
Property, franchise and other taxes............... 71,203 57,237
Income taxes paid................................. 92,301 2,602
----------- ----------
1,617,901 1,881,363
----------- ----------
Net cash provided by operating activities....... 1,988,871 1,181,631

INVESTING ACTIVITIES:
Proceeds from sales of property and equipment..... 171,372 3,000
Acquisition of property and equipment............. (579,637) (167,858)
Dividends/distributions from equity affiliates.... 24,221 32,300
----------- ----------
Net cash used in investing activities........... (384,044) (132,558)

FINANCING ACTIVITIES:
Note payments..................................... (1,597,540) (684,660)
Cash dividends paid............................... (89,476) (134,159)
----------- ----------
Net cash used in financing activities........... (1,687,016) (818,819)
----------- ----------

NET INCREASE (DECREASE) IN CASH..................... (82,189) 230,254

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 350,772 227,144
----------- ----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $ 268,583 $ 457,398
=========== ==========
</TABLE>

See accompanying notes.

F-12
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 - GENERAL

The unaudited financial information provided in these interim condensed
financial statements includes all normal recurring adjustments which are, in the
opinion of management, necessary to fairly present the financial position,
result of operations and cash flows of the Company. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted or
condensed. The Company believes that the disclosures herein are adequate to
make the information presented not misleading; however, these financial
statements should be read in conjunction with the audited financial statements
and related notes thereto included herein.

The results for interim periods are not necessarily indicative of trends or of
results to be expected for the full year.

NOTE 2- SUMMARIZED FINANCIAL INFORMATION OF EQUITY INVESTEES

Summarized income statement information for the six months ended June 30, 1997
and 1996 for The Home-Stake Royalty Corporation ("HSRC") and Alden Pipeline
Company is presented below:
<TABLE>
<CAPTION>

1997 1996
---- ----
<S> <C> <C>
Income Statement data:
Revenues.................... $4,351,608 $3,776,556
Income before income taxes.. 1,509,954 1,001,057
Net income /(1)/............ 1,091,138 754,245
</TABLE>

/(1)/ Includes $271,139 and $138,829 in 1997 and 1996, respectively,
attributable to the equity earnings of the Company recorded by HSRC.

During the first quarter of 1997, the Company sold its interest in the N.E.
Alden Field, including Alden Pipeline Company. This sale was effective January
1, 1997. Accordingly, 1997 information presented above does not include amounts
attributable to the operations of Alden Pipeline Company; amounts included for
1996 operations are not material to the totals shown.

NOTE 3 - NOTE PAYABLE

Note payable at June 30, 1997, represents the amounts due under the Company's
financing agreement which is due May 1, 1999, and provides for monthly
maturities of $114,110, plus interest at bank prime. In addition, the Company
has a line of credit in the amount of $500,000 available until May 1, 1998,
which provides for monthly payments of interest on the outstanding borrowings at
bank prime. There is no balance under this line, however the Company has issued
letters of credit in the amount of $60,000 which are also guaranteed by this
line.

The notes payable and line of credit described above are collateralized by
certain of the Company's producing properties.

NOTE 4 - CONTINGENCIES

The Company is involved in various legal actions arising in the normal course of
business. In the opinion of management, the Company's liabilities, if any, in
these matters will not have a material effect on the Company's financial
position or the results of operations.

F-13
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
The Home-Stake Oil & Gas Company

We have audited the accompanying consolidated balance sheets of The Home-Stake
Oil & Gas Company as of December 31, 1996 and 1995, and the related consolidated
statements of income and accumulated deficit and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Home-Stake Oil
& Gas Company at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.

ERNST & YOUNG LLP

Tulsa, Oklahoma
March 21, 1997

F-14
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

ASSETS
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 350,772 $ 227,144
Accounts receivable........................................ 1,089,063 522,149
Prepaid expenses........................................... 133,213 81,404
----------- -----------

Total current assets............................... 1,573,048 860,697

INVESTMENTS (NOTE 2)......................................... 2,733,595 2,407,552

PROPERTY AND EQUIPMENT, AT COST:
Producing oil and gas leases (working interests)........... 20,595,869 23,496,466
Producing oil and gas royalties............................ 3,012,619 3,026,954
Nonproducing oil and gas properties........................ 703,328 696,628
Office equipment and other................................. 492,217 484,063
----------- -----------
24,804,033 27,704,111
Less accumulated depreciation, depletion and amortization.. 16,201,676 17,961,108
----------- -----------
Net property and equipment......................... 8,602,357 9,743,003

OTHER ASSETS................................................. 23,327 20,499
----------- -----------
$12,932,327 $13,031,751
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued liabilities................... $ 827,272 $ 503,686
Payable to affiliate....................................... 66,213 195,320
Income taxes payable....................................... 15,971 2,610
Bonus payable.............................................. 15,929 32,710
Current notes payable (Note 3)............................. 1,369,320 1,369,320
----------- -----------
Total current liabilities.......................... 2,294,705 2,103,646
LONG-TERM NOTES PAYABLE (NOTE 3)............................. 2,738,640 4,564,423
DEFERRED INCOME TAXES (NOTE 4)............................... 392,566 71,167
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY (NOTE 7):
Preferred stock, $1 par value -
200,000 shares authorized; none issued
Common stock, $20 par value -
100,000 shares authorized and issued..................... 2,000,000 2,000,000
Additional paid-in capital................................. 8,055,613 8,055,613
Accumulated deficit........................................ (1,065,180) (2,279,081)
----------- -----------
8,990,433 7,776,532
Less treasury stock, at cost - 10,491 shares............... 1,484,017 1,484,017
----------- -----------

Total stockholders' equity......................... 7,506,416 6,292,515
----------- -----------

$12,932,327 $13,031,751
=========== ===========
</TABLE>

See accompanying notes.

F-15
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
REVENUES:
Oil sales........................................................ $ 4,719,835 $ 3,659,401
Gas sales........................................................ 2,374,423 1,743,338
Lease bonuses and rentals........................................ 17,300 19,086
Interest....................................................... 27,114 20,110
Gain on sales of assets........................................ 169,139 66,444
Income from equity affiliates.................................. 263,294 97,839
Other.......................................................... 170,969 171,208
----------- -----------

7,742,074 5,777,426
COSTS AND EXPENSES:
Lease operating expenses....................................... 2,432,956 1,582,091
Production taxes............................................... 657,788 463,114
Depreciation, depletion and amortization....................... 1,284,669 1,369,383
Dry hole costs................................................. 105,381 176,666
Condemned and abandoned properties............................. 50,354 81,579
General and administrative expense............................. 773,330 1,045,675
Interest expense............................................... 452,493 498,850
Property, franchise and other taxes............................ 102,313 100,021
----------- -----------

5,859,284 5,317,379
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES......................... 1,882,790 460,047

PROVISION FOR (BENEFIT FROM) INCOME TAXES (NOTE 4):
Current........................................................ 123,717 32,662
Deferred....................................................... 321,399 (800)
----------- -----------

445,116 31,862
----------- -----------

NET INCOME....................................................... 1,437,674 428,185

ACCUMULATED DEFICIT AT BEGINNING OF YEAR......................... (2,279,081) (2,393,985)

CASH DIVIDENDS ($2.50 PER SHARE - 1996, $3.50 PER SHARE - 1995).. (223,773) (313,281)
----------- -----------

ACCUMULATED DEFICIT AT END OF YEAR............................... $(1,065,180) $(2,279,081)
=========== ===========

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.................... 89,509 89,509
====== ======

NET INCOME PER SHARE OF COMMON STOCK............................. $16.06 $ 4.78
====== ======
</TABLE>

See accompanying notes.

F-16
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Oil and gas sales, net of production taxes............. $ 6,290,369 $ 4,804,865
Lease bonuses and rentals.............................. 17,300 19,086
Interest and dividends................................. 27,114 20,110
Other.................................................. 170,969 171,208
----------- -----------
6,505,752 5,015,269

Cash paid to suppliers and employees................... 3,544,523 2,464,418
Interest paid.......................................... 452,493 513,771
Property, franchise and other taxes.................... 102,313 100,021
Income taxes paid...................................... 86,142 357
----------- -----------
4,185,471 3,078,567
----------- -----------
Net cash provided by operating activities............ 2,320,281 1,936,702

INVESTING ACTIVITIES:
Proceeds from sales of property and equipment.......... 300,426 108,323
Acquisition of property and equipment.................. (288,396) (3,432,512)
Acquisition of investments............................. (218,554) --
Dividends from equity affiliate........................ 59,217 69,985
----------- -----------
Net cash used in investing activities................ (147,307) (3,254,204)

FINANCING ACTIVITIES:
Proceeds from notes payable............................ -- 2,858,300
Note payments.......................................... (1,825,783) (1,046,214)
Cash dividends paid.................................... (223,563) (313,117)
----------- -----------
Net cash provided by (used in) financing activities.. (2,049,346) 1,498,969
----------- -----------
NET INCREASE IN CASH..................................... 123,628 181,467
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........... 227,144 45,677
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................. $ 350,772 $ 227,144
=========== ===========

RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
NET INCOME............................................... $ 1,437,674 $ 428,185
RECONCILING ADJUSTMENTS:
Depreciation, depletion and amortization............... 1,284,669 1,369,383
Gain on sales of assets................................ (169,139) (66,444)
Income from equity affiliate........................... (263,294) (97,839)
Dry hole costs and condemned and abandoned
properties........................................... 155,735 258,245
Deferred income taxes.................................. 321,399 (800)
Changes in other assets and liabilities:
Accounts receivable.................................. (536,914) (157,102)
Prepaid expenses and other assets.................... (54,637) (22,097)
Accounts payable..................................... 148,208 220,947
Other liabilities.................................... (3,420) 4,224
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................ $ 2,320,281 $ 1,936,702
=========== ===========
</TABLE>

See accompanying notes.

F-17
<PAGE>

THE HOME-STAKE OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DESCRIPTION OF BUSINESS

The Home-Stake Oil & Gas Company is an "independent oil and gas producer"
actively engaged in the acquisition, exploration, development and production of
oil and gas properties. Oil and gas exploration and production activities are
subject to numerous risks inherent in the business. These include the
volatility of oil and gas prices, environmental concerns and governmental
regulations, general business risks and hazards involving the acquisition and
operation of oil and gas properties, the ability to continue to find new
reserves to replace those being depleted and the highly competitive nature of
the business. Its principal geographic operating areas lie within the states of
Oklahoma, Montana and Texas.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary H-S Gas System, Inc. The Company records its
proportionate share of assets, liabilities, revenues and expenses to account for
its investment in oil and gas working interests. All significant intercompany
accounts and transactions have been eliminated in consolidation.

The equity method is used to account for the Company's interest in H-S Royalty,
Ltd., a limited partnership in which it serves as general partner and owns a
small limited partnership interest. The equity method is also used when the
Company appropriately participates in control of the investee, but has less than
a 50% interest. Under the equity method, original investments are recorded at
cost and adjusted by the Company's share of undistributed earnings or losses of
those companies. The equity earnings of the Company recorded by The Home-Stake
Royalty Corporation have been eliminated in determining the amount of
undistributed earnings or losses. Dividends and distributions are credited
against the investment when received.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.

One of the most significant estimates made by the Company involves its oil and
gas reserves. The Company amortizes its costs of producing properties on the
unit-of-production method over the estimated remaining reserves of the Company.
Since estimates of remaining oil and gas reserves are highly subjective and
subject to constantly changing conditions, most of which are beyond the control
of the Company, it is reasonably possible that the Company's estimates will
change over time, affecting the rates of amortization. In addition, in
assessing whether any impairment to the carrying values of producing properties
has occurred, these same estimates of oil and gas reserves are used.
Consequently impairment adjustments to the carrying values are reasonably
possible.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts for cash and cash equivalents and note payable reported in
the balance sheets approximate fair value.

CASH AND CASH EQUIVALENTS

The Company includes certificates of deposit and money market funds in cash and
cash equivalents since such amounts are readily convertible into known amounts
of cash.

F-18
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CREDIT RISKS

The Company sells its oil and gas production, which is located primarily in
Montana, Oklahoma and Texas, directly or indirectly to numerous oil refiners and
pipeline companies without collateral. The Company believes its credit risks
are limited due to the nature of its business and purchaser base and has not
incurred any significant losses in connection therewith.

ENVIRONMENTAL COSTS

Environmental liabilities, which historically have not been material, are
recognized when it is probable that a loss has been incurred and the amount of
that loss is reasonably estimable. Environmental liabilities, when accrued, are
based upon estimates of expected future costs without discounting. At December
31, 1996 there are no such costs accrued. The Company's policy is in compliance
with Statement of Position 96-1, Environmental Remediation Liabilities, issued
by the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants and issuance of this statement had no impact on the
Company's financial position or results of operations.

PROPERTY AND EQUIPMENT

The Company follows the successful efforts method of accounting for its oil and
gas operations. Costs of productive oil or gas wells, as well as costs of
acquiring producing and nonproducing oil and gas properties, are capitalized.
Exploratory costs, annual delay rentals and exploratory dry holes are expensed.

Depreciation, depletion and amortization of producing properties are provided on
the unit-of-production method based on estimates of proved reserves.
Depreciation of other property and equipment is provided on straight-line or
accelerated methods over estimated useful lives.

In 1995, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS No. 121). Adoption of SFAS No. 121, which
generally limits the carrying value of producing properties to their discounted
estimated future net cash flows, had no retroactive impact on net income in 1995
since the Company has followed a similar policy since 1986. Adjustments under
this policy are included in depreciation, depletion and amortization and totaled
$87,469 and $137,180 in 1996 and 1995, respectively.

Nonproducing oil and gas properties include both perpetual mineral rights and
term leasehold interests. The perpetual mineral rights are written-off when
unsuccessful exploration information is obtained. The Company does not maintain
an extensive inventory of nonproducing leasehold interests, rather such
interests are acquired in connection with specific drilling objectives. Such
nonproducing leasehold interests are written-off or reserved as warranted by
drilling results.

Renewals and betterments are capitalized; maintenance and repairs are charged to
expense. Replacement of individual items of lease equipment are capitalized.
When leases or other assets are sold or retired, the cost and related
accumulated depreciation, depletion and amortization are eliminated from the
accounts and the resulting gain or loss is recognized in income. The Company's
historical experience has been that the salvage value of equipment on property
abandonments is sufficient to cover the costs of dismantlement and site
restoration. Therefore, the Company does not accrue such costs and salvage
value is not considered in calculating property amortization.

F-19
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

OIL AND GAS SALES

The Company sells most of its crude oil and natural gas concurrent with
production and does not store significant volumes for future sales. Revenue is
recognized on the "sales method" when oil and gas are sold. Under this method,
the Company may "sell" more or less than its proportionate share of gas
production in a given period, creating an imbalance position. However, an asset
or liability is recorded only to the extent that the Company's imbalance
position in a property cannot be recouped from remaining reserves. The
Company's net imbalance position at December 31, 1996 and 1995, were not
material.

INCOME TAXES

Certain income and expense items are recorded in one year in the financial
statements and are reported in a different year in the income tax return. Such
items generally include tax credit carryforwards, intangible drilling and
development costs, depreciation and depletion. The tax effects associated with
these differences are recorded in these financial statements and described as
"deferred income taxes".

NOTE 2 - RELATED PARTY TRANSACTIONS AND INVESTMENTS

The Company is under common management with The Home-Stake Royalty Corporation
("HSRC"), with which it frequently participates jointly in the acquisition of
mineral and leasehold interests and in exploration and development activities.
Each company generally owns an equal interest in the oil and gas properties in
which they jointly participate, however such interests may vary. Only HSRC,
however, serves as operator on properties that are not operated by outside
parties.

In 1995 the Boards of Directors of the Company and HSRC voted to change the
participation arrangement between the Companies such that effective January 1,
1996, the Company participated with a 40% interest in joint ventures (drilling,
acquisitions and/or other investments) between the Company and HSRC, with HSRC
participating in such ventures with a 60% interest. Joint general and
administrative expenses continue to be shared on a 50-50 basis. The Boards felt
this change was in the best interests of each company, based on a review of
their respective financial conditions. This participation arrangement is
reviewed by the Boards on an annual basis and future changes will be made as
circumstances, in the judgment of the Boards, require.

In accordance with oil and gas industry practice, the oil and gas ventures in
which both companies participate are considered to be joint, but separate. For
those properties operated by outside parties, each Company is generally billed
separately for their share of operating and drilling costs and separately
reimburses the operator for those costs. For properties operated by HSRC, the
Company is billed for such costs monthly.

Payroll costs for personnel are paid by HSRC and the Company reimburses HSRC for
its one-half share of such costs. For substantially all other general and
administrative costs, each Company separately pays for its one-half share.

F-20
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 2 - RELATED PARTY TRANSACTIONS AND INVESTMENTS (CONTINUED)

For the two years ended December 31, HSRC paid or billed the Company the
following amounts:

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Paid:
Oil and gas sales, net of production taxes.. $451,941 $231,235
Billed:
Property and equipment...................... 82,838 337,076
Lease operating expenses.................... 818,886 693,033
Payroll costs............................... 494,243 455,331
</TABLE>

All revenues and expenses described above are paid by the respective company in
cash on a monthly basis.

In November 1996, the Company acquired an additional 1,493 shares of HSRC at a
cost of $211,173. At December 31, 1996, the Company owns 19.3% of the
outstanding common stock of HSRC and, due to its control influence, accounts
for its investment in HSRC using the equity method. In November 1996, HSRC
acquired an additional 1,928 shares of the Company. At December 31, 1996, HSRC
owns 33.97% of the outstanding common stock of the Company. In addition, the
Company owns a 41% interest in Alden Pipeline Company, a general partnership
carried on the equity basis. These investments do not have quoted market
values. In March 1997, the Company sold its interest in Alden Pipeline Company
and the related producing properties at a gain of approximately $100,000.

At February 1, 1993, when the Company adopted equity accounting for its
investment in HSRC, the amount of investment included costs of $965,906 in
excess of the underlying equity in net assets which is being amortized into
income over ten years.

At December 31, investments consisted of the following:

<TABLE>
<CAPTION>
1996 1995
---- ----

<S> <C> <C>
The Home-Stake Royalty Corporation.. $2,679,554 $2,351,077
Alden Pipeline Company.............. 54,041 56,475
---------- ----------
$2,733,595 $2,407,552
========== ==========
</TABLE>

The Company received dividends totaling $59,217 and $69,985 for these
investments in 1996 and 1995, respectively.

F-21
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 2 - RELATED PARTY TRANSACTIONS AND INVESTMENTS (CONTINUED)

Summarized combined financial information for HSRC and Alden Pipeline Company,
for which amounts are not material, is presented below:

<TABLE>
<CAPTION>
Years ended December 31,
1996 1995
---- ----
<S> <C> <C>
Income statement data:
Revenues...................... $ 8,230,814 $6,027,846
Income before income taxes.... 2,432,921 739,559
Net income /(1)/.............. 1,820,225 591,690

December 31,
1996 1995
---- ----
Balance sheet data:
Current assets................ $ 2,421,988 $1,931,604
Property and equipment (net).. 8,931,104 9,941,396
Other assets.................. 3,616,614 3,245,023
Current liabilities........... 2,641,955 2,587,308
Noncurrent liabilities........ 1,174,975 2,898,788
Equity........................ 11,152,776 9,631,927
</TABLE>

/(1)/ Includes $399,786 and $131,550 in 1996 and 1995, respectively,
attributable to the equity earnings of the Company recorded by HSRC.

NOTE 3 - NOTES PAYABLE

Notes payable at December 31, consist of the following balances:

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Prime rate bank note due May 1,
1998, requiring monthly
principal payments of
$114,110, plus interest....... $4,107,960 $5,933,743

Less current portion............. 1,369,320 1,369,320
---------- ----------
$2,738,640 $4,564,423
========== ==========
</TABLE>

Interest is at bank prime (8.25% at December 31, 1996) and the note is
collateralized by certain of the Company's producing properties having a book
value at December 31, 1996 of $5,255,074. In addition, the Company has a bank
line of credit in the amount of $500,000 available until May 1, 1997 which
provides for monthly payments of interest on the outstanding borrowings at bank
prime. In connection with this line of credit, the Company has issued a letter
of credit in the amount of $60,000, which is guaranteed by this line, and pays a
commitment fee of one-half of one percent ( 1/2%) per annum on the unused
portion of the line.

F-22
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 3 - NOTES PAYABLE (CONTINUED)

In connection with the Company's bank loans, there are certain loan covenants
which require, among other things, that the Company maintain certain financial
ratios and minimum net worth requirements. In addition, the Company's annual
cash dividends are limited to the lesser of $365,000 or net income.

NOTE 4 - INCOME TAXES

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax liabilities:
Intangible drilling costs..................... $579,181 $690,119
Excess of tax over book depreciation.......... 190,763 132,639
Leasehold costs................................ 215,322 93,603
-------- --------
985,266 916,361
Deferred tax assets:
Alternative minimum tax credit carryforwards.. 472,582 551,726
Statutory depletion carryforwards............. 83,022 248,279
Deferred compensation accrual................. 14,667 19,556
Other (net)................................... 22,429 25,633
-------- --------
592,700 845,194
-------- --------
Net deferred tax liability...................... $392,566 $ 71,167
======== ========
</TABLE>

The reconciliation of the income tax provision to the "expected" provision,
computed at the statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----

<S> <C> <C>
Computed "expected" provision....... $640,149 $ 156,416
Excess statutory depletion.......... (95,254) (116,729)
Amortization of investment in HSRC.. 32,840 32,840
Income from equity affiliates....... (92,857) (37,328)
Other............................... (39,762) (3,337)
-------- ---------
Provision for income taxes.......... $445,116 $ 31,862
======== =========
</TABLE>

At December 31, 1996, the Company had nonexpiring alternative minimum tax credit
carryforwards of approximately $476,900 and statutory depletion carryforwards of
approximately $298,400, both available to reduce future federal income taxes,
the benefits of which have been recognized in these financial statements.

F-23
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 5 - BENEFIT PLANS

Effective January 1, 1994, the Company and HSRC adopted The Home-Stake Companies
Profit Sharing 401(k) Plan. The plan covers substantially all the Company's
employees that have completed one year of service and provides for a mandatory
Company contribution equal to 3% of the employee's compensation and an
additional matching Company contribution of up to 3%. Company contributions to
the Plan were $21,286 and $22,731 in 1996 and 1995, respectively.

NOTE 6 - COMMITMENTS AND CONTINGENCIES

The Company has a non-cancelable operating lease covering its office space
through December 30, 2000. This lease provides for annual rental payments of
$55,908, subject to an annual expense adjustment.

On June 13, 1996, the Company and HSRC filed suit in the United States District
Court for the Eastern District of Oklahoma against Mobil Oil Corporation and
Mobil Exploration & Production U.S., Inc. (collectively "Mobil"). This suit was
styled The Home-Stake Royalty Corporation and The Home-Stake Oil & Gas Company v
-------------------------------------------------------------------------
Mobil Oil Corporation and Mobil Exploration & Production U.S., Inc. (Case No.
- -------------------------------------------------------------------
CIV-96-271-S). This action concerned Mobil's operation of a waterflood unit in
which the Company and HSRC each own a 9% working interest. The Company and HSRC
sought actual damages, punitive damages and equitable relief in this matter.
Mobil counterclaimed for the Company's and HSRC's shares of environmental costs
which they had not paid. In late December 1996, this case was settled, with the
Company and HSRC each receiving $365,000 from Mobil. Since this property was
acquired by the Company and HSRC in 1995 and the related litigation issues
involving Mobil's operation of the unit existed, but were not disclosed, at the
time of acquisition and directly impacted the valuation of the property, the
amount received from Mobil was credited to the carrying value of the Company's
investment in the property. In connection with Mobil's counterclaim, the
Company and HSRC agreed to pay the unpaid environmental costs. In January 1997,
the Company and HSRC filed claims with their pollution insurance carrier for the
reimbursement of $187,800 ($93,900 each company), representing the Company's
share of surface owner settlement costs paid. The Company has not received a
response to this claim and has not accrued any amounts attributable to the
expected insurance reimbursement. In addition, the operator is still working to
reach settlements with remaining surface owners. It is currently estimated that
the Company's share of such additional costs may total as much as $50,000.
However, any amounts paid by the Company should be covered under the Company's
pollution insurance policy.

The Company is involved in various legal actions arising in the normal course of
business. In the opinion of management and legal counsel, the Company's
liabilities, if any, in these matters will not have a material effect on the
Company's financial position, results of operations or cash flows.

NOTE 7 - SHAREHOLDER RIGHTS PLAN

On May 29, 1991, the Company adopted a Rights Plan and distributed to its
shareholders one Right for each outstanding share of common stock. Each Right
entitles the holder to purchase one-tenth of an additional share of common stock
from the Company and acquire a note payable from the Company to the holder or,
under certain circumstances, purchase the stock of an acquiring company. Upon
the occurrence of certain specified events related to a change in control of the
Company, each holder of a Right (other than a potential acquiror) will have the
right to acquire, upon exercise, shares of the Company's common stock at one-
half of the then current market price. The Rights expire January 1, 2000, and
are exercisable only if a person or group acquires 15% or more of the Company's
common stock or commences a tender offer that would result in a person or group
acquiring 15% or more of the Company's common stock. The Rights are redeemable
in whole, but not in part, at a price of $.01 per Right, payable in cash or
stock.

F-24
<PAGE>

SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES

Changes in estimated proved oil and gas reserve quantities are summarized as
follows:

<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf)
------ ----- ------ -----
<S> <C> <C> <C> <C>
PROVED DEVELOPED AND UNDEVELOPED:

Beginning of year................. 2,731,332 9,728,544 1,893,407 7,843,029

Revisions of previous estimates.... (184,875) (461,642) 325,046 1,050,209

Purchases of reserves in-place..... 12,680 330,778 718,548 1,792,738

Extensions, discoveries and other 74,597 420,881 58,088 309,800
additions.........................

Sales of reserves in-place......... (16,033) (329,176) (37,458) (29,547)

Production......................... (233,746) (1,188,307) (226,299) (1,237,685)
--------- ---------- --------- ----------

End of year........................ 2,383,955 8,501,078 2,731,332 9,728,544
========= ========== ========= ==========

PROVED DEVELOPED PRODUCING:

Beginning of year................. 2,660,025 8,225,374 1,796,907 7,340,526
========= ========== ========= ==========

End of year....................... 2,331,766 7,035,113 2,660,025 8,225,374
========= ========== ========= ==========
</TABLE>

The Company's share of net proved oil and gas reserves of investees accounted
for on the equity method (see Note 2 to the Consolidated Financial Statements)
at December 31, 1996, was 469,513 barrels of oil and 1,705,334 Mcf of gas, and
at December 31, 1995 was 471,520 barrels of oil and 1,702,544 Mcf of gas.

The estimates of oil and gas reserves were prepared by Company employees and do
not include proved undeveloped reserves attributable to either royalty interests
(information is not available) or outside operated working interests (quantities
are not considered significant to total Company proved reserves). Furthermore,
these estimates do not include reserves whose estimates or recoverability are
less precise, commonly referred to as "probable" or "possible" reserves. The
Company has no reserves outside the continental United States.

F-25
<PAGE>

SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS

In accordance with the requirements of Statement of Financial Accounting
Standards No. 69 ("SFAS No. 69") presented below are projections of future net
oil and gas cash flows (sales less production taxes, operating expenses, certain
development costs and estimated income taxes) and related present values of
proved oil and gas reserves. As required by SFAS No. 69, these projections are
based on end of period prices and costs, held constant for all future periods.
Present values of the future net oil and gas cash flows were calculated using a
10% discount factor as required. While this information was developed with
reasonable care and disclosed in good faith, it is emphasized that some of the
data are necessarily imprecise and represent only approximate amounts because of
the subjective judgments involved in developing such information. Accordingly,
this information may not represent the present financial condition of the
Company or its expected future results. This information does not include any
amounts applicable to "probable" or "possible" reserves which may become proved
in the future.

Although these disclosures have been prepared in accordance with SFAS No. 69,
this information does NOT purport to present the fair market value of the
Company's oil and gas properties or a fair estimate of the present value of
future cash flows expected to be obtained from their production. The reserve
estimates, while carefully made, may be significantly revised based on future
events. In addition, estimates of the timing of production, actual prices
realized and related production costs and taxes may also vary significantly from
those used in these calculations.

Future net cash flows:

Oil and gas sales....................................... $ 76,848,015 $ 57,760,817

Lease operating expenses................................ (23,616,239) (21,524,072)

Production taxes........................................ (6,001,287) (4,442,559)

Development costs....................................... (474,842) (658,743)

Income taxes............................................ (11,844,727) (7,474,743)
------------ ------------

34,910,920 23,660,868

Less discount to present value at 10% rate.............. (14,795,394) (9,862,875)
------------ ------------

Standardized measure of discounted future net cash flows.. $ 20,115,526 $ 13,797,993
============ ============
</TABLE>

The Company's share of the standardized measure of discounted future net cash
flows of investees accounted for on the equity method at December 31, 1996 and
1995 is $4,051,474 and $2,430,545, respectively.

F-26
<PAGE>

SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

The following information summarizes the principal changes in the standardized
measure of discounted future net cash flows.

Beginning of year.............................. $13,797,993 $11,274,485

Sales of oil and gas, net of production costs.. (4,003,514) (3,357,534)

Net changes in prices and production costs..... 10,433,937 (1,741,062)

Extensions and discoveries..................... 990,404 443,540

Purchases of reserves-in-place................. 401,531 4,517,511

Sales of reserves-in-place..................... (427,591) (205,132)

Revisions of previous quantity estimates....... (1,931,536) 2,157,239

Net change in income taxes..................... (2,062,842) (192,477)

Other (net).................................... 1,537,345 (226,026)

Accretion of discount.......................... 1,379,799 1,127,449
----------- -----------

End of year.................................... $20,115,526 $13,797,993
=========== ===========
</TABLE>

COSTS INCURRED

Costs incurred in oil and gas producing activities include:

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Proved property acquisition costs.............. $ 216,594 $ 3,188,531
Unproved property acquisition costs............ 52,445 133,389
Exploration costs.............................. 336,889 128,679
Development costs.............................. 91,973 240,554
----------- -----------
$ 697,901 $ 3,691,153
=========== ===========
</TABLE>

The Company's share of costs incurred in oil and gas producing activities of
investees accounted for on the equity method in 1996 and 1995 was $183,770 and
$639,364, respectively.

F-27
<PAGE>

THE HOME-STAKE ROYALTY CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)

ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 727,181 $ 626,864
Accounts receivable.......................................... 707,408 1,469,877
Receivable from affiliate.................................... 17,679 66,213
Prepaid expenses............................................. 168,272 255,957
----------- -----------
Total current assets........................................... 1,620,540 2,418,911

INVESTMENTS (NOTE 2)........................................... 3,699,162 3,592,495

PROPERTY AND EQUIPMENT, AT COST:............................... 24,141,927 25,235,245
Less accumulated depreciation, depletion and amortization.. 15,716,548 16,437,277
----------- -----------
Net property and equipment.................................. 8,425,379 8,797,968

OTHER ASSETS................................................... 24,119 24,119
----------- -----------
$13,769,200 $14,833,493
=========== ===========
</TABLE>

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities..................... $ 602,247 $ 1,514,282
Dividends declared........................................... 62,827 62,827
Income taxes payable......................................... 137,738 75,198
Bonus Payable................................................ 24,200 20,253
Current note payable (Note 3)................................ -- 964,260
----------- -----------
Total current liabilities...................................... 827,012 2,636,820

LONG-TERM NOTE PAYABLE (NOTE 3)................................ -- 401,775

DEFERRED INCOME TAXES.......................................... 955,006 773,200

CONTINGENCIES (NOTE 4)

STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value -
200,000 shares authorized; none issued
Common stock, $40 par value -
100,000 shares authorized and issued....................... 4,000,000 4,000,000
Additional paid-in capital................................... 6,000,000 6,000,000
Retained earnings............................................ 5,351,346 4,385,862
----------- -----------
15,351,346 14,385,862

Less treasury stock, at cost - 30,192 shares................. 3,364,164 3,364,164
----------- -----------
Total stockholders' equity..................................... 11,987,182 11,021,698
----------- -----------
$13,769,200 $14,833,493
=========== ===========
</TABLE>

See accompanying notes.

F-28
<PAGE>

THE HOME-STAKE ROYALTY CORPORATION
CONDENSED STATEMENTS OF INCOME
AND RETAINED EARNINGS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Oil sales...................................................... $ 2,294,048 $ 2,298,046
Gas sales...................................................... 1,525,891 1,193,469
Lease bonuses and rentals...................................... 49,378 11,352
Interest and dividends......................................... 19,617 31,249
Gain on sales of assets........................................ 99,708 2,768
Income from equity affiliates.................................. 271,139 134,713
Other.......................................................... 91,827 96,114
----------- -----------
4,351,608 3,767,711

COSTS AND EXPENSES:
Lease operating expenses....................................... 778,957 1,037,094
Production taxes............................................... 306,053 305,624
Depreciation, depletion and amortization....................... 676,166 702,786
Dry hole costs................................................. 370,747 46,420
Condemned and abandoned properties............................. 46,515 (5,081)
General and administrative expense............................. 539,933 468,630
Interest expense............................................... 36,086 135,697
Property, franchise and other taxes............................ 87,197 65,459
----------- -----------
2,841,654 2,756,629
----------- -----------

INCOME BEFORE PROVISION FOR INCOME TAXES......................... 1,509,954 1,011,082

PROVISION FOR INCOME TAXES:
Current........................................................ 237,010 153,300
Deferred....................................................... 181,806 93,512
418,816 246,812
----------- -----------

NET INCOME....................................................... 1,091,138 764,270

RETAINED EARNINGS AT BEGINNING OF PERIOD......................... 4,385,862 2,855,837

CASH DIVIDENDS ($1.80 PER SHARE - 1997, $2.70 PER SHARE - 1996).. (125,654) (188,482)
----------- -----------

RETAINED EARNINGS AT END OF PERIOD............................... $ 5,351,346 $ 3,431,625
=========== ===========

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING............. 69,808 69,808
=========== ===========

NET INCOME PER COMMON SHARE...................................... $ 15.63 $ 10.95
=========== ===========
</TABLE>

See accompanying notes.

F-29
<PAGE>

THE HOME-STAKE ROYALTY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Oil and gas sales, net of production taxes...... $ 3,634,659 $3,113,619
Lease bonuses and rentals....................... 49,378 11,352
Interest and dividends.......................... 19,617 31,249
Other........................................... 91,827 96,114
----------- ----------
3,795,481 3,252,334

Cash paid to suppliers and employees............ 1,354,813 1,654,398
Interest paid................................... 36,086 135,697
Property, franchise and other taxes............. 87,197 65,459
Income taxes paid............................... 174,470 5,734
----------- ----------
1,652,566 1,861,288
----------- ----------
Net cash provided by operating activities...... 2,142,915 1,391,046

INVESTING ACTIVITIES:
Proceeds from sales of property and equipment... 329,391 16,808
Acquisition of property and equipment........... (908,835) (148,517)
Dividends from equity affiliates................ 30,337 42,614
----------- ----------
Net cash used in investing activities......... (549,107) (89,095)

FINANCING ACTIVITIES:
Note payments................................... (1,366,035) (482,130)
Cash dividends paid............................. (127,456) (191,309)
----------- ----------
Net cash used in financing activities......... (1,493,491) (673,439)
----------- ----------

NET INCREASE IN CASH.............................. 100,317 628,512

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.. 626,864 564,875
----------- ----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $ 727,181 $1,193,387
=========== ==========
</TABLE>

See accompanying notes.

F-30
<PAGE>

THE HOME-STAKE ROYALTY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 - GENERAL

The results for interim periods are not necessarily indicative of trends or of
results to be expected for the full year.

NOTE 2 - SUMMARIZED FINANCIAL INFORMATION OF EQUITY INVESTEES

Summarized income statement information for the six months ended June 30, 1997
and 1996, for The Home-Stake Oil & Gas Company ("HSOG") and Alden Pipeline
Company is presented below:
<TABLE>
<CAPTION>

1997 1996
---- ----
<S> <C> <C>
Income Statement data:
Revenues.................... $4,027,653 $3,600,334
Income before income taxes.. 1,256,381 749,024
Net income /(1)/............ 941,663 499,636
</TABLE>

/(1)/ Includes $165,989 and $120,010 in 1997 and 1996, respectively,
attributable to the equity earnings of the Company recorded by HSOG.

NOTE 3 - NOTE PAYABLE

On May 31, 1997, the Company paid-off its bank note payable which was due May 1,
1998. The Company has a line of credit in the amount of $700,000 available
until May 1, 1998, which provides for monthly payments of interest on the
outstanding borrowings at bank prime. There is no balance under this line,
however the Company has issued a letter of credit in the amount of $60,000 which
is guaranteed by this line.

The note payable and line of credit described above are collateralized by
certain of the Company's producing properties.

NOTE 4 - CONTINGENCIES

The Company is involved in various other legal actions arising in the normal
course of business. In the opinion of management, the Company's liabilities, if
any, in these matters will not have a material effect on the Company's financial
position or the results of operations.

F-31
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
The Home-Stake Royalty Corporation

We have audited the accompanying consolidated balance sheets of The Home-Stake
Royalty Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of income and retained earnings and cash flows for the
years then ended. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Home-Stake
Royalty Corporation at December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.

ERNST & YOUNG LLP

Tulsa, Oklahoma
March 21, 1997

F-32
<PAGE>

THE HOME-STAKE ROYALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

ASSETS

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 626,864 $ 564,875
Accounts receivable........................................ 1,469,877 1,024,200
Receivable from affiliate.................................. 66,213 195,320
Prepaid expenses........................................... 255,957 144,726
----------- -----------
Total current assets................................. 2,418,911 1,929,121

INVESTMENTS (NOTE 2)......................................... 3,592,495 3,223,735

PROPERTY AND EQUIPMENT, AT COST:
Producing oil and gas leases (working interests)........... 21,063,614 23,972,671
Producing oil and gas royalties............................ 2,842,116 2,872,257
Nonproducing oil and gas properties........................ 837,271 818,622
Office equipment and other................................. 492,244 484,089
----------- -----------
25,235,245 28,147,639
Less accumulated depreciation, depletion and amortization.. 16,437,277 18,356,014
----------- -----------
Net property and equipment........................ 8,797,968 9,791,625

OTHER ASSETS................................................. 24,119 21,288
----------- -----------
$14,833,493 $14,965,769
=========== ===========
</TABLE>

<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY

<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities................... $ 1,514,282 $ 1,461,650
Dividends declared......................................... 62,827 94,241
Income taxes payable....................................... 75,198 5,745
Bonus payable.............................................. 20,253 49,412
Current notes payable (Note 3)............................. 964,260 964,260
----------- -----------
Total current liabilities............................ 2,636,820 2,575,308
LONG-TERM NOTES PAYABLE (NOTE 3)............................. 401,775 2,410,650
DEFERRED INCOME TAXES (NOTE 4)............................... 773,200 488,138
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY (NOTE 7):
Preferred stock, $1 par value -
200,000 shares authorized; none issued
Common stock, $40 par value -
100,000 shares authorized and issued..................... 4,000,000 4,000,000
Additional paid-in capital................................. 6,000,000 6,000,000
Retained earnings.......................................... 4,385,862 2,855,837
----------- -----------
14,385,862 12,855,837
Less treasury stock, at cost - 30,192 shares............... 3,364,164 3,364,164
----------- -----------
Total stockholders' equity........................... 11,021,698 9,491,673
----------- -----------
$14,833,493 $14,965,769
=========== ===========
</TABLE>

See accompanying notes.

F-33
<PAGE>

THE HOME-STAKE ROYALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
REVENUES:
Oil sales.................................................... $4,827,826 $3,710,018
Gas sales.................................................... 2,536,078 1,857,979
Lease bonuses and rentals.................................... 23,294 24,122
Interest..................................................... 65,446 52,958
Gain on sales of assets...................................... 168,664 67,036
Income from equity affiliates................................ 389,972 119,601
Other........................................................ 202,184 176,854
---------- ----------
8,213,464 6,008,568
COSTS AND EXPENSES:
Lease operating expenses..................................... 2,444,121 1,592,664
Production taxes............................................. 631,600 481,998
Depreciation, depletion and amortization..................... 1,351,335 1,425,935
Dry hole costs............................................... 131,975 176,661
Condemned and abandoned properties........................... 55,668 82,443
General and administrative expense........................... 781,480 1,057,046
Interest expense............................................. 249,692 315,914
Property, franchise and other taxes.......................... 110,736 107,203
---------- ----------
5,756,607 5,239,864
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES......................... 2,456,857 768,704

PROVISION FOR INCOME TAXES (NOTE 4):
Current...................................................... 327,634 73,046
Deferred..................................................... 285,062 74,823
---------- ----------
612,696 147,869
---------- ----------
NET INCOME....................................................... 1,844,161 620,835

RETAINED EARNINGS AT BEGINNING OF YEAR........................... 2,855,837 2,632,908

CASH DIVIDENDS ($4.50 PER SHARE - 1996, $5.70 PER SHARE - 1995).. (314,136) (397,906)
---------- ----------

RETAINED EARNINGS AT END OF YEAR................................. $4,385,862 $2,855,837
========== ==========

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.................... 69,808 69,808
====== ======

NET INCOME PER SHARE OF COMMON STOCK............................. $26.42 $ 8.89
====== ======
</TABLE>

See accompanying notes.

F-34
<PAGE>

THE HOME-STAKE ROYALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Oil and gas sales, net of production taxes............. $ 6,600,732 $ 4,992,099
Lease bonuses and rentals.............................. 23,294 24,122
Interest............................................... 65,446 52,958
Other.................................................. 202,184 176,854
----------- -----------
6,891,656 5,246,033

Cash paid to suppliers and employees................... 3,595,153 2,276,663
Interest paid.......................................... 249,692 323,540
Property, franchise and other taxes.................... 110,736 107,203
Income taxes paid...................................... 224,756 50,480
4,180,337 2,757,886
----------- -----------

Net cash provided by operating activities............ 2,711,319 2,488,147

INVESTING ACTIVITIES:
Proceeds from sales of property and equipment.......... 362,260 153,696
Acquisition of property and equipment.................. (523,073) (3,386,054)
Acquisition of investments............................. (202,558) --
Dividends from equity affiliate........................ 71,022 99,432
----------- -----------
Net cash used in investing activities................ (292,349) (3,132,926)

FINANCING ACTIVITIES:
Proceeds from notes payable............................ -- 2,435,680
Note payments.......................................... (2,008,875) (1,110,460)
Cash dividends paid.................................... (348,106) (404,785)
----------- -----------
Net cash provided by (used in) financing activities.. (2,356,981) 920,435
----------- -----------
NET INCREASE IN CASH..................................... 61,989 275,656
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........... 564,875 289,219
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................. $ 626,864 $ 564,875
=========== ===========

RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
NET INCOME............................................... $ 1,844,161 $ 620,835
RECONCILING ADJUSTMENTS:
Depreciation, depletion and amortization............... 1,351,335 1,425,935
Gain on sales of assets................................ (168,664) (67,036)
Income from equity affiliates.......................... (389,972) (119,601)
Dry hole costs and condemned and abandoned
properties........................................... 187,643 259,104
Deferred income taxes.................................. 285,062 74,823
Changes in other assets and liabilities:
Accounts receivable.................................. (316,570) 308,091
Prepaid expenses and other assets.................... (114,062) (29,552)
Accounts payable..................................... (7,908) (3,832)
Other liabilities.................................... 40,294 19,380
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................ $2,711,319 $ 2,488,147
=========== ===========
</TABLE>

See accompanying notes.

F-35
<PAGE>

THE HOME-STAKE ROYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DESCRIPTION OF BUSINESS

The Home-Stake Royalty Corporation is an "independent oil and gas producer"
actively engaged in the acquisition, exploration, development and production of
oil and gas properties. Oil and gas exploration and production activities are
subject to numerous risks inherent in the business. These include the
volatility of oil and gas prices, environmental concerns and governmental
regulations, general business risks and hazards involving the acquisition and
operation of oil and gas properties, the ability to continue to find new
reserves to replace those being depleted and the highly competitive nature of
the business. Its principal geographic operating areas lie within the states of
Oklahoma, Montana and Texas.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary Alden Gas Gathering Company. The Company records
its proportionate share of assets, liabilities, revenues and expenses to account
for its investment in oil and gas working interests. All significant
intercompany accounts and transactions have been eliminated in consolidation.

The equity mehtod is used to account for the Company's interest in H-S Royalty,
Ltd., a limited partnership in which it serves as general partner and owns a
small limited partnership interest. The equity method is also used when the
Company has a 20% to 50% interest in other companies. Under the equity method,
original investments are recorded at cost and adjusted by the Company's share of
undistributed earnings and losses of these companies. The equity earnings of
the Company recorded by The Home-Stake Oil & Gas Company have been eliminated in
determining the amount of undistributed earnings or losses. Dividends and
distributions are credited against the investment when received.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts for cash and cash equivalents and notes payable reported in
the balance sheets approximate fair value.

F-36
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

CASH AND CASH EQUIVALENTS

The Company includes certificates of deposit and money market funds in cash and
cash equivalents since such amounts are readily convertible into known amounts
of cash.

CREDIT RISKS

The Company sells its oil and gas production, which is located primarily in
Montana, Oklahoma and Texas, directly or indirectly to numerous oil refiners and
pipeline companies without collateral. In addition, the Company has numerous
working interest owners to whom it grants credit on wells in which it serves as
operator. Substantially all of these owners are industry partners or
individuals who invest in oil and gas drilling ventures. The Company believes
its credits risks are limited due to nature of its business and partner base and
has not incurred any significant losses in connection therewith.

ENVIRONMENTAL COSTS

PROPERTY AND EQUIPMENT

In 1995, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS No. 121). Adoption of SFAS No. 121, which
generally limits the carrying value of producing properties to their discounted
estimated future net cash flows, had no retroactive impact on net income in 1995
since the Company has followed a similar policy since 1986. Adjustments under
this policy are included in depreciation, depletion and amortization and totaled
$91,107 and $139,031 in 1996 and 1995, respectively.

F-37
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

OIL AND GAS SALES

INCOME TAXES

NOTE 2 - RELATED PARTY TRANSACTIONS AND INVESTMENTS

The Company is under common management with The Home-Stake Oil & Gas Company
("HSOG"), with which it frequently participates jointly in the acquisition of
mineral and leasehold interests and in exploration and development activities.
Each company generally owns an equal interest in the oil and gas properties in
which they jointly participate, however such interests may vary. Only the
Company, however, serves as operator on properties that are not operated by
outside parties.

In 1995, the Boards of Directors of the Company and HSOG voted to change the
participation arrangement between the Companies such that effective January 1,
1996, the Company participated with a 60% interest in joint ventures (drilling,
acquisitions and/or other investments) between the Company and HSOG, with HSOG
participating in such ventures with a 40% interest. Joint general and
administrative expenses continue to be shared on a 50-50 basis. The Boards felt
this change was in the best interests of each company, based on a review of
their respective financial conditions. This participation arrangement is
reviewed by the Boards on an annual basis and future changes will be made as
circumstances, in the judgement of the Boards, require.

In accordance with oil and gas industry practice, the oil and gas ventures in
which both companies participate are considered to be joint, but separate. For
those properties operated by outside parties, each Company is generally billed
separately for their share of operating and drilling costs and separately
reimburse the operator for such costs. For properties operated by the Company,
HSOG is billed for such costs monthly by the Company.

F-38
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 2 - RELATED PARTY TRANSACTIONS AND INVESTMENTS - (CONTINUED)

Payroll costs for personnel are paid by the Company and HSOG reimburses the
Company for its one-half share of such costs. For substantially all other
general and administrative costs, each Company separately pays for its one-half
share.

For the two years ended December 31, the Company paid or billed HSOG the
following amounts:

All revenues and expenses described above are paid by the respective company in
cash on a monthly basis.

In November 1996, the Company acquired an additional 1,928 shares of HSOG at a
cost of $195,178. At December 31, 1996, the Company owns 33.9% of the
outstanding common stock of HSOG and accounts for its investment in HSOG using
the equity method. In November 1996, HSOG acquired an additional 1,493 shares
of the Company. At December 31, 1996, HSOG owns 19.3% of the outstanding common
stock of the Company. In addition, the Company owns a 41% interest in Alden
Pipeline Company, a general partnership carried on the equity method. These
investments do not have quoted market values. In March 1997, the Company sold
its interest in Alden Pipeline Company and the related producing properties at a
gain of approximately $100,000.

At July 1, 1991, when the Company adopted equity accounting for its investment
in HSOG, the amount of investment included costs of $1,527,439 in excess of the
underlying equity in net assets which is being amortized into income over ten
years.

At December 31, investments consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----

<S> <C> <C>
The Home-Stake Oil & Gas Company.. $3,538,454 $3,167,260
Alden Pipeline Company............ 54,041 56,475
---------- ----------
$3,592,495 $3,223,735
========== ==========
</TABLE>

The Company received dividends totaling $71,023 and $99,432 for these
investments in 1996 and 1995, respectively.

F-39
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 2 - RELATED PARTY TRANSACTIONS AND INVESTMENTS - (CONTINUED)

Summarized combined financial information for HSOG and Alden Pipeline Company,
for which amounts are not material, is presented below:

<TABLE>
<CAPTION>
Years ended December 31,
1996 1995
---- ----
<S> <C> <C>
Income statement data:
Revenues...................... $7,759,424 $5,796,704
Income before income taxes.... 1,858,854 430,902
Net income /(1)/.............. 1,417,738 399,040

December 31,
1996 1995
---- ----
Balance sheet data:
Current assets................ $1,576,125 $ 863,180
Property and equipment (net).. 8,735,493 9,892,774
Other assets.................. 2,756,922 2,428,051
Current liabilities........... 2,299,840 2,115,646
Noncurrent liabilities........ 3,131,206 4,635,590
Equity........................ 7,637,494 6,432,769

</TABLE>
/(1)/ Includes $273,108 and $109,788 in 1996 and 1995, respectively,
attributable to the equity earnings of the Company recorded by HSOG.

NOTE 3 - NOTES PAYABLE

Notes payable at December 31, consist of the following balances:

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Prime rate bank note due
May 1, 1998, requiring
monthly principal
payments of $80,355,
plus interest................. $1,366,035 $3,374,910

Less current portion............. 964,260 964,260
---------- ----------
$ 401,775 $2,410,650
========== ==========
</TABLE>

Interest is at bank prime (8.25% at December 31, 1996) and the note is
collateralized by certain of the Company's producing properties having a book
value at December 31, 1996 of $5,254,816. In addition, the Company has a bank
line of credit in the amount of $700,000 available until May 1, 1997 which
provides for monthly payments of interest on the outstanding borrowings at bank
prime. In connection with this line of credit, the Company has issued a letter
of credit in the amount of $60,000, which is guaranteed by this line, and pays a
commitment fee of one-half of one percent ( 1/2%) per annum on the unused
portion of the line.

F-40
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 4 - INCOME TAXES

Deferred income taxes represent the net tax effects associated with temporary
differences in the net book values of certain assets and liabilities for
financial reporting and income tax purposes. Significant components of the
Company's deferred income tax liabilities and assets at December 31, are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax liabilities:
Intangible drilling costs..................... $588,931 $696,748
Excess of tax over book depreciation.......... 192,065 145,894
Leasehold costs............................... 202,542 74,503
-------- --------
983,538 917,145
Deferred tax assets:
Alternative minimum tax credit carryforwards.. 173,242 383,818
Deferred compensation accrual................. 14,667 19,556
Other (net)................................... 22,429 25,633
-------- --------
210,338 429,007
-------- --------
Net deferred tax liability...................... $773,200 $488,138
======== ========
</TABLE>

The reconciliation of the income tax provision to the "expected" provision
computed at the statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----

<S> <C> <C>
Computed "expected" provision................... $ 835,331 $ 261,359

Excess statutory depletion...................... (101,828) (126,323)
Amortization of investment in HSOG.............. 51,934 51,934
Income from equity affiliates................... (135,927) (44,727)
Other........................................... (36,814) 5,626
--------- ---------

Provision for income taxes...................... $ 612,696 $ 147,869
========= =========
</TABLE>

At December 31, 1996, the Company had nonexpiring alternative minimum tax credit
carryforwards of approximately $185,800 available to reduce future federal
income taxes, the benefits of which have been recognized in these financial
statements.

NOTE 5 - BENEFIT PLANS

Effective January 1, 1994 the Company and HSOG adopted The Home-Stake Companies
Profit Sharing 401(k) Plan. The plan covers substantially all the Company's
employees that have completed one year of service and provides for a mandatory
Company contribution equal to 3% of the employee's compensation and an
additional matching Company contribution of up to 3%. Company contributions to
the Plan were $22,288 and $23,048 in 1996 and 1995, respectively.

F-41
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 6 - COMMITMENTS AND CONTINGENCIES

On June 13, 1996, the Company and HSOG filed suit in the United States District
Court for the Eastern District of Oklahoma against Mobil Oil Corporation and
Mobil Exploration & Production U.S., Inc. (collectively "Mobil"). This suit was
styled The Home-Stake Royalty Corporation and The Home-Stake Oil & Gas Company v
-------------------------------------------------------------------------
Mobil Oil Corporation and Mobil Exploration & Production U.S., Inc. (Case No.
- -------------------------------------------------------------------
CIV-96-271-S). This action concerned Mobil's operation of a waterflood unit in
which the Company and HSOG each own a 9% working interest. The Company and HSOG
sought actual damages, punitive damages and equitable relief in this matter.
Mobil counterclaimed for the Company's and HSOG's shares of environmental costs
which they had not paid. In late December 1996, this case was settled, with the
Company and HSOG each receiving $365,000 from Mobil. Since this property was
acquired by the Company and HSOG in 1995 and the related litigation issues
involving Mobil's operation of the unit existed, but were not disclosed, at the
time of acquisition and directly impacted the valuation of the property, the
amount received from Mobil was credited to the carrying value of the Company's
investment in the property. In connection with Mobil's counterclaim, the
Company and HSOG agreed to pay the unpaid environmental costs. In January 1997,
the Company and HSOG filed claims with their pollution insurance carrier for the
reimbursement of $187,800 ($93,900 each company), representing the Company's
share of surface owner settlement costs paid. The Company has not received a
response to this claim and has not accrued any amounts attributable to the
expected insurance reimbursement. In addition, the operator is still working to
reach settlements with remaining surface owners. It is currently estimated that
the Company's share of such additional costs may total as much as $50,000.
However, any amounts paid by the Company should be covered under the Company's
pollution insurance policy.

In addition, the Company is involved in various other legal actions arising in
the normal course of business. In the opinion of management and legal counsel,
the Company's liabilities, if any, in these matters will not have a material
effect on the Company's financial position, results of operations or cash flows.

NOTE 7 - SHAREHOLDER RIGHTS PLAN

F-42
<PAGE>

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES

Changes in estimated proved oil and gas reserve quantities are summarized as
follows:

PROVED DEVELOPED AND UNDEVELOPED:

Beginning of year.................. 2,757,425 9,956,399 1,934,411 8,339,949

Revisions of previous estimates.... (184,463) (525,793) 311,570 836,354

Purchases of reserves in-place..... 15,891 479,378 718,549 1,792,883

Extensions, discoveries and other 99,368 516,241 60,347 332,272
additions.........................

Sales of reserves in-place......... (15,985) (332,266) (37,726) (30,734)

Production......................... (239,525) (1,258,030) (229,726) (1,314,325)
--------- ---------- --------- ----------

End of year........................ 2,432,711 8,835,929 2,757,425 9,956,399
========= ========== ========= ==========

PROVED DEVELOPED PRODUCING:

Beginning of year................... 2,686,118 8,453,229 1,837,911 7,837,446
========= ========== ========= ==========

End of year......................... 2,380,522 7,369,964 2,686,118 8,453,229
========= ========== ========= ==========
</TABLE>

The Company's share of net proved oil and gas reserves of investees accounted
for on the equity method (see Note 2 to the Consolidated Financial Statements)
at December 31, 1996, was 808,161 barrels of oil and 2,881,865 Mcf of gas, and
at December 31, 1995 was 865,832 barrels of oil and 3,083,948 Mcf of gas.

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS

F-43
<PAGE>

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

reasonable care and disclosed in good faith, it is emphasized that some of the
data are necessarily imprecise and represent only approximate amounts because of
the subjective judgments involved in developing such information. Accordingly,
this information may not represent the present financial condition of the
Company or its expected future results. This information does not include any
amounts applicable to "probable" or "possible" reserves which may become proved
in the future.

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Future net cash flows:
Oil and gas sales........................ $ 78,855,048 $ 58,721,117
Lease operating expenses................. (23,802,053) (21,566,821)
Production taxes......................... (6,147,291) (4,502,273)
Development costs........................ (474,842) (658,575)
Income taxes............................. (12,305,138) (7,716,682)
------------ ------------
36,125,724 24,276,766
Less discount to present value at
10% rate............................. (15,133,629) (10,063,051)
------------ ------------
Standardized measure of discounted
future net cash flows................ $ 20,992,095 $ 14,213,715
============ ============
</TABLE>

The Company's share of the standardized measure of discounted future net cash
flows of investees accounted for on the equity method at December 31, 1996 and
1995 is $6,819,163 and $4,373,964, respectively.

The following information summarizes the principal changes in the standardized
measure of discounted future net cash flows.
<TABLE>
<CAPTION>

1996 1995
---- ----
<S> <C> <C>
Beginning of year.............................. $14,213,715 $11,806,618
Sales of oil and gas, net of production costs.. (4,288,183) (3,493,335)
Net changes in prices and production costs..... 10,716,647 (1,824,540)
Extensions and discoveries..................... 1,303,483 474,414
Purchases of reserves-in-place................. 573,138 4,592,387
Sales of reserves-in-place..................... (438,724) (210,156)
Revisions of previous quantity estimates....... (2,022,227) 2,020,087
Net change in income taxes..................... (2,169,336) (138,730)
Other (net).................................... 1,682,210 (193,692)
Accretion of discount.......................... 1,421,372 1,180,662
----------- -----------
End of year.................................... $20,992,095 $14,213,715
=========== ===========
</TABLE>

F-44
<PAGE>

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

COSTS INCURRED

Costs incurred in oil and gas producing activities include:

Proved property acquisition costs.... $327,008 $3,188,569

Unproved property acquisition costs.. 137,518 181,377

Exploration costs.................... 400,468 131,301

Development costs.................... 87,181 237,725
-------- ----------

$952,175 $3,738,972
======== ==========
</TABLE>

The Company's share of costs incurred in oil and gas producing activities of
investees accounted for on the equity method in 1996 and 1996 was $236,588 and
$1,170,096, respectively.

F-45
<PAGE>

APPENDIX A

AGREEMENT OF MERGER

THIS AGREEMENT OF MERGER (this "Agreement"), dated as of the 14th day of
August, 1997, is by and between THE HOME-STAKE OIL & GAS COMPANY, an Oklahoma
corporation ("HSOG"), and THE HOME-STAKE ROYALTY CORPORATION, an Oklahoma
corporation ("HSRC").

WHEREAS, the Boards of Directors of HSRC and HSOG have approved the merger
of HSRC with and into HSOG (the "Merger") in accordance with the Oklahoma
General Corporation Act (the "Act") and the provisions of this Agreement;

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, the parties hereto hereby agree as follows:

1. Constituent Corporations and Surviving Corporation. HSRC and HSOG
--------------------------------------------------
shall be the constituent corporations to the Merger (the "Constituent
Corporations"). At the Effective Time (as hereinafter defined) and pursuant to
the provisions of Section 1081 of the Act, HSRC shall be merged with and into
HSOG. HSOG shall be the surviving corporation of the Merger (the "Surviving
Corporation"). At the Effective Time, the separate existence and corporate
organization of HSRC, except insofar as it may be continued by statute, shall
cease and HSOG shall continue as the Surviving Corporation which shall succeed,
without other transfer or further act or deed whatsoever, to all the rights,
properties and assets of the Constituent Corporations and shall be subject to
and liable for all the debts, liabilities and duties of each of the Constituent
Corporations. The corporate name of HSOG and its identity, existence, purposes,
rights, immunities, properties, liabilities and obligations shall be unaffected
and unimpaired by the Merger except as expressly provided herein.

2. Effective Time. The date and time when the Merger shall become
--------------
effective (the "Effective Time") shall be 5:00 o'clock p.m., Central Standard
Time, on December 31, 1997.

3. Certificate of Incorporation; Bylaws. At the Effective Time, the
------------------------------------
Certificate of Incorporation of HSOG shall be amended as set forth in the
Certificate of Merger attached hereto as Exhibit A and made a part hereof (the
"Certificate of Merger") and such Certificate of Incorporation, as so amended,
shall be the Certificate of Incorporation of the Surviving Corporation. The
Bylaws of HSOG shall be the Bylaws of the Surviving Corporation.

4. Conversion of Shares. Each share of common stock, par value $40.00
--------------------
per share, of HSRC which shall be outstanding immediately prior to the Effective
Time ("HSRC Common Stock") shall, at the Effective Time, be converted into 48.66
shares of common stock, par value $0.01 per share, of HSOG ("New HSOG Common
Stock"). Each share of common stock, par value $20.00 per share, of HSOG which
shall be outstanding immediately prior to the Effective Time ("Old HSOG Common
Stock") shall, at the Effective Time, be converted into 30 shares of New HSOG
Common Stock. Notwithstanding the foregoing, no fractional share of New HSOG
Common Stock shall be issued, but in lieu thereof, each person otherwise
entitled to such a fractional share shall receive a single share of New HSOG
Common Stock. After the Effective Time, each outstanding certificate which
theretofore represented shares of HSRC Common Stock or Old HSOG Common Stock
shall thereafter represent, and, upon surrender thereof, be exchanged by the
Surviving Corporation for a certificate representing the number of whole shares
of New HSOG Common Stock into which the shares of HSRC Common Stock or Old HSOG
Common Stock have been converted. Each share of Old HSOG Common Stock that
shall at the Effective Time be held by HSRC or in the treasury of HSOG shall by
virtue of the Merger and without further action be deemed cancelled. Each share
of HSRC Common Stock that shall at the Effective Time be held by HSOG or in the
treasury of HSRC shall by virtue of the Merger and without further action be
deemed cancelled.

A-1
<PAGE>

5. Directors and Officers. The directors of the Surviving Corporation
----------------------
from and after the Effective Time shall be: Class I (1998 term expiration)--L.
W. Allegood and Larry F. Grindstaff; Class II (1999 term expiration)--Chris K.
Corcoran, Ronald O. Gutman and I. Wistar Morris, III; and Class III (2000 term
expiration)--Joseph J. McCain, Jr. and Robert C. Simpson. The officers of the
Surviving Corporation from and after the Effective Time shall be the officers of
HSOG. Such directors and officers shall hold their positions as such in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation.

6. Stated Capital. The amount of the stated capital of the Surviving
--------------
Corporation shall be the aggregate par value of the shares of New HSOG Common
Stock issued and outstanding immediately after the Effective Time and giving
effect to the conversion of shares of HSRC Common Stock and Old HSOG Common
Stock pursuant to Section 4 hereof.

7. Representations and Warranties of HSOG. HSOG represents and warrants
--------------------------------------
to HSRC that:

(a) HSOG is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Oklahoma, and has all
corporate powers and all governmental licenses, authorizations, consents
and approvals required to carry on its business as now conducted. HSOG is
duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification
necessary, except for those jurisdictions where the failure to be so
qualified would not, individually or in the aggregate, have a material
adverse effect on HSOG.

(b) The execution, delivery and performance by HSOG of this Agreement
and the consummation by HSOG of the transactions contemplated hereby are
within the corporate powers of HSOG and, except as set forth in the next
sentence, have been duly authorized by all necessary corporate action. The
affirmative vote of the holders of 66 2/3 percent of the outstanding shares
of Old HSOG Common Stock entitled to vote thereon is the only vote of any
class or series of HSOG capital stock necessary to approve this Agreement
and the transactions contemplated hereby. This Agreement constitutes a
valid and binding agreement of HSOG, enforceable in accordance with its
terms (except insofar as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, or by principles governing the
availability of equitable remedies).

8. Representations and Warranties of HSRC. HSRC represents and warrants
--------------------------------------
to HSOG that:

(a) HSRC is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Oklahoma and has all corporate
powers and all governmental licenses, authorizations, consents and
approvals required to carry on its business as now conducted. HSRC is duly
qualified to do business as a foreign corporation and is in good standing
in each jurisdiction where the character of the property owned or leased by
it or the nature of its activities makes such qualification necessary,
except for those jurisdictions where the failure to be so qualified would
not, individually or in the aggregate, have a material adverse effect on
HSRC.

(b) The execution, delivery and performance by HSRC of this Agreement
and the consummation by HSRC of the transactions contemplated hereby are
within the corporate powers of HSRC and, except as set forth in the next
sentence, have been duly authorized by all necessary corporate action. The
affirmative vote of the holders of 66 2/3 percent of the outstanding shares
of HSRC Common Stock entitled to vote thereon is the only vote of any class
or series of HSRC capital stock necessary to approve this Agreement and the
transactions contemplated hereby. This Agreement constitutes a valid and
binding agreement of HSRC, enforceable in accordance with its terms (except
insofar as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, or by principles governing the availability of equitable
remedies).

A-2
<PAGE>

9. Conditions to the Merger. The obligations of HSOG and HSRC to
------------------------
consummate the Merger are subject to the approval and adoption of this Agreement
by the holders of 66 2/3 percent of the outstanding shares of each of Old HSOG
Common Stock and HSRC Common Stock in accordance with the Act and the
satisfaction (or waiver by both parties) of the following additional conditions:

(a) No court, arbitrator or governmental body, agency or official
shall have issued any order, and there shall not be any statute, rule or
regulation, restraining or prohibiting the consummation of the Merger.

(b) All actions by or in respect of or filings with any governmental
body, agency, official, or authority required to permit the consummation of
the Merger shall have been obtained, but excluding any consent, approval,
clearance or confirmation the failure to obtain which could not reasonably
be expected to have a material adverse effect on the Surviving Corporation
after the Effective Time.

(c) HSOG and HSRC shall have obtained an opinion of Conner & Winters,
A Professional Corporation, to the effect that (1) the Merger will qualify
as a "reorganization" under Section 368(a) of the Code and the regulations
thereunder, (2) each of HSOG and HSRC will be a party to such
reorganization within the meaning of Section 368(b) of the Internal Revenue
Code of 1986, as amended, and the regulations thereunder, (3) no gain or
loss will be recognized by HSOG or HSRC as a result of the Merger, and (4)
no gain or loss will be recognized by a stockholder of HSRC as a result of
the Merger with respect to the shares of HSRC Common Stock converted solely
into shares of New HSOG Common Stock.

(d) HSOG and HSRC shall have received from Principal Financial
Securities, Inc. a written opinion addressed to the Boards of Directors or
Special Committees of the Boards of Directors of HSOG and HSRC, for
inclusion in HSOG's and HSRC's proxy statements in connection with the
Merger, that the Merger is fair, from a financial point of view, to the
stockholders of HSOG and HSRC, and such opinion shall not have been
withdrawn.

The obligation of HSOG to consummate the Merger is further subject to the
condition (unless waived by HSOG) that holders of not more than twelve percent
of either Old HSOG Common Stock or HSRC Common Stock shall have exercised their
right to appraisal pursuant to Section 1091 of the Act.

10. Filing of Certificate of Merger. The Certificate of Merger shall be
-------------------------------
filed with the Secretary of State of the State of Oklahoma on December 31, 1997;
provided, however, that prior to such filing, each of the conditions to the
- -------- -------
Merger set forth in Section 9 hereof must have been satisfied or, to the extent
permitted by said Section 9, waived.

11. Amendment and Termination. Notwithstanding approval and adoption of
-------------------------
this Agreement by the shareholders of either or both of the Constituent
Corporations and at any time prior to the filing of the Certificate of Merger
with the Secretary of State of the State of Oklahoma, this Agreement may be (i)
amended by the Boards of Directors of the Constituent Corporations to the extent
permitted by the Act or (ii) terminated and abandoned by the Board of Directors
of either of the Constituent Corporations. Further, this Agreement shall
terminate at the Effective Time in the event each of the conditions to the
Merger set forth in Section 9 hereof are not satisfied or, to the extent
permitted by said Section 9, waived, prior to the Effective Time. In the event
of any termination of this Agreement in accordance with this Section 11, no
party hereto shall have further duty, obligation or liability under this
Agreement.

A-3
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above stated.

ATTEST: THE HOME-STAKE OIL & GAS COMPANY

/s/ Chris K. Corcoran By:/s/ Robert C. Simpson
- -------------------------------- --------------------------------
Chris K. Corcoran Robert C. Simpson
Secretary President

[SEAL]

THE HOME-STAKE ROYALTY
ATTEST: CORPORATION

/s/ Chris K. Corcoran By:/s/ Robert C. Simpson
- -------------------------------- --------------------------------
Chris K. Corcoran Robert C. Simpson
Secretary President

[SEAL]

A-4
<PAGE>

AMENDMENT NO. 1
TO
AGREEMENT OF MERGER

THIS AMENDMENT NO. 1 TO AGREEMENT OF MERGER (this "Amendment"), dated as of
the 24th day of September, 1997, is by and between THE HOME-STAKE OIL & GAS
COMPANY, an Oklahoma corporation ("HSOG"), and THE HOME-STAKE ROYALTY
CORPORATION, an Oklahoma corporation ("HSRC").

WHEREAS, HSOG AND HSRC have entered into an Agreement of Merger dated as of
August 14, 1997 (the "Merger Agreement"), providing for the merger of HSRC with
and into HSOG; and

WHEREAS, HSOG and HSRC desire to amend certain sections of the Merger
Agreement as hereinafter provided;

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, the parties hereto hereby agree as follows:

1. Amendment. The first sentence of Section 9 of the Merger Agreement is
---------
hereby amended and restated to read in its entirety as follows:

The obligations of HSOG and HSRC to consummate the Merger
are subject to the approval and adoption of this Agreement
by the holders of 66 2/3 percent of the outstanding shares
of each of Old HSOG Common Stock and HSRC Common Stock in
accordance with the Act and the satisfaction of the following
additional conditions:

2. Full Force and Effect. Except as amended by this Amendment, all terms
---------------------
and provisions of the Merger Agreement shall remain in full force and effect in
accordance with their terms.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above stated.

THE HOME-STAKE OIL & GAS
ATTEST: COMPANY

/s/ Chris K. Corcoran By: \s\ Robert C. Simpson
- ------------------------------- ----------------------------
Chris K. Corcoran Robert C. Simpson
Secretary President

[SEAL]

THE HOME-STAKE ROYALTY
ATTEST: CORPORATION

/s/ Chris K. Corcoran By: \s\ Robert C. Simpson
- ------------------------------- ----------------------------
Chris K. Corcoran Robert C. Simpson
Secretary President

[SEAL]

<PAGE>

APPENDIX B

August 14, 1997

Special Committee of the
Board of Directors
Attn.: Mr. Ronald O. Gutman, Chairman
The Home-Stake Royalty Corporation
15 East 5th Street, Suite 2800
Tulsa, OK 74103

Dear Special Committee:

Principal Financial Securities, Inc. ("PFS") understands that The Home-Stake
Royalty Corporation ("HSRC" or the "Company"), will enter into a transaction
("Transaction") pursuant to an Agreement of Merger, dated August 14, 1997 (the
"Merger Agreement"), whereby all issued and outstanding shares of the Company's
Common Stock (including all options and warrants to purchase Common Stock)
shall be cancelled and extinguished and each share shall be converted into the
right to receive 48.66 shares of The Home-Stake Oil & Gas Company ("HSOG", and
together with HSRC, the "Companies") common stock (the "Proposed Consideration")
after taking into account a 30-for-1 split of HSOG common stock. You have asked
us to advise you as to the fairness to the holders of the Company's Common Stock
other than directors, officers, employees or holders of 15 percent (15%) or more
of the Common Stock of the Company (the "Disinterested Shareholders") of the
Proposed Consideration.

In arriving at our opinion we have:

1. Reviewed the Merger Agreement;

2. Reviewed HSOG's and HSRC's Forms 10-KSB for the fiscal year ended
December 31, 1996 and financial results for the six month period ending
June 30, 1997;

3. Reviewed certain internally prepared reserve information provided by the
Companies relating to the producing properties of the Companies and
audited by Lee Keeling and Associates, Inc.;

4. Reviewed certain other assets of the Companies including non-producing
mineral interests and a valuation of such assets by an outside certified
petroleum geologist;

5. Reviewed the Companies' projected financial and operating results
including capitalization ratios, earnings, cash flow, book value and
production;
<PAGE>

The Home-Stake Royalty Corporation
August 14, 1997
Page 2

6. Reviewed the financial terms, to the extent publicly available, of
certain comparable reserve acquisition transactions;

7. Discussed with management of the Companies the operations of and business
prospects for the Companies; and

8. Performed other analyses as are customary in our industry.

As part of our investment banking business, we regularly issue fairness
opinions and are continually engaged in the valuation of companies and their
securities in connection with business reorganizations, private placements,
negotiated underwritings, mergers and acquisitions and valuations for estate,
corporate and other purposes. In the ordinary course of business, Principal
Financial Securities, Inc. and its affiliates at any time may hold long or short
positions, and may trade or otherwise effect transactions as principal or for
the accounts of customers, in debt or equity securities or options on securities
of the Companies.

In connection with our review, we have not independently verified any of the
information concerning the Companies and have relied on its being complete and
accurate in all material respects. We have assumed that the pro forma financial
and reserve information reviewed by us has been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
Companies' management as to the future performance reflected therein. In
addition, we have not made an independent evaluation or appraisal of the assets
of the Companies, nor have we been furnished with any such independent
evaluations or appraisals (other than an appraisal report of non-producing
minerals prepared by an outside certified petroleum geologist on behalf of the
Companies).

Our opinion is necessarily based solely upon the information set forth herein
as reviewed by us and circumstances existing as of the date hereof. Events
occurring after the date hereof could materially affect the assumptions used
both in preparing this opinion and in the documents reviewed by us.

We are not opining, and were not requested by you to opine, as to the
fairness of any aspect of the Transaction other than the Proposed Consideration
to the disinterested stockholders of the Company. We have assumed that the
Merger Agreement and all other aspects of the proposed Transaction will be, in
all respects, in compliance with all laws and regulations that are applicable to
HSRC, or the proposed Transaction (and we have relied as to all legal matters
relating thereto on counsel to HSRC). We are not expressing any opinion as to
what the value of HSOG or HSRC Common Stock will be at the time of the Merger or
the prices at which the HSOG Common Stock will trade during the period following
announcement of the Merger or subsequent to the consummation of the Merger.
Further, our opinion does not address HSRC's or HSOG's underlying business
decisions effect on the Merger.

This letter shall be for the use of the Special Committee of the Board of
Directors of the Company in considering the Transaction. The Company may not
publish or refer to this letter
<PAGE>

The Home-Stake Royalty Corporation
August 14, 1997
Page 3

(either in its entirety or through excerpt or summaries) or disclose the
existence of our engagement hereunder or describe or characterize the advice
provided by us without the prior approval of PFS, which approval shall not be
unreasonably withheld. It is expressly understood that this letter may be
included in certain regulatory filings, including any proxy statement to be
mailed to the stockholders of the Company in connection with the Transaction, or
as otherwise required by law, rule or regulation of any governmental authority
and that such approval hereby is provided subject to PFS's prior review of
disclosures relating to PFS's engagement and the letter.

Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that, on the date hereof,
the Proposed Consideration is fair to the Disinterested Shareholders of the
Company.

Very truly yours,

/s/ PRINCIPAL FINANCIAL SECURITIES, INC.
<PAGE>

August 14, 1997

Special Committee of the
Board of Directors
Attn.: Mr. Robert C. Simpson, Chairman
The Home-Stake Oil & Gas Company
15 East 5th Street, Suite 2800
Tulsa, OK 74103

Dear Special Committee:

Principal Financial Securities, Inc. ("PFS") understands that The Home-Stake
Oil & Gas Company ("HSOG" or the "Company"), will enter into a transaction
("Transaction") pursuant to an Agreement of Merger, dated August 14, 1997 (the
"Merger Agreement"), whereby all issued and outstanding shares of common stock
(including all options and warrants to purchase common stock) of The Home-Stake
Royalty Corporation ("HSRC", and together with HSOG, "the Companies") shall be
cancelled and extinguished and each share shall be converted into the right to
receive 48.66 shares of HSOG Common Stock (the "Proposed Consideration") after
taking into account a 30-for-1 split of HSOG Common Stock. You have asked us to
advise you as to the fairness to the holders of the Company's Common Stock other
than directors, officers, employees or holders of 15 percent (15%) or more of
the Common Stock of the Company (the "Disinterested Shareholders") of the
Proposed Consideration.

In arriving at our opinion we have:

1. Reviewed the Merger Agreement;

2. Reviewed HSRC's and HSOG's Forms 10-KSB for the fiscal year ended
December 31, 1996 and financial results for the six month period ending
June 30, 1997;

3. Reviewed certain internally prepared reserve information provided by the
Companies relating to the producing properties of the Companies and
audited by Lee Keeling and Associates, Inc.;

4. Reviewed certain other assets of the Companies including non-producing
mineral interests and a valuation of such assets by an outside certified
petroleum geologist;

5. Reviewed the Companies' projected financial and operating results
including capitalization ratios, earnings, cash flow, book value and
production;
<PAGE>

The Home-Stake Oil & Gas Company
August 14, 1997
Page 2

6. Reviewed the financial terms, to the extent publicly available, of
certain comparable reserve acquisition transactions;

7. Discussed with management of the Companies the operations of and business
prospects for the Companies; and

8. Performed other analyses as are customary in our industry.

We are not opining, and were not requested by you to opine, as to the
fairness of any aspect of the Transaction other than the Proposed Consideration
to the disinterested stockholders of the Company. We have assumed that the
Merger Agreement and all other aspects of the proposed Transaction will be, in
all respects, in compliance with all laws and regulations that are applicable to
HSOG, or the proposed Transaction (and we have relied as to all legal matters
relating thereto on counsel to HSOG). We are not expressing any opinion as to
what the value of HSOG or HSRC Common Stock will be at the time of the Merger or
the prices at which the HSOG Common Stock will trade during the period following
announcement of the Merger or subsequent to the consummation of the Merger.
Further, our opinion does not address HSRC's or HSOG's underlying business
decisions effect on the Merger.

This letter shall be for the use of the Special Committee of the Board of
Directors of the Company in considering the Transaction. The Company may not
publish or refer to this letter
<PAGE>

The Home-Stake Oil & Gas Company
August 14, 1997
Page 3

Very truly yours,

/s/ PRINCIPAL FINANCIAL SECURITIES, INC.
<PAGE>

APPENDIX C

(S) 1091. Appraisal rights

APPRAISAL RIGHTS

A. Any shareholder of a corporation of this state who holds shares of
stock on the date of the making of a demand pursuant to the provisions of
subsection D of this section with respect to such shares, who continuously holds
such shares through the effective date of the merger or consolidation, who has
otherwise complied with the provisions of subsection D of this section and who
has neither voted in favor of the merger or consolidation nor consented thereto
in writing pursuant to the provisions of Section 1073 of this title shall be
entitled to an appraisal by the district court of the fair value of his shares
of stock under the circumstances described in subsections B and C of this
section. As used in this section, the word "shareholder" means a holder of
record of stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of a
nonstock corporation. The provisions of this subsection shall be effective only
with respect to mergers or consolidations consummated pursuant to an agreement
of merger or consolidation entered into after November 1, 1988.

B. 1. Except as otherwise provided for in this subsection, appraisal
rights shall be available for the shares of any class or series of stock of a
constituent corporation in a merger or consolidation, or of the acquired
corporation in a share acquisition, to be effected pursuant to the provisions of
Sections 1081, 1082, 1086, 1087, or 1091.1 of this title or Section 12 of this
act./1/

2. a. No appraisal rights under this section shall be available for
the shares of any class or series of stock which, at the
record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting of shareholders
to act upon the agreement of merger or consolidation, were
either:

(1) listed on a national securities exchange; or

(2) held of record by more than two thousand shareholders.

b. In addition, no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote
of the shareholders of the surviving corporation as provided
for in subsection F of Section 1081 of this title.

3. Notwithstanding the provisions of paragraph 2 of this subsection,
appraisal rights provided for in this section shall be available for the shares
of any class or series of stock of a constituent corporation if the holders
thereof are required by the terms of an agreement of merger or consolidation
pursuant to the provisions of Sections 1081, 1082, 1086 or 1087 of this title to
accept for such stock anything except:

a. shares of stock of the corporation surviving or resulting from
such merger or consolidation; or

b. shares of stock of any other corporation which at the
effective date of the merger or consolidation will be either
listed on a national securities exchange or held of record by
more than two thousand shareholders; or

C-1
<PAGE>

c. cash in lieu of fractional shares of the corporations
described in subparagraphs a and b of this paragraph; or

d. any combination of the shares of stock and cash in lieu of the
fractional shares described in subparagraphs a, b and c of
this paragraph.

4. In the event all of the stock of a subsidiary Oklahoma
corporation party to a merger effected pursuant to the provisions of Section
1083 of this title is not owned by the parent corporation immediately prior to
the merger, appraisal rights shall be available for the shares of the subsidiary
Oklahoma corporation.

C. Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections D and E
of this section, shall apply as nearly as is practicable.

D. Appraisal rights shall be perfected as follows:

1. If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
shareholders, the corporation, not less than twenty (20) days prior to the
meeting, shall notify each of its shareholders entitled to such appraisal rights
that appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each shareholder electing to demand the appraisal of the shares of the
shareholder shall deliver to the corporation, before the taking of the vote on
the merger or consolidation, a written demand for appraisal of the shares of the
shareholder. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the shareholder and that the shareholder intends
thereby to demand the appraisal of the shares of the shareholder. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
shareholder electing to take such action must do so by a separate written demand
as herein provided. Within ten (10) days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each shareholder of each constituent corporation who has complied with the
provisions of this subsection and has not voted in favor of or consented to the
merger or consolidation as of the date that the merger or consolidation has
become effective; or

2. If the merger or consolidation was approved pursuant to the
provisions of Section 1073 or 1083 of this title, the surviving or resulting
corporation, either before the effective date of the merger or consolidation or
within ten (10) days thereafter, shall notify each of the shareholders entitled
to appraisal rights of the effective date of the merger or consolidation and
that appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the shareholder at the address of the
shareholder as it appears on the records of the corporation. Any shareholder
entitled to appraisal rights may, within twenty (20) days after the date of
mailing of the notice, demand in writing from the surviving or resulting
corporation the appraisal of the shares of the shareholder. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
shareholder and that the shareholder intends to demand the appraisal of the
shares of the shareholder.

E. Within one hundred twenty (120) days after the effective date of the
merger or consolidation, the surviving or resulting corporation or any
shareholder who has complied with the provisions of subsections A and D of this
section and who is otherwise entitled to appraisal rights, may file a petition
in district court demanding a determination of the value of the stock of all
such shareholders. Provided, however, at any time within sixty (60) days after
the effective date of the merger or consolidation, any shareholder shall have
the right to withdraw the demand of the shareholder for appraisal and to accept
the terms offered upon the merger or consolidation. Within one hundred twenty
(120) days after the effective date of the merger or consolidation,

C-2
<PAGE>

any shareholder who has complied with the requirements of subsections A and D of
this section, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the shareholder within ten (10) days after the shareholder's
written request for such a statement is received by the surviving or resulting
corporation or within ten (10) days after expiration of the period for delivery
of demands for appraisal pursuant to the provisions of subsection D of this
section, whichever is later.

F. Upon the filing of any such petition by a shareholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which,
within twenty (20) days after such service, shall file in the office of the
court clerk of the district court in which the petition was filed a duly
verified list containing the names and addresses of all shareholders who have
demanded payment for their shares and with whom agreements as to the value of
their shares have not been reached by the surviving or resulting corporation.
If the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The court clerk, if
so ordered by the court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the shareholders shown on the list at the addresses
therein stated. Such notice shall also be given by one or more publications at
least one (1) week before the day of the hearing, in a newspaper of general
circulation published in the City of Oklahoma City, Oklahoma, or such
publication as the court deems advisable. The forms of the notices by mail and
by publication shall be approved by the court, and the costs thereof shall be
borne by the surviving or resulting corporation.

G. At the hearing on such petition, the court shall determine the
shareholders who have complied with the provisions of this section and who have
become entitled to appraisal rights. The court may require the shareholders who
have demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the court clerk for
notation thereon of the pendency of the appraisal proceedings; and if any
shareholder fails to comply with such direction, the court may dismiss the
proceedings as to such shareholder.

H. After determining the shareholders entitled to an appraisal, the court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
court shall take into account all relevant factors. In determining the fair
rate of interest, the court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have to pay
to borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any shareholder entitled to participate
in the appraisal proceeding, the court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the shareholder entitled to an appraisal. Any
shareholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to the provisions of subsection F of this section and who
has submitted the certificates of stock of the shareholder to the court clerk,
if such is required, may participate fully in all proceedings until it is
finally determined that the shareholder is not entitled to appraisal rights
pursuant to the provisions of this section.

I. The court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
shareholders entitled thereto. Interest may be simple or compound, as the court
may direct. Payment shall be so made to each such shareholder, in the case of
holders of uncertificated stock immediately, and in the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The court's decree may be enforced as
other decrees in the district court may be enforced, whether such surviving or
resulting corporation be a corporation of this state or of any other state.

C-3
<PAGE>

J. The costs of the proceeding may be determined by the court and taxed
upon the parties as the court deems equitable in the circumstances. Upon
application of a shareholder, the court may order all or a portion of the
expenses incurred by any shareholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.

K. From and after the effective date of the merger or consolidation, no
shareholder who has demanded the appraisal rights of the shareholder as
provided for in subsection D of this section shall be entitled to vote such
stock for any purpose or to receive payment of dividends or other distributions
on the stock, except dividends or other distributions payable to shareholders of
record at a date which is prior to the effective date of the merger or
consolidation; provided, however, that if no petition for an appraisal shall be
filed within the time provided for in subsection E of this section, or if such
shareholder shall deliver to the surviving or resulting corporation a written
withdrawal of the shareholder's demand for an appraisal and an acceptance of the
merger or consolidation, either within sixty (60) days after the effective date
of the merger or consolidation as provided for in subsection E of this section
or thereafter with the written approval of the corporation, then the right of
such shareholder to an appraisal shall cease. Provided, however, no appraisal
proceeding in the district court shall be dismissed as to any shareholder
without the approval of the court, and such approval may be conditioned upon
such terms as the court deems just.

L. The shares of the surviving or resulting corporation into which the
shares of such objecting shareholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation

/1/ Section 1090.2 of this title.

C-4
<PAGE>

APPENDIX D

CERTIFICATE OF MERGER

MERGING
THE HOME-STAKE ROYALTY CORPORATION
WITH AND INTO
THE HOME-STAKE OIL & GAS COMPANY

TO THE SECRETARY OF STATE
OF THE STATE OF OKLAHOMA:

The Home-Stake Oil & Gas Company, an Oklahoma corporation, hereby
certifies:

1. The name and state of incorporation of each of the constituent
corporations are:

Name of Corporation State of Incorporation
------------------- ----------------------
The Home-Stake Royalty Corporation Oklahoma
The Home-Stake Oil & Gas Company Oklahoma

2. That certain Agreement of Merger, dated August 14, 1997, by and between
the constituent corporations (referred to herein as the "Agreement of Merger"),
is an agreement of merger as contemplated by Section 1081 of the Oklahoma
General Corporation Act, and it has been approved, adopted, certified, executed
and acknowledged by each of the constituent corporations in accordance with the
provisions of Section 1081 of the Oklahoma General Corporation Act.

3. The name of the surviving corporation is: The Home-Stake Oil & Gas
Company.

4. The executed Agreement of Merger is on file at the principal place of
business of The Home-Stake Oil & Gas Company at the following address:

15 East 5th Street, Suite 2800
Tulsa, Oklahoma 74103

5. A copy of the Agreement of Merger will be furnished by The Home-Stake
Oil & Gas Company, on request and without cost, to any shareholder of any
constituent corporation.

6. This Certificate of Merger shall become effective at 5:00 o'clock p.m.,
Central Standard Time, on December 31, 1997.

7. The certificate of incorporation of the surviving corporation, as
heretofore amended and restated (the "Certificate of Incorporation"), shall be
amended as follows:

Article Five of the Certificate of Incorporation is hereby amended to
read in its entirety as follows:

D-1
<PAGE>

ARTICLE FIVE
------------

The aggregate number of shares of all classes which the Corporation
has authority to issue is 14,000,000, of which 12,000,000 shares shall be
Common Stock with a par value of $0.01 per share, and 2,000,000 shares
shall be Preferred Stock, with a par value of $1.00 per share.

The designations and the preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the shares of each class of stock
are as follows:

Preferred Stock
---------------

The Preferred Stock may be issued from time to time by the Board
of Directors as shares of one or more series. The description of
shares of each series of Preferred Stock, including any preferences,
conversion and other rights, voting powers, restrictions, limitations
as to dividends, qualifications and terms and conditions of redemption
shall be as set forth in resolutions adopted by the Board of Directors
and in a Certificate of Designations filed as required by law from
time to time prior to the issuance of any shares of such series.

The Board of Directors is expressly authorized, prior to
issuance, by adopting resolutions providing for the issuance of, or
providing for a change in the number of, shares of any particular
series of Preferred Stock and, if and to the extent from time to time
required by law, by filing a Certificate of Designations to set or
change the number of shares to be included in each series of Preferred
Stock and to set or change in any one or more respects the
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms and
conditions of redemption relating to the shares of each such series.
Notwithstanding the foregoing, the Board of Directors shall not be
authorized to change the right of the Common Stock of the Corporation
to vote one vote per share on all matters submitted for shareholder
action. The authority of the Board of Directors with respect to each
series of Preferred Stock shall include, but not be limited to,
setting or changing the following:

(a) the distinctive serial designation of such series and the
number of shares constituting such series (provided that the aggregate
number of shares constituting all series of Preferred Stock shall not
exceed 2,000,000);

(b) the annual dividend rate on shares of such series, whether
dividends shall be cumulative and, if so, from which date or dates;

(c) whether the shares of such series shall be redeemable and, if
so, the terms and conditions of such redemption, including the date or
dates upon and after which such shares shall be redeemable, and the
amount per share payable in case of redemption, which amount may vary
under different conditions and at different redemption dates;

(d) the obligation, if any, of the Corporation to retire shares
of such series pursuant to a sinking fund;

D-2
<PAGE>

(e) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes and,
if so, the terms and conditions of such conversion or exchange,
including the price or prices or the rate or rates of conversion or
exchange and the terms of adjustment, if any;

(f) whether the shares of such series shall have voting rights,
in addition to the voting rights provided by law, and, if so, the
terms of such voting rights;

(g) the rights of the shares of such series in the event of
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation; and

(h) any other relative rights, powers, preferences,
qualifications, limitations or restrictions thereof relating to such
series.

The shares of Preferred Stock of any one series shall be identical
with each other in all respects as to the dates from and after which
dividends thereon shall cumulate, if cumulative.

Common Stock
------------

Subject to all of the rights of the Preferred Stock as expressly
provided herein, by law or by the Board of Directors pursuant to this
Article Five, the Common Stock of the Corporation shall possess all
such rights and privileges as are afforded to capital stock by
applicable law in the absence of any express grant of rights or
privileges herein, including, but not limited to, the following rights
and privileges:

(a) dividends may be declared and paid or set apart for payment
upon the Common Stock out of any assets or funds of the Corporation
legally available for the payment of dividends;

(b) the holders of Common Stock shall have the right to vote for
the election of directors and on all other matters requiring
shareholder action, each share being entitled to one vote; and

(c) upon the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, the net assets of the Corporation shall
be distributed pro rata to the holders of the Common Stock in
accordance with their respective rights and interests.

Each share of the Corporation's Common Stock, par value $20 per
share ("Old Common Stock"), issued and outstanding or held in the
treasury of the Corporation immediately prior to 5:00 o'clock p.m.,
Central Daylight Savings Time, on December 31, 1997 (the "Effective
Time"), shall, at the Effective Time, be changed into and reclassified
as 30 fully paid and nonassessable shares of Common Stock, par value
$0.01 per share, and at the Effective Time, each holder of record of
Old Common Stock shall, without further action, be and become the
holder of 30 shares of Common Stock for each share of Old Common Stock
held of record immediately prior thereto. From and after the Effective
Time, each outstanding certificate which theretofore represented
shares of Old Common Stock shall thereafter

D-3
<PAGE>

represent, and, upon surrender thereof, be exchanged by the
Corporation for a certificate representing, 30 shares of Common Stock
for each share of Old Common Stock held of record immediately prior to
the Effective Time.

Article Six of the Certificate of Incorporation is hereby amended to
read in its entirety as follows:

ARTICLE SIX
-----------

The amount of stated capital which the Corporation shall have is
$2,120,000.

IN WITNESS WHEREOF, The Home-Stake Oil & Gas Company has caused this
Certificate of Merger to be executed by its President and attested by its
Secretary this _____ day of December, 1997.

THE HOME-STAKE OIL & GAS COMPANY
ATTEST:

By:
- --------------------------------- ------------------------------------
Chris K. Corcoran Robert C. Simpson
Secretary President

[SEAL]

STATE OF OKLAHOMA )
) ss.
COUNTY OF TULSA )

This instrument was acknowledged before me this _____ day of December,
1997, by Robert C. Simpson, as President of The Home-Stake Oil & Gas Company.

----------------------------------------
Notary Public

My Commission Expires:

- --------------------------
[SEAL]

D-4
<PAGE>

APPENDIX E

PROPOSED AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
OF THE HOME-STAKE OIL & GAS COMPANY

Proposed Amendment No. 1
------------------------

Existing Provisions Proposed Amendment
------------------- ------------------

ARTICLE THREE:
- -------------

"The term for which this Corporation ARTICLE THREE will be amended to
is to exist is fifty (50) years, read: "The Corporation shall have
from the 12th day of March, 1957 to perpetual existence."
the 12th day of March, 2007."

Proposed Amendment No. 2
------------------------

ARTICLE FOUR:
- ------------

"The purposes for which this ARTICLE FOUR will be deleted and
Corporation is formed are: replaced with the following: "The
purpose of the Corporation is to
Buy, sell, barter, or exchange, oil engage in any lawful act or activity
and gas lands or leases; to prospect for which corporations may be
for, produce, refine, buy, sell, or organized under the Oklahoma General
exchange, oil or gas; to build, Corporation Act."
equip, maintain and operate, oil or
gas pipe lines; to build, equip,
maintain and operate, oil
refineries; to refine crude oil and
market the products thereof; to
build, equip and maintain storage
tanks, buildings, machinery, and any
other things necessary or proper for
the conduct or operation of an oil
and gas mining, and producing
business; to buy, sell, own, and use
any and all lands which may be
necessary or useful for the purposes
of conducting an oil and gas mining
and producing and refining business;
including the right to produce and
sell gas under franchise to
incorporated cities and towns; to do
any and all things necessary,
needful or incident to the oil and
gas mining, and operating business;

To mine for, produce, sell, buy or
exchange, coal and other minerals,
of any character, including the
right to build any buildings, and
equip, maintain and operate, any and
all things necessary or useful in
the mining, or production of any
minerals. To do and perform any and
all things needful or useful in the
conduct of the business of
operating, producing and selling any
and all minerals."

Proposed Amendment No. 3
------------------------

ARTICLE EIGHT:
- -------------

"The Board of Directors of the ARTICLE EIGHT will be deleted and
Corporation shall consist of seven replaced with the following: "The
(7) Directors, each Director shall business of the Corporation shall

E-1
<PAGE>

Existing Provisions Proposed Amendment
------------------- ------------------

hold office for a term of three be managed under the direction of a
years from the date of election." Board of Directors. The number of
directors constituting the entire Board
of Directors shall be not less than
three (3) directors, nor more than
fifteen (15) directors, the exact number
within such limits to be determined from
time to time by resolution adopted by
the affirmative vote of a majority of
the entire Board of Directors, provided
however, that the number of directors
shall not be reduced so as to shorten
the term of any director at that time in
office, and provided further, that the
number of directors constituting the
entire Board of Directors shall be seven
(7) until otherwise fixed by a majority
of the entire Board of Directors."

Proposed Amendment No. 4
------------------------

ARTICLE NINE:
- ------------

"Any merger, consolidation, sale of a ARTICLE NINE will be deleted.
substantial portion of the
Corporation's assets, dissolution of
the Corporation or any other
reorganization or business
combination of the Corporation, or
any amendment of Article Eight of
this Restated Certificate of
Incorporation, shall not be
effective until approved by the
affirmative vote or written consent
of the holders of at least sixty-six
and two-thirds percent (66 2/3%) of
the Corporation's stock entitled to
vote thereon. Any subsequent
amendment of the Restated
Certificate of Incorporation to
modify the foregoing voting
requirement shall itself require the
affirmative vote or written consent
of the holders of at least sixty-six
and two-thirds percent (66 2/3%) of
the Corporation's stock entitled to
vote thereon before such amendment
shall be effective."

Proposed Amendment No. 5
------------------------

Not applicable. A new Article, ARTICLE NINE, will be
added as follows: "To the fullest
extent permitted by the Oklahoma
General Corporation Act as the same
exists on the date hereof or may
hereafter be amended, a director of
the Corporation shall not be liable
to the Corporation or its shareholders
for monetary damages for breach of
fiduciary duty as a director. No
amendment to or repeal of this
Article shall apply to or have any
effect on the liability or alleged
liability of any director of the
Corporation for or with respect to
any acts or omissions of such
director occurring prior to such
amendment or repeal."

E-2
<PAGE>

Existing Provisions Proposed Amendment
------------------- ------------------

Proposed Amendment No. 6
------------------------

Not applicable. A new Article, ARTICLE TWELVE, will
be added as follows: "In furtherance
and not in limitation of the powers
conferred by statute, the Board of
Directors of the Corporation is
expressly authorized to adopt, amend
or repeal the Bylaws of the
Corporation."

Proposed Amendment No. 7
------------------------

Not applicable. A new Article, ARTICLE THIRTEEN, will be
added as follows: "The Corporation may,
as determined by the Board of Directors
of the Corporation, indemnify and
advance expenses to a director, officer,
employee or agent to the maximum extent
permitted by and in accordance with
Section 1031 of the Oklahoma General
Corporation Act as the same exists on
the date hereof or may hereafter be
amended."

Proposed Amendment No. 8
------------------------

Not applicable. A new Article, ARTICLE FOURTEEN, will
be added as follows: "All rights,
privileges, immunities, restrictions,
penalties, duties, obligations and
liabilities of the Corporation and of
the shareholders of the Corporation
shall be governed solely by the
Oklahoma General Corporation Act as
the same exists on the date hereof or
may hereafter be amended."

E-3
<PAGE>

APPENDIX F
THE HOME-STAKE OIL & GAS COMPANY
1997 INCENTIVE STOCK PLAN

1. Preamble.
--------

The Home-Stake Oil & Gas Company, an Oklahoma corporation ("HSOG"), hereby
establishes The Home-Stake Oil & Gas Company 1997 Incentive Stock Plan (the
"Plan") as a means whereby HSOG may, through awards of stock options and
restricted stock:

(a) provide Officers, Directors and key employees who have
substantial responsibilities for the direction and management of HSOG and
its Subsidiaries, as well as consultants to HSOG, with additional incentive
to promote the success of the businesses of HSOG and its Subsidiaries;

(b) enable such employees to acquire equity interests in HSOG; and

(c) enable HSOG to attract and retain the services of key employees
upon whose judgment and effort the successful conduct of its operations is
largely dependent.

Except as specifically provided herein, the provisions of the Plan do not
apply to or affect any option, stock appreciation right, or stock heretofore or
hereafter granted under any other stock or stock option plan of HSOG or any
Subsidiary, and all such options, stock appreciation rights or stock continue to
be governed by and subject to the applicable provisions of the plan or agreement
under which they were granted.

2. Definitions.
-----------

2.01 "Administrator" shall mean that person designated by the Board from
-------------
time to time to administrator the Awards made under the Plan, which
designation shall be communicated to the Participants in writing.

2.02 "Award" shall mean a grant of an Option or the award of Restricted
-----
Stock under the Plan.

2.03 "Award Agreement" shall mean an agreement between HSOG and a
----- ---------
Participant which evidences the grant of an Option and/or the award of
Restricted Stock to a Participant and sets forth the terms and conditions
of such Option and/or Restricted Stock.

2.04 "Board" or "Board of Directors" means the board of directors of HSOG.
----- ----- -- ---------

2.05 "Change in Control" means the occurrence of any one of the following
------ -- -------
events:

(a) Any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(7) of the Exchange Act, except the Participant, his
affiliates and associates, HSOG, or any corporation, partnership, trust or
other entity controlled by HSOG (a "Subsidiary"), or any employee benefit
plan of HSOG or of any Subsidiary (each such individual, entity or group
shall hereinafter be referred to as a "Person"))becomes the beneficial
owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 20% or more of either (i) the then outstanding shares of common stock of
HSOG (the "Outstanding Company Common Stock" or (ii) the combined voting
power of the then outstanding voting securities of HSOG entitled to vote
generally in the election of directors (the Company Voting Securities), in
either case; or

(b) Individuals who, as of the beginning of any twenty-four month
period, constitute the Board (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board,

F-1
<PAGE>

provided that any individual becoming a director subsequent to the
beginning of such period whose election or nomination for election by
HSOG's shareholders was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding for
this purpose any such individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the directors of HSOG (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act); or

(c) Consummation by HSOG of a reorganization, merger or
consolidation (a "Business Combination"), in each case, with respect to
which all or substantially all of the individuals and entities who were the
respective beneficial owners of the outstanding Company Common Stock and
Company voting securities immediately prior to such Business Combination do
not, immediately following such Business Combination, beneficially own,
directly or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination in substantially the same proportion as
their ownership immediately prior to such Business Combination of the
Outstanding Company Common Stock and Company Voting Securities, as the case
may be; or

(d) (i) Consummation of a complete liquidation or dissolution of
HSOG or (ii) sale or other disposition of all or substantially all of the
assets of HSOG other than to a corporation with respect to which, following
such sale or disposition, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors of such corporation is then owned beneficially,
directly or indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Company Voting Securities, as the case may be,
immediately prior to such sale or disposition.

2.06 "Code" means the Internal Revenue Code of 1986, as it exists now and
----
as it may be amended from time to time.

2.07 "Common Stock" means the common stock of HSOG, $.01 par value per
------ -----
share.

2.08 "Company" means The Home-Stake Oil & Gas Company, an Oklahoma
-------
corporation, and any successor thereto.

2.09 "Director(s)" means a member or members of the Board.
--------

2.10 "Disability" means being unable to engage in any substantial gainful
----------
activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than 12 months.

2.11 "Exchange Act" means the Securities Exchange Act of 1934, as it
-------- ---
exists now or from time to time may hereafter be amended.

2.12 "Fair Market Value" means for the relevant day:
---- ------ -----

(a) If shares of Common Stock are listed or admitted to unlisted
trading privileges on any national or regional securities exchange, the
last reported sale price, regular way, on the composite tape of that
exchange on the day Fair Market Value is to be determined;

(b) If the Common Stock is not listed or admitted to unlisted
trading privileges as provided in paragraph (a), and if sales prices for
shares of Common Stock are reported by the National Market System of the
National Association of Securities Dealers Automated Quotation

F-2
<PAGE>

System ("NASDAQ System"), then the last sale price for Common Stock
reported as of the close of business on the day Fair Market Value is to be
determined, or if no such sale takes place on that day, the average of the
high bid and low asked prices so reported; if Common Stock is not traded on
that day, the next preceding day on which such stock was traded; or

(c) If trading of the Common Stock is not reported by the NASDAQ
System or on a stock exchange, Fair Market Value will be determined by the
Board in its discretion based upon the best available date.

2.13 "Incentive Stock Option" or "ISO" means an Option that complies with
--------- ----- ------ ---
the terms and conditions set forth in Section 422 of the Code and is
designated as an ISO at the time of its grant.

2.14 "Officer" means a corporate officer of HSOG or any Subsidiary or
-------
affiliate of HSOG.

2.15 "Option" means the right of a Participant to purchase a specified
------
number of shares of Common Stock, subject to the terms and conditions of
the Plan.

2.16 "Option Date" means the date upon which an Option is granted, or
------ ----
Restricted Stock is awarded, to a Participant under the Plan.

2.17 "Option Price" means the price per share at which an Option may be
------ -----
exercised.

2.18 "Participant" means an individual, or to the extent permitted as
-----------
contemplated at Section 5 hereof, the account of an individual, to whom an
Option or Restricted Stock has been granted under the Plan.

2.19 "Plan" means The Home-Stake Oil & Gas Company 1997 Incentive Stock
----
Plan herein and as from time to time amended.

2.20 "Restricted Stock" means Common Stock awarded to a Participant
---------- -----
pursuant to the Plan and subject to the restrictions contained or
authorized in Section 7 hereof.

2.21 "Securities Act" means the Securities Act of 1933, as it exists now
---------- ---
or from time to time may hereinafter be amended.

2.22 "Stock Split" means the 30-for-1 split of the issued and outstanding
----- -----
shares of Common Stock to be effected pursuant to amendments to HSOG's
Certificate of Incorporation in connection with the proposed merger of The
Home-Stake Royalty Corporation into HSOG, which amendments also provide for
an increase in the number of HSOG's authorized shares of Common Stock.
Such merger has been approved by the Board of Directors on the same date as
this Plan, and such Stock Split and increase in authorized shares will
become effective upon the effective date of such merger.

2.23 "Subsidiary" means any corporation or other entity of which the
----------
majority voting power or equity interest is owned directly or indirectly by
HSOG.

2.24 "Termination of Employment" means:
----------- -- ----------

(a) with respect to an employee, when the employee's employment
relationship with HSOG and all of its Subsidiaries is terminated,
regardless of any severance arrangements. A transfer from HSOG to a
Subsidiary or affiliate of HSOG or a Subsidiary, or vice versa is not a
---- -----
termination of employment for purposes of the Plan;

F-3
<PAGE>

(b) with respect to a consultant, when the consultant's consulting
relationship with HSOG is terminated either due to the termination of any
consulting agreement, or otherwise, regardless of the fact that no
employment relationship exists; or

(c) with respect to an Officer or Director, when such individual is
no longer serving as an Officer or Director of HSOG, as a consultant to or
employee of HSOG and any of its Subsidiaries.

2.25 Rules of Construction.
----- -- ------------

(a) Governing Law. The construction and operation of the Plan are
--------- ---
governed by the laws of the State of Oklahoma.

(b) Undefined Terms. Unless the context requires another meaning,
--------- -----
any term not specifically defined in the Plan has the meaning given to it
by the Code.

(c) Headings. All headings in the Plan are for reference only and
--------
are not to be utilized in construing the Plan.

(d) Gender. Unless clearly appropriate, all nouns of either gender
------
refer indifferently to persons of either gender.

(e) Singular and Plural. Unless clearly inappropriate, singular
-------- --- ------
terms refer also to the plural and vice versa.
---- -----

(f) Severability. If any provision of the Plan is determined to be
------------
illegal or invalid for any reason, the remaining provisions shall continue
in full force and effect and shall be construed and enforced as if the
illegal or invalid provision did not exist, unless the continuance of the
Plan in such circumstances is not consistent with its purposes.

3. Stock Subject to the Plan.
----- ------- -- --- ----

Four Hundred Fifty-One Thousand Seven Hundred and Thirty-Six (451,736) shares of
HSOG's Common Stock (or such greater or lesser number of shares that equals ten
percent (10%) of the issued and outstanding shares of Common Stock after giving
effect to the Stock Split and the merger of The Home-Stake Royalty Corporation
with the Company) have been reserved for issuance under this Plan. Such shares
of Common Stock may be newly issued shares or shares from the Company's
Treasury. Such number of shares available under this Plan shall be increased
automatically without further action by the Board of Directors or shareholders
of the Company to that number which, when added to the number of shares subject
to Options granted under this Plan and any other stock plan(s) of the Company
equals ten percent (10%) of the issued and outstanding shares of Common Stock at
such time(s) after the effective date of the Stock Split as the Company issues
additional shares of Common Stock (excluding for purposes of determining the
number of shares available under this Plan and the time(s) of such automatic
increases all shares of Common Stock issued pursuant to this Plan and any other
stock plan(s) of the Company and all shares of Common Stock in the Company's
Treasury). Options may be: (a) Incentive Stock Options, (b) other forms of
statutory stock options, or (c) nonstatutory (non-qualified) options.

4. Administration.
--------------

The Plan shall be administered by the Board. In addition to any other
powers set forth in the Plan, the Board has the exclusive authority:

(a) to construe and interpret the Plan, and to remedy any ambiguities or
inconsistencies therein;

F-4
<PAGE>

(b) to establish, amend and rescind appropriate rules and regulations
relating to the Plan;

(c) subject to the express provisions of the Plan, to determine the
individuals who will receive Awards of Options and/or Restricted Stock, the
times when they will receive them, the number of shares to be subject to
each Award and the Option Price, payment terms, payment method, and
expiration date applicable to each Award;

(d) to contest on behalf of HSOG or Participants, at the expense of
HSOG, any ruling or decision on any matter relating to the Plan or to any
Awards of Options and/or Restricted Stock;

(e) generally, to administer the Plan, and to take all such steps and
make all such determinations in connection with the Plan and the Awards of
Options and/or Restricted Stock as it may deem necessary or advisable;

(f) to determine the form in which tax withholding under Section 14 of
the Plan will be made; and

(g) to amend the Plan or any Option or Restricted Stock granted or
awarded hereunder as may be necessary in order for any business combination
involving HSOG to qualify for pooling-of-interest treatment under APB No.
16.

5. Eligible Participants.
-------- ------------

Subject to the provisions of the Plan, the persons who shall be eligible to
participate in the Plan and be granted Awards shall be those persons who are
Officers, Directors, key employees and consultants of HSOG or any Subsidiary who
shall be in a position, in the opinion of the Board, to make contributions to
the growth, management, protection, and success of HSOG and its Subsidiaries.
Of those persons described in the preceding sentence, the Board may, from time
to time, select persons to be granted Awards and shall determine the terms and
conditions with respect thereto. In making any such selection and in
determining the form of the Award, the Board may give consideration to the
functions and responsibilities of the person, to the person's contributions to
HSOG and its Subsidiaries, the value of the individual's service to HSOG and its
Subsidiaries and such other factors deemed relevant by the Board. In the event
and to the extent authorized by the United States Departments of Treasury and
Labor, The Home-Stake Companies 401(k) Plan account of an employee of HSOG or a
Subsidiary may also be a Participant, the Board may grant Options to such
account and, to the extent such account is a Participant, the Options in such an
account shall be subject to all of the terms and provisions of the Plan as if
the Options had been granted to the individual for whom the account is
maintained.

6. Terms and Conditions of Options.
----- --- ---------- -- -------

The Board may, in its discretion, grant Options to any Participant under
the Plan. Each Option shall be evidenced by a written agreement between HSOG
and the Participant. Unless the Board at the time of grant specifically
designates Options granted under the Plan as Incentive Stock Options, all
Options granted under the Plan shall be non-statutory options. Each Option
agreement, in such form as is approved by the Board, shall be subject to the
following express terms and conditions and to such other terms and conditions,
not inconsistent with the Plan as the Board may deem appropriate:

(a) Option Period. Each Option granted under the Plan shall be for such
------ ------
period as is established by the Board, except that each ISO shall expire no
later than ten years after the Option Date. Where Options are exercisable
in installments, the right to purchase any shares shall be cumulative, so
that when the right to purchase any shares has matured, such shares may be
purchased thereafter until the expiration of the Option. The Board shall
have the power to accelerate the exercisability of installments for any
Option granted under the Plan.

F-5
<PAGE>

(b) Option Price. At the time when the Option is granted, the Board
------ -----
will fix the Option Price; provided, however, that except as provided
herein at Section 6(c)(i), the Option Price shall be no less than the Fair
Market Value on the Option Date.

(c) Other Option Provisions. The form of Option authorized by the Plan
------ ------ ---------
may contain such other provisions as the Board may from time to time
determine, including:

(i) "Discounted Options" which may be granted to any Participant.
A "Discounted Option" is an Option having an Option Price per share
(i) less than the Fair Market Value at the Option Date provided such
Option Price shall not be less than 50% of the Fair Market Value at
the Option Date, or (ii) in the case of Directors, equal to the Fair
Market Value at the Option Date, less the amount of salary or
Director's fees elected (at least six months before the commencement
of the calendar or fiscal year with respect to which such fees will
be earned) by a Director to be received in the form of Options (the
"deferred amount") divided by the number of shares subject to the
Option. Discounted Options shall not be forfeitable under any
provision of the Plan and shall be exercisable until the third
anniversary of the Participant's Termination of Employment;

(ii) "Reload Options" which may be granted only to Directors and
employees of HSOG or a Subsidiary. A "Reload Option" is an Option
automatically granted to a Participant pursuant to the terms of an
Award Agreement upon the delivery (actual, constructive or by
attestation) of shares of Common Stock to pay any required
withholding tax in respect of the exercise of an Option (the
"delivered shares"). Such Reload Option entitles the Participant to
purchase (at an option price equal to the Fair Market Value at the
time of such delivery) a number of shares of Common Stock equal to
the number of delivered shares. Reload Options shall be subject to
all of the terms of the Plan and the Award Agreement in respect to
which they are granted, including the Option Period for the Option
exercised by delivery of the delivered shares, and shall not be
exercisable before the earlier of one year after their grant or the
day before the expiration of such Option Period. In the discretion
of the Board, Reload Options granted on the exercise of ISO's may be
ISO's or non-qualified options.

(d) Incentive Stock Options. ISO's may only be granted to employees
--------- ----- -------
of HSOG or of a Subsidiary. No more than Four Hundred Fifty-One Thousand
Seven Hundred and Thirty-Six (451,736) shares of HSOG's Common Stock (as
adjusted to reflect the Stock Split) may be issued upon the exercise of
ISO's granted under this Plan and no ISO may be granted under the Plan
after the tenth anniversary of the date the Plan is approved by the
shareholders of HSOG. The aggregate Fair Market Value (determined as of the
Option Date of the ISO) of the Common Stock with respect to which ISO's are
first exercisable by a Company or Subsidiary employee during any calendar
year under all Option plans of HSOG shall not exceed $100,000. An ISO
granted to an employee who, at the time the ISO is granted, owns Common
Stock possessing more than ten percent (10%) of the total combined voting
power of all classes of capital stock of HSOG or a Subsidiary thereof shall
have an exercise price equal to not less than 110 percent (110%) of the
Fair Market Value on the Option Date. Notwithstanding any other provision
of this Plan, an ISO shall not be transferable or assignable otherwise than
by will or the laws of descent and distribution. Any Participant who
disposes of shares acquired upon the exercise of an ISO either (i) within
two years after the Option Date of the Option under which the shares were
acquired or (ii) within one year after the acquisition of such shares shall
notify HSOG of such disposition and of the amount realized. Failure by a
Participant to so notify HSOG of such a disposition of shares shall entitle
HSOG to treat the shares of Common Stock issued to such Participant as void
ab initio or to recover from the Participant the greater of the value of
the shares disposed of as of the date of disposition or the value of the
shares disposed of as of the date HSOG learns of such disposition from
either (ii) any amounts due to such Participant from HSOG or a Subsidiary,
or (ii) otherwise. HSOG may, at its discretion, place a legend noting the
possible consequences of a Participant's failure to provide such
disposition notice on shares of Common Stock delivered upon the exercise of
an ISO.

F-6
<PAGE>

(e) No person shall have any rights of a shareholder with respect to
any shares to be delivered upon the exercise of an Option until such time
as such Option is validly exercised.

7. Terms and Conditions of Restricted Stock Awards.
-----------------------------------------------

The Board, in its discretion, may grant Restricted Stock to any Participant
under the Plan, the purchase price of which shall be established by the Board,
which purchase price may be financed by HSOG on terms established by the Board.
Each grant of Restricted Stock shall be evidenced by an Award Agreement between
HSOG and the Participant. All shares of Common Stock awarded to Participants
under the Plan as Restricted Stock shall be subject to the following express
terms and conditions and to such other terms and conditions, not inconsistent
with the Plan, as the Board shall deem appropriate:

(a) Restrictions on Transfer. Shares of Restricted Stock awarded
------------------------
to Participants shall contain such restrictions on transfer as the Board
may determine in its sole discretion. Except as permitted under Section 12
of the Plan, shares of Restricted Stock awarded to Participants may not be
sold or transferred before such restrictions on transfer lapse, and may
only be pledged to HSOG or any Subsidiary to satisfy any obligations that
the Participant may have to HSOG or the Subsidiary with respect to the
acquisition of such shares of Restricted Stock. Subject to the provisions
of subparagraphs (b) and (c) below and any other restrictions imposed by
law, the certificates for any shares of Restricted Stock the restrictions
on which have lapsed will be transferred to the Participant or, in the
event of his death, to the beneficiary or beneficiaries designated by
writing filed by the Participant with the Board for such purpose or, if
none, to his estate. Delivery of shares in accordance with the preceding
sentence shall be made within the 30-day period after such restrictions
shall lapse.

(b) Certificates Deposited With Company. Each certificate issued
-----------------------------------
in respect of shares of Restricted Stock awarded under the Plan shall be
registered in the name of the Participant and deposited with HSOG. Each
such certificate shall bear the following (or a similar) legend:

"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) relating to Restricted Stock contained in The Home-Stake
Oil & Gas Company 1997 Incentive Stock Plan and an agreement entered
into between the registered owner and The Home-Stake Oil & Gas
Company. Copies of such Plan and agreement are on file at the
principal office of The Home-Stake Oil & Gas Company."

(c) Shareholder Rights. Subject to the foregoing restrictions,
------------------
each Participant shall have all the rights of a shareholder with respect to
his shares of Restricted Stock including, but not limited to, the right to
vote such shares.

(d) Dividends. On each Common Stock dividend payment date, each
---------
Participant shall receive an amount equal to the dividend paid on that date
on a share of Common Stock, multiplied by his number of shares of
Restricted Stock.

8. Manner of Exercise of Options; Deferral of Receipt of Shares.
------------------------------------------------------------

(a) To exercise an Option in whole or in part, a Participant (or,
after his death, his executor or administrator) or his assignee (as
contemplated at Section 12 hereof) must give written notice to the
Administrator, stating the number of shares with respect to which he
intends to exercise the Option. HSOG will issue the shares with respect to
which the Option is exercised upon payment in full of the Option Price. The
Option Price may be paid (i) in cash, (ii) in shares of Common Stock held
by the Participant, his executor, administrator, or assignee, and having an
aggregate Fair Market Value, as determined as of the close of business on
the day on which such Option is exercised,

F-7
<PAGE>

equal to the Option Price, (iii) if permitted by the Board, a promissory
note in the amount of the Option Price, which note shall provide for full
personal liability of the maker and shall contain such other terms and
provisions as the Board may determine, including without limitation the
right to repay the note partially or wholly with Common Stock, (iv) if
authorized by the Board in the Award Agreement for the Option being
exercised, by delivery of irrevocable instructions to a broker to promptly
deliver to HSOG the amount of sale or loan proceeds necessary to pay for
all Common Stock acquired through such exercise and any tax withholding
obligations resulting from such exercise, (v) if authorized by the Board in
the Award Agreement for the Option being exercised, by the withholding by
HSOG, pursuant to a written election delivered by the Participant, his
executor, administrator, or assignee, to the Administrator on or prior to
the date of exercise, from the shares of Common Stock issuable upon any
exercise of the Option that number of shares having a Fair Market Value as
of the close of business on the day on which such Option is exercised equal
to such Option Price, (vi) by constructive delivery ("attestation") of
shares of Common Stock held by the Participant, his executor,
administrator, or assignee, and having an aggregate Fair Market Value, as
determined as of the close of business on the day of exercise, equal to the
Option Price effected through providing HSOG with a notarized statement on
or before the day of exercise attesting to the number of shares owned by
the Participant, his executor, administrator, or assignee, that will serve
as the Option Price payment shares, or (vii) as authorized by the Board in
the Award Agreement for the Option being exercised, by a combination of
such methods. The Option Price may also be paid in shares of Common Stock
which were received by the Participant, his executor, administrator, or
assignee, upon the exercise of one or more Options or as an award of
Restricted Stock under the Plan; provided, however, that in the event
shares of Restricted Stock are tendered as consideration for the exercise
of an Option, a number of the shares issued upon the exercise of said
Option, equal to the number of shares of Restricted Stock used as
consideration therefor, shall be subject to the same restrictions as the
Restricted Stock so submitted were at the time of their submission plus any
additional restrictions that may be imposed by the Board.

(b) A Participant (but not his executor, administrator or assignee)
may elect to defer the receipt of a portion of the shares of Common Stock
(the "Deferred Shares") deliverable upon the exercise of a non-qualified
Option provided such Participant (i) delivers to the Board a written
election (a "Deferral Election") to defer the receipt of shares of Common
Stock, in such form and with such terms as the Board determines, no later
than six months before the date of exercise of an Option as to which the
receipt of a portion of the shares of Common Stock is to be deferred, (ii)
pays the Option Price payable upon such exercise by delivery, or by
attestation, to HSOG of shares of Common Stock as provided at Section 8(a)
hereof, and (iii) is employed by HSOG or a Subsidiary at the time of
exercise of such Option. Only the number of shares otherwise deliverable
upon exercise of a non-qualified Option in excess of the number of shares
of Common Stock delivered in payment of the Option Price upon any exercise
of such Option shall be Deferred Shares. Any such Deferral Election shall
be revocable only upon the delivery of a superseding Deferral Election for
the shares subject to a Deferral Election. Upon the exercise of an Option
subject to a Deferral Election, that number of shares of Common Stock
which, but for such Deferral Election, would be deliverable upon such
exercise shall be issued to HSOG for the benefit of the Participant and
credited to a bookkeeping account (a "Unit Account") in the name of the
Participant. Each Participant's Unit Account will be credited with all non-
cash property either distributed in respect of any Deferred Shares,
credited to such account or into which any Deferred Shares credited to such
Unit Account are converted. All cash distributed in respect of a
Participant's Deferred Shares or into which a Participant's Deferred Shares
are converted shall be delivered to such Participant as soon as is
reasonably practical after such distribution or conversion. No Participant
shall be entitled to vote the Deferred Shares and instead such shares shall
be voted by the Secretary of HSOG on behalf of such Participant on all
matters on which the holders of Common Stock are entitled to vote in the
same manner as a majority of the shares of Common Stock are voted.

9. Vesting.
-------

F-8
<PAGE>

A Participant may not exercise an Option until it has become vested. The
portion of an Option Award that is vested depends upon the vesting restrictions,
if any, established by the Board for such Option at the time of its grant and
the period that has elapsed since the Option Date.

10. Change in Control.
-----------------

Notwithstanding the provisions of Sections 6 and 7 or anything contained in
a Participant's agreement to the contrary, upon a Change in Control, all Options
and/or Restricted Stock shall be subject to the following:

(a) The restrictions and limitations applicable to any Options
shall lapse, and such Options shall become free of all restrictions and
become fully vested to the full extent of the original grant.

(b) HSOG shall have the right to acquire from Participants their
vested Options for which the value, as established in the Change in
Control, of the Common Stock issuable upon exercise thereof is greater than
the Option Price by payment of the amount by which the price per share of
Common Stock, as established in the Change in Control, exceeds the Option
Price; and

11. Adjustments to Reflect Changes in Capital Structure.
---------------------------------------------------

If there is any change in the corporate structure or shares of HSOG, the
Board of Directors may, in its discretion, make any adjustments necessary to
prevent accretion, or to protect against dilution, in the number and kind of
shares authorized by the Plan and, with respect to outstanding Options and/or
Restricted Stock, in the number and kind of shares covered thereby and in the
applicable Option Price. For the purpose of this Section 11, a change in the
corporate structure or shares of HSOG includes, without limitation, any change
resulting from a recapitalization, stock split, stock dividend, consolidation,
rights offering, spin-off, reorganization, or liquidation and any transaction in
which shares of Common Stock are changed into or exchanged for a different
number or kind of shares of stock or other securities of HSOG or another
corporation.

12. Non-Transferability of Options and Restricted Stock; Limited Exception to
-------------------------------------------------------------------------
Transfer Restrictions.
---------------------

(a) Unless otherwise expressly provided in this Section 12, by
applicable law or by any Award Agreement, as the same may be amended,
evidencing the grant or award of Restricted Stock or Options: Awards are
non-transferable and shall not be subject in any manner to sale, transfer,
anticipation, alienation, assignment, pledge, encumbrance or charge; Awards
shall be exercised only by the person to whom such Awards were granted or
awarded (a "Recipient"); and amounts payable or shares issuable pursuant to
Awards shall be delivered only to or for the account of a Recipient.

(b) Except as precluded by any applicable law, the Board may permit
Awards to be transferred to and exercised by and paid to certain persons or
entities related to the Recipient, including, but not limited to members of
the Recipient's immediate family (parents, grandparents, children,
grandchildren, spouse, siblings), charitable institutions, or trusts or
other entities whose beneficiaries or beneficial owners are members of the
Recipient's immediate family and/or charitable institutions, or to such
other persons or entities as may be approved by the Board, pursuant to such
conditions and procedures as the Board may establish. Any permitted
transfer shall be subject to the condition that the Board receive evidence
satisfactory to it that the transfer is being made for estate and/or tax
planning purposes on a gratuitous or donative basis and without
consideration other than nominal consideration.

F-9
<PAGE>

(i) transfers to HSOG;

(ii) the designation of a beneficiary to receive benefits in
the event of the Recipient's death or, if the Recipient has died,
transfers to or exercise by the Recipient's beneficiary, or, in the
absence of a validly designated beneficiary, transfers by will or the
laws of descent and distribution;

(iii) transfers pursuant to a domestic relations order;

(iv) if the Recipient has suffered a disability, permitted
transfers or exercises on behalf of the Recipient by his or her legal
representative; or

(v) the authorization by the Board of "cashless exercise"
procedures with third parties who provide financing for the purpose of
(or who otherwise facilitate) the exercise of Awards consistent with
applicable laws and the express authorization of the Board.

(d) In the event of a transfer of an Award pursuant to Subsection
(b) or (c) of this Section 12, the Recipient will remain liable for any
taxes (including withholding and social security taxes) due upon or as a
consequence of the exercise of or lapse of any restrictions in respect of
an Award and neither HSOG nor the Board shall have any obligation to
provide notice to a transferee of any event or information that has, will
or could in any way affect an Award or its exercise.

13. Rights as Shareholder.
---------------------

No person shall have any rights of a shareholder as to shares of Common
Stock subject to an Award under the Plan until, after proper exercise of the
Award or other action required, such shares shall have been recorded on HSOG's
official shareholder records as having been issued or transferred. Upon
exercise of the Award or any portion thereof, HSOG will have thirty (30) days in
which to issue the shares, and the Participant will not be treated as a
shareholder for any purpose whatsoever prior to such issuance. No adjustment
shall be made for cash dividends or other rights for which the record date is
prior to the date such shares are recorded as issued or transferred in HSOG's
official shareholder records, except as provided herein or in an Agreement.

14. Withholding Tax.
---------------

Upon the exercise of an Option, or the lapse of restrictions on Restricted
Stock, requiring tax withholding, the Participant will be required to pay to
HSOG for remittance to the appropriate taxing authorities an amount necessary to
satisfy the employee's portion of federal, state and local taxes, if any,
incurred by reason of the exercise of an Option or the lapse of such
restrictions. A Participant may elect to have any tax withholding obligation
incurred upon the exercise of or lapse of restrictions in respect of an Award
satisfied by payment of cash by the Participant, by the withholding of cash
otherwise due the Participant, or, except in the case of ISO's, by the
withholding of shares of Common Stock issuable upon such occurrence and having
an aggregate Fair Market Value on the day prior to the day of exercise or lapse
sufficient to satisfy the applicable tax withholding requirement; provided,
however, that if the Participant elects to have shares of Common Stock withheld
from the shares deliverable upon such exercise or lapse, a Participant's
election must be delivered to the Administrator in writing on or prior to the
date of exercise of the Options or lapse of restrictions with respect to
Restricted Stock.

15. Termination of Employment.
-------------------------

In the event of a Participant's Termination of Employment, the following
rules shall apply:

F-10
<PAGE>

(a) Resignation in order to assume employment, approved by HSOG's
Chief Executive Officer, with a governmental, charitable or educational
institution, or business entity affiliated with HSOG:

When a Participant resigns to assume employment, approved by HSOG's
Chief Executive Officer, with a governmental, charitable or educational
institution, or business entity in which HSOG has an equity interest, the
Board may (i) authorize the continuation of Options granted or Restricted
Stock awarded prior to termination as if the Participant were still
employed by HSOG and (ii) permit the exercise of such Options or lapse of
restrictions in respect of Restricted Stock during periods after such
Termination of Employment, but not beyond the original expiration date of
the Option. Such actions will not be authorized to the extent they would
cause outstanding ISOs to be considered to have been modified for purposes
of Section 424(h) of the Code. Unless the Board determines otherwise,
termination of such approved employment, except to rejoin HSOG or accept
other employment which would qualify under this paragraph (a), or
divestiture by HSOG of its equity interest in such business entity, shall
be treated as a termination of employment pursuant to paragraph (b), (c) or
(d) of this Section 15.

(b) Termination of Employment for any reason other than death,
disability or resignation for approved employment pursuant to paragraph (a)
above:

Any Option or Restricted Stock shall expire forthwith; provided,
however, that with the approval of the Board evidenced by a writing signed
by an executive officer of HSOG other than the Participant, unvested
Options may be accelerated to vest immediately, any Options exercisable at
the time of such termination may be exercised up to a date after such
termination that is determined by the Board, but not exceeding five years
from the date of such termination and not beyond the date the Option
otherwise would have expired in accordance with the Award Agreement
evidencing such Option and/or the restrictions on Restricted Stock may be
eliminated so that such Restricted Stock is free of such restrictions at
the time of Termination of Employment and not forfeited upon such
Termination of Employment.

A Participant's estate or beneficiaries shall have a period up to the
later of one year after the Participant's death or the expiration date
specified in the Award Agreement within which to exercise the Option;
provided, however, in the case of ISO's, the Participant's estate or
beneficiaries may exercise an Option only until the expiration date
specified in the Award Agreement. Any Option may be immediately exercised
in full by the Participant's estate or beneficiaries. In the event the
Participant's estate is closed with exercisable Options then unexercised,
the rights under this paragraph shall pass by will or the laws of descent
and distribution. In the case of Restricted Stock, the restrictions on
such Restricted Stock shall be deemed to have lapsed immediately before
such Participant's death.

(d) Disability of a Participant:

In the event of a Participant's Disability during employment, the
Participant, or his or her guardian or legal representative shall have a
period up to the expiration date specified in the Award Agreement within
which to exercise the Option. In the case of Restricted Stock, the
restrictions on such Restricted Stock shall be deemed to have lapsed
immediately before the Termination of Employment of such Participant.

16. Cancellation of Option Grants and Restricted Stock.
--------------------------------------------------

(a) After Termination of Employment. If there is a Termination of
-------------------------------
Employment with respect to a Participant for any reason other than death,
and, pursuant to paragraph (a), (b) or (d) of

F-11
<PAGE>

Section 15, one or more Options have not yet expired or the restrictions
pertaining to Restricted Stock have not lapsed, the Board, in its sole
discretion, which may be delegated to the Chief Executive Officer of HSOG
or to the Chairman of the Board, may cancel any such Options at any time
prior to the exercise thereof or declare forfeited any such Restricted
Stock before the related restrictions lapse unless the following conditions
are met:

(i) The Participant shall not render services for any
organization or engage directly or indirectly in any business which,
in the judgment of the Chief Executive Officer of HSOG, is or becomes
competitive with HSOG, or which is or becomes otherwise prejudicial
to or in conflict with the interests of HSOG. The judgment of the
Chief Executive Officer shall be based on the Participant's positions
and responsibilities while employed by HSOG, the Participant's post-
employment responsibilities and position with the other organization
or business, the extent of past, current and potential competition or
conflict between HSOG and the other organization or business, the
effect on HSOG's customers, suppliers and competitors of the
Participant's assuming the post-employment position, and such other
considerations as are deemed relevant given the applicable facts and
circumstances. The Participant shall be free, however, to purchase as
an investment or otherwise, stock or other securities of such
organization or business so long as such stock or securities are
listed upon a recognized securities exchange or traded over-the-
counter, and such investment does not represent a substantial
investment to the Participant or a greater than five percent (5%)
equity interest in the organization or business.

(ii) The Participant shall not, without prior written
authorization from HSOG, disclose to anyone outside HSOG, or use in
other than HSOG's business, any confidential information or material
relating to the business of HSOG, acquired by the Participant either
prior to or after such Participant's Termination of Employment.

(b) Before Termination of Employment. The Board, in its sole
--------------------------------
discretion, which may be delegated to the Chief Executive Officer of HSOG
or to the Chairman of the Board, may cancel any Options held by a person or
reduce the number thereof at any time prior to the exercise thereof or
declare forfeited a part or all of any shares of Restricted Stock awarded
to a Participant under the following circumstances:

(i) The Participant's conduct either in connection with his
or her employment by HSOG or otherwise is deemed inimical to the
interests of HSOG.

(ii) The Participant's employment responsibilities with HSOG
are reduced or altered and the Board determines that the Participant
would not have been granted the Options or awarded the shares of
Restricted Stock, or such number of Options or shares of Restricted
Stock, had the Participant's employment responsibilities been at the
reduced or altered level at the time of the grant or award of such
Options or shares of Restricted Stock.

17. No Right To Employment.
----------------------

Participation in the Plan will not give any Participant a right to be
retained as an employee of HSOG or any Subsidiary, or any right or claim to any
benefit under the Plan, unless the right or claim has specifically accrued under
the Plan.

18. Amendment of the Plan.
---------------------

Except as provided in this Section 18, the Board of Directors may amend,
modify, suspend or discontinue this Plan for the purpose of meeting any changes
in legal requirements or for any other purpose permitted by law. Except for any
adjustments pursuant to Section 11, the Board of Directors may not (a) increase
the maximum number of shares that may be issued under the Plan, except with the
approval of

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<PAGE>

the shareholders of HSOG, (b) decrease the exercise price with respect to any
Option previously granted, or (c) delegate the administration of this Plan to
any committee.The Board may from time to time amend or revise the terms of the
Plan in whole or in part and may without limitation, adopt any amendment deemed
necessary.

19. Notice.
------

Any written notice to HSOG required by any of the provisions of the Plan
shall be addressed to the Administrator, if so required under the Plan, and
otherwise to the Chairman of the Board or to the Chief Executive Officer of
HSOG, and shall become effective when it is received by the office of such
Administrator, Chairman or the Chief Executive Officer.

20. Company Benefit and Compensation Plans.
--------------------------------------

Nothing contained in the Plan shall prevent any Participant prior to death,
or the Participant's dependents or beneficiaries after the Participant's death,
from receiving, in addition to any Options or Restricted Stock provided for
under the Plan, any salary, incentive or performance plan Awards, payments under
a Company retirement plan or other benefits that may be otherwise payable or
distributable to such Participant, or to the Participant's dependents or
beneficiaries under any other plan or policy of HSOG or otherwise. To the
extent permitted by law, grants of Options or awards of Restricted Stock under
the Plan may be made in combination with, or as alternatives to, grants, awards
or payments under other Company plans.

21. Representations and Warranties.
------------------------------

No person shall at any time have a right to be selected as a Participant in
the Plan, nor having been selected as a Participant for one Award to be selected
as a Participant for any other Award, and no person shall have any authority to
enter into any agreement assuring such selection or making any warranty or
representation with respect thereto. A Participant shall have no rights to or
interest in any Option or Restricted Stock except as set forth herein.

22. Unfunded Plan.
-------------

Insofar as it provides for grants of Options and awards of Restricted
Stock, the Plan shall be unfunded. Although bookkeeping accounts may be
established with respect to Participants who are or may become entitled to
Common Stock under the Plan, any such accounts shall be used merely as a
bookkeeping convenience. HSOG shall not be required to segregate any assets
that may at any time be represented by Common Stock, nor shall the Plan be
construed as providing for such segregation, nor shall HSOG nor the Board be
deemed to be a trustee of any Common Stock issuable or deliverable under the
Plan. Any liability of HSOG to a Participant with respect to a grant of Options
or award of Restricted Stock under the Plan shall be based solely upon any
contractual obligations that may be created by the Plan or an Award Agreement;
no such obligation of HSOG shall be deemed to be secured by any pledge or other
encumbrance on any property of HSOG. Neither HSOG nor the Board shall be
required to give any security or bond for the performance of any obligation that
may be created by the Plan.

23. Shareholder Approval.
--------------------

Continuance of the Plan, and the validity of any Options granted or
Restricted Stock awarded under the Plan, shall be subject to approval by the
shareholders of HSOG of the Plan within 12 months after the date the Plan is
adopted by the Board.

24. Conditions Upon Issuance of Shares.
----------------------------------

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<PAGE>

An Option shall not be exercisable, a share of Common Stock shall not be
issued pursuant to the exercise of an Option, and restrictions on Restricted
Stock awarded shall not lapse until such time as the Plan has been approved by
the shareholders of HSOG and unless the Award of Restricted Stock, exercise of
such Option and the issuance and delivery of such share pursuant thereto shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the shares of
Common Stock may then be listed, and shall be further subject to the approval of
counsel for HSOG with respect to such compliance. As a condition to the
exercise of an Option, HSOG may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Common Stock is
being purchased only for investment and without any present intention to sell or
distribute such shares if, in the opinion of counsel for HSOG, such a
representation is required by any of the aforementioned relevant provisions of
law.

25. Effective Date and Termination of Plan.
--------------------------------------

25.1 Effective Date. The Plan is effective as of the of the date of its
--------------
adoption by the Board of Directors, subject to its approval by the shareholders
of HSOG, pursuant to Section 23.

25.2 Termination of the Plan. The Board may terminate the Plan at any
-----------------------
time with respect to any shares that are not then subject to Options or
Restricted Stock. Termination of the Plan will not affect the rights and
obligations of any Participant with respect to Options or Restricted Stock
awarded before termination.

* * * * *

The undersigned, being the duly elected Secretary of The Home-Stake Oil &
Gas Company, does hereby certify that the foregoing The Home-Stake Oil & Gas
Company 1997 Incentive Stock Plan was approved by the Board of Directors as of
August 14, 1997 and by the shareholders of HSOG on , 1997.
-------------------

---------------------------------------
Secretary

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<PAGE>

APPENDIX G

(S) 1.159. Procedure by dissenting shareholder

In case any shareholder of any domestic corporation lawfully elects to
exercise his right to dissent, the following procedure shall be followed:

(1) Such shareholder shall, at the meeting at which such proposed
corporate action is to be voted upon or at any time prior to such meeting,
submit to the president or secretary of the corporation, or to the officer in
charge of the registered office, a written objection to such corporate action
setting out that his right to dissent shall be exercised if such action be
approved by the shareholders' vote and giving his address to which notice
thereof shall be delivered or mailed in the event of such approval;

(2) If such corporate action be approved by such vote, such shareholder
shall, within twenty (20) days from the receipt of notice of such approval,
present or mail to the president or secretary, or to the officer in charge of
the registered office, a written demand that the corporation pay him the fair
value of his shares. Such demand shall state the number and class of shares
upon which he is demanding payment, and the estimated fair value of such shares,
and shall contain a request that, in case the corporation shall not consent to
pay such estimated fair value, the corporation shall give notice of the amount
it claims to be the fair value thereof. The fair value of such shares shall be
the market value thereof as of the day before the vote was taken authorizing
such corporate action, excluding any appreciation or depreciation in consequence
of such proposed action. If such shares be listed upon a recognized stock
exchange and any of such shares shall have been sold upon such exchange upon the
day aforesaid, the fair value thereof shall be presumed to be the highest price
at which such shares were thus sold upon such day in the absence of any evidence
of fraud or collusion;

(3) Such shareholder shall, within such twenty-day period, submit to the
corporation or to one of the aforementioned officers thereof his certificate or
certificates of shares upon which he is demanding payment;

(4) Such certificates of shares shall be stamped or endorsed with a
statement or legend that such shares are dissenting shares, and a record thereof
shall be made upon the share ledgers of the corporation. Upon all subsequent
transfers of such shares upon the books of the corporation, prior to the time
the price equal to such fair value has been paid to such dissenting
shareholders, the new certificates issued representing such shares shall bear a
like statement or legend together with the name and address of the original
dissenting holder thereof. Such stamp or endorsement shall not in any way
constitute a waiver by the corporation of any right arising from the failure of
such shareholder to comply with the terms of this act;

(5) The corporation shall, within ten (10) days after receipt of the
demand provided for in paragraph (2) hereof, given written notice to such
dissenting shareholder at the address specified for such notice in such demand,
or, in the absence of such address in such demand, such notice shall be given to
such shareholder personally or mailed to the address at which notice of
shareholder's meetings are required to be mailed. Such notice shall either set
out that the corporation accepts the amount claimed in such demand and agrees to
pay such amount within fifteen (15) days upon the surrender of the share
certificates duly endorsed or contain an estimate by the corporation of the fair
value of such shares together with an offer to pay the amount of such estimate
within fifteen (15) days from the receipt of notice from such shareholder that
he agrees to accept such amount upon the surrender of the share certificates
duly endorsed;
<PAGE>

(6) In case such corporation thus rejects the amount claimed in such
demand as the fair value of such shares and tenders its estimate and offer, such
shareholder shall, within ten (10) days from the receipt of such estimate and
offer, give written notice to such corporation either setting out that he
accepts the valuation estimated by the corporation or stating that he rejects
such estimate and offer. If such shareholder rejects such estimate and offer and
the fair value of such shares be not agreed upon in writing within fifteen (15)
days from the giving or mailing of such notice of rejection, either party may
proceed in a civil action to have such fair value determined;

(7) If the fair value be established by agreement between the parties,
such amount agreed upon in writing shall be paid by such corporation within
fifteen (15) days after such agreement, and in case of default in payment
thereof an action may be brought for the full amount agreed upon with interest
from the end of such fifteen-day period in the same manner as an action brought
upon any contract and the period of limitations shall be the same as in the case
of an action upon a written contract; provided, however, that the statutes of
limitations shall be tolled during the time such payment is suspended by the
provisions of Sections 145 and 161g of this act;

(8) If such shareholder fails to substantially carry out the procedure
prescribed by this section, he shall, as of the date of such default, be deemed
to have waived his right to dissent to such corporate action, and if such
corporation fail to substantially comply with such procedure, it shall be deemed
to have rejected the offer by the shareholder who may then proceed with a civil
action as herein provided.

(9) Any agreement between such corporation and dissenting shareholders
fixing the fair value of shares upon which payment is being demanded shall be
filed with the secretary of the corporation.

(S) 1.160. Action to fix value of dissenting shares

a. Any dissenting shareholder of a domestic corporation or any such
corporation in whose behalf a cause of action to have the fair value of
dissenting shares determined has accrued may, within thirty (30) days after the
accrual thereof but not thereafter, file a petition in the district court of the
county in which the registered office of such corporation is located to have the
fair value of such dissenting shares determined. If such petition be not filed
within such period, then such shareholder shall be deemed to have waived his
right to dissent.

b. Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated. Dissenting shareholders may intervene in any pending action for
the appraisal of any dissenting shares.

c. On the trial of the action, the court shall determine whether the
dissenting shareholder is entitled to relief, and, if the court shall so find,
the court shall determine the fair value of said shares.

d. Any such judgment shall be payable only after the endorsement and
delivery to the corporation of the certificates of the shares described in the
judgment, or, in the event such certificates have been lost or destroyed, upon
delivery of a bond as provided in Section 105 of this act.

e. Any party shall have the right of appeal from such judgment, and the
costs of such action shall be assessed or apportioned as the court may consider
equitable

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