CALLON PETROLEUM CO, 424B1, 1996-11-26

CALLON PETROLEUM CO
424B1, 1996-11-26
CRUDE PETROLEUM & NATURAL GAS

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Filed pursuant to
rule 424(b)(1);
Registration No.
333-15501

PROSPECTUS
$21,000,000

[LOGO] CALLON PETROLEUM COMPANY

10% SENIOR SUBORDINATED NOTES DUE 2001

The 10% Senior Subordinated Notes due 2001 ("Notes") are being offered by
Callon Petroleum Company, a Delaware corporation ("Company" or "Callon").
The Notes mature on December 15, 2001. Interest on the Notes is payable
quarterly on December 15, March 15, June 15 and September 15, commencing March
15, 1997. The Notes will be redeemable at the option of the Company, in whole or
in part, on or after December 15, 1997, at 100% of the principal amount thereof,
plus accrued interest to the redemption date.

The Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined herein) of the Company. The Notes also will be structurally
subordinated to all liabilities of the Company's subsidiaries. As of September
30, 1996, the Company had $8.9 million of Senior Indebtedness and the Company's
subsidiaries, excluding guarantees of Senior Indebtedness, had liabilities of
$13.0 million. The Notes will be senior to the Company's existing $2.125
Convertible Exchangeable Preferred Stock, Series A ("Series A Preferred
Stock") and any 8.5% Convertible Subordinated Debentures due 2010
("Convertible Debentures") issued in exchange for such Series A Preferred
Stock. The Indenture will prohibit the Company's Restricted Subsidiaries (as
defined herein) from incurring subordinated indebtedness. See "Description of
Notes."

The Notes will be represented by a Global Certificate registered in the
name of the nominee of The Depository Trust Company, which will act as the
Depositary (the "Depositary"). Beneficial interests in the Global Certificate
will be shown on, and transfers thereof will be effected only through, records
maintained by the Depositary and its participants. Except as described herein,
Notes in definitive form will not be issued. See "Description of Notes -- Book
Entry Securities."

The Company has been advised by the Underwriter that it intends to make a
market in the Notes. No assurance can be given, however, that an active trading
market for the Notes will develop. The Company has no present intention to have
the Notes authorized for quotation on any automated quotation system or listed
on any securities exchange.

SEE "RISK FACTORS" ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES OFFERED HEREBY.

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

================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- --------------------------------------------------------------------------------
Per Note.. 100% 3.25% 96.75%
- --------------------------------------------------------------------------------
Total(4).. $21,000,000 $682,500 $20,317,500
================================================================================
(1) Plus accrued interest, if any, from November 27, 1996.

(2) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(3) Before deducting expenses payable by the Company estimated at $250,000

(4) The Company has granted to the Underwriter an option for 30 days to purchase
up to an additional $3.15 million aggregate principal amount of Notes, at
the Price to Public, less Underwriting Discount, solely to cover
overallotments, if any. If such option is exercised in full, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$24,150,000, $784,875, and $23,365,125, respectively. See
"Underwriting."
------------------------

The Notes are offered by the Underwriter, subject to prior sale, when, as
and if issued to and accepted by it and subject to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Notes
will be made on or about November 27, 1996 through the facilities of The
Depository Trust Company in New York, New York.

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

MORGAN KEEGAN & COMPANY, INC.

The date of this Prospectus is November 25, 1996
<PAGE>
AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "SEC"). Reports, proxy and information statements and other
information filed by the Company with the SEC pursuant to the informational
requirements of the Exchange Act may be inspected at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549-1004, and at the following Regional Offices of the SEC:
Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and New York Regional Office, 7 World Trade Center, New York, New
York 10048. Copies of such material may also be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549-1004 at prescribed rates. The Registration Statement was filed with the
SEC electronically. The SEC maintains a site on the World Wide Web that contains
documents filed with the SEC electronically. The address of such site is
http://www.sec.gov, and the Registration Statement may be inspected at such
site. The Common Stock is traded on the Nasdaq NMS. The Company's registration
statements, reports, proxy and information statements, and other information may
also be inspected at the National Association of Securities Dealers, Inc., 1735
K Street, N.W., Washington, D.C. 20006.

This Prospectus constitutes a part of a Registration Statement on Form S-1
filed by the Company with the SEC under the Securities Act of 1933, as amended
(the "Securities Act"). This Prospectus omits certain of the information
contained in the Registration Statement, and reference is hereby made to the
Registration Statement for further information with respect to the Company and
the securities offered hereby. Any statements contained herein concerning the
provisions of any document filed as an exhibit to the Registration Statement or
otherwise filed with the SEC are not necessarily complete and in each instance
reference is made to the copy of such document so filed. Each such statement is
qualified in its entirety by such reference.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE OVER THE COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE HEREIN. UNLESS OTHERWISE
INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITER'S
OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. REFERENCES TO "CALLON" OR THE
"COMPANY" HEREIN INCLUDE CALLON PETROLEUM COMPANY AND ITS PREDECESSORS AND
SUBSIDIARIES UNLESS THE CONTEXT OTHERWISE REQUIRES. CERTAIN TERMS RELATING TO
THE OIL AND GAS INDUSTRY ARE DEFINED IN "GLOSSARY."

THE COMPANY

Callon Petroleum Company and its predecessors have been engaged in the
acquisition, development, exploration and production of oil and gas since 1950.
The Company's properties are geographically concentrated in Louisiana, Alabama
and offshore Gulf of Mexico. Callon also manages properties for certain
institutional investors. Callon was formed in 1994 through the consolidation of
a publicly traded limited partnership, a joint venture with a consortium of
European entities and an independent energy company owned by certain members of
current management. As of December 31, 1995, the Company had estimated net
proved reserves of 58.3 Bcfe with a PV-10 Value of $63.8 million, representing
increases of 15% and 54% respectively, from December 31, 1994.

The Company's objective is to enhance stockholder value through sustained
growth in its reserve base, production levels and resulting cash flows from
operations. Over the past two years, the Company has shifted its emphasis from
the acquisition of producing properties to the acquisition of acreage with
development and exploratory drilling opportunities to further increase potential
recoverable reserves. In evaluating drilling opportunities, Callon performs
extensive geological and geophysical studies using computer aided exploration
techniques ("CAEX"), including, where appropriate, the acquisition of 3-D
seismic or high-resolution 2-D seismic data to facilitate these efforts.

EXPLORATION AND DEVELOPMENT OPERATIONS. The Company's exploratory and
development operations are concentrated in two areas in the Gulf of Mexico, the
Shallow Miocene focus area, located in the state waters of Alabama and the
federal outer continental shelf in the Gulf of Mexico ("OCS"), and the outer
regions of the OCS, at depths of between 13,000 and 18,000 feet ("Deep OCS
Prospects"). Wells drilled in the Shallow Miocene focus area seek oil and gas
deposits at from 1,800 to 6,000 feet, and are characterized by relatively low
exploration and development costs, high initial production rates and short
reserve lives. Wells drilled on the Deep OCS Prospects are more expensive to
drill and complete. These wells have greater risks, but seek larger oil and gas
deposits with longer reserve lives.

In 1995 and 1996, the Company acquired an extensive infrastructure of
production platforms, gathering systems and pipelines in the Shallow Miocene
focus area. During 1996, the Company completed four proprietary high resolution
seismic surveys over an eight block area contiguous to Chandeleur Block 40 ("CB
40") in the Shallow Miocene focus area. Based on these surveys, in October and
November of 1996, the Company drilled two gross (1.52 net) successful
development wells and one gross (1.0 net) successful exploratory well in this
area. These wells are expected to be placed on production by the end of November
and, coupled with the replacement of compression equipment at the CB 40 and Main
Pass Block 163 production facilities, the Company anticipates a significant
increase in its gas production rates by year-end 1996. The Company's capital
budget currently anticipates drilling an additional five gross (4.0 net)
development wells and three gross (0.9 net) exploratory wells during late 1996
and 1997 in this area, for aggregate net cost to drill and complete of $15.3
million.

In 1996, the Company joined with Murphy Exploration and Production, Inc.
("Murphy") to acquire 18 blocks in the OCS. Callon owns a 25% working interest
in these Deep OCS Prospects. The Company's capital budget for late 1996 and 1997
contemplates drilling eight gross (2.0 net) exploratory wells jointly with
Murphy at a total cost to Callon to drill and complete of $11.3 million. The
first well commenced drilling in the West Cameron 603 Block in October 1996, and
drilling of the second well is scheduled in November 1996. In addition to the
wells drilled with Murphy, the Company, as operator, plans to drill an
additional two wells in 1997 on Deep OCS Prospects.

3
<PAGE>
In total, the Company's current capital budget contemplates the drilling of
nine gross (5.9 net) development wells and 12 gross (3.9 net) exploratory wells
during late 1996 and 1997 at an estimated net cost to the Company to drill and
complete of $34.9 million. These drilling operations will be financed
through cash flows from operations, the net proceeds of this Offering and
borrowings under the Company's credit facility with a commercial bank ("Credit
Facility"). See "Use of Proceeds."

PRODUCING PROPERTY ACQUISITIONS. Over the past seven years, the Company
has increased its reserves through the acquisition of producing properties that
are geologically complex, have (or are analogous to fields with) an established
production history from stacked pay zones and are candidates for exploitation.
The Company focuses on reducing operating costs and implementing production
enhancements through the application of technologically advanced production and
recompletion techniques. Between 1989 and September 30, 1996, Callon acquired
producing properties in 16 negotiated transactions, on behalf of itself and, in
certain cases, its primary institutional investor, for an aggregate net purchase
price of $194 million and, during that period, the Company had an average
Reserve Replacement Cost of $0.84 per Mcfe. During the nine months ended
September 30, 1996, the Company invested a total of $1.0 million and acquired an
average 73% working interest (55% net revenue interest) in 12 producing wells,
as well as a 100% ownership of one production facility and a 49% ownership in
another, both of which are located in its Shallow Miocene focus area. Estimated
net proved reserves attributable to these properties, as estimated by the
Company's internal reserve engineers as of September 30, 1996, is 10 Bcfe.

Through its acquisition program, the Company has assembled an operational
and technical database in geographical areas at a low cost to the Company. The
relationship with its institutional investors has allowed the Company to pursue
larger acquisitions, while the cost sharing arrangements and ongoing management
fees have enabled the Company to enhance the rate of return on its properties
and to maintain a larger, more experienced team of technical and operating
personnel than otherwise would be feasible for a company of its size.

SIGNIFICANT PRODUCING PROPERTIES. The following table shows the PV-10
Value and estimated net proved oil and gas reserves by major field for the
Company's four largest producing fields and for all other properties combined at
December 31, 1995.
<TABLE>
<CAPTION>
ESTIMATED NET PROVED
PERCENT ----------------------
PV-10 TOTAL OIL GAS
PRIMARY VALUE PV-10 RESERVES RESERVES
FIELD NAME/LOCATION OPERATOR(S) ($000) VALUE (MBBLS) (MMCF)
- ------------------------------------- ------------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Chandeleur Block 40.................. Callon $16,851 26.4% -- 12,161
Federal Waters
Black Bay Complex.................... Callon 10,187 16.0 2,144 684
Louisiana State Waters
North Dauphin Island................. Callon 9,749 15.3 -- 6,879
Alabama State Waters
Big Escambia Creek Field............. Exxon 9,330 14.6 1,053 2,305
Escambia County, Alabama
Other properties..................... Various 17,647 27.7 1,569 7,638
------- -------- --------- ---------
Total........................... $63,764 100.0% 4,766 29,667
======= ======== ========= =========
</TABLE>
4
<PAGE>
THE OFFERING

Securities Offered...... $21,000,000 aggregate principal amount of 10% Senior
Subordinated Notes due 2001, assuming no exercise of
the Underwriter's overallotment option to purchase up
to $3,150,000 additional aggregate principal amount of
Notes.

Maturity Date........... December 15, 2001.

Interest Payment Dates.. December 15, March 15, June 15 and September 15,
commencing March 15, 1997. The first interest payment
will represent interest from the date of original
issuance through March 15, 1997.

Optional Redemption..... The Notes will be redeemable at the Company's option,
in whole or in part, on or after December 15, 1997 at
100% of the principal amount plus accrued interest to
the date of redemption. See "Description of Notes --
Optional Redemption by Company."

Ranking................. The Notes will be unsecured and subordinated in right
of payment to all existing and future Senior
Indebtedness of the Company. The Notes will also be
structurally subordinated to all liabilities of the
Company's subsidiaries. On September 30, 1996, the
total amount of Senior Indebtedness of the Company was
$8.9 million and the total amount of liabilities of
the Company's subsidiaries as of September 30, 1996
was $13.0 million excluding guarantees of Senior
Indebtedness. The Notes will rank senior to the
Company's existing Series A Preferred Stock and any
Convertible Debentures that may be issued upon the
exchange of such Series A Preferred Stock. The
Indenture pursuant to which the Notes will be issued
will prohibit the Company's Restricted Subsidiaries
from incurring subordinated indebtedness. See
"Description of Notes -- Subordination" and "--
Certain Covenants -- Limitation on Indebtedness for
Money Borrowed" and "Description of Existing
Securities and Debt Instruments."

Principal Covenants..... The Indenture will contain covenants restricting the
Company's ability to incur additional indebtedness if
the ratio of the Company's consolidated Indebtedness
for Money Borrowed (as defined) to Consolidated EBITDA
(as defined) would exceed 10.0:1 or if the ratio of
Consolidated EBITDA to Consolidated Interest Expense
(as defined) would be less than 1.1:1. The Indenture
will also prohibit restrictions on the payments of
dividends by Restricted Subsidiaries and will place
limitations on certain liens, restricted payments and
transactions with Affiliates and the ranking of future
subordinated indebtedness. See "Description of Notes
-- Certain Covenants."

Sinking Fund............ None.

Use of Proceeds......... The Company intends to use the net proceeds from this
Offering to fund a portion of its remaining 1996 and
its 1997 capital expenditure budget. Pending the use
of net proceeds as described herein, the Company will
use net proceeds to repay amounts under its Credit
Facility, which may be reborrowed at a later date, or
invest such net proceeds in short-term liquid
investments.

Trustee................. American Stock Transfer & Trust Company.

RISK FACTORS

See "Risk Factors" for a discussion of certain matters that should be
considered in evaluating an investment in the Notes.

5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales................... $ 18,578 $ 17,400 $ 23,210 $ 13,948 $ 10,048
Interest and other.................. 537 501 627 171 230
--------- --------- --------- --------- ---------
Total revenues................. 19,115 17,901 23,837 14,119 10,278
--------- --------- --------- --------- ---------
Costs and Expenses:
Lease operating expenses............ 5,646 5,201 6,732 4,042 3,713
Depreciation, depletion and
amortization...................... 7,697 7,929 10,376 6,049 3,411
General and administrative.......... 2,352 2,960 3,880 3,717 2,350
Interest............................ 184 1,441 1,794 624 196
--------- --------- --------- --------- ---------
Total costs and expenses....... 15,879 17,531 22,782 14,432 9,670
--------- --------- --------- --------- ---------
Income (loss) from operations......... 3,236 370 1,055 (313) 608
Provision (benefit) for income
taxes............................... -- -- -- (200) 113
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect
of change in accounting principle... 3,236 370 1,055 (113) 495
Cumulative effect of change in
accounting principle(2)............. -- -- -- -- 5,262
--------- --------- --------- --------- ---------
Net income (loss)..................... 3,236 370 1,055 (113) 5,757
Preferred stock dividends............. 2,097 -- 256 -- --
--------- --------- --------- --------- ---------
Net income (loss) available to common
shares.............................. $ 1,139 $ 370 $ 799 $ (113) $ 5,757
========= ========= ========= ========= =========
Net income (loss) per common share:
Income (loss) per share before change
in accounting principle............. $ .20 $ .06 $ .14 $ (.03) $ .13
========= ========= ========= ========= =========
Cumulative effect of change in
accounting principle................ $ -- $ -- $ -- $ -- $ 1.40
========= ========= ========= ========= =========
Weighted average common shares
outstanding......................... 5,755 5,754 5,755 4,346 3,769
========= ========= ========= ========= =========
STATEMENT OF CASH FLOWS DATA:
Net income (loss)..................... $ 3,236 $ 370 $ 1,055 $ (113) $ 5,757
Depreciation, depletion and
amortization........................ 7,913 8,131 10,600 6,328 3,657
Other non-cash items.................. 201 -- 133 (112) (5,114)
Net change in assets and
liabilities......................... 5,772 233 (2,080) (756) 435
--------- --------- --------- --------- ---------
Cash provided by operating
activities.......................... 17,122 8,734 9,708 5,347 4,735
========= ========= ========= ========= =========
Cash provided by (used in) investing
activities.......................... (19,874) (16,780) (24,237) (6,423) (2,710)
========= ========= ========= ========= =========
Cash provided by (used in) financing
activities.......................... 7,196 3,617 11,509 3,916 (1,695)
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Working capital (deficit)............. $ 2,968 $ (7,106) $ 4,712 $ 1,896 $ (687)
Oil and gas properties, net........... 68,415 51,890 57,765 43,920 21,000
Total assets.......................... 99,923 76,048 83,867 73,786 39,825
Total debt............................ 8,950 14,868 100 19,234 2,691
Total stockholders' equity............ 76,268 43,801 75,129 43,431 27,170
OTHER FINANCIAL DATA:
Capital expenditures, net............. $ 19,874 $ 16,780 $ 24,237 $ 10,412 $ 2,710
EBITDA(3)............................. $ 11,318 $ 9,982 $ 13,582 $ 6,727 $ 4,496
Ratio of earnings to fixed
charges(4).......................... 18.6 1.3 1.6 -- 3.6

</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)

6
<PAGE>
- ------------
(1) The Company succeeded to the business and properties of Callon Petroleum
Operating Company ("Callon Petroleum Operating"), Callon Consolidated
Partners, L.P. ("CCP") and CN Resources ("CN") on September 16, 1994
(the "Consolidation"). Historical information about the Company prior to
September 16, 1994 includes the financial and operating information of the
predecessors of the Company, other than the interest in CN not owned by
Callon Petroleum Operating, combined as entities under common control in a
manner similar to a pooling of interests. See "The Company."

(2) Effective January 1, 1993, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 109 "Accounting for Income
Taxes," which resulted in the recording of a deferred tax asset of
$5,262,000 at December 31, 1993. See Note 3 of the Notes to Consolidated
Financial Statements.

(3) EBITDA is earnings before interest, taxes, depreciation and amortization.
EBITDA is presented because it is a widely accepted financial indication of
a company's ability to service and incur debt. EBITDA should not be
considered as an alternative to earnings (loss) as an indicator of the
Company's operating performance or to cash flow as a measure of liquidity.

(4) For purpose of computing this ratio, "earnings" represent income (loss)
before income taxes and extraordinary item plus fixed charges. "Fixed
charges" consist of interest expense on all indebtedness and that portion
of rental expense considered to be representative of the interest factor
therein. As a result of the loss incurred for the year ended December 31,
1994 earnings did not cover fixed charges by $313,000.

SUMMARY OPERATING AND RESERVE DATA(1)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (MBbls)..................... 451 430 595 364 369
Gas (MMcf)...................... 4,784 5,279 6,694 4,076 1,659
Total production (MMcfe)........ 7,490 7,860 10,261 6,260 3,870
AVERAGE SALES PRICE PER UNIT:
Oil (per Bbl)................... $ 18.05 $ 16.68 $ 16.68 $ 15.63 $ 16.73
Gas (per Mcf)................... 2.18 1.88 1.96 2.00 2.10
Total production (per Mcfe)..... 2.48 2.18 2.24 2.21 2.49
OTHER OPERATING DATA:
Lease operating expenses/Mcfe... $ 0.56 $ 0.50 $ 0.49 $ 0.49 $ 0.72
Severance taxes/Mcfe............ 0.20 0.16 0.17 0.16 0.24
Capital expenditures (net)
(000's)....................... 19,874 16,780 24,237 10,412 2,710

</TABLE>
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
RESERVE REPLACEMENT COSTS/Mcfe(2).... $ 1.05 $ 0.97 $ 0.58
ESTIMATED NET PROVED RESERVES:
Oil (MBbls)..................... 4,766 4,424 2,842
Gas (MMcf)...................... 29,667 24,102 14,167
Gas equivalent (MMcfe).......... 58,263 50,646 31,219
Estimated future net cash
flows, before income
taxes (000's)................. $ 95,730 $ 59,477 $ 35,814
PV-10 Value (000's)............. $ 63,764 $ 41,383 $ 22,554
- ------------
(1) The Company succeeded to the business and properties of its predecessor
entities on September 16, 1994 pursuant to the Consolidation. Historical
data about the Company prior to September 16, 1994 includes the operating
data of the Company's predecessors, other than the interest in CN not owned
by Callon Petroleum Operating, combined as entities under common control, in
a manner similar to a pooling of interests. See "The Company."

(2) See "Glossary."

7
<PAGE>
RISK FACTORS

THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING WITHOUT LIMITATION, STATEMENTS UNDER "PROSPECTUS
SUMMARY", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS", AND "BUSINESS AND PROPERTIES" REGARDING THE COMPANY'S
FINANCIAL POSITION, ESTIMATED RESERVE QUANTITIES AND NET PRESENT VALUES OF
RESERVES, BUSINESS STRATEGY, PLANS AND OBJECTIVES OF MANAGEMENT OF THE COMPANY
FOR FUTURE OPERATIONS AND COVENANT COMPLIANCE, ARE FORWARD-LOOKING STATEMENTS.
ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UPON WHICH SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ARE REASONABLE, IT CAN GIVE NO ASSURANCES
THAT SUCH ASSUMPTIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS
("CAUTIONARY STATEMENTS") ARE DISCLOSED BELOW AND ELSEWHERE IN THIS
PROSPECTUS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED BY THE CAUTIONARY STATEMENTS. PROSPECTIVE PURCHASERS OF THE NOTES
OFFERED HEREBY SHOULD CAREFULLY CONSIDER, TOGETHER WITH OTHER INFORMATION IN
THIS PROSPECTUS, THE FOLLOWING FACTORS THAT AFFECT THE COMPANY.

SIGNIFICANT LEVERAGE AND DEBT SERVICE

The Company currently anticipates that it will fund its capital expenditure
budget for late 1996 and 1997 substantially with debt. As a result, the Company
expects to be more highly leveraged.

The Company's level of indebtedness will have several important effects on
its future operations, including (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) covenants
contained in the Company's debt obligations will require the Company to meet
certain financial tests, and other restrictions will limit its ability to borrow
additional funds or to dispose of assets and may affect the Company's
flexibility in planning for, and reacting to, changes in its business, including
possible acquisition activities and (iii) the Company's ability to obtain
financing in the future for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired. The Company's
ability to meet its debt service obligations and to reduce its total
indebtedness will be dependent upon the Company's future performance, which will
be subject to general economic conditions and to financial, business and other
factors affecting the operations of the Company, many of which are beyond its
control.

SUBORDINATION

The Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company. In the event of bankruptcy,
liquidation or reorganization of the Company, the assets of the Company will be
available to pay obligations on the Notes only after all Senior Indebtedness has
been paid in full, and there may not be sufficient assets remaining to pay
amounts due on any or all of the Notes outstanding. The Notes are also
structurally subordinated to the obligations of the Company's subsidiaries. The
aggregate principal amount of Senior Indebtedness of the Company as of September
30, 1996 would have been $100,000 after giving effect to the sale of the Notes
and the use of proceeds as described under "Use of Proceeds," and the
indebtedness and accounts payable of the Company's subsidiaries as of September
30, 1996 was $13.0 million, excluding guarantees of Senior Indebtedness.
Additional Senior Indebtedness may be incurred by the Company from time to time,
subject to certain restrictions, and the Company's subsidiaries may incur
obligations which are structurally senior to the Notes. See "Description of
Notes -- Subordination."

MARKET FOR THE NOTES

The Company has no present intention to have the Notes authorized for
quotation on any automated quotation system or listed on any securities
exchange. Although the Underwriter has advised the Company that it presently
intends to make a market in the Notes, the Underwriter may discontinue making a
market in the Notes at any time for any reason. Therefore, no assurance can be
given that an active trading market for

8
<PAGE>
the Notes will develop, or if it develops, that the trading market will continue
for any period of time thereafter.

VOLATILITY OF OIL AND GAS PRICES

The Company's revenues, profitability and future growth and the carrying
value of its oil and gas properties are substantially dependent on prevailing
prices of oil and gas. The Company's ability to maintain or increase its
borrowing capacity and to obtain additional capital on attractive terms is also
substantially dependent upon oil and gas prices. Prices for oil and gas are
subject to large fluctuations in response to relatively minor changes in the
supply of and demand for oil and gas, market uncertainty and a variety of
additional factors beyond the control of the Company. These factors include
weather conditions in the United States, the condition of the United States
economy, the actions of the Organization of Petroleum Exporting Countries,
governmental regulation, political stability in the Middle East and elsewhere,
the foreign supply of oil and gas, the price of foreign imports and the
availability of alternate fuel sources. Any substantial and extended decline in
the price of oil or gas would have an adverse effect on the Company's carrying
value of its proved reserves, borrowing capacity, revenues, profitability and
cash flows from operations.

Volatile oil and gas prices make it difficult to estimate the value of
producing properties for acquisition and often cause disruption in the market
for oil and gas producing properties, as buyers and sellers have difficulty
agreeing on such value. Price volatility also makes it difficult to budget for
and project the return on acquisitions and development and exploitation
projects.

RISKS OF EXPLORATION AND DEVELOPMENT

The major focus of the Company's operations over the next two years is
expected to be the exploration for and development of oil and gas properties,
primarily in federal and state waters in the Gulf of Mexico. Exploration and
drilling activities are generally considered to be of a higher risk than
acquisitions of producing oil and gas properties. Additionally, the Company's
wells on its Deep OCS Prospects seek to discover deposits of gas at deep
formations, and have more risk than wells seeking to develop hydrocarbons from
shallow formations. No assurances can be made that the Company will discover oil
and gas in commercial quantities in its exploration and development operations.
Expenditure of a material amount of funds in exploration for oil and gas without
discovery of commercial quantities of reserves will have a material adverse
effect upon the Company.

OPERATING HAZARDS, OFFSHORE OPERATIONS AND UNINSURED RISKS

Callon's operations are subject to risks inherent in the oil and gas
industry, such as blowouts, cratering, explosions, uncontrollable flows of oil,
gas or well fluids, fires, pollution and other environmental risks. These risks
could result in substantial losses to the Company due to injury and loss of
life, severe damage to and destruction of property and equipment, pollution and
other environmental damage and suspension of operations. Moreover, a substantial
portion of the Company's operations are offshore and therefore are subject to a
variety of operating risks peculiar to the marine environment, such as
hurricanes or other adverse weather conditions, to more extensive governmental
regulation, including regulations that may, in certain circumstances, impose
strict liability for pollution damage, and to interruption or termination of
operations by governmental authorities based on environmental or other
considerations.

The Company maintains insurance of various types to cover its operations,
including maritime employer's liability and comprehensive general liability.
Amounts in excess of base coverages are provided by primary and excess umbrella
liability policies with maximum limits of $50 million. In addition, the Company
maintains operator's extra expense coverage, which provides coverage for the
control of wells drilled and/or producing and redrilling expenses and pollution
coverage for wells out of control.

No assurances can be given that Callon will be able to maintain adequate
insurance in the future at rates the Company considers reasonable. The
occurrence of a significant event not fully insured or indemnified against could
materially and adversely affect the Company's financial condition and results of
operations.

9
<PAGE>
ESTIMATES OF OIL AND GAS RESERVES

This Prospectus contains estimates of oil and gas reserves, and the future
net cash flows attributable to those reserves, prepared by Huddleston & Co.,
Inc., independent petroleum and geological engineers (the "Reserve
Engineers"). There are numerous uncertainties inherent in estimating quantities
of proved reserves and cash flows attributable to such reserves, including
factors beyond the control of the Company and the Reserve Engineers. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact manner. The accuracy of an
estimate of quantities of reserves, or of cash flows attributable to such
reserves, is a function of the available data, assumptions regarding future oil
and gas prices and expenditures for future development and exploitation
activities, and of engineering and geological interpretation and judgment.
Additionally, reserves and future cash flows may be subject to material downward
or upward revisions, based upon production history, development and exploitation
activities and prices of oil and gas. Actual future production, revenue, taxes,
development expenditures, operating expenses, quantities of recoverable reserves
and the value of cash flows from such reserves may vary significantly from the
assumptions and estimates set forth herein. In addition, reserve engineers may
make different estimates of reserves and cash flows based on the same available
data. In calculating reserves on a Mcfe basis, oil was converted to gas
equivalent at the ratio of six Mcf of gas to one Bbl of oil. While this ratio
approximates the energy equivalency of gas to oil on a Btu basis, it may not
represent the relative prices received by the Company on the sale of its oil and
gas production.

The estimated quantities of proved reserves and the discounted present
value of future net cash flows attributable to estimated proved reserves set
forth in this Prospectus were prepared by the Reserve Engineers in accordance
with the rules of the SEC, and are not intended to represent the fair market
value of such reserves.

ABILITY TO REPLACE RESERVES

The Company's future success depends upon its ability to find, develop and
acquire additional oil and gas reserves that are economically recoverable. As is
generally the case in the Gulf Coast region, many of the Company's producing
properties are characterized by a high initial production rate, followed by a
steep decline in production. As a result, the Company must locate and develop or
acquire new oil and gas reserves to replace those being depleted by production.
Without successful exploration or acquisition activities, the Company's reserves
and revenues will decline rapidly. No assurances can be given that the Company
will be able to find and develop or acquire additional reserves at an acceptable
cost.

The exploration for oil and gas requires the expenditure of substantial
amounts of capital, and there can be no assurances that commercial quantities of
oil or gas will be discovered as a result of such activities. The Company's
current capital budget contemplates drilling nine gross (5.9 net) development
wells and 12 gross (3.9 net) exploratory wells during late 1996 and 1997. The
estimated cost, net to the Company, to drill and complete these wells is $34.9
million. The drilling of several unsuccessful wells in this area could have a
material adverse effect on the Company and its ability to repay the Notes. In
addition, the successful acquisition of producing properties requires an
assessment of recoverable reserves, future oil and gas prices and operating
costs, potential environmental and other liabilities and other factors. Such
assessments are necessarily inexact and their accuracy inherently uncertain. In
addition, no assurances can be given that the Company's exploitation and
development activities will result in any increases in reserves. The Company's
operations may be curtailed, delayed or canceled as a result of lack of adequate
capital and other factors, such as title problems, weather, compliance with
governmental regulations or price controls, mechanical difficulties or shortages
or delays in the delivery of equipment. In addition, the costs of exploration
and development may materially exceed initial estimates.

SUBSTANTIAL CAPITAL REQUIREMENTS

The Company makes, and will continue to make, substantial capital
expenditures for the exploitation, exploration, acquisition and production of
oil and gas reserves. Historically, the Company has financed these expenditures
primarily with cash generated by operations and proceeds from bank borrowings.
The

10
<PAGE>
Company's capital budget for the last quarter of 1996 and for 1997 is $69.1
million. The Company believes that it will have sufficient cash provided by
operating activities, the proceeds of this Offering and borrowings under its
Credit Facility to fund such planned capital expenditures. If revenues or the
Company's borrowing base decrease as a result of lower oil and gas prices,
operating difficulties or declines in reserves, the Company may have limited
ability to expend the capital necessary to undertake or complete future drilling
programs. There can be no assurance that additional debt or equity financing or
cash generated by operations will be available to meet these requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

HEDGING OF PRODUCTION

Part of the Company's business strategy is to reduce its exposure to the
volatility of oil and gas prices by hedging a portion of its production. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." In a typical hedge transaction,
the Company will have the right to receive from the counterparty to the hedge,
the excess of the fixed price specified in the hedge over a floating price based
on a market index, multiplied by the quantity hedged. If the floating price
exceeds the fixed price, the Company is required to pay the counterparty this
difference multiplied by the quantity hedged. The Company is required to pay the
difference between the floating price and the fixed price (when the floating
price exceeds the fixed price) regardless of whether the Company has sufficient
production to cover the quantities specified in the hedge. Significant
reductions in production at times when the floating price exceeds the fixed
price could require the Company to make payments under the hedge agreements even
though such payments are not offset by sales of production. Hedging will also
prevent the Company from receiving the full advantage of increases in oil or gas
prices above the fixed amount specified in the hedge.

COMPETITION

The Company operates in the highly competitive areas of oil and gas
exploration, development and production. The availability of funds and
information relating to a property, the standards established by the Company for
the minimum projected return on investment, the availability of alternate fuel
sources and the intermediate transportation of gas are factors which affect the
Company's ability to compete in the marketplace. The Company's competitors
include major integrated oil companies, substantial independent energy
companies, affiliates of major interstate and intrastate pipelines and national
and local gas gatherers, many of which possess greater financial and other
resources than the Company. See "Business and Properties -- Competition,
Markets and Regulation."

ENVIRONMENTAL AND OTHER REGULATIONS

The Company's operations are subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection. These laws and regulations require the acquisition
of a permit before drilling commences, restrict the types, quantities and
concentration of various substances that can be released into the environment in
connection with drilling and production activities, limit or prohibit drilling
activities on certain lands lying within wilderness, wetlands and other
protected areas, and impose substantial liabilities for pollution resulting from
the Company's operations. Moreover, the recent trend toward stricter standards
in environmental legislation and regulation is likely to continue. For instance,
legislation has been proposed in Congress from time to time that would
reclassify certain oil and gas exploration and production wastes as "hazardous
wastes" which would make the reclassified wastes subject to much more stringent
handling, disposal and clean-up requirements. If such legislation were to be
enacted, it could have a significant impact on the operating costs of the
Company, as well as the oil and gas industry in general. Initiatives to further
regulate the disposal of oil and gas wastes are also pending in certain states,
and these various initiatives could have a similar impact on the Company.
Management believes that the Company is in substantial compliance with current
applicable environmental laws and regulations.

11
<PAGE>
The Company's operations could result in liability for personal injuries,
property damage, oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages. The Company could be liable for
environmental damages caused by previous property owners. As a result,
substantial liabilities to third parties or governmental entities may be
incurred, the payment of which could have a material adverse effect on the
Company's financial condition and results of operations. The Company maintains
insurance coverage for its operations, including limited coverage for sudden
environmental damages, but does not believe that insurance coverage for
environmental damages that occur over time is available at a reasonable cost.
Moreover, the Company does not believe that insurance coverage for the full
potential liability that could be caused by sudden environmental damages is
available at a reasonable cost. Accordingly, the Company may be subject to
liability or may lose substantial portions of its properties in the event of
certain environmental damages. The Company could incur substantial costs to
comply with environmental laws and regulations.

The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse impact on the Company. See "Business and
Properties -- Competition, Markets and Regulation."

CONTROL OF THE COMPANY, STOCKHOLDERS' AGREEMENT

John S. Callon, Fred L. Callon and members of their families (collectively,
the "Callon Family") and NOCO Enterprises, L.P., a limited partnership owned
by a consortium of European institutional investors ("NOCO"), who collectively
and beneficially own over 60% of the outstanding Common Stock have entered into
a stockholders' agreement (the "Stockholders' Agreement") pursuant to which
members of the Callon Family and NOCO agree (i) to vote for two directors
nominated by each party; (ii) not to support certain changes in control without
the consent of the other party; and (iii) not to sell Common Stock without first
offering it to the other party, except in limited circumstances. As a result of
the Stockholders' Agreement, it is expected that the members of the Callon
Family and NOCO will be able to control the election of at least four directors
of the Company. See "Principal Stockholders -- Stockholders' Agreement."

THE COMPANY

The Company was formed under Delaware law in 1994 to succeed to the
business and properties of Callon Petroleum Operating, an independent energy
company owned by members of the Callon Family, Callon Consolidated Partners,
L.P., a publicly traded limited partnership ("CCP"), and CN Resources, a joint
venture engaged in the oil and gas business ("CN").

The predecessors of Callon Petroleum Operating were formed in 1950 by John
S. Callon. Since that time and until September 16, 1994, Callon Petroleum
Operating or its predecessors were actively engaged in the oil and gas business.
CCP was a publicly traded limited partnership formed in 1987 by the
consolidation of oil and gas limited partnerships formed by Callon Petroleum
Operating. Callon Petroleum Operating was the sole general partner of CCP. CN
was a general partnership formed in April 1992 of which Callon Petroleum
Operating and NOCO were the only partners.

Effective September 16, 1994, pursuant to the Consolidation, CCP was merged
into the Company and the Company acquired all of the capital stock of Callon
Petroleum Operating, as well as the partnership interest in CN formerly owned by
NOCO ("NOCO Interest"). As a result, the Company has acquired the properties
and liabilities of CCP, Callon Petroleum Operating and CN. Because all of the
parties to the Consolidation (other than CN) were under common control, the
financial statements and operating data of the Company include the financial
statements and operating data of CCP and Callon Petroleum Operating, including
Callon Petroleum Operating's ownership interest in CN, which were combined in a
manner similar to a pooling of interests. The acquisition of the NOCO Interest
was recorded as a purchase effective as of the date of the Consolidation
(September 16, 1994). Amounts related to the Company's acquisition of

12
<PAGE>
the NOCO Interest, therefore, are included from the date of the purchase for the
periods presented in the Consolidated Financial Statements.

The Company's principal executive office is located at 200 North Canal
Street, Natchez, Mississippi 39120, and its telephone number is (601) 442-1601.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be $20.1 million ($23.1 million if the Underwriter's
overallotment option is exercised in full). The Company intends to use all of
such net proceeds, together with internally generated cash flows and borrowings
under its primary credit facility (the "Credit Facility"), to fund a portion
of its 1996 capital expenditure budget and a portion of its 1997 capital
expenditure budget, estimated to be $69.1 million. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Pending the use of funds to pay capital expenditures, the
Company will use the net proceeds of this Offering to repay borrowings under its
Credit Facility. To the extent proceeds are in excess of amounts outstanding
under the Credit Facility, the Company will invest in short-term investments. As
of September 30, 1996, borrowings of $8.9 million were outstanding under the
Credit Facility, with a weighted average interest rate of 6.875%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

13
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1996 and as adjusted to give effect to the issuance and sale of
the Notes offered by the Company and the application of the net proceeds
therefrom as described in "Use of Proceeds." This table should be read in
conjunction with the Company's Consolidated Financial Statements, including the
Notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" found elsewhere in this Prospectus.

SEPTEMBER 30, 1996
--------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Cash and cash equivalents............... $ 8,709 $19,926
========== ===========
Long-term debt:
Credit Facility......................... $ 8,950 $ 100
The Notes offered hereby(1)............. -- 21,000
Stockholders' equity:
Preferred Stock, $0.01 par value,
2,500,000 shares authorized; 1,315,500
shares of $2.125 Convertible
Exchangeable Preferred Stock, Series A
issued and outstanding with a
liquidation preference of
$32,887,500........................... 13 13
Common Stock, $0.01 par value,
20,000,000 shares authorized;
5,754,863 shares outstanding.......... 58 58
Capital in excess of par value.......... 73,955 73,955
Retained earnings....................... 2,242 2,242
---------- -----------
Total stockholders' equity.............. 76,268 76,268
---------- -----------
Total capitalization.................... $ 85,218 $97,368
========== ===========

- ------------
(1) Assumes the Underwriter's overallotment option is not exercised.

14
<PAGE>
SELECTED FINANCIAL DATA

The following table sets forth, as of the dates and for the periods
indicated, selected financial information for the Company. The financial
information for each of the four years in the period ended December 31, 1995
have been derived from the audited Consolidated Financial Statements of the
Company for such periods. The financial information for the year ended December
31, 1991 has been derived from the audited financial statements of Callon
Petroleum Operating and CCP. The financial information for the nine month
periods ended September 30, 1996 and 1995 has been derived from the Company's
unaudited Consolidated Financial Statements. The information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto. The following information is not necessarily indicative of future
results for the Company.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues:
Oil and gas sales.................. $ 18,578 $ 17,400 $ 23,210 $ 13,948 $ 10,048 $ 10,015 $ 10,769
Interest and other................. 537 501 627 171 230 232 167
--------- --------- --------- --------- --------- --------- ---------
Total revenues..................... 19,115 17,901 23,837 14,119 10,278 10,247 10,936
--------- --------- --------- --------- --------- --------- ---------
Costs and Expenses:
Lease operating expenses.............. 5,646 5,201 6,732 4,042 3,713 3,702 3,285
Depreciation, depletion and
amortization....................... 7,697 7,929 10,376 6,049 3,411 3,360 3,257
General and administrative............ 2,352 2,960 3,880 3,717 2,350 1,848 2,312
Interest.............................. 184 1,441 1,794 624 196 160 321
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses........... 15,879 17,531 22,782 14,432 9,670 9,070 9,175
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations......... 3,236 370 1,055 (313) 608 1,177 1,761
Provision (benefit) for income
taxes.............................. -- -- -- (200) 113 235 297
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before cumulative effect
of change in accounting principle..... 3,236 370 1,055 (113) 495 942 1,464
Cumulative effect of change in
accounting principle(2)............... -- -- -- -- 5,262 -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)....................... 3,236 370 1,055 (113) 5,757 942 1,464
Preferred stock dividends............... 2,097 -- 256 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) available to common
shares................................ 1,139 370 799 (113) 5,757 942 1,464
Pro forma adjustment (unaudited):
Provision for income taxes(2)........... -- -- -- -- 100 145 302
--------- --------- --------- --------- --------- --------- ---------
Pro forma net income (loss)............. $ 1,139 $ 370 $ 799 $ (113) $ 5,657 $ 797 $ 1,162
========= ========= ========= ========= ========= ========= =========
Net income (loss) per common share:
Income (loss) per share before
accounting principle change........... $ .20 $ .06 $ .14 $ (.03) $ .13 $ .25 $ .39
========= ========= ========= ========= ========= ========= =========
Cumulative effect of accounting
change................................ $ -- $ -- $ -- $ -- $ 1.40 $ -- $ --
========= ========= ========= ========= ========= ========= =========
Pro forma............................... $ .20 $ .06 $ .14 $ (.03) $ 1.50 $ .21 $ .31
========= ========= ========= ========= ========= ========= =========
Weighted average common shares
outstanding........................... 5,755 5,754 5,755 4,346 3,769 3,769 3,769
========= ========= ========= ========= ========= ========= =========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS DATA(1):
Net income (loss)....................... $ 3,236 $ 370 $ 1,055 $ (113) $ 5,757 $ 942 $ 1,464
Depreciation, depletion and
amortization.......................... 7,913 8,131 10,600 6,328 3,657 3,577 3,445
Other non-cash items.................... 201 -- 133 (112) (5,114) 270 331
Net change in assets and liabilities.... 5,772 233 (2,080) (756) 435 (2,758) 2,299
--------- --------- --------- --------- --------- --------- ---------
Cash provided by operating activities... 17,122 8,734 9,708 5,347 4,735 2,031 7,539
========= ========= ========= ========= ========= ========= =========
Cash provided by (used in) investing
activities............................ (19,874) (16,780) (24,237) (6,423) (2,710) (3,817) (1,929)
========= ========= ========= ========= ========= ========= =========
Cash provided by (used in) financing
activities............................ 7,196 3,617 11,509 3,916 (1,695) 233 (3,826)
========= ========= ========= ========= ========= ========= =========
BALANCE SHEET DATA(1):
Working capital (deficit)............... $ 2,968 $ (7,106) $ 4,712 $ 1,896 $ (687) $ (1,011) $ (289)
Oil and gas properties, net............. 68,415 51,890 57,765 43,920 21,000 22,138 22,060
Total assets............................ 99,923 76,048 83,867 73,786 39,825 35,570 36,937
Total debt.............................. 8,950 14,868 100 19,234 2,691 2,975 1,209
Total stockholders' equity.............. 76,268 43,801 75,129 43,431 27,170 22,711 23,067
OTHER FINANCIAL DATA(1):
Capital expenditures, net............... $ 19,874 $ 16,780 $ 24,237 $ 10,412 $ 2,710 $ 3,817 $ 1,929
EBITDA(3)............................... $ 11,318 $ 9,982 $ 13,582 $ 6,727 $ 4,496 $ 4,949 $ 5,561
Ratio of earnings to fixed charges(4)... 18.6 1.3 1.6 -- 3.6 6.6 5.4

</TABLE>
- ------------
(1) The Company succeeded to the business and properties of Callon Petroleum
Operating, CCP and CN on September 16, 1994 pursuant to the Consolidation.
Historical information about the Company prior to September 16, 1994
includes the financial and operating information of the predecessors of the
Company, other than the interest in CN not owned by Callon Petroleum
Operating, combined as entities under common control in a manner similar to
a pooling of interests. See "The Company."

(2) Effective January 1, 1993, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 109 "Accounting for Income Taxes"
which resulted in the recording of a deferred tax asset of $5,262,000 at
December 31, 1993. See Note 3 of the Notes to Consolidated Financial
Statements.

(3) EBITDA is presented because it is a widely accepted financial indication of
a company's ability to service and incur debt. EBITDA should not be
considered as an alternative to earnings (loss) as an indicator of the
Company's operating performance or to cash flow as a measure of liquidity.

16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL

The Company's revenues, profitability and future growth and the carrying
value of its oil and gas properties are substantially dependent on prevailing
prices of oil and gas. The Company's ability to maintain or increase its
borrowing capacity and to obtain additional capital on attractive terms is also
substantially dependent upon oil and gas prices. Prices for oil and gas are
subject to large fluctuation in response to relatively minor changes in the
supply of and demand for oil and gas, market uncertainty and a variety of
additional factors beyond the control of the Company. These factors include
weather conditions in the United States, the condition of the United States
economy, the actions of the Organization of Petroleum Exporting Countries,
governmental regulation, political stability in the Middle East and elsewhere,
the foreign supply of oil and gas, the price of foreign imports and the
availability of alternate fuel sources. Any substantial and extended decline in
the price of oil or gas would have an adverse effect on the Company's carrying
value of its proved reserves, borrowing capacity, revenues, profitability and
cash flows from operations.

The Company uses the full cost method of accounting for the Company's
investment in oil and gas properties. Under the full cost method of accounting,
all costs of acquisition, exploration and development of oil and gas reserves
are capitalized into a "full cost pool." Oil and gas properties in the pool,
plus estimated future expenditures to develop proved reserves and future
abandonment, site remediation and dismantlement costs, are depleted and charged
to operations using the unit of production method based on the ratio of current
production to total estimated proved recoverable oil and gas reserves. To the
extent that such capitalized costs (net of depreciation, depletion and
amortization) exceed the discounted future net cash flows on an after-tax basis
of estimated proved oil and gas reserves, such excess costs are charged to
operations. Once incurred, the writedown of oil and gas properties is not
reversible at a later date even if oil or natural gas prices increase.

RESULTS OF OPERATIONS

The following table sets forth selected operating data for the Company for
the periods and upon the basis indicated.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Production:
Oil (MBbls)........................ 451 430 595 364 369
Gas (MMcf)......................... 4,784 5,279 6,694 4,076 1,659
Total production (MMcfe)........... 7,490 7,860 10,261 6,260 3,870
Average Sales Price:
Oil (per Bbl)...................... $ 18.05 $ 16.68 $ 16.68 $ 15.63 $ 16.73
Gas (per Mcf)...................... 2.18 1.88 1.96 2.00 2.10
Total production (per Mcfe)........ 2.48 2.18 2.24 2.21 2.49
Average Costs (per Mcfe):
Lease operating expenses (excluding
severance taxes)................. $ 0.56 $ 0.50 $ 0.49 $ 0.49 $ 0.72
Severance taxes.................... 0.20 0.16 0.17 0.16 0.24
Depreciation, depletion and
amortization..................... 1.03 1.01 1.01 0.97 0.88
General and administrative (net of
management fees)................. 0.31 0.38 0.38 0.59 0.61

</TABLE>
17
<PAGE>
The following table sets forth selected production data for the Company for
the periods and upon the basis indicated.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(MMCFE) (MMCFE)
<S> <C> <C> <C> <C> <C>
Production attributable to:
Chandeleur Block 40................ 1,158 104 144 37 --
Black Bay Complex.................. 912 1,020 1,351 608 252
North Dauphin Island Field......... 2,514 4,074 5,102 2,524 162
Escambia Minerals properties....... 1,084 399 783 -- --
--------- --------- --------- --------- ---------
5,668 5,597 7,380 3,169 414
Other properties................... 1,822 2,262 2,881 3,091 3,456
--------- --------- --------- --------- ---------
Total......................... 7,490 7,859 10,261 6,260 3,870
========= ========= ========= ========= =========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995

For the nine months ended September 30, 1996, total oil and gas revenues
increased by $1.2 million, or 7%, to $18.6 million when compared to $17.4
million for the same period in 1995. This increase is principally the result of
increased sales prices in both oil and gas.

For the nine months ended September 30, 1996, oil production and revenues
increased to 451 MBbls and $8.1 million, respectively. For the comparable period
in 1995, oil production was 430 MBbls while revenues totaled $7.2 million. Oil
prices during the first nine months of 1996 averaged $18.05, compared to $16.68
for the same period in 1995. Total oil revenues have increased 13% over the
September 1995 level as a result of this price increase and increased production
from the Escambia Minerals properties.

Gas production and revenue for the nine-month period ended September 30,
1996, was 4.8 Bcf and $10.4 million, respectively, compaired with gas production
of 5.3 Bcf and gas revenues of $9.9 million in the first nine months of 1995.
The average sales price for natural gas sold in the first nine months in 1996
was $2.18 per Mcf, a $0.30 per Mcf increase over the average price for the same
period in 1995. Revenues gained from the price increase, coupled with the
decreased production, resulted in a net 5% increase in total gas revenues.
Included in gas production and revenue for the nine month period ended September
30, 1996 is 526 MMcf and $996,000, respectively, representing production from
October 1993 to September 1996 attributed to a disputed interest in a lease
which was resolved in the Company's favor during August 1996.

The following table summarizes oil and gas production from the Company's
major producing properties for the comparable periods.
<TABLE>
<CAPTION>
OIL PRODUCTION
(BBLS) GAS PRODUCTION (MCF)
-------------------- ------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------------
1996 1995 1996 1995
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Chandeleur Block 40.................. -- -- 1,158,000 104,000
Black Bay Complex.................... 152,000 169,000 -- 6,000
North Dauphin Island Field........... -- -- 2,514,000 4,074,000
Escambia Minerals properties......... 144,000 53,000 220,000 81,000
Other properties..................... 155,000 208,000 892,000 1,014,000
--------- --------- ----------- -----------
Total........................... 451,000 430,000 4,784,000 5,279,000
========= ========= =========== ===========
</TABLE>
Lease operating expenses, excluding severance taxes, for the first nine
months of 1996 increased by 5% to $4.2 million from $3.9 million for the 1995
comparable period. This increase is primarily attributable to a corresponding
increase in oil production resulting from the Company's acquisition of the
Escambia Minerals properties acquired subsequent to June 1995. Severance taxes
increased by 18% to $1.5 million during the first nine months of 1996 from $1.3
million for the same period in 1995, primarily as a result of higher prices for
oil and gas.

18
<PAGE>

Depreciation, depletion and amortization for the first nine months of 1996
was $7.7 million, or $1.03 per Mcfe. For the same period in 1995, the total was
$7.9 million and $1.01 per Mcfe.

During the first nine months of 1996, general and administrative expenses
declined by 21% to $2.4 million, compared to $3.0 million for the same period in
1995. This reduction is associated with continued overall improvements in
operational efficiencies and reduced executive incentive compensation payments.

Interest expense as of September 30, 1996 was $184,000 compared to $1.4
million for the same period in 1995. This expense reduction is attributable to
the reduction in the Company's debt using the proceeds from the sale of Series A
Preferred Stock in November 1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994

Oil and gas sales increased $9.3 million, or 66%, during 1995 to $23.2
million compared with $13.9 million in 1994. This increase is partially
attributable to the Company's purchase in September 1994 of NOCO's interest in
CN pursuant to the Consolidation as well as the acquisition of certain
properties from W&T Offshore, Inc. (the "1994 Properties"). The Company's
purchase of the Escambia Minerals properties in June 1995 also contributed $1.9
million to the increase in oil and gas sales.

Oil production attributable to the NOCO Interest, the Escambia Minerals
properties and the 1994 Properties substantially outweighed normal production
declines in previously existing properties, as oil production for 1995 increased
to 594 MBbls from the 1994 level of 364 MBbls. The average price per barrel sold
also increased by $1.05 in 1995 compared to 1994 prices, resulting in a total of
$4.3 million increase in oil revenues.

Total gas production increased 2.6 Bcf to 6.7 Bcf in 1995 compared to 4.1
Bcf in 1994. A substantial portion of this increase in production was
attributable to the Company's acquisition of the North Dauphin Island Field. Gas
production from the North Dauphin Island Field increased from 2.5 Bcf in 1994 to
5.1 Bcf in 1995 and added $5.0 million in revenues in 1995 compared with 1994.
Although spot market gas prices declined in 1995, gas price hedges limited the
effect of the decline to $.04 per Mcf.

Lease operating expenses, including production taxes, increased 67% during
1995 to $6.7 million, compared to $4.0 million for 1994. This increase was
largely attributable to the corresponding increase in oil and gas production
caused by the Company's acquisition of the NOCO Interest, the Escambia Minerals
properties and the 1994 Properties. The Company's purchase of the NOCO Interest
in September 1994 resulted in an increase in combined lease operating expenses
attributable to the North Dauphin Island Field and the Black Bay Complex from
$1.5 million in 1994 to $3.6 million in 1995. Lease operating expenses on a Mcfe
basis increased by less than 2% to $0.66 for 1995 compared to $0.65 for 1994.

Total depreciation, depletion and amortization expense was $10.4 million
for 1995, compared to $6.0 million for 1994. This increase reflects additional
production and reserves resulting from the purchase of the NOCO Interest, the
Escambia Minerals properties and the 1994 Properties.

General and administrative expenses were $3.9 million for 1995, compared to
$3.7 million in 1994. The increase was primarily attributable to the Company's
expanding operations.

The Company had a zero effective tax rate for 1995, compared to an
effective rate of (63)% in 1994. The 1995 rate was primarily due to a reduction
in the deferred tax asset valuation allowance of $551,000. The valuation
allowance was reduced during 1995 due to a reduction in the gross deferred tax
asset. This valuation allowance represents the portion of federal net operating
loss carryforward and other temporary differences which the Company believes
will not be utilized.

YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1993

Oil production for 1994 decreased 5 MBbls from the 1993 level of 369 MBbls.
In addition, the average price per barrel sold in 1994 declined by $1.10 when
compared to the average price received in 1993. As a result, total oil revenue
declined by $475,000 (including $100,000 related to unfavorable hedging
activities during 1994). Normal production declines for several of the Company's
major oil fields, primarily the Lockhart Crossing Field and several Arkansas
fields, were partially offset by the Company's purchase of a 4.9% average net
revenue interest in the West Delta 30 Field and NOCO's interest in CN, which
owned a

19
<PAGE>
9.5% average net revenue interest in the Black Bay Complex. Average daily oil
production, net to the Company, declined to 998 Bbls/d during 1994 compared to
1,011 Bbls/d for 1993.

Due to the Company's purchase of a 9.4% working interest in the North
Dauphin Island Field during the fourth quarter of 1993, the Company's purchase
of the NOCO Interest (which included a working interest in the North Dauphin
Island Field) and the acquisition of the 1994 Properties in late September 1994,
gas production increased 146% to 4.1 Bcf for 1994, from 1.7 Bcf for 1993. The
production increase, offset by only a $0.10 per Mcf average price decline,
resulted in a $4.7 million increase in gas revenues. This increase in revenue
includes approximately $1.3 million attributable to hedging activities. Average
daily gas production increased to 11.2 MMcf/d for 1994 compared to 4.5 MMcf/d
for 1993. This favorable impact on production of the North Dauphin Island Field
acquisition was partially offset by normal production declines for certain other
major gas fields and the sale during the second half of 1993 of the Company's
interest in three gas fields.

Lease operating expenses, including production taxes, increased 9% during
1994 to $4.0 million, compared to $3.7 million for 1993. Of this increase,
$800,000 was attributable to the Company's purchase of the NOCO Interest and the
1994 Properties. The increase was partially offset by a decline of $400,000 in
expenses associated with various Arkansas oil fields, and the Lockhart Crossing,
Padgitt and Main Pass Block 35 Fields. The sale of the Company's interest in
three oil and gas fields during 1993 accounted for an additional $100,000
decrease. The 146% increase in gas production volumes for 1994 resulting from
the Company's acquisition of the NOCO Interest, and the low operating costs for
this field, resulted in a decline in lease operating expenses, on a Mcfe basis,
to $0.65 for 1994, compared to $0.96 for 1993.

Total depreciation, depletion and amortization expense was $6.0 million for
1994 compared to $3.4 million for 1993 and reflects a $2.6 million increase due
to the acquisition of an interest in the North Dauphin Island Field in the
fourth quarter of 1993, and the acquisition of the 1994 Properties and the NOCO
Interest in the third quarter of 1994. On a Mcfe basis, depreciation, depletion
and amortization expense increased to $0.97 in 1994 compared to $0.88 for 1993.

General and administrative expenses increased during 1994 to $3.7 million
compared to $2.4 million for 1993. An increase of $600,000 was due to
professional fees incurred in connection with the Consolidation. The balance of
the increase was attributable to increased staffing levels required to conduct
the Company's expanding operations.

Interest expense increased from $196,000 for 1993 to $624,000 for 1994.
This increase was primarily attributable to the $19.0 million of bank debt
assumed in the Consolidation.

LIQUIDITY AND CAPITAL RESOURCES

CAPITAL SOURCES

The Company's primary sources of capital are its cash flows from
operations, borrowings from commercial lenders and sales of its securities. For
the year ended December 31, 1995, the Company's cash flows from operations were
$9.7 million, and it borrowed $6.0 million, net of repayments, under its Credit
Facility. In addition, in November, 1995, the Company sold 1,315,500 shares of
Series A Preferred Stock, generating approximately $30.9 million after
underwriters' discount and expense. The Company used approximately $21.5 million
of the net proceeds from the sale of the Series A Preferred Stock to reduce
outstanding bank indebtedness. During the nine months ended September 30, 1996,
the Company had cash flows from operations of $17.1 million, borrowed $8.9
million under its Credit Facility, had net capital expenditures of $19.9 million
and paid $1.7 million in dividends on the Series A Preferred Stock. The balance
of the cash flow was retained for future operating expenses and potential
drilling and acquisition opportunities.

Effective October 31, 1996, the Company amended and restated its Credit
Facility. Borrowings under the Credit Facility are secured by mortgages covering
substantially all of the Company's producing oil and gas properties. The Credit
Facility provides for borrowings of a maximum of the lesser of $50 million and a
borrowing base ("Borrowing Base") determined periodically on the basis of a
discounted present value of

20
<PAGE>

future net cash flows attributable to the Company's proved producing oil and gas
reserves. Through May 15, 1997, the Credit Facility provides a $30 million
Borrowing Base. Pursuant to the Credit Facility, depending upon the percentage
of the unused portion of the Borrowing Base, the interest rate is equal to
either the lender's prime rate or the lender's prime rate plus 0.50%. The
Company, at its option, may fix the interest rate on all or a portion of the
outstanding principal balance at either 1.00% or 1.375% above a defined
"Eurodollar" rate, depending upon the percentage of the unused portion of the
Borrowing Base, for periods of up to six months. The weighted average interest
rate for the total debt outstanding at November 5, 1996 was 6.375%. Under the
Credit Facility, a commitment fee of .25% or .375% per annum on the unused
portion of the Borrowing Base (depending upon the percentage of the unused
portion of the Borrowing Base) is payable quarterly. The Company may borrow,
pay, reborrow and repay under the Credit Facility until October 31, 2000, on
which date, the Company must repay in full all amounts then outstanding.

Callon's relationship with an institutional investor has historically been
important to its producing property acquisition strategy. Under this
arrangement, the Company transferred a non-operated interest in acquired
properties to the institutional investor in exchange for a portion of the
purchase price of the property. The Company believes its relationship with this
institutional investor has allowed it to make larger acquisitions than would
otherwise be possible. Since 1989, this institutional investor has invested
$130.0 million in property acquisitions made by the Company. In addition, fees
received by the Company from operating and managing properties owned by
institutional investors and others enable the Company to maintain a larger and
more experienced staff. The Company has not financed an acquisition with its
institutional investor since September 1994.

The Company periodically uses derivative financial instruments to manage
oil and gas price risk. Settlements of gains and losses on commodity price swap
contracts are generally based upon the difference between the contract price or
prices specified in the derivative instrument and a New York Mercantile Exchange
("NYMEX") price or other cash or futures index price, and are reported as a
component of oil and gas revenues. Gains or losses attributable to the
termination of a swap contract are deferred and recognized in revenue when the
oil and gas is sold. From October 1, 1996 to March 31, 1997, the Company has in
effect hedges of gas equivalent to approximately 16% of its production at a
floor price per MMBtu of $1.75 and a ceiling price per MMBtu of $2.20 (NYMEX).
In addition, the Company is party to hedges in effect from October 1, 1996
through December 31, 1996 representing approximately 81% of its oil production
at a floor price per Bbl of $17.25 and a ceiling price per Bbl of $19.59
(NYMEX). The Company is also party to hedges that will be in effect for 1997
representing approximately 30% of oil production at an average fixed price of
$23.33 per Bbl (NYMEX). During the third quarter of 1996, the Company terminated
hedges attributable to its fourth quarter 1996 production at a profit, which
will have the effect of increasing fourth quarter oil and gas revenues by
$180,000.

CAPITAL EXPENDITURES

During the first nine months of 1996, net capital expenditures of $19.9
million were incurred. A production facility was acquired for $1.5 million and
the Company's share of the total costs for the leases in the OCS was
approximately $12.2 million. The remaining $6.2 million consists of the purchase
of several additional leases and seismic surveys in Callon's current focus
areas, production facility improvements, capitalized overhead and the purchase
of office furniture and fixtures.

At September 30, 1996, the Company had a working capital surplus of $3.0
million and a current ratio of 1.2 to 1.

The Company has recently changed the focus of its reserve growth strategy
from the acquisition and exploitation of oil and gas properties to exploration
and development drilling. The Company expects to concentrate its exploration and
development drilling in the Shallow Miocene focus area and the Deep OCS
Prospects. The Company has identified nine development and 12 exploratory
drilling locations, and has a

21
<PAGE>
capital budget of $34.9 million to drill and complete these wells. The Company's
capital budget for the remainder of 1996 and 1997 will depend upon the success
of its exploration and development drilling. If the Company's exploration
drilling operations are successful, it will require additional capital to
develop discoveries during late 1997 and thereafter. If the Company's initial
drilling operations are not successful, the Company may redeploy its remaining
capital budget to other activities.

ACCOUNTING POLICIES

In January 1996, the Company adopted the provisions of SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS 121 requires the Company to review its oil and gas
properties whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable, and recognize a loss if
such recoverable amounts are less than the carrying amount. There have been no
impairment losses recognized as of September 30, 1996, but any future losses
would be included in depletion, depreciation, amortization and impairment in
future accounting periods.

On October 23, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," effective for the Company at December 31, 1996.
Under FAS 123 companies can either record expenses based on the fair value of
stock-based compensation upon issuance or elect to remain under the current
"APB Opinion No. 25" method, whereby no compensation cost is recognized upon
grant, and make disclosures as if FAS 123 had been applied. The Company
anticipates that it will continue to account for its stock-based compensation
plans under APB Opinion No. 25.

22
<PAGE>
BUSINESS AND PROPERTIES

The Company's objective is to enhance stockholder value through sustained
growth in its reserve base, production levels and resulting cash flows from
operations. Over the past two years, the Company has shifted its emphasis from
the acquisition of producing properties to the acquisition of acreage with
development and exploratory drilling opportunities to further increase potential
recoverable reserves. In evaluating drilling opportunities, Callon performs
extensive geological and geophysical studies using CAEX, including, where
appropriate, the acquisition of 3-D seismic or high-resolution 2-D seismic data
to facilitate these efforts.

EXPLORATION AND DEVELOPMENT OPERATIONS. The Company's exploratory and
development operations are concentrated in two areas in the Gulf of Mexico, the
Shallow Miocene focus area, located in the state waters of Alabama and the
federal OCS in the Gulf of Mexico, and the Deep OCS Prospects. Wells drilled in
the Shallow Miocene focus area seek oil and gas deposits at from 1,800 to 6,000
feet, and are characterized by relatively low exploration and development costs,
high initial production rates and short reserve lives. Wells drilled on the Deep
OCS Prospects are more expensive to drill and complete. These wells have greater
risks, but seek larger oil and gas deposits with longer reserve lives.

In 1995 and 1996, the Company acquired an extensive infrastructure of
production platforms, gathering systems and pipelines in the Shallow Miocene
focus area. During 1996, the Company completed four proprietary high resolution
seismic surveys over an eight block area contiguous to Chandeleur Block 40 in
the Shallow Miocene focus area. Based on these surveys, in October and November
of 1996, the Company drilled two gross (1.52 net) successful development wells
and one gross (1.0 net) successful exploratory well in this area. These wells
are expectd to be placed on production by the end of November and, coupled with
the replacement of compression equipment at the CB 40 and Main Pass Block 163
production facilities, the Company anticipates a significant increase in its gas
production rates by year-end 1996. The Company's capital budget currently
anticipates drilling an additional five gross (4.0 net) development wells and
three gross (0.9 net) exploratory wells during late 1996 and 1997 in this area,
for aggregate net cost to drill and complete of $15.3 million.

In 1996, the Company joined with Murphy to acquire 18 blocks in the OCS.
Callon owns a 25% working interest in these Deep OCS Prospects. The Company's
capital budget for late 1996 and 1997 contemplates drilling eight gross (2.0
net) exploratory wells jointly with Murphy at a total cost to Callon to drill
and complete of $11.3 million. The first well commenced drilling in the West
Cameron 603 Block in October 1996, and drilling of the second well is scheduled
in November 1996. In addition to the wells drilled with Murphy, the Company, as
operator, plans to drill an additional two wells in 1997 on Deep OCS Prospects.

In total, the Company's current capital budget contemplates the drilling of
nine gross (5.9 net) development wells and 12 gross (3.9 net) exploratory wells
during late 1996 and 1997 at an estimated net cost to the Company to drill and
complete of $34.9 million. These drilling operations will be financed through
cash flows from operations, the net proceeds of this Offering and borrowings
under the Company's Credit Facility. See "Use of Proceeds."

23
<PAGE>
and, in certain cases, its primary institutional investor, for an aggregate net
purchase price of $194 million and, during that period, the Company had an
average Reserve Replacement Cost of $0.84 per Mcfe. During the nine months ended
September 30, 1996, the Company invested a total of $1.0 million and acquired an
average 73% working interest (55% net revenue interest) in 12 producing wells,
as well as a 100% ownership of one production facility and a 49% ownership in
another, both of which are located in its Shallow Miocene focus area. Estimated
net proved reserves attributable to these properties, as estimated by the
Company's internal reserve engineers as of September 30, 1996, is 10 Bcfe.

SIGNIFICANT PRODUCING PROPERTIES

The following table shows the PV-10 Value and estimated net proved oil and
gas reserves by major field for the Company's four largest producing fields and
for all other properties combined at December 31, 1995.
<TABLE>
<CAPTION>
ESTIMATED NET PROVED
PERCENT ----------------------
PV-10 TOTAL OIL GAS
PRIMARY VALUE PV-10 RESERVES RESERVES
FIELD NAME/LOCATION OPERATOR(S) ($000) VALUE (MBBLS) (MMCF)
- ------------------------------------- ------------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Chandeleur Block 40.................. Callon $16,851 26.4% -- 12,161
Federal Waters
Black Bay Complex.................... Callon 10,187 16.0 2,144 684
Louisiana State Waters
North Dauphin Island Field........... Callon 9,749 15.3 -- 6,879
Alabama State Waters
Big Escambia Creek Field............. Exxon 9,330 14.6 1,053 2,305
Escambia County, Alabama
Other properties..................... Various 17,647 27.7 1,569 7,638
------- -------- --------- ---------
Total........................... $63,764 100.0% 4,766 29,667
======= ======== ========= =========
</TABLE>
CHANDELEUR BLOCK 40

The Company and its institutional investor acquired an initial 33.3%
working interest in the Chandeleur Block 40 in 1994. On December 29, 1995,
Callon acquired an additional 66.7% working (55.5% net revenue) interest in the
Chandeleur Block 40 for $9 million and subsequently sold a 22.2% working
interest in the field for $3 million. The Company currently holds a combined
52.3% working (43.6% net revenue) interest in the Chandeleur Block 40.

The estimated net proved reserves as of December 31, 1995 were 12.2 Bcf of
natural gas. When the Company assumed operations of the field in December 1995,
two wells were producing 5.5 MMcf/d of gas from a Shallow Miocene reservoir at
approximately 3,800 feet. The Company has since successfully recompleted one
well, increasing the rate of production to 10.5 MMcf/d of gas, and drilled one
offset well which encountered 44 feet of net pay. Production from the offset
well is expected to commence in November 1996.

BLACK BAY COMPLEX

The Company-operated Black Bay Complex (the "Complex") is located in
shallow waters off the Louisiana coast. It consists of eight fields, 94 wells
producing 4.8 MBbls/d during September 1996 and approximately 30,000 acres of
oil and gas leases, all of which are held by production. The Company owns

24
<PAGE>
an average 15.4% working interest (11.6% net revenue interest) in the Complex,
and an institutional investor, whose properties are managed by the Company, owns
a 32.6% working interest.

The discovery well in the Complex was completed in 1949. Forty-five
different sandstone formations and 137 separate reservoirs ranging in depth from
6,200 to 9,600 feet have been identified within the Complex. As of year-end
1995, these fields had produced approximately 239 MMBbls of oil and 215 Bcf of
gas. The Company assumed operations of the complex in August 1992, and since
that time the Company has reduced operating expenses 30%, successfully drilled
six development wells, including a horizontal well, and implemented 14
recompletions, seven of which employed a new stimulation technology. As of
September 30, 1996, the Company has invested $3.6 million in drilled wells,
recompletions and facility enhancement activities.

NORTH DAUPHIN ISLAND FIELD

The Company owns a 94.4% working interest in the North Dauphin Island
Field, located in shallow Alabama state waters. The field was discovered in
April 1990, and the wells produce from a Shallow Miocene reservoir at
approximately 1,800 feet. There are five gas wells, three of which were drilled
horizontally, which were producing 9.1 MMcf/d at the end of September 1996. The
field had produced 56.4 Bcf of gas as of September 30, 1996.

The Company also owns a state-of-the-art production platform, including
compressors and dehydration facilities, an associated gathering system, and a
12-inch diameter, 12-mile pipeline ("North Dauphin Island Platform"). This
pipeline leads to existing onshore connections with the pipeline systems of Koch
Gateway Pipeline Company, Transcontinental Natural Gas Pipe Line Corporation and
Florida Natural Gas Transmission Company. The current throughput capacity of the
gathering and transportation facilities is in excess of 100 MMcf/d and with
additional compression, the capacity can be increased to 130 MMcf/d. The
ownership of the North Dauphin Island Platform and associated pipeline provides
the Company with a significant strategic advantage in the North Dauphin Island
area.

In 1995, the Company signed an agreement with a subsidiary of a major oil
company providing for gas gathering services and transportation through the
North Dauphin Island Platform to onshore pipeline connections. The agreement
further provides for the subsidiary to purchase firm capacity commitments from
the Company for gas deliveries through the North Dauphin Island Platform for 15
years, which commenced in April 1996, to transport up to 100 MMcf/d of the
subsidiary's gas production. Firm capacity reservations will average over $1.0
million per year through the term of the contract. Additional revenues may be
received depending upon the actual throughput used by the subsidiary.

A recently completed high resolution seismic survey has resulted in a good
match between reservoir volumetrics and production data. The Company plans to
workover one of the five field wells to restore production to an underproduced
area on the western side of the field.

BIG ESCAMBIA CREEK FIELD

The Company holds an average working interest of 6.9% (7.1% net revenue
interest), subject to a 10% reduction after payout, in 11 wells and a 2.9%
average royalty interest in another five wells. The gross average daily
production for these wells for September 1996 was approximately 3.6 MBbls of
condensate, 1.8 MBbls of gas liquids, 9.6 MMcf of residue gas and 393 long tons
of sulphur. These wells are producing from the Smackover formation at depths
ranging from 15,100 to 15,600 feet. Production in this field has been partially
curtailed due to low treatment plant capacity and, as a result, no significant
field production decline occurred during the past several years. Big Escambia
Creek Field is part of the Escambia Minerals properties acquisition.

EXPLORATION AND DEVELOPMENT PROJECTS

Over the last two years, the Company shifted the focus of its operations
from the acquisition and exploitation of oil and gas properties to exploratory
and developmental drilling. The Company's exploration and development activity
is focused primarily in two areas in the Gulf of Mexico: the Shallow Miocene
focus area and the Company's Deep OCS Prospects.

25
<PAGE>
SHALLOW MIOCENE FOCUS AREA

The Company's Shallow Miocene focus area is located in the OCS offshore
blocks of Chandeleur, Main Pass and Viosca Knoll as well as in the state waters
of Alabama. Wells drilled in the Shallow Miocene focus area are characterized by
relatively low exploration and development costs, high initial production rates
and short reserve lives. The Company entered this area in 1993 with the purchase
of the North Dauphin Island field and has used state of the art reservoir
engineering and seismic technology to develop proprietary processes which the
Company believes provides it with a competitive advantage in exploiting Shallow
(1,800 to 6,000 feet) Miocene reservoirs.

During 1996 the Company completed five proprietary high resolution seismic
surveys in this area. Designed specifically for the Shallow Miocene by the
Company, four of the surveys were conducted within the eight contiguous blocks
around Chandeleur 40. A drilling program was initiated as a result of the survey
and three wells, which logged 44 feet, 54 feet and six feet of net pay, were
completed in late October and early November 1996.

In addition, the Company will participate in the drilling of an exploratory
well on Main Pass 234 and has farmed in an exploratory prospect on Main Pass 240
with both wells scheduled to commence drilling in the first quarter of 1997. As
a direct result of this geographic concentration of production and prospects,
the Company has also developed an inventory of deeper Middle Miocene prospects.
The first of these, at Main Pass 247, will be drilled before the end of 1996 to
test numerous Shallow and Middle Miocene sands.

In October and November of 1996, Callon drilled two gross (1.52 net)
successful development wells and one gross (1.0 net) successful exploratory well
in the Shallow Miocene focus area. During the fourth quarter of 1996 and 1997,
the Company expects to drill five gross (4.0 net) development wells and three
gross (0.9 net) exploratory wells in the Shallow Miocene focus area, at an
aggregate net cost to drill and complete of $15.3 million.

DEEP OCS PROSPECTS

In addition to the prospects in its Shallow Miocene focus area, the Company
has acquired a number of prospects in the OCS which are intended to explore for
reserves at depths in excess of 10,000 feet. Wells drilled to these objectives
are characterized by high drilling and completion costs and are subject to
delays in commencing sales of oil and gas as production platforms and
transportation facilities are built. Targeted deposits of oil and gas in this
focus area are larger than in the Shallow Miocene area, and have longer reserve
lives.

The Company joined with Murphy in 1996 to evaluate and acquire selected
tracts at OCS lease sales. Pursuant to these bids, the Company acquired a 25%
working interest in 18 offshore blocks which Murphy will operate. Nine of these
blocks have as their objective development of the Plio-Pleistocene formations at
depths from 13,000 to 18,000 feet. The Company's Deep OCS Prospects cover the
West Cameron and High Island blocks which are located in the outer regions of
the OCS in water depths ranging from 150 to 350 feet.

The first of the wells drilled on the properties acquired with Murphy,
commenced drilling in October 1996 in the West Cameron Block 603, and is
expected to reach total depths during December. The primary objective of the
well is gas deposits at approximately 15,500 feet. The prospect is defined by a
3-D seismic survey, and off-set wells drilled in an adjoining block have
established reservoir conditions. Net costs to the Company to drill the well are
anticipated to be $1.4 million and net costs to complete the well, if
productive, are estimated to be $300,000. If the well is successful, the Company
anticipates that it will drill up to four development wells and construct
production facilities at a net cost to the Company of approximately $10.6
million.

During the fourth quarter of 1996 and 1997, the Company expects to drill
eight gross (2.0 net) exploratory wells on the OCS blocks acquired with Murphy.
Total costs, net to the Company's 25% working interest, to drill and complete
these wells is estimated to be $11.3 million. The Company expects that Murphy
will be the operator of all of these wells.

26
<PAGE>
In addition to wells on the blocks acquired with Murphy, the Company, as
operator, anticipates drilling two development wells during 1997 with objective
depths between 10,500 and 13,000 feet. Total costs net to the Company's 19%
working interest to drill these wells, are estimated to be $1.0 million and net
costs to complete these wells, if productive, are estimated to be $400,000. If
productive, these wells will be produced through nearby production facilities
owned and operated by the Company.

RELATIONS WITH INSTITUTIONAL INVESTOR

Callon has established a relationship with an institutional investor which
has been important to the Company's acquisition strategy. Between 1989 and 1994,
this institutional investor has invested $130 million in property acquisitions
made with the Company. These properties, which are managed by the Company, had
estimated net proved reserves at December 31, 1995 of 10.3 MMBbls of oil and
33.7 Bcf of gas. The Company's arrangements with this institutional investor
vary from acquisition to acquisition. In a typical transaction, the Company
acquires a working interest and burdens the working interest with a net profits
interest transferred to the institutional investor. The Company's arrangements
with the institutional investor generally provide that the Company earns an
increased interest in the properties either at the time of closing an
acquisition or after the institution receives a certain level of distribution.
The Company also receives operating and property management fees from
institutional investors and joint interest partners.

The Company believes this institutional relationship provides Callon with
the ability to make larger acquisitions than would otherwise be possible. The
fees received by the Company from operating and managing properties owned by
institutional investors also enable the Company to maintain a larger and more
experienced operations and technical staff, including petroleum engineers,
geoscientists and landmen.

RESERVES

The following table sets forth certain information about the estimated net
proved reserves of the Company as of the dates set forth below.

DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
Proved developed:
Oil (MBbls)........................ 3,890 3,309 2,084
Gas (MMcf)......................... 20,408 20,582 11,366
Proved undeveloped:
Oil (MBbls)........................ 876 1,115 758
Gas (MMcf)......................... 9,259 3,520 2,801
Total proved:
Oil (MBbls)........................ 4,766 4,424 2,842
Gas (MMcf)......................... 29,667 24,102 14,167
Estimated pre-tax future net cash flows
(000's)............................... $ 95,730 $ 59,477 $ 35,814
========= ========= =========
PV-10 Value (000's)..................... $ 63,764 $ 41,383 $ 22,554
========= ========= =========

The Reserve Engineers prepared the estimates of proved reserves of the
Company and the future net cash flows (and present value thereof) attributable
to such proved reserves. Reserves were estimated using oil and gas prices and
production and development costs in effect on December 31 of each such year,
without escalation, and were otherwise prepared in accordance with the SEC
regulations regarding disclosure of oil and gas reserve information.

There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of the Company and
the Reserve Engineers. The reserve data set forth in this Prospectus represent
only estimates. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
manner, and 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 by different engineers often vary, sometimes significantly.
In addition,

27
<PAGE>
physical factors, such as the results of drilling, testing and production
subsequent to the date of an estimate, as well as economic factors, such as an
increase or decrease in product prices that renders production of such reserves
more or less economic, may justify revision of such estimates. Accordingly,
reserve estimates are different from the quantities of oil and gas that are
ultimately recovered. See "Risk Factors -- Estimates of Oil and Gas Reserves."

OIL AND GAS PRODUCTION, AVERAGE SALES PRICES AND PRODUCTION COSTS

The following table sets forth the quantities of oil and gas produced by
the Company from wells located onshore in the continental United States and
offshore in Alabama, Louisiana, Texas and federal waters.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Production:
Oil (MBbls)........................ 451 430 595 364 369
Gas (MMcf)......................... 4,784 5,279 6,694 4,076 1,659
Total production (MMcfe)........... 7,490 7,860 10,261 6,260 3,870
</TABLE>

The following table sets forth the Company's average sales prices per Bbl
of oil and per Mcf of gas and the average production costs (including severance
taxes on production and property and transportation charges) per MMcfe for the
periods indicated.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average sales price per Bbl............. $ 18.05 $ 16.68 $ 16.68 $ 15.63 $ 16.73
Average sales price per Mcf............. 2.18 1.88 1.96 2.00 2.10
Average production cost per MMcfe....... 0.76 0.66 0.66 0.65 0.96
</TABLE>

PRODUCTIVE WELLS AND ACREAGE

The following table sets forth the wells drilled and completed by the
Company during the periods indicated. All such wells were drilled in the
continental United States including federal and state waters in the Gulf of
Mexico.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993
------------- ------------- --------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Development:
Oil................................ 6 .65 7 .36 8 .59
Gas................................ 1 .13 -- -- 17 .68
Non-productive..................... -- -- 6 .42 2 .21
----- --- ----- --- ----- ----
Total......................... 7 .78 13 .78 27 1.48
===== === ===== === ===== ====
Exploration:
Oil................................ 1 .24 -- -- 1 .12
Gas................................ -- -- -- -- 1 .04
Non-productive..................... -- -- 1 .24 2 .12
----- --- ----- --- ----- ----
Total......................... 1 .24 1 .24 4 .28
===== === ===== === ===== ====
</TABLE>
The Company owned working and royalty interests in approximately 1,256
gross (48.2 net) producing oil and 291 gross (12.8 net) producing gas wells as
of December 31, 1995. A well is categorized as an oil

28
<PAGE>
well or a gas well based upon the ratio of oil to gas reserves on a Mcfe basis.
However substantially all of the Company's wells produce both oil and gas.

The following table shows the approximate leasehold acreage of the Company
as of December 31, 1995.

LEASEHOLD ACREAGE
------------------------------------------
DEVELOPED UNDEVELOPED
-------------------- --------------------
STATE GROSS NET GROSS NET
- ---------------------------------- --------- --------- --------- ---------
Alabama........................... 14,565 11,900 3,240 444
Arkansas.......................... 2,224 383 770 41
California........................ -- -- 480 480
Louisiana......................... 53,057 6,796 2,347 220
Michigan.......................... 4,674 218 246 29
Mississippi....................... 3,103 1,290 724 572
New Mexico........................ 1,560 168 -- --
Oklahoma.......................... 9,469 1,144 -- --
Texas............................. 12,390 828 -- --
Utah.............................. 10,880 1,253 -- --
Federal waters.................... 19,995 2,675 761 761
--------- --------- --------- ---------
Total................... 131,917 26,655 8,568 2,547
========= ========= ========= =========

The royalty and mineral acreage of the Company, as of December 31, 1995,
was approximately 1,336 net developed acres and 6,953 net undeveloped acres. In
addition, the Company owned 5,464 developed and 134,536 undeveloped mineral
acres.

MAJOR CUSTOMERS

For the year ended December 31, 1995, Northridge Energy Marketing Company
("Northridge") and Williams Energy Services, Inc. ("Williams") purchased 20%
and 37%, respectively, of the Company's oil and gas production. Northridge
purchased oil production from the Black Bay Complex and Williams purchased gas
from the North Dauphin Island Field. Because of the nature of oil and gas
operations and the marketing of production, the Company believes that the loss
of these customers would not have a material adverse effect on the Company.

TITLE TO PROPERTIES

Callon believes that it has satisfactory title to the Company's oil and gas
properties in accordance with standards generally accepted in the oil and gas
industry, subject to the mortgages under the Credit Facility and such exceptions
which, in the opinion of the Company, are not so material as to detract
substantially from the use or value of such properties. In addition to the
mortgages, the Company's properties are typically subject, in one degree or
another, to one or more of the following: royalties and other burdens and
obligations, express or implied, under oil and gas leases; overriding royalties
and other burdens created by the Company or its predecessors in title; a variety
of contractual obligations (including, in some cases, development obligations)
arising under operating agreements, farmout agreements, production sales
contracts and other agreements that may affect the properties or their titles;
back-ins and reversionary interests arising under purchase agreements and
leasehold assignments; liens that arise in the normal course of operations, such
as those for unpaid taxes, statutory liens securing obligations to unpaid
suppliers and contractors and contractual liens under operating agreements;
pooling, unitization and communitization agreements, declarations and orders;
and easements, restrictions, rights-of-way and other matters that commonly
affect oil and gas producing property. To the extent that such burdens and
obligations affect the Company's rights to production revenues, they have been
taken into account in calculating the Company's net revenue interests and in
estimating the size and value of the Company's reserves. Callon believes that

29
<PAGE>
the burdens and obligations affecting the Company's properties are conventional
in the industry for properties of the kind owned by the Company.

OTHER PROPERTIES

The Company's headquarters are located in Natchez, Mississippi, in
approximately 51,500 square feet of owned space. The Company also maintains
field offices in the area of the major fields in which Callon operates
properties or has a significant interest, all of which are owned.

EMPLOYEES

The Company had 146 employees on October 1, 1996, none of whom are
currently represented by a union. The Company considers itself to have good
relations with its employees. The Company employs 10 petroleum engineers and
four petroleum geoscientists.

LITIGATION

The Company is a defendant in various legal proceedings and claims which
arise in the ordinary course of Callon's business. Callon does not believe the
ultimate resolution of such actions will have a material effect on the Company's
financial position or results of operations.

COMPETITION, MARKETS AND REGULATIONS

COMPETITION

The oil and gas industry is highly competitive in all of its phases. Callon
encounters competition from other oil and gas companies in all areas of the
Company's operations, including the acquisition of reserves and producing
properties and the marketing of oil and gas. Many of these companies possess
greater financial and other resources than the Company. Competition for
producing properties is affected by the amount of funds available to the
Company, information about a producing property available to the Company and any
standards established by the Company for the minimum projected return on
investment. Because gathering systems and related facilities are the only
practical method for the intermediate transportation of gas, competition for gas
delivery is presented by other pipelines and gas gathering systems. Competition
may also be presented by alternate fuel sources.

MARKETS

Callon's ability to market oil and gas from the Company's wells depends
upon numerous factors beyond the Company's control, including the extent of
domestic production and imports of oil and gas, the proximity of the gas
production to gas pipelines, the availability of capacity in such pipelines, the
demand for oil and gas by utilities and other end users, the availability of
alternate fuel sources, the effects of inclement weather, state and federal
regulation of oil and gas production and federal regulation of gas sold or
transported in interstate commerce. No assurances can be given that Callon will
be able to market all of the oil or gas produced by the Company or that
favorable prices can be obtained for the oil and gas Callon produces.

The supply of gas capable of being produced has exceeded demand in recent
years, as a result of decreased demand for gas in response to economic factors,
conservation, lower prices for alternate energy sources and other factors. As a
result of this excess supply of gas, gas producers have experienced increased
competitive pressure and lower prices. Substantially all of the gas produced by
the Company is sold at market responsive prices.

In view of the many uncertainties affecting the supply of and demand for
oil, gas and refined petroleum products, the Company is unable to predict future
oil and gas prices and demand or the overall effect such prices and demand will
have on the Company. Callon does not believe that the loss of any of the
Company's oil purchasers would have a material adverse effect on the Company's
operations. Additionally, since substantially all of the Company's gas sales are
on the spot market, the loss of one or more gas purchasers should not materially
and adversely affect the Company's financial condition. The marketing of

30
<PAGE>
oil and gas by Callon can be affected by a number of factors which are beyond
the Company's control, the exact effects of which cannot be accurately
predicted.

FEDERAL REGULATIONS

SALES OF GAS. Effective January 1, 1993, the Natural Gas Wellhead
Decontrol Act deregulated prices for all "first sales" of gas. Thus, all sales
of gas by the Company may be made at market prices, subject to applicable
contract provisions.

TRANSPORTATION OF GAS. The rates, terms and conditions applicable to the
interstate transportation of gas by pipelines are regulated by the Federal
Energy Regulatory Commission ("FERC") under the Natural Gas Act ("NGA"), as
well as under section 311 of the Natural Gas Policy Act ("NGPA"). Since 1985,
the FERC has implemented regulations intended to make gas transportation more
accessible to gas buyers and sellers on an open-access, non-discriminatory
basis.

Most recently, in Order No. 636, ET SEQ., the FERC promulgated an extensive
set of new regulations requiring all interstate pipelines to "restructure"
their services. The most significant provisions of Order No. 636 (i) require
that interstate pipelines provide firm and interruptible transportation solely
on an "unbundled" basis, separate from their sales service, and convert each
pipeline's bundled firm city-gate sales service into unbundled firm
transportation service; (ii) issue blanket certificates to pipelines to provide
unbundled sales service; (iii) require that pipelines provide firm and
interruptible transportation service on a basis that is equal in quality for all
gas supplies, whether purchased from the pipeline or elsewhere; (iv) require
that pipelines provide a new, non-discriminatory "no-notice" transportation
service; (v) establish two new, generic programs for the reallocation of firm
pipeline capacity; (vi) require that all pipelines offer access to their storage
facilities on a firm and interruptible, open access, contract basis; (vii)
provide pregranted abandonment of unbundled sales and interruptible and
short-term firm transportation service and conditional pregranted abandonment of
long-term transportation service; (viii) modify transportation rate design by
requiring all fixed costs related to transportation to be recovered through the
reservation charge under the straight fixed variable ("SFV") method. The order
also recognized that the elimination of city-gate sales service and the
implementation of unbundled transportation service would result in considerable
costs being incurred by the pipelines. Therefore, Order No. 636 provided
mechanisms for the recovery by pipelines from present, former and future
customers of certain types of "transition" costs likely to occur due to these
new regulations.

In subsequent orders, the FERC substantially upheld the requirements
imposed by Order No. 636. Pursuant to Order No. 636, pipelines and their
customers engaged in extensive negotiations in order to develop and implement
new service relationships under Order No. 636. Tariffs instituting these new
restructured services were placed into effect on all pipelines on or before
November 1, 1993. Numerous petitions for judicial review of Order No. 636 have
been filed and consolidated for review in the United States Court of Appeals for
the D.C. Circuit. In addition, numerous parties have sought review of separate
FERC orders implementing Order No. 636 on individual pipeline systems. Since the
restructuring requirements that emerge from this lengthy administrative and
judicial review process may be materially different from those of Order No. 636
as originally adopted, it is not possible to predict what effect, if any, the
final rule resulting from Order No. 636 will have on the Company.

SALES AND TRANSPORTATION OF OIL. Sales of oil and condensate can be made
by the Company at market prices not subject at this time to price controls. The
price that the Company receives from the sale of these products will be affected
by the cost of transporting the products to market. As required by the Energy
Policy Act of 1992, the FERC has revised its regulations governing the rates
that may be charged by oil pipelines. The new rules, which were effective
January 1, 1995, provide a simplified, generally applicable method of regulating
such rates by use of an index for setting rate ceilings. In certain
circumstances, the new rules permit oil pipelines to establish rates using
traditional cost of service and other methods of ratemaking. The effect that
these new rules may have on moving the Company's products to market cannot yet
be determined. In addition, at the same time as it issued the new rules, the
FERC also issued notices of inquiry regarding market-based pricing for oil
pipeline rates and the information required to be filed for

31
<PAGE>
ratemaking and reporting purposes. It is not possible to predict what rules, if
any, the FERC will ultimately adopt as a result of these inquiry proceedings or
the effect that any rules that are adopted might have on the cost of moving the
Company's products to market.

LEGISLATIVE PROPOSALS. In the past, Congress has been very active in the
area of gas regulation. There are legislative proposals pending in the state
legislatures of various states, which, if enacted, could significantly affect
the petroleum industry. At the present time it is impossible to predict what
proposals, if any, might actually be enacted by Congress or the various state
legislatures and what effect, if any, such proposals might have on the Company's
operations.

FEDERAL, STATE OR INDIAN LEASES. In the event the Company conducts
operations on federal, state or Indian oil and gas leases, such operations must
comply with numerous regulatory restrictions, including various
nondiscrimination statutes, and certain of such operations must be conducted
pursuant to certain on-site security regulations and other appropriate permits
issued by the Bureau of Land Management ("BLM") or Minerals Management Service
or other appropriate federal or state agencies.

The Mineral Leasing Act of 1920 (the "Mineral Act") prohibits direct or
indirect ownership of any interest in federal onshore oil and gas leases by a
foreign citizen of a country that denies "similar or like privileges" to
citizens of the United States. Such restrictions on citizens of a
"non-reciprocal" country include ownership or holding or controlling stock in
a corporation that holds a federal onshore oil and gas lease. If this
restriction is violated, the corporation's lease can be canceled in a proceeding
instituted by the United States Attorney General. Although the regulations of
the BLM (which administers the Mineral Act) provide for agency designations of
non-reciprocal countries, there are presently no such designations in effect.
The Company owns interests in numerous federal onshore oil and gas leases. It is
possible that the Common Stock will be acquired by citizens of foreign
countries, which at some time in the future might be determined to be
non-reciprocal under the Mineral Act.

STATE REGULATIONS

Most states regulate the production and sale of oil and gas, including
requirements for obtaining drilling permits, the method of developing new
fields, the spacing and operation of wells and the prevention of waste of oil
and gas resources. The rate of production may be regulated and the maximum daily
production allowable from both oil and gas wells may be established on a market
demand or conservation basis or both.

The Company may enter into agreements relating to the construction or
operation of a pipeline system for the transportation of gas. To the extent that
such gas is produced, transported and consumed wholly within one state, such
operations may, in certain instances, be subject to the jurisdiction of such
state's administrative authority charged with the responsibility of regulating
intrastate pipelines. In such event, the rates which the Company could charge
for gas, the transportation of gas, and the construction and operation of such
pipeline would be subject to the rules and regulations governing such matters,
if any, of such administrative authority.

ENVIRONMENTAL REGULATIONS

GENERAL. The Company's activities are subject to existing federal, state
and local laws and regulations governing environmental quality and pollution
control. Although no assurances can be made, the Company anticipates that,
absent the occurrence of an extraordinary event such as those noted under "Risk
Factors," compliance with existing federal, state and local laws, rules and
regulations regulating the release of materials into the environment or
otherwise relating to the protection of the environment will not have a material
effect upon the capital expenditures, earnings or the competitive position of
Callon with respect to the Company's operations. The Company cannot predict what
effect additional regulation or legislation, enforcement policies issued
thereunder, and claims for damages to property, employees, other persons and the
environment resulting from the Company's operations could have on its
activities.

Activities of the Company with respect to gas facilities, including the
operation and construction of pipelines, plants and other facilities for
transporting, processing, treating or storing gas and other products,

32
<PAGE>
are subject to stringent environmental regulation by state and federal
authorities including the Environmental Protection Agency ("EPA"). Such
regulation can increase the cost of planning, designing, installing and
operating such facilities. In most instances, the regulatory requirements impose
water and air pollution control measures. Although Callon believes that
compliance with environmental regulations will not have a material adverse
effect on the Company, risks of substantial costs and liabilities related to
environmental compliance issues are inherent in oil and gas production
operations, and no assurance can be given that significant costs and liabilities
will not be incurred. Moreover, it is possible that other developments, such as
stricter environmental laws and regulations, and claims for damages to property
or persons resulting from oil and gas production, would result in substantial
costs and liabilities to the Company.

SOLID AND HAZARDOUS WASTE. The Company currently owns or leases, and has
in the past owned or leased, numerous properties that have been used for
production of oil and gas for many years. Although the Company has utilized
operating and disposal practices that were standard in the industry at the time,
hydrocarbons or other solid wastes may have been disposed or released on or
under the properties owned or leased by the Company. In addition, many of these
properties have been operated by third parties. The Company had no control over
such parties' treatment of hydrocarbons or other solid wastes and the manner in
which such substances may have been disposed or released. State and federal laws
applicable to oil and gas wastes and properties have gradually become stricter
over time. Under these new laws, the Company could be required to remove or
remediate previously disposed wastes (including wastes disposed or released by
prior owners or operators) or property contamination (including groundwater
contamination by prior owners or operators) or to perform remedial plugging
operations to prevent future contamination.

The Company generates wastes, including hazardous wastes, that are subject
to the Federal Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes. The EPA has limited the disposal options for certain hazardous
wastes and is considering the adoption of stricter disposal standards for
nonhazardous wastes. Furthermore, it is possible that certain wastes currently
exempt from treatment as "hazardous wastes" generated by the Company's oil and
gas operations may in the future be designated as "hazardous wastes" under
RCRA or other applicable statutes, and therefore be subject to more rigorous and
costly disposal requirements.

SUPERFUND. 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 with respect to the release of a "hazardous
substance" into the environment. These persons include the owner and operator
of a site and any party that disposed or arranged for the disposal of the
hazardous substance found at a site. CERCLA also authorizes the EPA and, in some
cases, third parties, to take actions in response to threats to the public
health or the environment and to seek to recover from the responsible classes of
persons the costs of such action. In the course of the Company's operations,
Callon has generated and will generate wastes that may fall within CERCLA's
definition of "hazardous substances." The Company may also be an owner of
sites on which "hazardous substances" have been released. The Company may be
responsible under CERCLA for all or part of the costs to clean up sites at which
such wastes have been disposed. At this time, neither the Company nor its
predecessors has been designated as a potentially responsible party under CERCLA
with respect to any such site.

OIL POLLUTION ACT. The Oil Pollution Act of 1990 (the "OPA") and
regulations thereunder impose a variety of regulations on "responsible
parties" related to the prevention of oil spills and liability for damages
resulting from such spills in "waters of the United States." The term "waters
of the United States" has been broadly defined to include inland waterbodies,
including wetlands, playa lakes and intermittent streams. A "responsible
party" includes the owner or operator of a facility or vessel, or the lessee or
permittee of the area in which an offshore facility is located. The OPA assigns
liability to each responsible party for oil removal costs and a variety of
public and private damages. While liability limits apply in some circumstances,
a party cannot take advantage of liability limits if the spill was caused by
gross negligence or willful misconduct or resulted from violation of a federal
safety, construction or

33
<PAGE>
operating regulation. If the party fails to report a spill or to cooperate fully
in the cleanup, liability limits also do not apply. Few defenses exist to the
liability imposed by the OPA.

The OPA also imposes ongoing requirements on a responsible party, including
proof of financial responsibility to cover at least some costs in a potential
spill. OPA currently requires owners and operators of offshore oil and gas
facilities to establish $150 million in financial responsibility. Under the
rule, financial responsibility can be established through insurance, guaranty,
indemnity, surety bond, letter of credit, qualification as a self-insurer or a
combination thereof. It is unlikely that insurance companies or underwriters
will be willing to provide coverage under the OPA because the statute provides
for direct lawsuits against insurers who provide financial responsibility
coverage, and most insurers have strongly protested this requirement. The
financial tests or other criteria that will be used to judge self-insurance are
also uncertain. On September 30, 1996, Congress passed legislation lowering the
financial responsibility requirement under OPA to $35 million, subject to
increase to $150 million if a formal risk assessment indicates the increase is
warranted. The requirements under OPA may have the potential to result in the
imposition of substantial additional annual costs on the Company or otherwise
materially adversely affect the Company. The impact of the rule is not expected
to be any more burdensome to the Company than it will be to other similarly or
less capitalized owners or operators in the Gulf of Mexico.

AIR EMISSIONS. The operations of the Company are subject to local, state
and federal laws and regulations for the control of emissions from sources of
air pollution. Administrative enforcement actions for failure to comply strictly
with air regulations or permits are generally resolved by payment of monetary
fines and correction of any identified deficiencies. Alternatively, regulatory
agencies could require the Company to cease construction or operation of certain
air emission sources, although the Company believes that in such case it would
have enough permitted or permittable capacity to continue its operations without
a material adverse effect on any particular producing field.

OSHA AND OTHER REGULATIONS. The Company is subject to the requirements of
the Federal Occupational Safety and Health Act ("OSHA") and comparable state
statutes. The OSHA hazard communication standard, the EPA community
right-to-know regulations under Title III of CERCLA and similar state statutes
require Callon to organize and/or disclose information about hazardous materials
used or produced in the Company's operations. Certain of this information must
be provided to employees, state and local governmental authorities and local
citizens.

34
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The Company currently has a Board of Directors composed of seven members.
In accordance with the Certificate of Incorporation of the Company, as amended
(the "Charter"), the members of the Board of Directors are divided into three
classes, Class I, Class II and Class III, and are elected for a full term of
office expiring at the third succeeding annual stockholders' meeting following
their election to office and when a successor is duly elected and qualified. The
terms of office of the Class I, Class II and Class III directors expire at the
annual meeting of stockholders in 1998, 1999 and 1997, respectively. The Charter
also provides that such classes shall be as nearly equal in number as possible.
The directors and executive officers of the Company are as follows:

NAME AGE PRESENT COMPANY POSITION
- ----------------------- --- -------------------------------------------------
Fred L. Callon......... 46 Director, President; Chief Operating Officer
(Class III)

John S. Callon......... 76 Director, Chairman of the Board; Chief Executive
Officer (Class II)

Dennis W. Christian.... 50 Director, Senior Vice President (Class III)

Robert A. Stanger...... 56 Director (Class I)

H. Michael Tatum....... 67 Vice President; Secretary

Kathy G. Tilley........ 51 Vice President

John C. Wallace........ 58 Director (Class I)

B. F. Weatherly........ 52 Director (Class II)

John S. Weatherly...... 44 Senior Vice President; Chief Financial Officer;
Treasurer

Richard O. Wilson...... 66 Director (Class I)

All of the directors, other than Messrs. Stanger and Wilson, have served as
directors since the Company's inception in 1994. Messrs. Stanger and Wilson have
served as directors since March 2, 1995.

The following is a brief description of the background and principal
occupation of each director and executive officer.

Fred L. Callon is President and Chief Operating Officer of the Company and
Callon Petroleum Operating and has held that position with the Company or its
predecessors since 1984. He has been employed by the Company or its predecessors
since 1976. He graduated from Millsaps College in 1972 and received his M.B.A.
degree from the Wharton School of Finance in 1974. Following graduation and
until his employment by Callon Petroleum Operating, he was employed by Peat,
Marwick, Mitchell & Co., certified public accountants. He is a certified public
accountant and is a member of the American Institute of Certified Public
Accountants and the Mississippi Society of Certified Public Accountants. He is
the nephew of John S. Callon.

John S. Callon is Chairman of the Board of Directors and Chief Executive
Officer of the Company and Callon Petroleum Operating. Mr. Callon founded the
Company's predecessors in 1950, and has held an executive office with the
Company or its predecessors since that time. He has served as a director of the
Mid-Continent Oil and Gas Association and as the President of the Association's
Mississippi-Alabama Division. He has also served as Vice President for
Mississippi of the Independent Petroleum Association of America. He is a member
of the American Petroleum Institute. Mr. Callon is the uncle of Fred L. Callon.

Dennis W. Christian is Senior Vice President of Acquisitions and Operations
for the Company and Callon Petroleum Operating, and has held that or similar
positions with the Company or its predecessors since 1981. Prior to joining
Callon Petroleum Operating, he was resident manager in Stavanger, Norway, for
Texas Eastern Transmission Corporation. Mr. Christian received his B.S. degree
in petroleum engineering in 1969 from Louisiana Polytechnic Institute. His
previous experience includes five years with Chevron U.S.A. Inc.

35
<PAGE>
Robert A. Stanger has been the managing general partner since 1978 of
Robert A. Stanger & Co., Inc., a Shrewsbury, New Jersey-based firm engaged in
publishing financial material and providing investment banking services to the
real estate and oil and gas industries. He is a director of Citizens Utilities,
Stamford, Connecticut, a provider of telecommunications, electric, gas, and
water services. Previously, Mr. Stanger was Vice President of Merrill Lynch &
Co. He received his B.A. degree in economics from Princeton University in 1961.
Mr. Stanger is a member of the National Association of Securities Dealers, the
New York Society of Security Analysts, the International Association of
Financial Planners, and the Investment Program Association.

H. Michael Tatum is Vice President and Secretary for the Company and Callon
Petroleum Operating and is responsible for management of administrative matters.
Mr. Tatum has held this position with the Company or its predecessors since
1976, and has been employed by Callon Petroleum Operating since 1969. He
graduated from Southern Methodist University in 1967 and is a member of the
American Society of Corporate Secretaries and the Society for Human Resource
Management.

Kathy G. Tilley is Vice President of Acquisitions and New Ventures for the
Company and Callon Petroleum Operating and has held that position since April
1996. She was employed by Callon Petroleum Operating in December 1989 as manager
of acquisitions and prior thereto, held that or similar positions as a
consultant from 1981. Ms. Tilley received her B.A. degree in economics from
Louisiana State University in 1967.

John C. Wallace is an executive officer of NOCO Management Ltd., the
general partner of the general partner of NOCO. He is a Chartered Accountant
having qualified with Coopers & Lybrand in Canada in 1963, after which he joined
Baring Brothers & Co., Limited in London England. For more than the last ten
years, he has served as Chairman of Fred. Olsen Ltd., a London-based corporation
which he joined in 1968, where he has specialized in the business of shipping
and property development. He is a director of Harland & Wolff PLC, Belfast, A/S
Ganger Rolf and A/S Bonheur, Oslo, publicly traded shipping companies, and
O.G.C. International P.L.C., a Scottish public company engaged in the offshore
oil and gas maintenance and construction business headquartered in Aberdeen,
Scotland. He is also a director of Belmont Constructors, Inc., a Houston,
Texas-based industrial contractor associated with Fred. Olsen Interests, and
other companies associated with Fred. Olsen Interests.

B. F. Weatherly is a principal of Amerimark Capital Group, Houston, Texas,
an investment banking firm. He is an executive officer of NOCO Management Ltd.,
the general partner of the general partner of NOCO. Prior to September 1996, he
was Executive Vice President, Chief Financial Officer and a director of Belmont
Constructors, Inc., a Houston, Texas-based industrial contractor associated with
Fred. Olsen Interests. From 1989 to 1991, he was a partner in Amerimark Capital
Corp., a Dallas investment banking firm. He holds a Master of Accountancy degree
from the University of Mississippi. He has previously been associated with
Arthur Andersen LLP, and has served as a Senior Vice President of Weatherford
International, Inc. B. F. Weatherly and John S. Weatherly are brothers.

John S. Weatherly is Senior Vice President, Chief Financial Officer and
Treasurer for the Company and Callon Petroleum Operating. Prior to April 1996,
he was Vice President, Chief Financial Officer and Treasurer of the Company and
has held those positions since 1983. Prior to joining Callon Petroleum Operating
in August 1980, he was employed by Arthur Andersen LLP as Audit Manager in the
Jackson, Mississippi office. He received his B.B.A. degree in accounting in 1973
and his M.B.A. degree in 1974 from the University of Mississippi. He is a
certified public accountant and a member of the American Institute of Certified
Public Accountants and the Mississippi Society of Certified Public Accountants.
John S. Weatherly and B. F. Weatherly are brothers.

Richard O. Wilson for the past nine years has been Chairman of O.G.C.
International P.L.C., a Scottish public company engaged in the offshore oil and
gas maintenance and construction business headquartered in Aberdeen, Scotland.
For the past 13 years, Mr. Wilson has also been Chairman of Dolphin A/S,
Stavanger, Norway, and Dolphin Drilling Ltd., Aberdeen, Scotland, both offshore
drilling companies owned by Fred. Olsen Interests. He is also Chairman of
Belmont Constructors, Inc., a Houston, Texas-based industrial contractor
associated with Fred. Olsen Interests. He holds a B.S. degree in civil
engineering from

36
<PAGE>
Rice University. Mr. Wilson is a Fellow in the American Society of Civil
Engineers, a member of the Institute of Petroleum, London England, and the
Cosmos Club, Washington, D.C.

Messrs. John S. Callon and Fred L. Callon, as nominees of the Callon
Family, and Messrs. B. F. Weatherly and John C. Wallace, as nominees of NOCO,
were elected to the Board of Directors pursuant to the terms of the
Stockholders' Agreement dated September 16, 1994. See "Principal
Stockholders -- Stockholders' Agreement."

All officers and directors of the Company are United States citizens,
except Mr. Wallace, who is a citizen of Canada.

COMPENSATION OF DIRECTORS

The Company's Board of Directors holds four regular meetings each year.
During 1996, as compensation for all services as a director of the Company, each
non-employee director will be paid $10,000. Non-employee directors are also
granted, upon their initial election or appointment, options to purchase 5,000
shares of Common Stock pursuant to the 1996 Callon Petroleum Stock Incentive
Plan (the "1996 Plan") and will be granted options for an additional 5,000
shares for each year in which they continue to serve as directors. See " --
Incentive Plans -- 1996 Plan." On August 23, 1996, the Compensation Committee
authorized a one-time grant to each non-employee director of an option to
purchase 20,000 shares of Common Stock under the 1996 Plan at a purchase price
of $12.00 per share, the fair market value of the Common Stock on such date,
subject to approval of the 1996 Plan by the Company's stockholders at the 1997
annual meeting of stockholders. One-fourth of each option will vest at each
succeeding annual meeting of directors following each annual stockholders'
meeting, beginning in 1997.

EXECUTIVE COMPENSATION

The following table sets forth information with respect to the Chief
Executive Officer of the Company and the four most highly compensated executive
officers of the Company as to whom the total salary and bonus for the year ended
December 31, 1995 exceeded $100,000. Such amounts include compensation from the
Company's predecessors for the year ended December 31, 1994.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ---------------------------------
----------------------------- AWARDS
OTHER ----------------------- PAYOUTS ALL
ANNUAL RESTRICTED SECURITIES ------- OTHER
COMPEN- STOCK UNDERLYING LTIP COMPEN-
YEAR SALARY BONUS SATION AWARD(S) OPTIONS PAYOUTS SATION
(1) ($) ($) $(2) ($) (#)(3) ($) ($)(4)
--------- --------- --------- ------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John S. Callon.......................... 1995 190,000 161,500 -- -- -- -- 10,393
Chairman and Chief Executive Officer 1994 168,000 95,000 -- -- 90,000 -- 9,565
Fred L. Callon.......................... 1995 170,000 144,500 -- -- -- -- 10,288
President and Chief Operating Officer 1994 150,000 85,000 -- -- 80,000 -- 9,096
Dennis W. Christian..................... 1995 150,000 127,500 -- -- -- -- 9,080
Senior Vice President 1994 118,450 140,000 -- -- 60,000 -- 7,186
John S. Weatherly....................... 1995 130,000 110,500 -- -- -- -- 7,873
Senior Vice President, Chief Financial 1994 100,000 107,500 -- -- 60,000 -- 6,068
Officer and Treasurer
H. Michael Tatum........................ 1995 100,000 34,000 -- -- -- -- 6,061
Vice President and Secretary 1994 92,183 58,046 -- -- 25,000 -- 5,598

</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)

37
<PAGE>
- ------------
(1) Information for years prior to 1994 is omitted under SEC rules because the
Company was not a reporting company during such periods.

(2) Amounts in the column do not include perquisites and other personal
benefits, securities or property, unless the annual amount of such
compensation exceeds the lesser of $50,000 or 10% of the total of annual
salary and bonus reported for the named executive.

(3) Represents awards granted under the 1994 Plan.

(4) Amounts reflect the Company's contribution in 1995 and 1994, respectively,
of $9,500 and $8,400 to John S. Callon's 401(k) savings plan and payment of
$893 and $1,165 of term life insurance premiums; $8,500 and $7,500 to Fred
L. Callon's 401(k) savings plan and payment of $1,788 and $1,596 of term
life insurance premiums; $7,500 and $5,923 to Mr. Christian's 401(k) savings
plan and payment of $1,580 and $1,263 of term life insurance premiums;
$6,500 and $5,000 to Mr. Weatherly's 401(k) savings plan and payment of
$1,373 and $1,068 of term life insurance premiums; and $5,000 and $4,609 to
Mr. Tatum's 401(k) savings plan and payment of $1,061 and $989 of term life
insurance premiums.

RECENT COMPENSATION AWARDS

On August 23, 1996, the Compensation Committee granted stock options to
the Company's executive officers and senior management under the 1996 Plan,
subject to stockholder approval of the 1996 Plan. Pursuant to the awards, Fred
L. Callon was granted an option to purchase 75,000 shares of Common Stock;
Dennis W. Christian was granted an option to purchase 70,000 shares of Common
Stock; H. Michael Tatum was granted an option to purchase 15,000 shares of
Common Stock; Kathy G. Tilley was granted an option to purchase 55,000 shares of
Common Stock; and John S. Weatherly was granted an option to purchase 65,000
shares of Common Stock. In addition, other members of senior management were
granted options to purchase an aggregate 170,000 shares of Common Stock. All of
such options were granted at an exercise price of $12.00 per share, the fair
market value of the Common Stock on the date of grant, and 20% of each option
vests on January 1 of each succeeding year, beginning January 1, 1997. Unvested
options are subject to forfeiture upon certain termination of employment events.

The Compensation Committee also awarded performance shares under the 1996
Plan to the Company's executive officers on August 23, 1996, subject to
stockholder approval of the 1996 Plan. Contingent upon such stockholder
approval, Fred L. Callon will be awarded 60,000 performance shares; Dennis W.
Christian will be awarded 55,000 performance shares; H. Michael Tatum will be
awarded 15,000 performance shares; Kathy G. Tilley will be awarded 45,000
performance shares; and John S. Weatherly will be awarded 50,000 performance
shares. All of the performance shares granted will vest in whole on January 1,
2001, and will be subject to forfeiture upon certain termination of employment
events.

EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS

Fred L. Callon, Dennis W. Christian and John S. Weatherly has entered into
employment agreements with the Company effective September 1, 1996 and ending
December 31, 2001. The agreements provide that Mr. Callon, Mr. Christian and Mr.
Weatherly will receive an annual base salary of at least $200,000, $175,000 and
$165,000, respectively, and that they will be entitled to participate in any
incentive compensation program established by the Company for its executive
officers. Each agreement terminates upon death or disability or for cause. If
the agreement is terminated because of disability, compensation payments
continue for a period of two years from the date of termination, reduced by the
amount of disability insurance paid. If the agreement is terminated for cause,
the Company is not required to make any additional payments. "Cause" is defined
generally as any of the following, as determined by a majority vote of the Board
of Directors: intentional or continual neglect of duties, conviction of a
felony, or failure or refusal to perform duties in accordance with the
employment agreement.

The employment agreements further provide that the employee may terminate
the agreement for "good reason," which is defined generally as (a) failure to
be re-elected to office, (b) significant change in duties, (c) reduction or
failure to provide typical increases in salary following a change in control of
the Company, (d) relocation to an office outside the Natchez, Mississippi area,
or (e) failure to maintain the

38
<PAGE>
level of participation in the compensation and benefit plans of the Company
following a change in control. If the employee terminates his agreement for good
reason (other than following a change in control), or if the Company breaches
the agreement compensation shall continue for a period of two years from the
date of termination. If the agreement is terminated following a change in
control, compensation shall continue for a period of three years. Pursuant to
the agreements, a "change in control" occurs if: (i) any person or group of
persons acting in concert (within the meaning of Section 13(d) of the Exchange
Act) shall have become the beneficial owner of a majority of the outstanding
common stock of the Company (other than pursuant to the Stockholders'
Agreement), (ii) the stockholders of the Company cause a change in a majority of
the members of the Board within a twelve-month period, or (iii) the Company or
its stockholders enter into an agreement to dispose of all or substantially all
of the assets or outstanding capital stock of the Company. If the compensation
to be paid upon a change in control would constitute a "parachute" payment
under the Internal Revenue Code, the amount otherwise payable will be grossed up
to an amount such that the employee will receive the amount he would have
received if no portion of such compensation had been subject to the excise tax
imposed by the Internal Revenue Code, and the Company will be responsible for
the amount of the excise tax.

On June 19, 1996, the Company entered into a consulting agreement with John
S. Callon to be effective as of the day he ceases to be the Chief Executive
Officer of the Company. Pursuant to the agreement, John S. Callon is to provide
consulting services to the Company on matters pertaining to corporate or
financial strategy, investor relations and public/private financing
opportunities for no more than 20 hours per month, ten months a year. The
agreement remains in effect from the effective date until December 31, 2001,
subject to renewal for succeeding five year periods unless earlier terminated.
As compensation for his services under the agreement, John S. Callon will be
paid a fee ("Consultation Fee") of not less than $190,000 per year increased
annually based upon the change in the Consumer Price Index, as adjusted for
inflation. In addition, he will remain eligible to participate in the Company's
major medical and disability coverage, and will be entitled to participate in
all other employee benefit plans (other than a cash bonus program) provided to
full-time executives of the Company. As an inducement for entering into the
agreement, John S. Callon was granted 25,000 performance shares of Common Stock,
20% of which vests on each of the first five anniversaries of the effective date
of the agreement.

Upon termination of the agreement other than for cause, John S. Callon or
his spouse shall be entitled to receive a termination payment equal to the
Consultation Fee, as adjusted for inflation, to be paid annually until the later
of the death of John S. Callon (if applicable) or his spouse. In lieu of the
termination payment, John S. Callon or his spouse may elect to receive, subject
to the approval of the Board of Directors a lump sum payment of $1.5 million. In
addition, if the agreement terminates due to the Company's breach, John S.
Callon and his spouse shall be entitled to liquidated damages. The Company may
terminate the agreement for cause. "Cause" is defined generally in the
agreement as willful misconduct or intentional and continual neglect of duties
which has materially and adversely affected the Company. Mr. Callon has
indicated that he currently plans to retire during 1997.

Pursuant to the 1996 Plan and the 1994 Plan (as defined below), in the case
of a merger or consolidation where the Company is not the surviving entity, or
if the Company is about to sell or otherwise dispose of substantially all of its
assets while unvested options remain outstanding, the Compensation Committee or
other plan administrator may, in its discretion and without shareholder
approval, declare some or all options exercisable in full before or
simultaneously with such merger, consolidation or sale of assets without regard
for prescribed waiting periods. Alternatively, the Compensation Committee or
other plan administrator may cancel all outstanding options provided option
holders are given notice and a period of 30 days prior to the merger,
consolidation or sale to exercise the options in full.

INCENTIVE PLANS

The Company currently maintains two Common Stock-based incentive plans for
employees: the 1994 Callon Petroleum Company Stock Incentive Plan (the "1994
Plan") and the 1996 Plan. The Company in the past has used and will continue to
use, stock options and performance share grants to attract and retain key
employees in the belief that employee stock ownership and stock related
compensation devices

39
<PAGE>
encourage a community of interest between employees and stockholders.

1994 PLAN. The 1994 Plan was adopted on June 30, 1994. Pursuant to the 1994
Plan, 600,000 shares of Common Stock were reserved for issuance upon the
exercise of options or for grants of performance shares. The 1994 Plan is
administered by the Compensation Committee of the Board of Directors. Members of
the Compensation Committee currently are Messrs. Stanger, Wallace, B. F.
Weatherly and Wilson. No awards were granted under the 1994 Plan during 1995 and
1996, other than automatic stock option grants to non-employee directors and the
grant of performance shares to John S. Callon in connection with his Consulting
Agreement. No additional awards may be granted under the 1994 Plan. See "--
Employment Agreements, Termination of Employment and Change in Control
Arrangements."

1996 PLAN. On August 23, 1996, the Board of Directors of the Company
approved and adopted the 1996 Plan, and granted awards thereunder to various
employees, in each case subject to approval of the 1996 Plan by the stockholders
of the Company at the 1997 annual meeting. See " -- Recent Compensation
Awards." Individual awards under the 1996 Plan may take the form of one or more
of (i) incentive stock options; (ii) non-qualified stock options; or (iii)
performance shares.

The 1996 Plan is administered by a plan administrator which may be either
(i) the Board of Directors of the Company; (ii) any duly constituted committee
of the Board of Directors consisting of at least two non-employee directors; or
(iii) any other duly constituted committee of the Board of Directors. The plan
administrator will select the officers, key employees and consultants who will
receive awards and the terms and conditions of those awards. The maximum number
of shares of Common Stock that may be subject to outstanding awards may not
exceed 900,000. Shares of Common Stock tendered as payment for shares issued
upon exercise of an option or which are attributable to awards which have
expired, terminated or been canceled or forfeited are available for issuance or
use in connection with future awards.

The option price of any incentive stock option shall be 100% of the fair
market value of a share of Common Stock on the date the incentive option is
granted. Any incentive option must be exercised within ten years of the date of
grant. Unless otherwise determined by the plan administrator, the option price
of any non-qualified stock option shall be 100% of the fair market value of a
share of Common Stock on the date the option is granted. Vesting of stock
options and performance shares, and the term of any non-qualified stock option
or performance share award is determined by the plan administrator.

The 1996 Plan provides that each director that is not an employee of the
Company shall, on the date on which he or she is initially elected or appointed
a director of the Company, be granted a stock option to purchase 5,000 shares of
Common Stock for the fair market price on the date of grant and for a term of
ten years. After each subsequent annual meeting of stockholders at which such
person continues to serve as a director, he or she will automatically be granted
a stock option to purchase an additional 5,000 shares of Common Stock for the
fair market price on the date of such grant and for a term of ten years.

In the event of a termination of employment, outstanding options and
performance shares may be subject to forfeiture and/or time limitations. Stock
options and performance shares are evidenced by written agreements, the terms
and provisions of which may differ. No stock option is transferable other than
by will or by the laws of descent or distribution.

The 1996 Plan may be amended by the Board of Directors without the consent
of the stockholders except that any amendment, though effective when made, will
be subject to stockholder approval if required by any federal or state law or
regulation or by the rules of any stock exchange or automated quotation system
on which the Common Stock may then be listed or quoted. In addition, no
amendment can impair the rights of a holder of an outstanding award under the
Plan without such holder's consent. As of October 25, 1996, there were 145,000
shares available for grant under the 1996 Plan.

OPTION GRANTS IN LAST FISCAL YEAR

There were no individual grants of stock options under the 1994 Plan made
during the year ended December 31, 1995 to the Chief Executive Officer of the
Company or any of the four most highly

40
<PAGE>
compensated executive officers of the Company named in the Summary Compensation
Table. In addition, no stock appreciation rights were granted by the Company in
1995.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

The following table sets forth certain information concerning the number
and value of unexercised options to purchase Common Stock by the Chief Executive
Officer and the four most highly compensated executive officers named in the
Summary Compensation Table at December 31, 1995. No stock options were exercised
by such persons in 1995.

AGGREGATED OPTION EXERCISES IN 1995 AND OPTION VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, DECEMBER 31,
1995 1995
---------------- ----------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED($) UNEXERCISABLE(1) UNEXERCISABLE(2)
- ---------------------------------------- --------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
John S. Callon.......................... -- -- 90,000/-- --
Fred L. Callon.......................... -- -- 80,000/-- --
Dennis W. Christian..................... -- -- 60,000/-- --
John S. Weatherly....................... -- -- 60,000/-- --
H. Michael Tatum........................ -- -- 25,000/-- --
</TABLE>
- ------------
(1) Represents awards granted under the 1994 Plan.

(2) As of December 31, 1995, the market price of stock was below the exercise
price.

LONG-TERM INCENTIVE PLAN AWARDS

Prior to 1996, Callon had not awarded any performance shares under the 1994
Plan nor did it have any other long-term incentive plan for the Company's
employees.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Company's Compensation Committee are Messrs. Stanger,
Wallace, B. F. Weatherly and Wilson, none of whom are or have been officers or
employees of the Company.

STOCKHOLDERS' AGREEMENT. In connection with the Consolidation, the
Company, the Callon Family and NOCO entered into the Stockholders' Agreement
which contains certain voting requirements and transfer restrictions. Messrs.
Wallace, B. F. Weatherly and Wilson are affiliates of NOCO. See " -- Certain
Transactions."

REGISTRATION RIGHTS. NOCO is party to a Registration Rights Agreement
dated September 16, 1994. Messrs. Wallace, B. F. Weatherly and Wilson are
affiliates of NOCO. See " -- Certain Transactions."

CERTAIN TRANSACTIONS

CONSOLIDATION. Pursuant to the Consolidation in which certain of the
Company's predecessor entities were merged into the Company effective September
16, 1994, John S. Callon, Fred L. Callon and other non-employee members of the
Callon Family exchanged all of the outstanding stock of Callon Petroleum
Operating for an aggregate of 1,892,278 shares of Common Stock of the Company.
Certain Callon Family members also converted units of limited partnership
interest ("Units") in CCP into an aggregate of 9,635 shares of Common Stock,
representing one-third of a share of Common Stock for each Unit. The number of
shares of Common Stock issued in the Consolidation was based upon the Company's
assignment of exchange values to the assets and liabilities of CCP, Callon
Petroleum Operating and CN.

41
<PAGE>
STOCKHOLDERS' AGREEMENT. In connection with the Consolidation, the
Company, the Callon Family (including John S. Callon and Fred L. Callon) and
NOCO entered into the Stockholders' Agreement which (a) provides that the Callon
Family shall vote for two directors to the Company's Board of Directors as
directed by NOCO and NOCO will vote for two directors to the Company's Board of
Directors as directed by the Callon Family, (b) contains certain restrictions on
transfer of the Common Stock owned by the Callon Family and NOCO, and (c)
provides that neither the Callon Family nor NOCO can transfer shares of Common
Stock in connection with, or vote for, consent to or otherwise approve, a
transaction which would result in certain changes of control or fundamental
changes without the prior written consent of the other party. The Callon Family
and NOCO own an aggregate of more than 60% of the Company's outstanding Common
Stock.

CONTINGENT SHARES. The Callon Family (including John S. Callon and Fred L.
Callon), as former stockholders of Callon Petroleum Operating, may receive
additional shares of Common Stock pursuant to a Contingent Share Agreement dated
September 16, 1994 between the Callon Family and the Company (the "Contingent
Share Agreement"). The number of shares issued in the Consolidation was based
on the respective asset values of the parties to the Consolidation including
Callon Petroleum Operating. Callon Petroleum Operating owned certain oil and gas
properties which, for purposes of the Consolidation, could not be properly
valued due to inadequate drilling and production history. The Contingent Share
Agreement provides that promptly after December 31, 1995, a number of shares of
Common Stock will be issued to the Callon Family equal to the present value of
the properties (as determined by independent reserve engineers) divided by
$12.05. Due to the continued limited production history of the properties, the
Company has amended the Contingent Share Agreement to extend the valuation date
to December 31, 1996.

REGISTRATION RIGHTS. The Callon Family (including John S. Callon and Fred
L. Callon) is party to a Registration Rights Agreement dated September 16, 1994,
pursuant to which they are entitled to require the Company to register Common
Stock owned by them with the SEC for sale to the public in a firm commitment
public offering and generally to include shares owned by them in registration
statements filed by the Company. NOCO and the Company have entered into a
similar agreement.

WILCOX ENERGY. Prior to the consummation of the Consolidation, Callon
Petroleum Operating distributed the capital stock of its wholly owned
subsidiary, Wilcox Energy Company ("Wilcox"), to its stockholders (i.e., the
Callon Family, including John S. Callon and Fred L. Callon). The business of
Wilcox is the drilling of shallow exploratory wells in the Wilcox Trend, and
Callon Petroleum Operating did not believe that Wilcox would fit within the
Company's business strategy.

NOTE TO AFFILIATE. Prior to the Consolidation, CN from time to time loaned
money to NOCO on a short-term basis, at approximately the interest rate earned
by CN on short-term cash investments. In 1993, $4.0 million was borrowed. On
December 31, 1993, $1.0 million was outstanding at an interest rate of 4.0%. In
1994, the outstanding loan balance of $1.0 million was repaid prior to the
Consolidation.

FEES TO NOCO. Prior to the Consolidation, the partnership agreement of CN
provided that CN would reimburse Callon Petroleum Operating and NOCO at cost for
overhead and executive and other personnel services for operations of CN. During
1993, CN paid Callon Petroleum Operating $1.4 million and paid NOCO $320,000 as
such reimbursement. NOCO Management, Ltd., the general partner of NOCO Holdings,
L.P. (the sole limited partner of NOCO) and whose members include John C.
Wallace, Richard O. Wilson, and B. F. Weatherly, directors of the Company,
received $190,200 in 1993 of such amounts in fees for services provided to CN by
its members, including Mr. Wallace and Mr. Weatherly. In turn, Mr. Wallace
received $13,500 of such amounts in 1993, and Mr. Weatherly received $67,500 of
such amounts in 1993 from NOCO Management, Ltd. for such services. In 1994, the
Company reimbursed NOCO $131,000 for costs and expenses incurred by NOCO in the
Consolidation. No overhead payments have been made following the effective date
of the Consolidation.

42
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth, as of October 25, 1996, certain information
with respect to the ownership of shares of Common Stock and the Company's Series
A Preferred Stock as to (i) all persons known by the Company to be the
beneficial owners of 5% or more of the outstanding shares of Common Stock, (ii)
each director, (iii) each of the executive officers named in the Summary
Compensation Table, and (iv) all executive officers and directors of the Company
as a group. Information set forth in the table with respect to beneficial
ownership of Common Stock and Series A Preferred Stock has been obtained from
filings made by the named beneficial owners with the SEC or, in the case of
executive officers and directors of the Company, has been provided to the
Company by such individuals.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------ ------------------------
AMOUNT AND AMOUNT AND
NAME AND NATURE OF PERCENT NATURE OF PERCENT
ADDRESS OF BENEFICIAL OF BENEFICIAL OF
BENEFICIAL OWNER(S) OWNERSHIP CLASS OWNERSHIP CLASS
- ------------------------------------- ---------- -------- ---------- --------
DIRECTORS:
<S> <C> <C> <C> <C>
John S. Callon.................. 294,040 (b) 5.03% 0 0
200 North Canal Street
P.O. Box 1287
Natchez, Mississippi 39120
Fred L. Callon.................. 656,761 (c) 11.23 0 0
200 North Canal Street
P.O. Box 1287
Natchez, Mississippi 39120
Dennis W. Christian............. 74,000 (d) 1.27 0 0
Robert A. Stanger............... 15,856 (e) * 0 0
John C. Wallace................. 1,999,758 (f) 34.66 0 0
65 Vincent Square
London, England
SW1P 2RX
B.F. Weatherly.................. 2,000,125 (g) 34.66 0 0
9603 Doliver Street
Houston, Texas 77063
Richard O. Wilson............... 2,002,031 (h) 34.69 1,000 *
2400 West Loop South
Suite 150
Houston, Texas 77027
NAMED EXECUTIVE OFFICERS:
John S. Weatherly............... 73,896 (i) 1.27 0 0
H. Michael Tatum................ 28,000 (j) * 0 0
DIRECTORS AND EXECUTIVE OFFICERS
AS A GROUP (10 PERSONS)............ 3,185,951 (k) 51.5 1,000 *
CERTAIN BENEFICIAL OWNERS:
NOCO Enterprises, L.P........... 1,984,758 (l) 34.49 0 0
6814 Northampton Way
Houston, Texas 77055
Wellington Management Company... 401,220 (m) 6.67 140,000 10.64
75 State Street
Boston, Massachusetts 02109
</TABLE>
- ------------
* less than 1%

(a) Unless otherwise indicated, each of the above persons may be deemed to have
sole voting and dispositive power with respect to such shares.

(FOOTNOTES CONTINUED ON FOLLOWING PAGE)

43
<PAGE>

(b) Of the 294,040 shares beneficially owned by John S. Callon, 129,040 are
owned directly by him and he has sole voting and dispositive power over
such shares, 75,000 shares are held in a family limited partnership, and
90,000 shares are subject to options under the Company's 1994 Plan
exercisable within 60 days. Shares indicated as owned by John S. Callon do
not include shares of Common Stock owned by NOCO and shares of Common Stock
owned by certain other members of the Callon Family, including 61,837
shares owned by John S. Callon's wife and over which he disclaims
beneficial ownership. Under the terms of the Stockholders' Agreement, John
S. Callon and the other members of the Callon Family have the right of
first refusal to acquire shares of Common Stock proposed to be sold by NOCO
under certain circumstances and all parties to the Stockholders' Agreement
have agreed to support two directors nominated by the Callon Family and two
directors nominated by NOCO. John S. Callon disclaims beneficial ownership
of the NOCO shares.

(c) Of the 656,761 shares beneficially owned by Fred L. Callon, 201,556 shares
are owned directly by him; 268,016 shares are held by him as custodian for
certain minor Callon Family members; 78,430 shares are held by him as
trustee of certain Callon Family trusts; 80,000 are subject to options
under the 1994 Plan exercisable within 60 days; 15,000 are subject to
options under the 1996 Plan exercisable within 60 days; and 13,759 shares
are held by Fred L. Callon as Trustee of shares held by the Callon
Petroleum Company Employee Savings and Protection Plan. Shares indicated as
owned by Fred L. Callon do not include shares of Common Stock owned by NOCO
and shares of Common Stock owned by other members of the Callon Family,
including 25,009 shares owned by Fred L. Callon's wife over which he
disclaims beneficial ownership. Under the terms of the Stockholders'
Agreement, Fred L. Callon and the other members of the Callon Family have
the right of first refusal to acquire shares of Common Stock proposed to be
sold by NOCO under certain circumstances and all parties to the
Stockholders' Agreement have agreed to support two directors nominated by
the Callon Family and two directors nominated by NOCO. Fred L. Callon
disclaims beneficial ownership of the NOCO shares.

(d) Includes 60,000 shares subject to options under the 1994 Plan and 14,000
shares subject to options under the 1996 Plan, all of which are exercisable
within 60 days.

(e) Includes 15,000 shares subject to options under the 1994 Plan, exercisable
within 60 days.

(f) Includes 15,000 shares subject to options under the 1994 Plan, exercisable
within 60 days, and 1,984,758 shares owned by NOCO (see note (l) below).

(g) Includes 15,000 shares subject to options under the 1994 Plan, exercisable
within 60 days and 1,984,758 shares owned by NOCO (see note (1) below).

(h) Includes 15,000 shares subject to options under the 1994 Plan, exercisable
within 60 days, 2,273 shares issuable upon conversion of 1,000 shares of
Series A Preferred Stock and 1,984,758 shares owned by NOCO (see note (l)
below).

(i) Includes 217 shares which are held by Mr. Weatherly as custodian for his
minor children and 60,000 shares which are subject to options under the
1994 Plan and 13,000 shares which are subject to options under the 1996
Plan, all of which are exercisable within 60 days.

(j) Includes 25,000 shares subject to options under the 1994 Plan and 3,000
shares subject to options under the 1996 Plan, all of which are exercisable
within 60 days.

(k) Includes 405,000 shares subject to options under the 1994 Plan and 45,000
shares subject to options under the 1996 Plan, all of which are exercisable
within 60 days.

(l) The sole limited partner of NOCO is NOCO Holdings, L.P., and the sole
general partner of NOCO is NOCO Properties Inc., a wholly-owned subsidiary
of NOCO Holdings, L.P. The general partner of NOCO Holdings, L.P. is NOCO
Management, Ltd., a limited liability company. The management of NOCO
Management, Ltd. is vested in its four members: John C. Wallace, Barry I.
Meade, B. F. Weatherly and Richard O. Wilson. The address of NOCO Holdings,
L.P. and NOCO Management, Ltd. is the same as that listed above for NOCO.
Mr. Wallace's address is 65 Vincent Square, London England SW1P 2RX. Mr.
Meade's address is 6814 Northampton Way, Houston, Texas 77055. Mr.
Weatherly's address is 9603 Doliver Street, Houston, Texas 77063. Mr.
Wilson's address is 2400 West Loop South, Suite 150, Houston, Texas 77027.
Messrs. Wallace, Weatherly and Meade also serve as officers of NOCO
Management, Ltd. NOCO Properties Inc. and NOCO Management, Ltd. may be
deemed to be the beneficial owner of the Common Stock held by NOCO as a
result of their respective general partner interests in NOCO and NOCO
Holdings, L.P. As a result of their positions with NOCO

(FOOTNOTES CONTINUED ON FOLLOWING PAGE)

44
<PAGE>
Management, Ltd., Messrs. Wallace, Meade, B. F. Weatherly and Wilson may be
deemed to share the power to vote and dispose of such Common Stock and
thereby to be the beneficial owner of such Common Stock. Under the terms of
the Stockholders' Agreement, NOCO has the right of first refusal to acquire
shares of Common Stock proposed to be sold by members of the Callon Family
under certain circumstances and all parties to the Stockholders' Agreement
have agreed to support two directors nominated by the Callon Family and two
directors nominated by NOCO. NOCO disclaims beneficial ownership of the
shares owned by members of the Callon Family. Because of the Stockholders'
Agreement, NOCO and members of the Callon Family may be deemed to be a
"group" for purposes of beneficial ownership under SEC regulations. If
such a group were deemed to exist, it would beneficially own over 60% of
the Common Stock.

(m) Includes 318,220 shares issuable upon conversion of 140,000 shares of Series
A Preferred Stock.

STOCKHOLDERS' AGREEMENT

Pursuant to the Stockholders' Agreement among the Callon Family and NOCO
dated September 16, 1994, the Callon Family and NOCO each elect two directors to
the Company's Board of Directors. Specifically, the Stockholders' Agreement
provides that the Callon Family and NOCO shall use their best efforts, including
voting the shares of Common Stock which they own, to cause the Company's Board
of Directors to be composed of at least four members, two of such members to be
selected by the Callon Family and two of such members to be selected by NOCO.
The Stockholders' Agreement also contains restrictions on transfer of shares of
Common Stock owned by the Callon Family and NOCO and prohibits the Callon Family
and NOCO from taking certain actions which would result in certain changes of
control or fundamental changes, without the consent of the other party. See
"Management -- Certain Transactions."

As a result of the Stockholders' Agreement, the Callon Family, on the one
hand, and the Callon Family and NOCO, on the other, may be deemed to form a
"group" for purposes of beneficial ownership under SEC regulations. The Callon
Family disclaims beneficial ownership of the Common Stock owned by NOCO. In
addition, each Callon Family stockholder disclaims beneficial ownership of all
shares of Common Stock owned by the other Callon Family stockholders and the
existence of a group comprised of the Callon Family stockholders. If NOCO and
the Callon Family were deemed to be a group, it would beneficially own more than
60% of the outstanding Common Stock.

DESCRIPTION OF NOTES

The Notes are to be issued under the Indenture, dated as of November 27,
1996, between the Company and American Stock Transfer & Trust Company, as
trustee (the "Trustee"). The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the provisions of the Indenture (including the
definition of certain terms in the Indenture), the form of which has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
Wherever particular provisions and definitions of the Indenture are referred to,
such provisions and definitions are incorporated by reference as part of the
statements made, and the statements are qualified in their entirety by such
reference. As used in this "Description of Notes," the term "Company" refers
only to Callon Petroleum Company. Article and Section references are to Articles
and Sections of the Indenture.

GENERAL

The Notes offered by this Prospectus will be limited to $21.0 million
aggregate principal amount, plus up to an additional $3.15 million aggregate
principal amount if the Underwriter's overallotment option is exercised. The
Notes will be issued in global or registered form only, without coupons, in
denominations of $1,000 and any integral multiple thereof. Interest on the Notes
will accrue from November 27, 1996 and will be payable quarterly on the 15th day
of each March, June, September and December in each year, commencing March 15,
1997, at the rate per annum stated on the cover page of this Prospectus.
Interest will be payable to the person in whose name the Note is registered at
the close of business on the 1st day of March, June, September and December, as
the case may be, immediately preceding such Interest Payment Date. The Notes
will mature on December 15, 2001, unless redeemed earlier at the option of the
Company as set forth

45
<PAGE>
below. The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.

Principal and interest will be payable at an office or agency to be
maintained by the Company in New York City, except that, at the option of the
Company in the event the Notes do not remain in book entry form, interest may be
paid by check mailed to the person entitled thereto. The Notes may be presented
for registration of transfer or exchange at an office or agency to be maintained
by the Company in New York City. The Notes will be exchangeable without service
charge but the Company may require payment to cover taxes or other government
charges. Except under the conditions described in "Certain Covenants -- Liens"
below, the Notes will not be secured by the assets of the Company or any of its
subsidiaries or Affiliates or otherwise. All indebtedness of the Company under
the Credit Facility (which constitutes Senior Indebtedness) is secured by
substantially all of the producing oil and gas assets of the Company and its
Subsidiaries. In addition, the rights of the Company to participate in any
distribution of assets of any subsidiary upon its liquidation or reorganization
or otherwise (and thus the ability of the Holders of the Notes to benefit
indirectly from such distribution) are subject to the prior claims of creditors
of the subsidiary.

BOOK ENTRY SECURITIES

The Notes will be issued in the form of a fully registered Global
Certificate. The Global Certificate will be deposited with, or on behalf of, The
Depository Trust Company, New York, New York (the "Depositary") and registered
in the name of the Depositary's nominee.

Except as set forth below, the Global Certificate may be transferred, in
whole and not in part, only to another nominee of the Depositary or to a
successor of the Depositary or its nominee.

The Depositary has advised the Company and the Underwriter as follows: It
is a limited-purpose trust company which was created to hold securities for its
participating organizations (the "Participants") and to facilitate the
clearance and settlement of transactions in such securities between Participants
through electronic book entry changes in accounts of its Participants.
Participants include securities brokers and dealers (including the Underwriter),
banks, trust companies, clearing corporations and certain other organizations.
Access to the Depositary's book entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants"). Persons who are not Participants may beneficially
own securities held by the Depositary only through Participants or Indirect
Participants.

The Depositary has also advised that pursuant to procedures established by
it (i) upon the issuance by the Company of the Notes, the Depositary will credit
the accounts of Participants designated by the Underwriter with the principal
amount of the Notes purchased by the Underwriter, and (ii) ownership of
beneficial interests in the Global Certificate will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
the Depositary (with respect to Participants' interests), the Participants and
the Indirect Participants. The laws of some states require that certain persons
take physical delivery in definitive form of securities which they own.
Consequently, the ability to transfer beneficial interests in the Global
Certificate is limited to such extent.

So long as a nominee of the Depositary is the registered owner of the
Global Certificate, such nominee will be considered the sole owner or Holder of
the Notes for all purposes under the Indenture. Except as provided below, owners
of beneficial interests in the Global Certificate will not be entitled to have
Notes registered in their names, will not receive or be entitled to receive
physical delivery of Notes in definitive form and will not be considered the
owners or Holders thereof under the Indenture.

Neither the Company, the Trustee, the paying agent nor the Notes registrar
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Certificate, or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.

46
<PAGE>
Principal and interest payments on the Global Certificate registered in the
name of the Depositary's nominee will be made by the Company, either directly or
through a paying agent, to the Depositary's nominee as the registered owner of
the Global Certificate. Under the terms of the Indenture, the Company and the
Trustee will treat the persons in whose names the Notes are registered as the
owners of such Notes for the purpose of receiving payments of principal and
interest on such Notes and for all other purposes whatsoever. Therefore, neither
the Company, the Trustee nor any paying agent has any direct responsibility or
liability for the payment of principal or interest on the Notes to owners of
beneficial interests in the Global Certificate. The Depositary has advised the
Company and the Trustee that its present practice is, upon receipt of any
payment of principal or interest to credit immediately the accounts of the
Participants with payment in amounts proportionate to their respective holdings
in principal amount of beneficial interests in the Global Certificate as shown
on the records of the Depositary. Payments by Participants and Indirect
Participants to owners of beneficial interests in the Global Certificate will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers in bearer form or registered
in "street name" and will be the responsibility of such Participants or
Indirect Participants.

The Company will issue Notes in definitive form in exchange for the Global
Certificate if, and only if, either (1) the Depositary is at any time unwilling
or unable to continue as depositary and a successor depositary is not appointed
by the Company within 90 days, or (2) an Event of Default has occurred and is
continuing and the Notes registrar has received a request from the Depositary to
issue Notes in definitive form in lieu of all or a portion of the Global
Certificate. In either instance, an owner of a beneficial interest in the Global
Certificate will be entitled to have Notes equal in principal amount to such
beneficial interest registered in its name and will be entitled to physical
delivery of such Notes in definitive form. Notes so issued in definitive form
will be issued in denominations of $1,000 and integral multiples thereof and
will be issued in registered form only, without coupons.

SUBORDINATION OF THE NOTES

The payment of the principal of and interest on the Notes will be
subordinated in right of payment, as set forth in Article Thirteen of the
Indenture, to the prior payment in full of Senior Indebtedness, which will
include borrowings under the Credit Facility, whether outstanding on the date of
the Indenture or thereafter incurred. In the event of any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding in connection therewith, relating to the
Company or to its creditors, as such, or to its assets, or any liquidation,
dissolution or other winding-up of the Company, whether voluntary or involuntary
and whether or not including insolvency or bankruptcy, or any assignment for the
benefit of creditors or other marshalling of assets or liabilities of the
Company (provided that this provision will not require the repayment of all
Senior Indebtedness in full in connection with the consolidation or merger of
the Company or its liquidation or dissolution following the conveyance,
transfer, lease or other disposition of all or substantially all the properties
and assets of the Company and its Restricted Subsidiaries on a consolidated
basis upon the terms and conditions described under the "Consolidation, Merger
and Sale of Assets" covenant described below as a prerequisite to any payments
being made to Holders of Notes), the holders of Senior Indebtedness will first
be entitled to receive payment in full of all amounts due on or in respect of
all Senior Indebtedness, or provision must be made for such payment, before the
Holders of Notes will be entitled to receive any direct or indirect payment or
distribution of any kind or character (other than any payment or distribution in
the form of Permitted Junior Securities) on account of principal of or interest
on the Notes or on account of the purchase or redemption or other acquisition of
the Notes (including pursuant to an optional redemption). In the event that,
notwithstanding the foregoing, the Trustee or the Holder of any Note receives
any payment or distribution of properties or assets of the Company of any kind
or character, whether in cash, property or securities, by set-off or otherwise,
in respect of principal of or interest on the Notes before all Senior
Indebtedness is paid or provided for in full, then the Trustee or the Holders of
Notes receiving any such payment or distribution (other than a payment or
distribution in the form of Permitted Junior Securities) will be required to pay
or deliver such payment or distribution forthwith to the trustee in bankruptcy,
receiver, liquidating trustee,

47
<PAGE>
custodian, assignee, agent or other Person making payment or distribution of
properties of assets of the Company for application to the payment of all Senior
Indebtedness remaining unpaid, to the extent necessary to pay all Senior
Indebtedness in full.

The Company also may not make any payment or distribution of any properties
or assets of the Company of any kind or character (other than Permitted Junior
Securities) on account of any principal of or interest on the Notes or on
account of the purchase or redemption or other acquisition of Notes for the
period specified below ("Payment Blockage Period") upon the occurrence of a
Non-payment Event of Default with respect to any Specified Senior Indebtedness
and receipt by the Trustee and the Company of written notice thereof from one or
more of the holders of such Specified Senior Indebtedness (or their
representative). The Payment Blockage Period will commence upon the earlier of
the dates of receipt by the Trustee or the Company of such notice from one or
more of the holders of such Specified Senior Indebtedness (or their
representative) and shall end on the earliest of (i) 179 days thereafter, (ii)
the date, as set forth in a written notice from the holders of the Specified
Senior Indebtedness (or their representative) to the Company or the Trustee, on
which such Non-payment Event of Default is cured, waived in writing or ceases to
exist or such Specified Senior Indebtedness is discharged or (iii) the date on
which such Payment Blockage Period shall have been terminated by written notice
to the Company or the Trustee from one or more of such holders (or their
representative) initiating such Payment Blockage Period, after which the Company
will resume (unless otherwise prohibited pursuant to the immediately preceding
paragraph) making any and all required payments in respect of the Notes,
including any missed payments. In any event, not more than one Payment Blockage
Period may be commenced during any period of 360 consecutive days. No
Non-payment Event of Default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee can be made the basis for
a subsequent Payment Blockage Notice. In the event that, notwithstanding the
foregoing, the Company makes any payment to the Trustee or the Holder of any
Note prohibited by the subordination provision of the Indenture, then such
payment will be required to be paid over and delivered forthwith to the Company.

If the Company fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provision described above, such failure would constitute an Event of Default
under the Indenture and would enable the Holders of the Notes to accelerate the
maturity thereof. See " -- Events of Default and Remedies."

As a result of such subordination provisions described above, in the event
of a distribution of assets upon the liquidation, receivership, reorganization
or insolvency of the Company, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the Holders of the Notes, and
assets which would otherwise be available to pay obligations in respect of the
Notes will be available only after all Senior Indebtedness has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on any
or all of the Notes.

The subordination provisions described above will cease to be applicable to
the Notes upon any Legal Defeasance or Covenant Defeasance of the Notes as
described under " -- Legal Defeasance and Covenant Defeasance."

Senior Indebtedness may also be issued and incurred in the future, subject
only to certain limitations contained in the covenant described under "Certain
Covenants -- Limitation on Indebtedness for Money Borrowed". The Notes will
also be structurally subordinated to all liabilities of the Company's
Subsidiaries. As of September 30, 1996, the Company had an aggregate of $8.9
million of outstanding Senior

48
<PAGE>

Indebtedness, and the Subsidiaries had liabilities of $13.0 million, excluding
guarantees of Senior Indebtedness.

CERTAIN COVENANTS

RESTRICTIONS ON DIVIDENDS, REDEMPTIONS AND OTHER PAYMENTS

(a) The Indenture will provide that the Company shall not, either directly
or indirectly through any Restricted Subsidiary, (i) declare or pay any
dividend, either in cash or property, on any shares of its capital stock (except
dividends or other distributions payable solely in shares of capital stock of
the Company), (ii) purchase, redeem or retire any shares of its capital stock or
any warrants, rights or options to purchase or acquire any shares of its capital
stock or (iii) make any other payment or distribution in respect of the
Company's capital stock (such dividends, purchases, redemptions, retirements,
payments and distributions being herein collectively called "Restricted
Payments") if, after giving effect thereto,

(1) an Event of Default would have occurred; or

(2) (A) the sum of (i) such Restricted Payments plus (ii) the
aggregate amount of all Restricted Payments made during the period after
the date of the Indenture would exceed (B) the sum of (i) $10 million plus
(ii) 50% of the Company's Consolidated Net Income subsequent to September
30, 1996 (with 100% reduction for a loss), plus (iii) the cumulative net
proceeds received by the Company from the issuance or sale after the date
of the Indenture of capital stock of the Company (including in such net
proceeds the face amount of any indebtedness that has been converted into
common stock of the Company after the date of the Indenture).

(b) Notwithstanding paragraph (a) above, the Company may take the
following actions so long as no Event of Default shall have occurred and be
continuing:

(i) the payment of dividends on any of the shares of the capital
stock of the Company (including, without limitation, the Series A Preferred
Stock of the Company); and

(ii) the repurchase, redemption or other acquisition or retirement of
any shares of any class of capital stock of the Company or any Restricted
Subsidiary, in exchange for, or out of the aggregate net cash proceeds of a
substantially concurrent issue and sale (other than to a Restricted
Subsidiary) of shares of common stock of the Company.

The actions described in clauses (i) and (ii) of this paragraph (b) shall be
Restricted Payments that shall be permitted to be taken in accordance with this
covenant and shall not reduce the amount that would otherwise be available for
Restricted Payments under clause (2) of paragraph (a). For purposes of this
covenant, the amount of any Restricted Payment payable in property shall be
deemed to be the fair market value of such property as determined by the Board
of Directors of the Company. (Section 1006)

LIMITATION ON INDEBTEDNESS FOR MONEY BORROWED

The Indenture will provide that the Company will not, and will not permit
any Restricted Subsidiary to, create, incur, assume, guarantee or become liable
("incur") with respect to any Indebtedness for Money Borrowed, including
Acquired Indebtedness but excluding Permitted Indebtedness, if, immediately
after giving effect to any such creation, incurrence, assumption or guarantee
(including giving effect to the retirement of any existing Indebtedness for
Money Borrowed from the proceeds of such additional Indebtedness for Money
Borrowed):

(1) The ratio of (a) the aggregate amount of the outstanding
Indebtedness for Money Borrowed of the Company and its Restricted
Subsidiaries as of the end of the immediately preceding fiscal quarter of
the Company, as determined on a consolidated basis in accordance with GAAP,
to (b) the Consolidated EBITDA for the immediately preceding four fiscal
quarters of the Company, would exceed 10.0 to 1.0; or

(2) The Interest Coverage Ratio would have been at least 1.1 to 1.0.

49
<PAGE>
Further, the Indenture will provide that the Company will not permit any
Restricted Subsidiary to incur any Indebtedness for Money Borrowed (except to
the Company or another Restricted Subsidiary) that is expressly subordinate in
right of payment to any other Indebtedness for Money Borrowed of such Restricted
Subsidiary. (Section 1007)

LIENS

The Indenture will provide that the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien of any kind, except for Permitted Liens, upon any of
their respective assets or properties, whether now owned or acquired after the
date of the Indenture, or any income or profits therefrom to secure any Pari
Passu Indebtedness or Subordinated Indebtedness, unless prior to or
contemporaneously therewith the Notes are directly secured equally and ratably,
provided that (1) if such secured indebtedness is Pari Passu Indebtedness, the
Lien securing such Pari Passu Indebtedness shall be subordinate and junior to,
or PARI PASSU with, the Lien securing the Notes and (2) if such secured
indebtedness is Subordinated Indebtedness, the Lien securing such Subordinated
Indebtedness shall be subordinate and junior to the Lien securing the Notes at
least to the same extent as such Subordinated Indebtedness is subordinated to
the Notes. The foregoing covenant will not apply to any Lien securing Acquired
Indebtedness, provided that any such Lien extends only to the properties or
assets that were subject to such Lien prior to the related acquisition by the
Company or such Restricted Subsidiary and was not created, incurred or assumed
in contemplation of such transaction. (Section 1008)

LIMITATION ON RANKING OF FUTURE INDEBTEDNESS

The Indenture will provide that the Company will not incur or permit to
remain outstanding any Indebtedness for Money Borrowed (including Acquired
Indebtedness and Permitted Indebtedness) which is expressly subordinate in right
of payment to any Senior Indebtedness, other than Subordinated Indebtedness or
Pari Passu Indebtedness. For purposes of this covenant, the incurrence of Senior
Indebtedness which is unsecured shall not, because of its unsecured status, be
deemed to be subordinate in right of payment to any Senior Indebtedness which is
secured. (Section 1013)

LIMITATIONS ON RESTRICTING SUBSIDIARY DIVIDENDS

The Indenture will provide that the Company shall not and shall not permit
any Restricted Subsidiary to, directly or indirectly, create or otherwise cause
to become effective any encumbrance or restriction of any kind on the ability of
any Restricted Subsidiary to (a) pay dividends in cash or make any other
distribution on its capital stock to the Company or any other Restricted
Subsidiary, (b) pay any indebtedness owed to the Company or any other Restricted
Subsidiary, (c) make loans, advances, or capital contributions to the Company or
any other Restricted Subsidiary, or (d) transfer any of its properties or assets
to the Company or another Restricted Subsidiary, except in each instance (i) as
set forth in the instrument evidencing or the agreement governing Acquired
Indebtedness of any acquired Person which becomes a Restricted Subsidiary,
provided, that any restriction or encumbrance under such instrument or agreement
existed at the time of acquisition, was not put in place in anticipation of such
acquisition, and is not applicable to any Person, other than the Person or
property or assets of the Person so acquired; (ii) customary provisions of any
lease or license of the Company or any Restricted Subsidiary relating to the
property covered thereby and entered into in the ordinary course of business;
(iii) any encumbrance or restriction arising under applicable law; (iv) any
encumbrance or restriction arising under the Indenture, the Credit Facility, or
other indebtedness or other agreements existing on the date of original issuance
of the Notes; (v) any restrictions with respect to a Restricted Subsidiary
imposed pursuant to an agreement that has been entered into for the sale or
disposition of the stock, business, assets or properties of such Restricted
Subsidiary; (vi) any encumbrance or restriction arising under the terms of
purchase money obligations, but only to the extent such purchase money
obligations restrict or prohibit the transfer of the property so acquired; (vii)
any encumbrance or restriction arising under customary non-assignment provisions
in installment purchase contracts; (viii) any encumbrance or restriction on the
ability of any Restricted Subsidiary to transfer any of its property acquired
after the date of the Indenture to the Company or any other Restricted
Subsidiary that is required by a lender to, or purchaser of any indebtedness of,
such

50
<PAGE>
Restricted Subsidiary in connection with a financing of the acquisition of such
property (including with respect to the purchase of asset portfolios and
pursuant to the underwriting or origination of mortgage loans) by such
Restricted Subsidiary; and (ix) any encumbrance or restriction pursuant to any
agreement that extends, refinances, renews or replaces any agreement described
in the foregoing clauses (i) through (viii), and except with respect to clause
(d) only, restrictions in the form of Liens which are not prohibited as
described in the "Liens" covenant and which contain customary limitations on
the transfer of collateral. (Section 1014)

LIMITATION ON TRANSACTIONS WITH AFFILIATES

The Indenture will provide that the Company shall not, and shall not permit
any of its Restricted Subsidiaries to, enter into any transaction (or series of
related transactions), including, without limitation, the sale, purchase, lease,
or exchange of any property or the rendering of any service (a "Transaction"),
involving payments in excess of $50,000, with any Affiliate of the Company
(other than the Company or a Restricted Subsidiary), on terms and conditions
less favorable to the Company or such Restricted Subsidiary, as the case may be,
than would be available at such time in a comparable Transaction in arm's length
dealings with an unrelated Person as determined by the Board of Directors, such
approval to be evidenced by a Board Resolution.

The provisions of the immediately preceding paragraph will not apply to:
(1) Restricted Payments otherwise permitted pursuant to the covenant described
under " -- Restrictions on Dividends, Redemptions and Other Payments"; (2)
fees and compensation (including amounts paid pursuant to employee benefit
plans) paid to, and indemnity provided on behalf of, officers, directors,
employees or consultants of the Company or any Restricted Subsidiary, as
determined by the Board of Directors or the senior management thereof in the
exercise of their reasonable business judgment; or (3) payments for goods and
services purchased in the ordinary course of business on an arm's length basis.
(Section 1015)

REPORTS

So long as the Company is a reporting company under the Exchange Act, the
Company will furnish to Holders of the Notes annual reports of the Company
containing audited consolidated financial statements and interim reports with
unaudited consolidated summary financial data on a quarterly basis. If the
Company ceases to be a reporting company under the Exchange Act, the Company
will furnish to Holders of the Notes annual audited consolidated financial
statements and quarterly unaudited consolidated summary financial statements.
(Section 704)

EVENTS OF DEFAULT AND REMEDIES

An Event of Default will include: (i) failure to pay the principal of the
Notes when due at Stated Maturity, upon redemption or upon acceleration, as
provided in the Indenture, whether or not prohibited by the subordination
provisions of the Indenture, (ii) failure to pay any interest on the Notes for
30 days, whether or not prohibited by the subordination provisions of the
Indenture, (iii) failure to perform, or a breach of, any other covenant or
agreement set forth in the Indenture for 30 days after receipt of written notice
from the Trustee or Holders of at least 25% in aggregate principal amount of the
outstanding Notes specifying the default and requiring the Company to remedy
such default, (iv) default in the payment at Stated Maturity of Indebtedness for
Money Borrowed of the Company or any Restricted Subsidiary having an outstanding
principal amount due at Stated Maturity greater than $2.5 million and such
default having continued for a period of 30 days beyond any applicable grace
period, (v) an event of default as defined in any mortgage, indenture or
instrument of the Company or any Restricted Subsidiary shall have happened and
resulted in acceleration of Indebtedness for Money Borrowed which, together with
the principal amount of any other Indebtedness for Money Borrowed so
accelerated, exceeds $2.5 million or more at any time, and such default shall
not be cured or waived and such acceleration shall not have been rescinded or
annulled within a period of 30 days from the occurrence of such acceleration,
(vi) certain events of insolvency, receivership or reorganization of the Company
or any Material Subsidiary and (vii) entry of a final judgment, decree or order
against the Company or any Material Subsidiary for the payment of money

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in excess of $2.5 million and such judgment, decree or order continues
unsatisfied for 30 days without a stay of execution. (Section 501)

If any Event of Default (other than as specified in clause (vi) above)
occurs and is continuing, the Trustee, by written notice to the Company, or the
Holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee and the Company, may, and the Trustee upon
the request of the Holders of not less than 25% in aggregate principal amount of
the Notes then outstanding shall, declare the principal of and accrued interest
on all of the Notes due and payable immediately, upon which declaration all
amounts payable in respect of the Notes shall be immediately due and payable. If
an Event of Default specified in clause (vi) above occurs and is continuing,
then the principal of and accrued interest on all of the Notes then outstanding
shall automatically become and be immediately due and payable without any
declaration, notice or other act on the part of the Trustee or any Holder of
Notes. (Section 502)

After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the Holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may rescind
such declaration if (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, (ii) all overdue interest on all Notes,
(iii) the principal of any Notes which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate borne by the Notes,
and (iv) to the extent that payment of such interest is lawful, interest upon
overdue interest and overdue principal at the rate borne by the Notes (without
duplication of any amount paid or deposited pursuant to clause (ii) or (iii) );
(b) the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction; and (c) all Events of Default, other than the nonpayment
of principal of or interest on the Notes that has become due solely by such
declaration of acceleration, have been cured or waived. (Section 502)

No Holder of any of the Notes will have any right to institute any
proceeding with respect to the Indenture or any remedy thereunder, unless such
Holder has notified the Trustee of a continuing Event of Default and the Holders
of at least 25% in aggregate principal amount of the outstanding Notes have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as Trustee under the Notes and the Indenture, the Trustee has
failed to institute such proceeding within 60 days after receipt of such notice
and the Trustee, within such 60-day period, has not received directions
inconsistent with such written request by Holders of a majority in aggregate
principal amount of the outstanding Notes. Such limitations will not apply,
however, to a suit instituted by a Holder of a Note for the enforcement of the
payment of the principal of or interest on such Note on or after the respective
due dates expressed in such Note. (Section 507 and 508)

During the existence of an Event of Default, the Trustee will be required
to exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case an Event of Default shall occur and be continuing, the Trustee will not
be under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders of Notes unless such
Holders shall have offered to the Trustee reasonable security or indemnity.
Subject to certain provisions concerning the rights of the Trustee, the Holders
of a majority in aggregate principal amount of the outstanding Notes will have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power conferred
on the Trustee under the Indenture. (Sections 512, 601 and 603)

The Holders of not less than a majority in aggregate principal amount of
the Notes then outstanding may on behalf of the Holders of all of the Notes
waive any existing Default or Event of Default and its consequences, except in
respect of the payment of the principal of or interest on any Note or in respect
of a

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provision of the Indenture which cannot be modified or amended without the
consent of the Holder of each Note affected thereby as described below under
" -- Modification and Waiver." (Section 513)

If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee shall mail to each Holder of Notes notice of the
Default or Event of Default within 90 days after the occurrence thereof. Except
in the case of a Default or an Event of Default in payment of principal of or
interest on any Notes, the Trustee may withhold the notice to the Holders of
Notes if the Trustee determines in good faith that withholding the notice is in
the interest of such Holders. (Section 602)

The Company is required to deliver to the Trustee annual and quarterly
statements regarding compliance with the Indenture, and the Company will also be
required, upon becoming aware of any Default or Event of Default, to deliver to
the Trustee a statement specifying such Default or Event of Default. (Section
1011)

REDEMPTION AT OPTION OF THE COMPANY

The Notes are subject to redemption at 100% of the principal amount thereof
plus accrued interest, at the option of the Company in whole or in part from
time to time, on or after December 15, 1997, upon not less than 30 nor more than
60 days' notice mailed to the registered Holders thereof. The redemption price
will be paid with interest accrued to the date fixed for redemption. If the
Company elects to redeem less than all of the Notes, the Trustee will select
which Notes to redeem by lot or such other method as it shall deem fair and
appropriate, including the selection for redemption of a portion of the
principal amount of any Note but not less than $1,000. On and after the
redemption date, interest will cease to accrue on the Notes or portions thereof
called for redemption. (Article Eleven)

MODIFICATION AND WAIVER

With certain limited exceptions which permit modifications of the Indenture
by the Company and the Trustee only, the Indenture may be modified by the
Company with the consent of Holders of not less than a majority in aggregate
principal amount of outstanding Notes; PROVIDED, HOWEVER, that no such changes
shall without the consent of the Holder of each Note affected thereby (i) change
the maturity date of the principal of, or the due date of any installment of
interest on, any Note, (ii) reduce the principal of, or the rate of interest on,
any Note, (iii) change the place of payment or the currency in which any portion
of the principal of, or interest on, any Note is payable, (iv) impair the right
to institute suit for the enforcement of any such payment, (v) reduce the
above-stated percentage of Holders of the outstanding Notes necessary to modify
the Indenture, (vi) modify the foregoing requirements or reduce the percentage
of outstanding Notes necessary to waive any past default or certain covenants or
(vii) reduce the relative ranking of the Notes. (Section 902)
The Holders of a majority in aggregate principal amount of outstanding
Notes may waive compliance by the Company with certain covenants, most of which
are described above under " -- Certain Covenants." (Section 1012)

CONSOLIDATION, MERGER AND SALE OF ASSETS

The Company may not consolidate with, merge with, or transfer all or
substantially all of its assets to another entity where the Company is not the
surviving corporation unless (i) such other entity assumes the Company's
obligations under the Indenture, (ii) such other entity shall be a Person
organized and existing under the laws of the United States of America, any state
thereof or the District of Columbia, and (iii) after giving effect thereto, no
event shall have occurred and be continuing which, after notice or lapse of
time, would become an Event of Default. (Section 801)

LEGAL DEFEASANCE AND COVENANT DEFEASANCE

The Company may, at its option and at any time, elect to have all of the
obligations of the Company discharged with respect to the outstanding Notes
("Legal Defeasance"). Such Legal Defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented by the
outstanding Notes and to have been discharged from all their other obligations
with respect to such Notes,

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except for (i) the rights of Holders of outstanding Notes to receive payment in
respect of the principal of and interest on such Notes when such payments are
due, (ii) the Company's obligations to replace any temporary Notes, register the
transfer or exchange of any Notes, replace mutilated, destroyed, lost or stolen
Notes and maintain an office or agency for payments in respect of the Notes,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and (iv)
the Legal Defeasance provisions of the Indenture. In addition, the Company may,
at its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture,
some of which are described under " -- Certain Covenants" above, and
thereafter any omission to comply with such obligations shall not constitute a
Default or an Event of Default with respect to the Notes ("Covenant
Defeasance"). In the event Covenant Defeasance occurs, certain events (not
including nonpayment, bankruptcy, insolvency and reorganization events)
described under " -- Events of Default and Remedies" will no longer constitute
an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in United States dollars, Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of and interest on the
outstanding Notes to redemption or maturity; (ii) the Company shall have
delivered to the Trustee an Opinion of Counsel to the effect that the Holders of
the outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Legal Defeasance or Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal Defeasance or
Covenant Defeasance had not occurred (in the case of Legal Defeasance, such
opinion must refer to and be based upon a published ruling of the Internal
Revenue Service or a change in applicable federal income tax laws); (iii) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit or insofar as clause (vi) under the first paragraph under
" -- Events of Default and Remedies" is concerned, at any time during the
period ending on the 91st day after the date of deposit; (iv) such Legal
Defeasance or Covenant Defeasance shall not cause the Trustee to have a
conflicting interest under the Indenture or the Trust Indenture Act of 1939 with
respect to any securities of the Company; (v) such Legal Defeasance or Covenant
Defeasance shall not result in a breach or violation of, or constitute a default
under, any other material agreement or instrument to which the Company is a
party or by which it is bound; and (vi) the Company shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, which, taken
together, state that all conditions precedent under the Indenture to either
Legal Defeasance or Covenant Defeasance, as the case may be, have been complied
with. (Article Twelve)

SATISFACTION AND DISCHARGE OF INDENTURE

The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money or Government Obligations have theretofore been
deposited in trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust) have been delivered to the
Trustee for cancellation or (b) all Notes not theretofore delivered to the
Trustee for cancellation have become due and payable or will become due and
payable at their Stated Maturity within one year, or are to be called for
redemption within one year under arrangements satisfactory to the Trustee for
the serving of notice of redemption by the Trustee in the name, and at the
expense, of the Company, and the Company has irrevocably deposited or caused to
be deposited with the Trustee funds in an amount sufficient to pay and discharge
the entire indebtedness on the Notes not theretofore delivered to the Trustee
for cancellation, for principal of and interest on the Notes to the date of
deposit (in the case of Notes which have become due and payable) or to the
Stated Maturity or redemption date, as the case may be, together with
instructions from the Company irrevocably directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums then due and payable under the

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Indenture by the Company; and (iii) the Company has delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, which, taken together, state
that all conditions precedent under the Indenture relating to the satisfaction
and discharge of the Indenture have been complied with. (Sections 401 and 402)

GOVERNING LAW

The Indenture and the Notes will be governed and construed in accordance
with the laws of the State of New York. (Section 113)

THE TRUSTEE

American Stock Transfer & Trust Company will be the Trustee under the
Indenture. The Trustee is the transfer agent and registrar for both the Common
Stock and the Series A Preferred Stock. The Indenture provides for the
indemnification of the Trustee by the Company under certain circumstances.
(Section 607)

The Indenture (including the provisions of the Trust Indenture Act of 1939
incorporated by reference therein) will contain limitations on the rights of the
Trustee thereunder, should it become a creditor of the Company, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; PROVIDED, HOWEVER, if it acquires any
conflicting interest (as defined in the Trust Indenture Act of 1939) it must
eliminate such conflict or resign. (Sections 613 and 614)

CERTAIN DEFINITIONS

Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
(Section 101)

"Acquired Indebtedness" means Indebtedness for Money Borrowed of a Person
existing at the time such Person becomes a Restricted Subsidiary or assumed in
connection with the acquisition by the Company or a Restricted Subsidiary of
assets from such Person, and not incurred in connection with, or in anticipation
of, such Person becoming a Restricted Subsidiary or such acquisition. Acquired
Indebtedness shall be deemed to be incurred on the date of the related
acquisition of assets from any Person or the date the acquired Person becomes a
Restricted Subsidiary.

"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control", when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to
the foregoing.

"Average Life" means, with respect to any Indebtedness for Money
Borrowed, as at any date of determination, the quotient obtained by dividing (a)
the sum of the products of (i) the number of years (and any portion thereof)
from the date of determination to the date or dates of each successive scheduled
principal payment (including, without limitation, any sinking fund or mandatory
redemption payment requirements) of such Indebtedness for Money Borrowed
multiplied by (ii) the amount of each such principal payment by (b) the sum of
all such principal payments.

"Board of Directors" means the board of directors of the Company or any
duly authorized committee of that board.

"Capitalized Lease Obligation" means, as to any Person, the obligations
of such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) real or personal property which obligations are
required to be classified and accounted for as capital lease obligations on a
balance sheet of such Person under GAAP and, for purposes of the Indenture, the
amount of such obligations at any date shall be the capitalized amount thereof
at such date, determined in accordance with GAAP.

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"Consolidated EBITDA" means, for any period, determined in accordance
with GAAP on a consolidated basis for the Company and its Restricted
Subsidiaries, the sum of Consolidated Net Income, plus depreciation, depletion,
amortization and other non-cash charges, income tax expense, and interest
expense, for such period, each as deducted in determining such Consolidated Net
Income.

"Consolidated Interest Expense" means, for any period, the interest
expense for such period, which is required to be shown as such on the financial
statements of the Company and its Restricted Subsidiaries, on a consolidated
basis, prepared in accordance with GAAP.

"Consolidated Net Income" means, for any period, the amount of
consolidated net income (loss) of the Company and its Restricted Subsidiaries
for such period, determined in accordance with GAAP; PROVIDED, HOWEVER, that
there shall be included in Consolidated Net Income any net extraordinary gains
or losses for such period (less all fees and expenses related thereto); and,
PROVIDED, FURTHER, that there shall not be included in Consolidated Net Income
(1) any net income (loss) of a Restricted Subsidiary for any portion of such
period during which it was not a Consolidated Subsidiary, (2) any net income
(loss) of businesses, properties or assets acquired or disposed of (by way of
merger, consolidation, purchase, sale or otherwise) by the Company or any
Restricted Subsidiary for any portion of such period prior to the acquisition
thereof or subsequent to the disposition thereof or (3) any net income for such
period resulting from transfers of assets received by the Company or any
Restricted Subsidiary from an Unrestricted Subsidiary.

"Consolidated Subsidiary" means a Restricted Subsidiary the financial
statements of which are consolidated with the financial statements of the
Company.

"Corporation" includes corporations, associations, companies, joint stock
companies, limited liability companies or business trusts.

"Credit Facility" means that certain Amended and Restated Credit
Agreement, dated as of October 31, 1996, among the Company, Callon Petroleum
Operating Company, Callon Offshore Production, Inc., the several banks and other
financial institutions from time to time parties thereto (the "Banks"), and
The Chase Manhattan Bank, as agent for the Banks, as the same may be amended,
modified, supplemented, extended, restated, replaced, renewed or refinanced from
time to time.

"Event of Default" has the meaning specified in the covenant described
under " -- Events of Default and Remedies."

"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board in effect on the date
of the Indenture.

"Holder" when used with respect to the Notes, means the Person in whose
name such Note is registered in the Note Register.

"Indebtedness for Money Borrowed" means any of the following obligations
of the Company or any Restricted Subsidiary: (1) any obligations, contingent or
otherwise, for borrowed money or for the deferred purchase price of property,
assets, securities or services (including, without limitation, any interest
accruing subsequent to an event of default), (2) all obligations (including the
Notes) evidenced by bonds, notes, debentures or other similar instruments, (3)
all indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired (even though the rights
and remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property), except any such
obligation that constitutes a trade payable and an accrued liability arising in
the ordinary course of business, if and to the extent any of the foregoing
indebtedness would appear as a liability upon a balance sheet prepared in
accordance with GAAP, (4) all Capitalized Lease Obligations, (5) liabilities of
the Company actually due and payable under bankers acceptances and letters of
credit, (6) all indebtedness of the type referred to in clause (1), (2), (3),
(4) or (5) above secured by (or for which the holder of such indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon or
security interest in property of the Company or any Restricted Subsidiary
(including, without limitation, accounts and contract rights), even though the
Company or any Restricted Subsidiary has not assumed or

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become liable for the payment of such indebtedness, and (7) any guarantee or
endorsement (other than for collection or deposit in the ordinary course of
business) or discount with recourse of, or other agreement, contingent or
otherwise, to purchase, repurchase, or otherwise acquire, to supply, or advance
funds or become liable with respect to, any indebtedness or any obligation of
the type referred to in any of the foregoing clauses (1) through (6), regardless
of whether such obligation would appear on a balance sheet; PROVIDED, HOWEVER,
that Indebtedness for Money Borrowed shall not include (i) Production Payments
and Reserve Sales, (ii) any liability for gas balancing incurred in the ordinary
course of business, (iii) accounts payable or other obligations of the Company
or a Restricted Subsidiary in the ordinary course of business in connection with
the obtaining of goods or services, and (iv) any liability under any and all (A)
employment or consulting agreements or employee benefit plans or arrangements
and (B) futures contracts, forward contracts, swap, cap or collar contracts,
option contracts, or other similar derivative agreements.

"Interest Coverage Ratio" means, for any date of determination, the ratio
of (1) Consolidated EBITDA for the immediately preceding four fiscal quarters of
the Company to (2) Consolidated Interest Expense for such immediately preceding
four fiscal quarters.

"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance or similar agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
agreement to give or grant a Lien or any lease, conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing) upon or with respect to any property of any kind. A Person shall be
deemed to own subject to a Lien any property which such Person has acquired or
holds subject to the interest of a vendor or lessor under any conditional sale
agreement, capital lease or other title retention agreement.

"Material Subsidiary" means any Restricted Subsidiary whose assets or
revenues comprise at least five percent (5%) of the assets or revenues of the
Company and the Restricted Subsidiaries on a consolidated basis as of the end
of, or for the, Company's most recently completed fiscal quarter, as determined
from time to time.

"Non-payment Event of Default" means any event (other than a Payment
Event of Default), the occurrence of which (with or without notice or the
passage of time) entitles one or more Persons to accelerate the maturity of any
Specified Senior Indebtedness.

"Note Register" means the register maintained by or for the Company in
which the Company shall provide for the registration of the Notes and of
transfer of the Notes.

"PARI PASSU Indebtedness" means any Indebtedness for Money Borrowed of
the Company that is PARI PASSUin right of payment to the Notes.

"Payment Event of Default" means any default in the payment or required
prepayment of principal of (or premium, if any, on) or interest on any Specified
Senior Indebtedness when due (whether at final maturity, upon scheduled
installment, upon acceleration or otherwise).

"Permitted Indebtedness" means any of the following:

(i) Indebtedness for Money Borrowed outstanding on the date of the
Indenture (and not repaid or defeased with the proceeds of the offering of
the Notes);

(ii) Indebtedness for Money Borrowed of the Company to a Restricted
Subsidiary and Indebtedness for Money Borrowed of a Restricted Subsidiary
to the Company or a Restricted Subsidiary; provided, however, that upon any
event which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of any such Indebtedness
for Money Borrowed (except to the Company or a Restricted Subsidiary), such
Indebtedness for Money Borrowed shall be deemed, in each case, to be
incurred and shall be treated as an incurrence for purposes of the
"Limitation on Indebtedness for Money Borrowed" covenant at the time the
Restricted Subsidiary in question ceased to be a Restricted Subsidiary;

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(iii) any guarantee of Senior Indebtedness incurred in compliance
with the "Limitation on Indebtedness for Money Borrowed" covenant, by a
Restricted Subsidiary or the Company; and

(iv) any renewals, substitutions, refinancings or replacements (each,
for purposes of this clause, a "refinancing") by the Company or a
Restricted Subsidiary of any Indebtedness for Money Borrowed incurred
pursuant to clause (i) of this definition, including any successive
refinancings by the Company or such Restricted Subsidiary, so long as (A)
any such new Indebtedness for Money Borrowed shall be in a principal amount
that does not exceed the principal amount (or, if such Indebtedness for
Money Borrowed being refinanced provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination)
so refinanced plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of the Indebtedness
for Money Borrowed refinanced or the amount of any premium reasonably
determined by the Company or such Restricted Subsidiary as necessary to
accomplish such refinancing, plus the amount of expenses of the Company or
such Restricted Subsidiary incurred in connection with such refinancing,
and (B) in the case of any refinancing of Indebtedness for Money Borrowed
of the Company that is not Senior Indebtedness, such new Indebtedness for
Money Borrowed is either PARI PASSU with the Notes or subordinated to the
Notes at least to the same extent as the Indebtedness being refinanced and
(C) such new Indebtedness for Money Borrowed has an Average Life equal to
or longer than the Average Life of the Indebtedness for Money Borrowed
being refinanced and a final Stated Maturity equal to or later than the
final Stated Maturity of the Indebtedness for Money Borrowed being
refinanced.

"Permitted Junior Securities" means any equity securities or subordinated
debt securities of the Company or any successor obligor with respect to the
Senior Indebtedness provided for by a plan of reorganization or readjustment
that, in the case of any such subordinated debt securities, are subordinated in
right of payment to all Senior Indebtedness that may at the time be outstanding
to substantially the same degree as, or to a greater extent than, the Notes are
so subordinated as provided in the Indenture.

"Permitted Liens" means any of the following types of Liens:

(a) Liens existing as of the date the Notes are first issued (except
to the extent such Liens secure any Pari Passu Indebtedness or Subordinated
Indebtedness that is repaid or defeased with proceeds of the offering of
the Notes), and any renewal, extension or refinancing of any such Lien
provided that thereafter such Lien extends only to the properties that were
subject to such Lien prior to the renewal, extension or refinancing
thereof;

(b) Liens securing the Notes; and

"Person" means any individual, Corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.

"Production Payments and Reserve Sales" means the grant or transfer to
any Person of a royalty, overriding royalty, net profits interest, production
payment (whether volumetric or dollar denominated), master limited partnership
interest or other interest in oil and gas properties, which reserves the right
to receive all or a portion of the production or the proceeds from the sale of
production attributable to such properties where the holder of such interest has
recourse solely to such production or proceeds of production, subject to the
obligation of the grantor or transferor to operate and maintain, or cause the
subject interests to be operated and maintained, in a reasonably prudent manner
or other customary standard and/or subject to the obligation of the grantor or
transferor to indemnify for environmental matters.

"Restricted Subsidiary" means any Subsidiary, whether existing on or
after the date of the Indenture, unless such Subsidiary is an Unrestricted
Subsidiary or is designated as an Unrestricted Subsidiary pursuant to the terms
of the Indenture.

"Senior Indebtedness" means the principal amount of, and interest on and
all other amounts due on or in connection with, (1) any Indebtedness for Money
Borrowed of the Company, whether now outstanding or

58
<PAGE>
hereafter created, incurred, assumed or guaranteed, unless in the instrument
creating or evidencing such Indebtedness for Money Borrowed or pursuant to which
such Indebtedness for Money Borrowed is outstanding it is provided that such
indebtedness is subordinate in right of payment or in rights upon liquidation to
any other Indebtedness for Money Borrowed of the Company and (2) all renewals,
extensions and refundings of any such indebtedness.

"Specified Senior Indebtedness" means (a) all Senior Indebtedness of the
Company in respect of the Credit Facility and any renewals, amendments,
extensions, supplements, modifications, deferrals, refinancings, or replacements
(each, for purposes of this definition, a "refinancing") thereof by the
Company, including any successive refinancings thereof by the Company and (b)
any other Senior Indebtedness and any refinancings thereof by the Company having
a principal amount of at least $5 million as of the date of determination and
provided that the agreements, indentures or other instruments evidencing such
Senior Indebtedness or pursuant to which such Senior Indebtedness was issued
specifically designates such Senior Indebtedness as "Specified Senior
Indebtedness" for purposes of the Indenture. For purposes of this definition, a
refinancing of any Specified Senior Indebtedness shall be treated as Specified
Senior Indebtedness only if the Senior Indebtedness issued in such refinancing
ranks or would rank PARI PASSU with the Specified Senior Indebtedness refinanced
and only if the Senior Indebtedness issued in such refinancing is permitted by
the covenant described under "Certain Covenants -- Limitation of Indebtedness
for Money Borrowed."

"Stated Maturity" with respect to any Note or any installment of
principal thereof or interest thereon means the date established by the
Indenture as the fixed date on which the principal of such Note or such
installment of principal or interest is due and payable, and, when used with
respect to any other Indebtedness for Money Borrowed or any installment of
interest thereon, means the date specified in the instrument evidencing or
governing such Indebtedness for Money Borrowed as the fixed date on which the
principal of such Indebtedness for Money Borrowed or such installment of
interest is due and payable.

"Subordinated Indebtedness" means Indebtedness for Money Borrowed of the
Company which is expressly subordinated in right of payment to the Notes,
including, without limitation, the Convertible Debentures.

"Subsidiary" means any Corporation of which at the time of determination
the Company or one or more Subsidiaries owns or controls directly or indirectly
more than 50% of the Voting Stock.

"Unrestricted Subsidiary" means (i) any Subsidiary that at the time of
determination will be designated an Unrestricted Subsidiary by the Board of
Directors as provided below and (ii) any Subsidiary of an Unrestricted
Subsidiary. The Board of Directors may designate any Subsidiary as an
Unrestricted Subsidiary so long as neither the Company nor any Restricted
Subsidiary is directly or indirectly liable pursuant to the terms of any
Indebtedness for Money Borrowed of such Subsidiary or has any assets or
properties which are subject to any Lien securing any Indebtedness for Money
Borrowed of such Subsidiary. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing a Board Resolution with the Trustee
giving effect to such designation. The Board of Directors may designate any
Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving
effect to such designation, (i) no Event of Default shall have occurred and be
continuing and (ii) the Company could occur $1.00 of additional Indebtedness for
Money Borrowed (other than Permitted Indebtedness) under the "Limitation on
Indebtedness for Money Borrowed" covenant.

"Voting Stock" means stock, interests, participations, rights in or other
equivalents in the equity interests (however designated) with respect to a
Corporation having general voting power under ordinary circumstances to elect at
least a majority of the board of directors, managers or trustees of such
Corporation, PROVIDED that, for the purposes hereof, stock which carries only
the right to vote conditionally on the happening of an event shall not be
considered Voting Stock whether or not such event shall have happened.

59
<PAGE>
DESCRIPTION OF OUTSTANDING SECURITIES AND DEBT INSTRUMENTS

COMMON STOCK

The Company is authorized by its Charter to issue up to 20,000,000 shares
of Common Stock, $0.01 par value. As of October 25, 1996, 5,754,863 shares of
Common Stock were issued and outstanding.

Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters submitted to a vote of stockholders. Such
holders do not have the right to cumulate their votes in the election of
directors. Holders of Common Stock have no redemption or conversion rights and
no preemptive or other rights to subscribe for securities of the Company. In the
event of a liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share equally and ratably in all of the assets
remaining, if any, after satisfaction of all debts and liabilities of the
Company, and of the preferential rights of any series of preferred stock then
outstanding. The outstanding shares of Common Stock are validly issued, fully
paid and nonassessable. Holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. American Stock Transfer & Trust Company is transfer
agent and registrar for the Common Stock.

PREFERRED STOCK

The Company is authorized by its Charter to issue 2,500,000 shares of
preferred stock, $0.01 par value per share. The Board of Directors has the
authority to divide the preferred stock into one or more series and to fix and
determine the relative rights and preferences of the shares of each such series,
including dividend rates, terms of redemption, sinking funds, the amount payable
in the event of voluntary liquidation, dissolution or winding up of the affairs
of the Company, conversions rights and voting powers. The Company has authorized
the issuance of the Convertible Exchangeable Preferred Stock, Series A,
consisting of up to 1,380,000 shares of preferred stock ("Series A Preferred
Stock").

SERIES A PREFERRED STOCK

In November 1995, the Company issued and sold 1,315,500 shares of its
Series A Preferred Stock. The following description of the Series A Preferred
Stock is qualified in its entirety by the Certificate of Designations dated
November 22, 1995, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.

DIVIDEND RIGHTS. Holders of the Series A Preferred Stock are entitled to
an annual cash dividend of $2.125 per share, payable quarterly. If dividends are
not paid in full on all outstanding shares of the Series A Preferred Stock and
any other security ranking on parity with the Series A Preferred Stock,
dividends declared on the Series A Preferred Stock and such other parity stock
are paid pro rata. Unless full cumulative dividends on all outstanding shares of
Series A Preferred Stock have been paid, no dividends (other than in Common
Stock or other stock ranking junior to the Series A Preferred Stock) may be
paid, or any other distributions made, on the Common Stock or on any other stock
of the Company ranking junior to the Series A Preferred Stock, nor may any
Common Stock or any other stock of the Company ranking junior to or on a parity
with the Series A Preferred Stock be redeemed, purchased or otherwise acquired
for any consideration by the Company (except by conversion into or exchange for
stock of the Company ranking junior to the Series A Preferred Stock).

CONVERSION. The Series A Preferred Stock is convertible at any time prior
to being called for redemption into Common Stock at a rate of approximately
2.273 shares of Common Stock for each share of Series A Preferred Stock, subject
to adjustment for certain antidilutive events. The Company from time to time may
reduce the conversion price by any amount for a period of at least 20 days if
the Board of Directors determines that such reduction is in the best interests
of the Company. In the event of certain changes in control or fundamental
changes, holders of Series A Preferred Stock have the right to convert all of
their Series A Preferred Stock into Common Stock at a rate equal to the average
of the last reported sales prices of the Common Stock for the five business days
ending on the last business day preceding the date of the change in control or
fundamental change. The Company or its successor may elect to distribute cash to
such holders in lieu of Common Stock at an equal value.

60
<PAGE>
EXCHANGE. The Series A Preferred Stock may be exchanged at the option of
the Company for Convertible Debentures beginning on January 15, 1998 at the rate
of $25 principal amount of Convertible Debentures for each share of Preferred
Stock, provided that all accrued and unpaid dividends have been paid and certain
other conditions are met.

REDEMPTION. On or after December 31, 1998 the Company may from time to
time redeem the Series A Preferred Stock at an initial redemption price of
$26.488. On December 31 of each year thereafter and until December 31, 2005, the
redemption price decreases. On December 31, 2005 and thereafter, the redemption
price shall remain at $25.

VOTING RIGHTS. The holders of Series A Preferred Stock have no voting
rights, except as otherwise provided by law. However, if dividend payments are
in arrears in an amount equal to or exceeding six quarterly dividends, the
number of directors of the Company will be increased by two and the holders of
the Series A Preferred Stock (voting separately as a class) will be entitled to
elect the additional two directors until all dividends have been paid. In
addition, the Company may not create, issue or increase the authorized number of
shares of any class or series of stock ranking senior to the Series A Preferred
Stock or alter, change or repeal any of the powers, rights or preferences of the
holders of the Series A Preferred Stock as to adversely affect such powers,
rights or preferences.

CONVERTIBLE DEBENTURES

The Convertible Debentures will be issued under an indenture between the
Company and Bank One, Columbus, NA, as trustee, a copy of which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
statements below are summaries of certain provisions of such indenture and the
Convertible Debentures, do not purport to be complete and are qualified in their
entirety by such reference.

GENERAL. The Convertible Debentures will be unsecured, subordinated
obligations of the Company, limited in aggregate principal amount to the
aggregate liquidation preference of the Series A Preferred Stock and will mature
on December 31, 2010. The Company will pay interest on the Convertible
Debentures semiannually following the issue thereof at the rate of 8.5% per
annum. The Convertible Debentures are to be issued in fully registered form,
without coupons, in denominations of $25 or any integral multiple thereof.

CONVERSION. The Convertible Debentures will be convertible at any time
after issue and prior to being called for redemption into Common Stock at the
conversion rate in effect on the Series A Preferred Stock at the date of
exchange, subject to adjustment for certain antidilutive events. The Company
from time to time may reduce the conversion price in order that certain
stock-related distributions which may be made by the Company to its shareholders
will not be taxable. Each holder of a Convertible Debenture will be entitled to
conversion rights identical in substance to the rights applicable to holders of
Series A Preferred Stock in the event of a change in control or fundamental
change.

SUBORDINATION. Payment of principal of (and premium, if any) and interest
on the Convertible Debentures will be subordinated and junior in right of
payment to the prior payment in full of all senior indebtedness of the Company,
including the Notes. During the continuation of any default in the payment of
principal, interest or premium on any senior indebtedness, no payment with
respect to the principal, interest or premium (if any) on the Convertible
Debentures may be made until such default on the senior indebtedness shall have
been cured or waived or shall have ceased to exist.

REDEMPTION. On or after December 31, 1998, the Convertible Debentures may
be redeemed at the option of the Company at a redemption price (expressed as
percentages of principal amount) of 105.95%. On December 31 of each year
thereafter and until December 31, 2005, the redemption price decreases. On
December 31, 2005 and thereafter, the redemption price shall remain at 100.00%.

EVENTS OF DEFAULT. Upon an Event of Default, the Trustee or the holders of
at least 25% in aggregate principal amount of the outstanding Convertible
Debentures may accelerate the maturity of all Convertible Debentures, subject to
certain conditions. An Event of Default is defined in the indenture generally as
(i) failure to pay principal or premium, if any, on any Convertible Debenture
when due at maturity, upon

61
<PAGE>
redemption or otherwise; (ii) failure to pay an interest on any Convertible
Debenture when due and continuing for 30 days; (iii) breach of such indenture or
Convertible Debentures by the Company; (iv) certain events in bankruptcy,
insolvency or reorganization; (v) default on indebtedness (other than non-
recourse indebtedness) resulting in more than $7,500,000 becoming due and
payable prior to its maturity; or (vi) a judgment or decree entered against the
Company involving a liability of $7,500,000 or more.

CREDIT FACILITY

Effective October 31, 1996, the Company amended and restated its Credit
Facility which is secured by mortgages covering substantially all of the
Company's producing oil and gas properties. The Credit Facility provides for
borrowings of a maximum of the lesser of $50 million and a Borrowing Base
determined periodically on the basis of a discounted present value attributable
to the Company's proven producing oil and gas reserves. Through May 15, 1997,
the Credit Facility provides a $30 million Borrowing Base. Pursuant to the
Credit Facility, depending upon the percentage of the unused portion of the
Borrowing Base, the interest rate is equal to either Prime or Prime plus 0.50%.
Prime is the prime commercial lending rate announced from time to time by the
lender. The Company, at its option, may fix the interest rate on all or a
portion of the outstanding principal balance at either 1.00% or 1.375% above an
agreement-defined "Eurodollar" rate, depending upon the percentage of the unused
portion of the Borrowing Base, for periods of up to six months. The weighted
average interest rate for the total debt outstanding at November 5, 1996 was
6.375%. Under the Credit Facility, a commitment fee of .25% or .375% per annum
on the unused portion of the Borrowing Base (depending upon the percentage of
the unused portion of the Borrowing Base) is payable quarterly. The Company may
borrow, pay, reborrow and repay under the Credit Facility until October 31,
2000, on which date the Company must repay in full all amounts then outstanding.

Borrowings under the Credit Facility are guaranteed by certain of the
Company's subsidiaries. The Credit Facility has certain customary covenants
including, but not limited to, covenants with respect to the following matters:
(i) limitation on restricted payments, distributions and investments; (ii)
limitations on guarantees and indebtedness; (iii) limitation on prepayments of
subordinated indebtedness; (iv) limitation on prepayments of additional
indebtedness; (v) limitation on mergers and issuances of securities; (vi)
limitation on sales of property; (vii) limitation on transactions with
affiliates; (viii) limitation on derivative contracts; (ix) limitation on
acquisitions, new businesses and margin stock; and (x) limitation with respect
to certain prohibited types of contracts and multi-employer ERISA plans. The
Company is also required to maintain certain financial ratios and conditions,
including without limitation an EBITDA to debt service coverage ratio, a net
worth requirement and a funded debt to capitalization ratio.

62
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement between
the Company and Morgan Keegan & Company, Inc. ("the Underwriter"), the Company
has agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase from the Company, Notes in the aggregate principal amount of
$21,000,000.

The Underwriter proposes to offer the Notes being purchased by it directly
to the public at the initial public offering price set forth on the cover page
of this Prospectus and in part to certain securities dealers, which are members
of the National Association of Securities Dealers, Inc., at such price less
concessions as it may determine within its discretion. After the initial public
offering, the public offering price and concession may be changed.

Under the terms and conditions of the Underwriting Agreement, the
Underwriter is obligated to purchase all of the Notes if any are purchased.

The Company has granted the Underwriter an option exercisable for 30 days
after the date of this Prospectus to purchase up to an additional $3,150,000
aggregate principal amount of the Notes, at the purchase price per Note set
forth on the cover page of this Prospectus, solely to cover overallotments, if
any, in the sale of the Notes.

The Company has agreed to indemnify the Underwriter against certain
liabilities which may be incurred in connection with the Offering, including
certain liabilities under the Securities Act or to contribute to payments the
Underwriter may be required to make in respect of such liabilities.

The Notes are a new issue of securities with no established trading market.
The Company has been advised by the Underwriter that the Underwriter intends to
make a market for the Notes but is not obligated to do so and may discontinue
market making at any time without notice. No assurance can be given as to the
liquidity of, or the trading market for, the Notes.

In November 1995, the Underwriter acted as an underwriter of the Series A
Preferred Stock for which it received a customary underwriting discount.

LEGAL MATTERS

The validity of the Notes will be passed upon by Butler & Binion, L.L.P.,
Houston, Texas. Certain legal matters with respect to such securities will be
passed upon for the Underwriter by Vinson & Elkins L.L.P., Houston, Texas.

EXPERTS

The audited historical financial statements of the Company included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving such
report.

The information appearing in this Prospectus regarding quantities of
reserves of oil and gas and the future net cash flows and the present values
thereof from such reserves is based on estimates of such reserves and present
values prepared by Huddleston & Co., Inc., an independent petroleum and
geological engineering firm.

63
<PAGE>
GLOSSARY

The following definitions shall apply to the technical terms used in this
Prospectus.

"Bbls" means barrels.

"Bbls/d" means barrels per day.

"Bcf" means billion cubic feet.

"Bcfe" means billion cubic feet equivalent, determined using the ratio of
six Mcf of gas to one barrel of oil, condensate or natural gas liquids.

"Gross" means the number of wells or acres in which the Company has an
interest.

"MBbls" means thousands of barrels.

"Mcf" means thousands of cubic feet. Gas volumes are stated at the legal
pressure base of the state or area in which the reserves are located at 60
degrees Fahrenheit.

"Mcf/d" means thousand cubic feet per day.

"Mcfe" means one thousand cubic feet equivalent, determined using the
ratio of six Mcf of gas to one barrel of oil, condensate or natural gas liquids.

"MMBbls" means millions of barrels.

"MMBtu" means a million British thermal units. A British thermal unit is
the heat required to raise the temperature of a one-pound mass of water from
59.5 to 60.5 degrees Fahrenheit under specified conditions.

"MMcf" means millions of cubic feet.

"MMcfe" means one million cubic feet equivalent, determined using the
ratio of six Mcf of gas to one barrel of oil, condensate or natural gas liquids.

"Net" is determined by multiplying gross wells or acres by the Company's
working interest in such wells or acres.

"PV-10 Value" means the present value, discounted at 10%, of future net
cash flows from estimated proved reserves, calculated holding prices and costs
constant at amounts in effect on the date of the report (unless such prices or
costs are subject to change pursuant to contractual provisions).

"Reserve Replacement Costs," expressed in dollars per Mcfe, is calculated
by dividing the amount of total capital expenditures for oil and gas activities
by the amount of proved reserves added during the same period (including the
effect on proved reserves of reserve revisions).

<PAGE>
INDEX TO FINANCIAL STATEMENTS

PAGE
----
CALLON PETROLEUM COMPANY
(historical):
Report of Independent Public
Accountants.................... F-2

Consolidated Balance Sheets as
of September 30, 1996 and
December 31, 1995 and 1994..... F-3

Consolidated Statements of
Operations for the Nine Months
Ended September 30, 1996 and
1995 and for the Years Ended
December 31, 1995, 1994 and
1993........................... F-4

Consolidated Statements of
Stockholders' Equity for the
Nine Months Ended
September 30, 1996 and for the
Years Ended December 31, 1995,
1994 and 1993.................. F-5

Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 1996 and 1995 and
for the Years Ended December
31, 1995 and 1994.............. F-6

Notes to Consolidated Financial
Statements..................... F-7

CALLON PETROLEUM COMPANY (pro forma):
Pro Forma Consolidated Statement
of Operations for the Year
Ended December 31, 1995........ F-20

Notes to Pro Forma Consolidated
Financial Statement............ F-21

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Callon Petroleum Company:

We have audited the accompanying consolidated balance sheets of Callon
Petroleum Company (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Callon Petroleum Company and
subsidiaries, as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

As discussed in Note 3 to the consolidated financial statements, effective
January 1, 1993 the Company changed its method of accounting for income taxes.

ARTHUR ANDERSEN LLP

New Orleans, Louisiana
February 23, 1996

F-2
<PAGE>
CALLON PETROLEUM COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994
------------- ------------ ------------
(UNAUDITED)

ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......... $ 8,709 $ 4,265 $ 7,285
Accounts receivable, trade......... 8,401 8,329 8,895
Other current assets............... 149 238 21
------------- ------------ ------------
Total current assets.......... 17,259 12,832 16,201
------------- ------------ ------------
Oil and gas properties, full cost
accounting method:
Evaluated properties............... 308,178 304,737 285,976
Less accumulated depreciation,
depletion and amortization....... (264,658) (257,143) (246,975)
------------- ------------ ------------
43,520 47,594 39,001
Unevaluated properties excluded
from amortization................ 24,895 10,171 4,919
------------- ------------ ------------
Total oil and gas
properties................. 68,415 57,765 43,920
------------- ------------ ------------
Pipeline and other facilities, net...... 6,695 5,371 5,579
Other property and equipment, net....... 1,620 1,633 1,633
Deferred tax asset...................... 5,462 5,462 5,462
Long-term gas balancing receivable...... 435 619 734
Other assets, net....................... 37 185 257
------------- ------------ ------------
Total assets.................. $ 99,923 $ 83,867 $ 73,786
============= ============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade............ $ 14,054 $ 8,077 $ 10,391
Deferred income.................... 237 43 43
Current maturities of long-term
debt............................. -- -- 3,871
------------- ------------ ------------
Total current liabilities..... 14,291 8,120 14,305
------------- ------------ ------------
Long-term debt.......................... 8,950 100 15,363
Deferred income......................... 61 86 128
Long-term gas balancing payable......... 353 432 559
------------- ------------ ------------
Total liabilities............. 23,655 8,738 30,355
------------- ------------ ------------
Stockholders' equity:
Preferred Stock, $0.01 par value,
2,500,000 shares authorized;
1,315,500 shares of Convertible
Exchangeable Preferred Stock,
Series A issued
and outstanding with a
liquidation preference of
$32,887,500 (Note 11)............ 13 13 --
Common Stock, $0.01 par value;
20,000,000 shares authorized;
5,754,863 at September 30, 1996
and 5,754,529 shares outstanding
at December 31, 1995............. 58 58 58
Capital in excess of par value..... 73,955 73,955 43,069
Retained earnings.................. 2,242 1,103 304
------------- ------------ ------------
Total stockholders' equity....... 76,268 75,129 43,431
------------- ------------ ------------
Total liabilities &
stockholders' equity....... $ 99,923 $ 83,867 $ 73,786
============= ============ ============
</TABLE>

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

F-3
<PAGE>
CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales..................... $ 18,578 $ 17,400 $ 23,210 $ 13,948 $ 10,048
Interest and other.................... 537 501 627 171 230
--------- --------- --------- --------- ---------
Total revenues................... 19,115 17,901 23,837 14,119 10,278
--------- --------- --------- --------- ---------
Costs and expenses:
Lease operating expenses.............. 5,646 5,201 6,732 4,042 3,713
Depreciation, depletion and
amortization....................... 7,697 7,929 10,376 6,049 3,411
General and administrative............ 2,352 2,960 3,880 3,717 2,350
Interest.............................. 184 1,441 1,794 624 196
--------- --------- --------- --------- ---------
Total costs and expenses......... 15,879 17,531 22,782 14,432 9,670
--------- --------- --------- --------- ---------
Income (loss) from operations........... 3,236 370 1,055 (313) 608
Income tax expense (benefit).......... -- -- -- (200) 113
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect
of change in accounting principle..... 3,236 370 1,055 (113) 495
Cumulative effect of change in
accounting principle (Note 3)......... -- -- -- -- 5,262
--------- --------- --------- --------- ---------
Net income (loss)....................... 3,236 370 1,055 (113) 5,757
Preferred stock dividends............... 2,097 -- 256 -- --
--------- --------- --------- --------- ---------
Net income (loss) available to common
shares................................ $ 1,139 $ 370 $ 799 $ (113) $ 5,757
========= ========= ========= ========= =========
Pro forma adjustment (unaudited):
Provision for income taxes (Note 3)... -- -- -- -- 100
--------- --------- --------- --------- ---------
Pro forma net income (loss)........... $ 1,139 $ 370 $ 799 $ (113) $ 5,657
========= ========= ========= ========= =========
Income (loss) per common share:
Income (loss) per share before change
in accounting principle............ $ .20 $ .06 $ .14 $ (.03) $ .13
========= ========= ========= ========= =========
Cumulative effect of change in
accounting principle............... $ -- $ -- $ -- $ -- $ 1.40
========= ========= ========= ========= =========
Pro forma............................. $ .20 $ .06 $ .14 $ (.03) $ 1.50
========= ========= ========= ========= =========
Weighted average common shares
outstanding........................... 5,755 5,754 5,755 4,346 3,769
========= ========= ========= ========= =========
</TABLE>

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

F-4
<PAGE>
CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
CAPITAL IN
CAPITAL PREFERRED COMMON EXCESS OF RETAINED
ACCOUNTS STOCK STOCK PAR VALUE EARNINGS
-------- --------- ------ ---------- --------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1992............. $ 22,711 $ -- $-- $ -- $ --
Net income.............................. 5,757 -- -- -- --
Provision for income taxes (Note 3)..... 113 -- -- -- --
Distributions........................... (1,411) -- -- -- --
-------- --------- ------ ---------- --------
Balances, December 31, 1993............. 27,170 -- -- -- --
Pre consolidation income (loss)......... (417) -- -- -- --
Distributions........................... (1,191) -- -- -- --
Consolidation (Note 1).................. (25,562) -- 58 43,069 --
Post consolidation income............... -- -- -- -- 304
-------- --------- ------ ---------- --------
Balances, December 31, 1994............. -- -- 58 43,069 304
Net income.............................. -- -- -- -- 1,055
Sale of preferred stock (Note 11)....... -- 13 -- 30,886 --
Preferred stock dividends............... -- -- -- -- (256)
-------- --------- ------ ---------- --------
Balances, December 31, 1995............. -- 13 58 73,955 1,103
Net income (Unaudited).................. -- -- -- -- 3,236
Preferred stock dividends (Unaudited)... -- -- -- -- (2,097)
-------- --------- ------ ---------- --------
Balances, September 30, 1996
(Unaudited)........................... $ -- $ 13 $ 58 $ 73,955 $ 2,242
======== ========= ====== ========== ========
</TABLE>

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

F-5
<PAGE>
CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- ---------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................. $ 3,236 $ 370 $ 1,055 $ (113) $ 5,757
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation, depletion and
amortization............... 7,913 8,131 10,600 6,328 3,657
Amortization of deferred
costs...................... 201 -- 133 88 35
Cumulative effect of change in
accounting principle....... -- -- -- -- (5,262)
Income tax expense
(benefit).................. -- -- -- (200) 113
---------- ---------- ---------- ---------- ---------
11,350 8,501 11,788 6,103 4,300
Changes in current assets &
liabilities:
Accounts receivable,
trade................... (72) 2,063 566 565 2,165
Other current assets....... 89 (39) (217) (8) (23)
Accounts payable, trade.... 5,534 (1,563) (2,314) (1,242) (2,171)
Deferred income............ 194 -- -- -- --
Change in gas balancing
receivable................. 184 163 115 (148) 25
Change in gas balancing
payable.................... (79) (130) (127) 210 108
Change in deferred income..... (25) (32) (42) (43) 143
Change in other assets, net... (53) (229) (61) (90) 188
---------- ---------- ---------- ---------- ---------
Cash provided by operating
activities................. 17,122 8,734 9,708 5,347 4,735
---------- ---------- ---------- ---------- ---------
Cash flows from investing activities:
Capital expenditures............... (20,402) (16,860) (24,323) (10,420) (4,096)
Equity issued to purchase CN cash
(Note 4)........................ -- -- -- 3,989 --
Cash proceeds from sale of mineral
interests....................... 528 80 86 8 1,386
---------- ---------- ---------- ---------- ---------
Cash used in investing
activities................. (19,874) (16,780) (24,237) (6,423) (2,710)
---------- ---------- ---------- ---------- ---------
Cash flows from financing activities:
Payments on debt................... -- (2,383) (25,134) (20,627) (2,783)
Increase in debt................... 8,850 6,000 6,000 25,734 2,499
Dividends/distributions paid....... -- -- -- (1,191) (1,411)
Sale of preferred stock............ -- -- 30,899 -- --
Increase in accrued preferred stock
dividends payable............... 443 -- -- -- --
Dividends on preferred stock....... (2,097) -- (256) -- --
---------- ---------- ---------- ---------- ---------
Cash provided by (used in)
financing activities....... 7,196 3,617 11,509 3,916 (1,695)
---------- ---------- ---------- ---------- ---------
Net increase (decrease) in cash and
cash equivalents................... 4,444 (4,429) (3,020) 2,840 330
Cash and cash equivalents:
Balance, beginning of period....... 4,265 7,285 7,285 4,445 4,115
---------- ---------- ---------- ---------- ---------
Balance, end of period............. $ 8,709 $ 2,856 $ 4,265 $ 7,285 $ 4,445
========== ========== ========== ========== =========
</TABLE>

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

F-6

<PAGE>

CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Callon Petroleum Company, formerly Callon Petroleum Holding Company, (the
"Company") was organized under the laws of the state of Delaware in March,
1994 to serve as the surviving entity in the consolidation to combine the
businesses and properties of Callon Consolidated Partners, L.P. ("CCP"),
Callon Petroleum Operating Company ("CPOC") and CN Resources ("CN"),
directly or indirectly, with the Company. CPOC was the general partner of CCP,
and CN was a general partnership between CPOC and NOCO Enterprises, L. P.
("NOCO"), a limited partnership owned by private investors (CPOC, CCP and CN
are referred to collectively as the "Constituent Entities"). The combination
of the businesses and properties of the Constituent Entities with the Company
was effected in three simultaneous transactions on September 16, 1994
(collectively, the "Consolidation"):

(i) CCP was merged (the "Merger") into the Company and each unit of
limited partner interest in CCP ("Units") was converted into the right to
receive one-third of a share of Common Stock of the Company ("Common
Stock"). Subject to compliance with certain requirements, any holder of
less than 100 Units could elect to receive, in lieu of shares of Common
Stock, $4.50 in cash per Unit owned. CCP unitholders received 1,877,493
shares of Common Stock of the Company.

(ii) Holders of capital stock of CPOC exchanged such capital stock
for an aggregate of 1,892,278 shares of Common Stock of the Company,
resulting in CPOC becoming a wholly owned subsidiary of the Company (the
"Share Exchange").

(iii) NOCO exchanged its partnership interest for 1,984,758 shares of
Common Stock of the Company, resulting in CN becoming directly and
indirectly wholly owned by the Company (the "CN Exchange"). See Note 4.

As a result of the Consolidation, all of the businesses and properties of
the Constituent Entities are owned (directly or indirectly) by the Company, and
the former stockholders of CPOC, partners of CCP and NOCO have become
stockholders of the Company. Certain registration rights were granted to the
holders of the capital stock of CPOC and NOCO. See Note 7.

The Company and its predecessors have been engaged in the acquisition,
development and exploration of crude oil and natural gas since 1950. The
Company's properties are geographically concentrated in Louisiana, Alabama and
offshore Gulf of Mexico.

BASIS OF PREPARATION

The accompanying Consolidated Financial Statements of the Company reflect
the combination of CPOC, CCP, and CPOC's interest in CN as a reorganization of
entities under common control (accounted for similar to a "pooling of
interest"). NOCO's interest in CN was recorded as a purchase effective at the
date of the Consolidation (September 16, 1994), thus amounts related to the CN
Exchange are included from the date of the purchase for the periods presented in
the Consolidated Financial Statements. CPOC made no direct investment in CN,
therefore the inclusion of 100% of the assets and liabilities of CN in the
Consolidated Balance Sheet, as of the purchase date, are attributable to NOCO's
interest in CN. Because no revenues or expenses, as of the date of the
Consolidation, were attributable to CPOC's interest in CN until NOCO had
received a preferential return on its investment, all of the revenues and
expenses of CN through September 16, 1994, are also attributable to NOCO. See
Note 4 for pro forma information.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND REPORTING

The Consolidated Financial Statements include the accounts of the Company,
and its subsidiary, CPOC. CPOC also has subsidiaries which are Callon Offshore
Production, Inc., Mississippi Marketing, Inc.

F-7
<PAGE>
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and Callon Exploration Company. All intercompany accounts and transactions have
been eliminated. Certain prior year amounts have been reclassified to conform
with presentation in the current year. Reclassifications relate primarily to
operator overhead reimbursements (previously included in "Management Fees and
Other") which are shown as a reduction of production expenses and general and
administrative expenses. This change in presentation more clearly reflects
industry practice for reporting operator overhead reimbursements.

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

ACCOUNTING PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which was adopted by the Company for the fiscal year ending December 31, 1996.
The effect of adopting FAS 121 was not material to the Company's financial
position or results of operations.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation", effective for the Company at December 31, 1996.
Under FAS 123, companies can either record expenses based on the fair value of
stock-based compensation upon issuance or elect to remain under the current
"APB Opinion No. 25" method, whereby no compensation cost is recognized upon
grant, and make disclosures as if FAS 123 had been applied. The Company
anticipates it will continue to account for its stock-based compensation plans
under APB Opinion No. 25.

PROPERTY AND EQUIPMENT

The Company follows the full cost method of accounting for oil and gas
properties whereby all costs incurred in connection with the acquisition,
exploration and development of oil and gas reserves, including certain overhead
costs, are capitalized. Such amounts include the cost of drilling and equipping
productive wells, dry hole costs, lease acquisition costs, delay rentals and
other costs related to exploration and development activities. Payroll and
general and administrative costs include salaries and related fringe benefits
paid to employees directly engaged in the acquisition, exploration and/or
development of oil and gas properties as well as other directly identifiable
general and administrative costs associated with such activities. Costs
associated with unevaluated properties are excluded from amortization.
Unevaluated property costs are transferred to evaluated property costs at such
time as wells are completed on the properties, the properties are sold or
management determines these costs have been impaired.

Costs of properties, including future development and net future site
restoration, dismantlement and abandonment costs, which have proved reserves and
those which have been determined to be worthless are depleted using the
unit-of-production method based on proved reserves. If the total capitalized
costs of oil and gas properties, net of amortization, exceed the sum of (1) the
estimated future net revenues from proved reserves at current prices and
discounted at 10% and (2) the cost of unevaluated properties (the full cost
ceiling amount), then such excess is charged to expense during the period in
which the excess occurs.

Upon the acquisition or discovery of oil and gas properties, management
estimates the future net costs to be incurred to dismantle, abandon and restore
the property using geological, engineering and regulatory data available. Such
cost estimates are periodically updated for changes in conditions and
requirements. Such estimated amounts are considered as part of the full cost
pool subject to amortization upon acquisition

F-8
<PAGE>
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

or discovery. Such costs are capitalized, as oil and gas properties, as the
actual restoration, dismantlement and abandonment activities take place. As of
December 31, 1995 and 1994, estimated future site restoration, dismantlement and
abandonment costs, net of related salvage value and amounts funded by
abandonment trusts (see Notes 7 and 9) were not material.

Depreciation of other property and equipment is provided using the
straight-line method over estimated lives of three to 20 years. Depreciation of
the pipeline facilities is provided using the straight-line method over a 27
year estimated life.

NATURAL GAS IMBALANCES

Natural gas imbalances occur when a producer sells natural gas
disproportionate to his ownership share of the total gas production from a
property as a result of pipeline curtailments, contract differences or election
by some producers not to sell their gas currently. These imbalances are made up
through allocations of future production from the property. The Company follows
an entitlement method of accounting for its proportionate share of gas
production on a well by well basis, recording a receivable to the extent that a
well is in an "undertake" position and conversely recording a liability to the
extent that a well is in an "overtake" position.

DERIVATIVES

The Company uses derivative financial instruments (see Note 6) for price
protection purposes on a limited amount of its future production and does not
use them for trading purposes. Such derivatives are accounted for on an accrual
basis and amounts paid or received under the agreements are recognized as oil
and gas sales in the period in which they accrue.

RESERVE FOR DOUBTFUL ACCOUNTS

The balance in the reserve for doubtful accounts included in accounts
receivable is $481,000 and $479,000 at December 31, 1995 and 1994, and $393,000
at September 30, 1996. Net charge offs were $181,000 in 1994 and $53,000 in
1993, and net recoveries were $2,000 in 1995. There were no provisions to
expense in the three-year period ended December 31, 1995 or the nine months
ended September 30, 1996. Net charge offs were $88,000 for the nine months ended
September 30, 1996 and net recoveries were $2,000 for the nine months ended
September 30, 1995.

STATEMENTS OF CASH FLOWS

For purposes of the Consolidated Statements of Cash Flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.

The Company paid no federal income taxes for the three years ended December
31, 1995. During the years ended December 31, 1995, 1994 and 1993, the Company
made cash payments of $1,910,000, $377,000 and $182,000, respectively, for
interest charged on its indebtedness, and $72,000 for the nine months ended
September 30, 1996.

PER SHARE AMOUNTS

Per share amounts are calculated on a weighted average basis in accordance
with the shares issued in the Consolidation described in Note 1. The options
discussed in Note 10 have no effect on these calculations in 1995. The preferred
stock issued in 1995 (Note 11) is not a common stock equivalent and is not
included in the calculations of per share amounts, and due to their antidilutive
effect on earnings per share, dual presentation of per share amounts is not
necessary.

F-9
<PAGE>
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INCOME TAXES

Effective January 1, 1993, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 109 ("FAS 109") "Accounting for
Income Taxes". The statement provides for the recognition of a deferred tax
asset for deductible temporary timing differences, capital and operating loss
carryforwards, statutory depletion carryforward and tax credit carryforwards,
net of a "valuation allowance". The valuation allowance is provided for that
portion of the asset, for which it is deemed more likely than not, that it will
not be realized. The adoption of this change in accounting principle resulted in
the recording of a deferred tax asset at December 31, 1995, 1994 and 1993 as
follows:

1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
Federal net operating loss
carryforward.......................... $ 3,563 $ 2,072 $ 1,835
Federal capital loss carryforward....... -- -- 1,377
Statutory depletion carryforward........ 3,987 4,085 3,885
Temporary differences:
Oil and gas properties............. 874 2,817 2,542
Pipeline facilities................ (1,880) (1,953) --
Non-oil and gas property........... 23 28 440
Other.............................. 655 724 525
--------- --------- ---------
Total tax asset......................... 7,222 7,773 10,604
Valuation allowance..................... (1,760) (2,311) (5,342)
--------- --------- ---------
Net tax asset........................... $ 5,462 $ 5,462 $ 5,262
========= ========= =========

At December 31, 1995, the Company had, for tax reporting purposes,
operating loss carryforwards ("NOL") of $10.2 million which expire in 1999
through 2010. Such carryovers are subject to limitations on utilization as a
result of ownership changes which occurred in CPOC's common stock prior to the
Consolidation and ownership changes as a result of the Consolidation.
Additionally, the Company had available for tax reporting purposes $11.4 million
in statutory depletion deductions which can be carried forward for an indefinite
period.

As a result of the combination of the Company and CCP there was a change in
the tax status of the Company; therefore, the Company was able to reduce the
valuation allowance at January 1, 1993 by $5,262,000. This reduction is shown as
a "cumulative effect of change in accounting principle" in the December 31,
1993 Consolidated Statement of Operations. The net asset represents the
statutory depletion carryforward (which has an unlimited carryforward period)
and the portion of the federal net operating loss carryforward that the
Company's management believes will be utilized. All other temporary differences
are offset by the valuation allowance, which represents that portion of the
asset that management believes is more likely than not, that it will not be
realized.

During 1994, additional statutory depletion was estimated which has been
reflected as a reduction of the income tax provision and an addition to the
deferred tax asset in the amount of $200,000, resulting in an effective tax rate
of (63)%. At December 31, 1995, the difference between the Company's effective
tax rate and the statutory rate of 35% is attributed to the following:
refinement of prior estimates of statutory depletion, 14%; reduction in the
valuation allowance, (52)%; and other nondeductible items, 3%.

The income tax amounts on the Consolidated Statements of Stockholders'
Equity in 1993 reflect the historical accounting treatment of income taxes of
one of the Constituent Entities. Such accounting treatment was discontinued in
1994 due to the effect of the Consolidation.

F-10
<PAGE>
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The pro forma provision for income taxes relates to the income of CCP prior
to the Consolidation as if such income was taxed as a corporation. Pro forma tax
adjustments were provided only to the extent CCP had income, thus none was
recorded in 1994.

4. ACQUISITIONS

On September 14, 1994, (with an effective date of September 16, 1994) the
unitholders of CCP, stockholders of CPOC, and the partners of CN completed the
Consolidation as described in Note 1. Net assets purchased (excluding cash of
$3,989,000) was $13,847,000 of which oil and gas property, including pipeline
facilities, and debt amounted to $24,506,000 and $11,436,000, respectively. Such
amounts represent non-cash transactions and therefore are not included in the
Consolidated Statements of Cash Flows.

On December 29, 1995, CPOC purchased a 66.67% working interest in
Chandeleur Block 40 (the "CB 40 Acquisition") from Amerada Hess Corporation
and, in a simultaneous transaction under a pre-existing agreement, sold
one-third of the acquired interest to an industry partner. The Company's net
purchase price of $6 million was funded from existing cash on hand.

The following information represents unaudited pro forma results of the
Company for the years ended December 31, 1995, 1994 and 1993 and includes both
the purchase of CN and the CB 40 Acquisition, presented as if the purchase of CN
had occurred at the beginning of 1994 and 1993, and the CB 40 Acquisition
presented as if it had occurred at the beginning of 1995 and 1994.

PRO FORMA (UNAUDITED)
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Total revenues.......................... $ 25,237 $ 29,132 $ 40,050
========= ========= =========
Net income before cumulative effect of
change in accounting principle........ $ 1,179 $ 3,703 $ 4,833
========= ========= =========
Net income per common share............. $ .20 $ .64 $ .84
========= ========= =========
Weighted average common shares
outstanding........................... 5,755 5,755 5,755
========= ========= =========

Pro forma common shares outstanding used in the above calculations include
shares of the Company issued as a result of the Merger of CCP and the Share
Exchange in addition to the shares of the Company issued in the CN Exchange.

The Company, together with Murphy Exploration and Production, Inc.,
("Murphy") was the high bidder on 12 offshore tracts at the Outer Continental
Shelf ("OCS") Lease Sale #157, held April 24, 1996 in New Orleans, Louisiana,
and conducted by the U.S. Department of the Interior through its Minerals
Management Service ("MMS"). The Company holds a 25% working interest in the
leases and its share of the total lease costs was approximately $11.4 million.
On September 25, 1996, the Company and Murphy submitted bids on six
additional offshore leases encompassing approximately 35,000 acres at the OCS
Lease Sale #161, held in New Orleans, Louisiana by the MMS. If the bids are
approved and the leases are awarded, the Company's share of the costs will be
$3.8 million, of which $.8 million had been paid as of September 30, 1996. The
Company will own a 25% working interest in the awarded leases.

F-11
<PAGE>
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. NOTES PAYABLE

Notes payable consisted of the following at:

DECEMBER 31,
SEPTEMBER 30, --------------------
1996 1995 1994
------------- --------- ---------
(UNAUDITED)

(IN THOUSANDS)
Credit Facility...................... $ 8,950 $ 100 $ 19,000
Building Mortgage, at prime, as
defined plus 2%
(9.75% at December 31, 1994)....... -- -- 234
------------- --------- ---------
8,950 100 19,234
Less: current portion................ -- -- 3,871
------------- --------- ---------
$ 8,950 $ 100 $ 15,363
============= ========= =========

On October 14, 1994, CPOC entered into a definitive credit agreement with a
commercial lender providing for a credit facility of up to $30,000,000.
Currently, the credit facility provides the Company with a minimum borrowing
base of $15,000,000 through December 31, 1996. The purpose for obtaining this
credit facility was to refinance existing indebtedness incurred primarily
through acquisitions of oil and gas properties prior to, and assumed by the
Company as a result of, the Consolidation (See Note 1). The interest rate in the
agreement is the average published prime rate of three major U.S. banks. The
Company, at its option, may fix the rate on all or a portion of the outstanding
balance at 1.375% above an agreement defined "Eurodollar" rate for periods of
up to six months. The weighted average rate for the total debt outstanding at
September 30, 1996 and December 31, 1995 was 6.875% and 9.25%, respectively. A
commitment fee of one half of 1% per annum on the unused portion of the
borrowing base is payable quarterly. Principal payments are payable on the last
day of each month, commencing January 31, 1997, in a manner intended to repay
the debt in full on June 30, 1999. Borrowings under the credit facility are
secured by a mortgage of substantially all of the Company's and its
subsidiaries' oil and gas properties.

The credit facility contains various covenants including restrictions on
additional indebtedness and payment of cash dividends as well as maintenance of
certain financial ratios.

The Company changed its commercial lender and entered into a new definitive
credit agreement on October 31, 1996. The new credit facility provides for
borrowing of up to $50,000,000 with an initial borrowing base of $30,000,000.
The interest rate, fees, terms and covenants of the new credit agreement are
similar to and, in most cases, are more favorable than the 1994 credit
agreement. The maturity date of the new credit facility is October 31, 2000.

6. HEDGING CONTRACTS

The Company hedges with third parties certain of its crude oil and natural
gas production in various swap agreement contracts. The contracts are tied to
published market prices for crude oil and natural gas and are settled monthly
based on the differences between contract prices and the average defined market
price for that month applied to the related contract volume. As of September 30,
1996, December 31, 1995 and December 31, 1994 the Company's open forward sales
position (all expiring in 1996) was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------- -------------------
OIL GAS OIL GAS OIL GAS
(BBLS) (MMBTU) (BBLS) (MMBTU) (BBLS) (MMBTU)
------- ------- ------ --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Volumes.............................. 180,000 -- -- 1,200,000 192,000 3,800,000
Average Price per Unit............... $ 23.33 -- -- $ 1.75 $ 18.24 $ 2.30
</TABLE>

In addition, as of December 31, 1995, the Company has entered into collar
agreements with third parties whereby minimum floor prices and maximum ceiling
prices are contracted and applied to related

F-12
<PAGE>
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

contract volumes. These agreements in effect for 1996 and the first quarter of
1997 are for average oil volumes of 23,750 barrels per month at a ceiling price
of $19.38 and floor of $16.75 and for average gas volumes of 130,000 MCF's per
month at a ceiling price of $2.28 and floor of $1.80. At September 30, 1996, the
Company had collar agreements for average oil volumes of 40,000 barrels per
month for the fourth quarter of 1996 at a ceiling price of $19.59 and floor of
$17.25 and average gas volumes of 100,000 MCF's per month at a ceiling price of
$2.20 and floor of $1.75 through the first quarter of 1997.

During 1994, the Company recognized revenue under the swap agreements of
$1,227,000 and $1,724,000 on a Historical and a Pro forma basis respectively,
and $2,466,000 for the twelve months ended December 31, 1995. The Company
recognized a reduction in revenue of $2,048,000 for the nine months ended
September 30, 1996 under the hedging agreements.

The calculation of the fair market value of the hedging contracts indicates
a $413,800 market value liability to the Company as of December 31, 1995 based
on market prices at that date.

7. COMMITMENTS AND CONTINGENCIES

As operator, the Company has guaranteed, through its debt facilities,
certain letters of credit in the amount of $253,000. These letters of credit are
primarily issued to various state oil and gas regulatory agencies to ensure
compliance with various regulations on operated properties.

As described in Note 9, abandonment trusts (the "Trusts") have been
established for future abandonment obligations of those oil and gas properties
of the Company burdened by a net profits interest. The management of the Company
believes the Trusts will be sufficient to offset those future abandonment
liabilities; however, the Company is responsible for any abandonment expenses in
excess of the Trusts' balances. As of December 31, 1995, total estimated site
restoration, dismantlement and abandonment costs were approximately $21,395,000,
net of expected salvage value. Substantially all such costs are expected to be
funded through the Trusts' funds, all of which will be accessible to the Company
when abandonment work begins. In addition as a working interest owner and/or
operator of oil and gas properties, the Company is responsible for the cost of
abandonment of such properties, see Note 2.

The Consolidation described in Note 1 provides that the former stockholders
of CPOC, as a result of the Share Exchange, may be issued additional shares of
the Company's Common Stock ("Contingent Shares"). The Contingent Shares are
attributable to the value of specified oil and gas properties, which were owned
by CPOC and were in the early stages of development at the date of the
Consolidation. The amount of Contingent Shares, if any, to be issued will be
determined based on a valuation of these specified oil and gas properties at
December 31, 1996.

Also, as part of the Consolidation, the Company entered into Registration
Rights Agreements whereby the former stockholders of CPOC and NOCO are entitled
to require the Company to register Common Stock of the Company owned by them
with the Securities and Exchange Commission for sale to the public in a firm
commitment public offering and generally to include shares owned by them, at no
cost, in registration statements filed by the Company. Costs of the offering
will not include discounts and commissions, which will be paid by the respective
sellers of the Common Stock.

F-13
<PAGE>
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. OIL AND GAS PROPERTIES

The following table sets forth cost information relating to the Company's
oil and gas activities:

<TABLE>
<CAPTION>
NINE
MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ----------------------------------
1996 1995 1994 1993
------------- ---------- ---------- ----------
(UNAUDITED)

<S> <C> <C> <C> <C>
Capitalized costs incurred: (IN THOUSANDS)
Beginning of period balance........ $ 304,737 $ 285,976 $ 260,971 $ 258,554
Property acquisition............... 2,153 14,017 23,037 2,550
Exploration and development........ 1,816 4,830 1,976 1,253
Sale of mineral interests.......... (528 ) (86) (8) (1,386)
------------- ---------- ---------- ----------
End of period balance.............. $ 308,178 $ 304,737 $ 285,976 $ 260,971
============= ========== ========== ==========
Accumulated depreciation, depletion and
amortization:
Beginning of period balance........ $ 257,143 $ 246,975 $ 240,926 $ 237,515
Provision for depreciation,
depletion and amortization....... 7,515 10,168 6,049 3,411
------------- ---------- ---------- ----------
End of period balance.............. $ 264,658 $ 257,143 $ 246,975 $ 240,926
============= ========== ========== ==========
</TABLE>
Depreciation, depletion and amortization per unit-of-production (equivalent
barrel of oil) amounted to $5.95, $5.80 and $5.29 for the years ended December
31, 1995, 1994 and 1993, respectively, and $6.02 and $5.79 for the nine months
ended September 30, 1996 and 1995, respectively.

9. NET PROFITS INTEREST

Since 1989, the Constituent Entities have entered into separate agreements
to purchase certain oil and gas properties with gross contract acquisition price
of $170,000,000 ($150,000,000 net as of closing dates) and in simultaneous
transactions, entered into agreements to sell overriding royalty interests
("ORRI") in the acquired properties. These ORRI are in the form of net profits
interests ("NPI") equal to a significant percentage of the excess of gross
proceeds over production costs, as defined, from the acquired oil and gas
properties. A net deficit incurred in any month can be carried forward to
subsequent months until such deficit is fully recovered. The Company has the
right to abandon the purchased oil and gas properties if it deems the properties
to be uneconomical.

The Company has, pursuant to the purchase agreements, created abandonment
trusts whereby funds are provided out of gross production proceeds from the
properties for the estimated amount of future abandonment obligations related to
the working interests owned by the Company. The Trusts are administered by
unrelated third party trustees for the benefit of the Company's working interest
in each property. The Trust agreements limit their funds to be disbursed for the
satisfaction of abandonment obligations. Any funds remaining in the Trusts after
all restoration, dismantlement and abandonment obligations have been met will be
distributed to the owners of the properties in the same ratio as contributions
to the Trusts. The Trusts' assets are excluded from the Consolidated Balance
Sheets of the Company because the Company does not control the Trusts. Estimated
future revenues and costs associated with the NPI and the Trusts are also
excluded from the oil and gas reserve disclosures at Note 12. As of December 31,
1995 and 1994 the Trusts' assets (all cash and investments) totaled $16,100,000
and $14,208,000, respectively, all of which will be available to the Company to
pay its portion, as working interest owner, of the restoration, dismantlement
and abandonment costs discussed at Note 7.

F-14
<PAGE>
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At the time of acquisition of properties by the Company, the property
owners estimated the future costs to be incurred for site restoration,
dismantlement and abandonment, net of salvage value. A portion of the amounts
necessary to pay such estimated costs was deposited in the Trusts upon
acquisition of the properties, and the remainder is deposited from time to time
out of the proceeds from production. The determination of the amount deposited
upon the acquisition of the properties and the amount to be deposited as
proceeds from production was based on numerous factors, including the estimated
reserves of the properties. The amounts deposited in the Trusts upon acquisition
of the properties was capitalized by the Company as oil and gas properties.

As operator, the Company receives all of the revenues and incurs all of the
production costs for the purchased oil and gas properties but retains only that
portion applicable to its net ownership share. As a result, the payables and
receivables associated with operating the properties included in the Company's
Consolidated Balance Sheets include both the Company's and all other outside
owner's shares. However, revenues and production costs associated with the
acquired properties reflected in the accompanying Consolidated Statements of
Operations represent only the Company's share, after reduction for the NPI. At
December 31, 1995 and 1994 the amounts payable to the NPI owners included in the
accounts payable in the accompanying Consolidated Balance Sheets were
approximately $2,836,000 and $2,087,000, respectively, and $6,203,000 at
September 30, 1996.

10. EMPLOYEE BENEFIT PLANS

The Company has adopted a series of incentive compensation plans designed
to align the interest of the executives and employees with those of its
stockholders. The following is a brief description of each plan:

o The Savings and Protection Plan, provides employees with the option
to defer receipt of a portion of their compensation and the Company
may, at its discretion, match a portion of the employee's deferral.
The Company may also elect, at its discretion, to contribute a non-
matching amount to employees. The amounts held under the Savings
and Protection Plan are invested in various funds maintained by a
third party in accordance with the directions of each employee. An
employee is fully vested immediately upon participation in the
Savings and Protection Plan. The total amounts contributed by the
Company were $176,000, $154,000 and $151,000 in the years 1995,
1994 and 1993, respectively.

o The 1994 Stock Incentive Plan (the "Plan") provides for 600,000
shares of Common Stock to be reserved for issuance pursuant to such
Plan. Under the Plan the Company may grant both stock options
qualifying under Section 422 of the Internal Revenue Code and
options that are not qualified as incentive stock options, as well
as performance shares. No options will be granted at an exercise
price of less than fair market value of the Common Stock on the
date of grant. During 1994 the Company granted options to purchase
a total of 460,000 shares of Common Stock pursuant to the Plan at
$10 per share. In 1995, the Company granted 30,000 additional
options under the Plan at an average exercise price of $10.08 per
share. All such options could be exercised after January 1, 1996
and have an expiration date ten years from date of grant.

On August 23, 1996,the Board of Directors of the Company approved and
adopted the 1996 Plan, and granted stock options to purchase an aggregate
450,000 shares of Common Stock to the Company's executive officers and senior
management under the 1996 Plan, subject to stockholder approval of the 1996
Plan. All of such options were granted at an exercise price of $12 per share,
the fair market value of the Common Stock on the date of grant, and 20% of each
option becomes exercisable on January 1 of each succeeding year, beginning
January 1, 1997. Unvested options are subject to forfeiture upon certain
termination of employment events. The Compensation Committee also awarded
performance shares totaling 225,000 shares under the 1996 Plan to the Company's
executive officers on August 23, 1996, subject to stockholder approval of the

F-15
<PAGE>
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1996 Plan. All of the performance shares granted vest in whole on January 1,
2001, and are subject to forfeiture upon certain termination of employment
events.

The Company has no other formal benefit plans.

11. PREFERRED STOCK

In November 1995, the Company sold 1,315,500 shares of $2.125 Convertible
Exchangeable Preferred Stock, Series A (the "Preferred Stock"). Annual
dividends are $2.125 per share and are cumulative. The net proceeds of the $.01
par value stock after underwriters discount and expense was $30,899,000. Each
share has a liquidation preference of $25.00, plus accrued and unpaid dividends.
Dividends on the Preferred Stock are cumulative from the date of issuance and
are payable quarterly, commencing January 15, 1996. The Preferred Stock is
convertible at any time, at the option of the holders thereof, unless previously
redeemed, into shares of Common Stock of the Company at an initial conversion
price of $11 per share of Common Stock, subject to adjustments under certain
conditions.

The Preferred Stock is redeemable at any time on or after December 31,
1998, in whole or in part at the option of the Company at a redemption price of
$26.488 per share beginning at December 31, 1998 and at premiums declining to
the $25.00 liquidation preference by the year 2005 and thereafter, plus accrued
and unpaid dividends. The Preferred Stock is also exchangeable, in whole, but
not in part, at the option of the Company on or after January 15, 1998 for the
Company's 8.5% Convertible Subordinated Debentures due 2010 (the "Debentures")
at a rate of $25.00 principal amount of Debentures for each share of Preferred
Stock. The Debentures will be convertible into Common Stock of the Company on
the same terms as the Preferred Stock and will pay interest semi-annually.

The Company used approximately $21.5 million of the net proceeds from the
sale of the Preferred Stock to repay outstanding indebtedness under its primary
credit facility (See Note 5), which indebtedness was incurred to finance certain
acquisitions of properties. The Company is using the excess of the net proceeds
from the sale of the Preferred Stock over the amount used to repay indebtedness,
together with internally generated cash flows to acquire, develop and explore
oil and gas properties.

12. SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED)

The Company's proved oil and gas reserves at December 31, 1995, have been
estimated by independent petroleum consultants in accordance with guidelines
established by the Securities and Exchange Commission ("SEC"). Accordingly,
the following reserve estimates are based upon existing economic and operating
conditions.

There are numerous uncertainties inherent in establishing quantities of
proved reserves. The following reserve data represent estimates only and should
not be construed as being exact. In addition, the present values should not be
construed as the current market value of the Company's oil and gas properties or
the cost that would be incurred to obtain equivalent reserves.

F-16
<PAGE>
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Changes in the estimated net quantities of crude oil and natural gas
reserves, all of which are located in the United States, are as follows:

YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
Proved developed and undeveloped
reserves:
Crude Oil (MBbls):
Beginning of period................ 4,424 2,842 3,324
Revisions to previous estimates.... (441) (303) (248)
Purchase of reserves in place...... 1,363 2,245 --
Sales of reserves in place......... (2) (3) (4)
Extensions and discoveries......... 16 7 139
Production......................... (594) (364) (369)
--------- --------- ---------
End of Period...................... 4,766 4,424 2,842
========= ========= =========
Natural Gas (MMcf):
Beginning of period................ 24,102 14,167 10,947
Revisions to previous estimates.... (976) (2,793) 1,404
Purchase of reserves in place...... 12,985 16,757 3,701
Sales of reserves in place......... (22) (39) (305)
Extensions and discoveries......... 271 85 79
Production......................... (6,693) (4,075) (1,659)
--------- --------- ---------
End of Period...................... 29,667 24,102 14,167
========= ========= =========
Proved developed reserves:
Crude Oil (MBbls):
Beginning of period................ 3,309 2,084 2,569
========= ========= =========
End of Period...................... 3,890 3,309 2,084
========= ========= =========
Natural Gas (MMcf):
Beginning of period................ 20,582 11,366 9,753
========= ========= =========
End of Period...................... 20,408 20,582 11,366
========= ========= =========

STANDARDIZED MEASURE

The Company's standardized measure of discounted future net cash flows and
changes therein relating to proved oil and gas reserves which follows was
computed using reserve valuations based on regulations prescribed by the SEC.
These regulations provide that the oil, condensate and gas price structure
utilized to project future net cash flows reflects current prices at each date
presented and have been escalated only when known and determinable price changes
are provided by contract and law. Future production, development and net
abandonment costs are based on current costs without escalation. No future
income taxes were provided on the future net inflows as tax credits (including
carryovers) and other permanent differences are expected to be higher than the
estimated future income taxes calculated using the appropriate statutory rates.
The resulting net future cash flows have been discounted to their present values
based on a 10% annual discount factor.

F-17
<PAGE>
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
Future cash inflows..................... $ 157,240 $ 115,659 $ 70,320
Future costs --
Production......................... (50,236) (43,579) (27,805)
Development and net abandonment.... (11,274) (12,603) (6,701)
---------- ---------- ----------
Future net inflows before income
taxes................................. 95,730 59,477 35,814
Future income taxes..................... -- -- --
---------- ---------- ----------
Future net cash flows................... 95,730 59,477 35,814
10% discount factor..................... (31,966) (18,094) (13,260)
---------- ---------- ----------
Standardized measure of discounted
future net cash flows................. $ 63,764 $ 41,383 $ 22,554
========== ========== ==========

CHANGES IN STANDARDIZED MEASURE
OF DISCOUNTED FUTURE NET CASH FLOWS
FROM PROVED RESERVE QUANTITIES
(UNAUDITED)

YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---------- --------- ---------
(IN THOUSANDS)
Standardized measure -- beginning of
period................................ $ 41,383 $ 22,554 $ 25,296
Sales and transfers, net of production
costs................................. (12,477) (9,815) (5,811)
Net change in sales and transfer prices,
net of production costs............... 11,519 1,368 (5,496)
Exchange and sale of in place
reserves.............................. (23) (48) (326)
Purchases, extensions, discoveries, and
improved recovery, net of future
production and development costs...... 28,204 26,376 7,090
Revisions of quantity estimates......... (4,242) (6,297) 461
Accretions of discount.................. 2,963 1,488 1,957
Changes in production rates, timing and
other................................. (3,563) 5,757 (617)
---------- --------- ---------
Standardized measure -- end of period... $ 63,764 $ 41,383 $ 22,554
========== ========= =========

F-18

<PAGE>
CALLON PETROLEUM COMPANY
PRO FORMA CONSOLIDATED FINANCIAL STATEMENT

The following unaudited pro forma financial statement presents the results
of operations of Callon Petroleum Company (the "Company"). Such unaudited pro
forma combined information is based on the historical results of operations of
the Company and the effect of the issuance by the Company of 1,315,500 shares of
$2.125 Convertible Exchangeable Preferred Stock, Series A on November 28, 1995.

On December 29, 1995, Callon Petroleum Operating Company, a wholly owned
subsidiary of the Company purchased a 66.67% working interest in Chandeleur
Block 40 (the "CB 40 Acquisition") and, in a simultaneous transaction, sold
one-third of the acquired interest to a third party. The Company's net purchase
price of $6 million was funded from existing cash on hand.

See Note 1 in the Notes to Pro Forma Consolidated Financial Statement for
the basis of presentation of the above described events in this Pro Forma
Consolidated Financial Statement of the Company.

F-19
<PAGE>
CALLON PETROLEUM COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------
ADJUSTMENTS
----------------------------------------------------------
PREFERRED
HISTORICAL STOCK CB 40 PRO FORMA
COMPANY OFFERING ACQUISITION AS ADJUSTED
---------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
<S> <C> <C> <C> <C>
Oil and gas sales.................. $ 23,210 $ -- $ 1,400(d) $24,610
Interest........................... 627 -- -- 627
---------- --------- ----------- -----------
Total revenues................ 23,837 -- 1,400 25,237
---------- --------- ----------- -----------
Expenses:
Production costs................... 6,732 -- 295(d) 7,027
Depreciation, depletion and
amortization..................... 10,376 -- 521(d) 10,897
General and administrative......... 3,880 -- -- 3,880
Interest........................... 1,794 (1,794)(b) -- --
---------- --------- ----------- -----------
Total expenses................ 22,782 (1,794) 816 21,804
---------- --------- ----------- -----------
Income from operations.................. 1,055 1,794 584 3,433
Provision for income taxes.............. -- 628(a) 204(a) 832
---------- --------- ----------- -----------
Net income.............................. 1,055 1,166 380 2,601
Preferred stock dividends............... 256 2,539(c) -- 2,795
---------- --------- ----------- -----------
Net income (loss) available to common
shares................................ $ 799 $ (1,373) $ 380 $ (194)
========== ========= =========== ===========
Net income (loss) per common share...... $ (0.03)
===========
Weighted average common shares
outstanding........................... 5,755
===========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statement.

F-20
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENT (UNAUDITED)

1. BASIS OF PRESENTATION

The Company was formed in 1994 to succeed to the business and properties of
a group of companies engaged in the exploration, development and operations of
oil and gas properties. The Company subsequently issued 1,315,500 shares of
$2.125 Convertible Exchangeable Preferred Stock, Series A on November 28, 1995.

On December 29, 1995, Callon Petroleum Operating Company, a wholly owned
subsidiary of the Company, purchased a 66.67% working interest in Chandeleur
Block (the "CB 40 Acquisition") and, in simultaneous transaction under a
preexisting agreement, sold one-third of the acquired interest to a third party.
The Company's net purchase price of $6 million was funded from existing cash on
hand.

The accompanying Pro Forma Consolidated Statement of Operations of the
Company for the year ended December 31, 1995, reflects the sale of the 1,315,500
shares of Preferred Stock of the Company and the CB 40 Acquisition in each case
as if such transactions occurred at the beginning of the period presented.

The Pro Forma Consolidated Statement of Operations is based on the
assumptions set forth in the notes to such statement. Such pro forma information
should be read in conjunction with the related financial information of the
Company and is not necessarily indicative of the results which would actually
have occurred had the transactions been in effect on the date or for the period
indicated or which may occur in the future.

2. PRO FORMA ADJUSTMENTS

Pro Forma entries necessary to adjust the historical financial statement of
the Company are as follows:

(a) To record a provision for Federal income taxes at a corporate
statutory rate of 35% of the combined pro forma income before taxes.

(b) Reflects a reduction of interest expense related to the use of
Preferred Stock offering proceeds to repay debt as if the offering had
occurred on January 1, 1995 for the year ended December 31, 1995. No
adjustment has been made to reflect the potential interest income from the
investment of the excess proceeds from the offering over the amount of debt
repaid and the CB 40 Acquisition.

(c) Represents preferred stock dividends computed at the dividend
rate of $2.125 per share on the 1,315,500 preferred shares as if the
offering was completed on January 1, 1995 for the year ended December 31,
1995.

(d) To reflect the purchase of the CB 40 Acquisition and the related
results of operations including an adjustment for depletion as described in
Note 1.

F-21

<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE NOTES OFFERED HEREBY BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

PAGE
-----
Available Information................... 2
Prospectus Summary...................... 3
Risk Factors............................ 8
The Company............................. 12
Use of Proceeds......................... 13
Capitalization.......................... 14
Selected Financial Data................. 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 17
Business and Properties................. 23
Management.............................. 35
Principal Stockholders.................. 43
Description of Notes.................... 45
Description of Outstanding Securities
and Debt Instruments.................. 60
Underwriting............................ 63
Legal Matters........................... 63
Experts................................. 63
Glossary................................ 64
Index to Financial Statements........... F-1

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

$21,000,000

[LOGO FOR CALLON]

CALLON PETROLEUM
COMPANY

10% SENIOR SUBORDINATED NOTES
DUE 2001

PROSPECTUS

MORGAN KEEGAN & COMPANY, INC.

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