<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
                         COMMISSION FILE NUMBER 0-18836

                             MIDLAND RESOURCES, INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

               TEXAS                                     75-2286814
      (STATE OF INCORPORATION)              (IRS EMPLOYER IDENTIFICATION NUMBER)


16701 GREENSPOINT PARK DRIVE,  SUITE 200                   77060
            HOUSTON, TEXAS                               (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)


                                 (281) 873-4828
                            ISSUER'S TELEPHONE NUMBER

   Securities registered pursuant to Section 12(b) of the Exchange Act:  None

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                          Common Stock, $.001 Par Value
              Warrants to purchase common stock at $4.00 per share

     Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing requirements for the past 90
days.  Yes  X 

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.   X 

     State issuer's revenues for fiscal 1996:  $7,240,030

     State the aggregate market value of the voting stock held by non-affiliates
computed using $5.75, the price at which the stock sold on March 26, 1997: 
$15,703,359

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.

   Common Stock, Par Value $.001         4,411,031 Shares as of March 26, 1997

                       DOCUMENTS INCORPORATED BY REFERENCE
     Part III of this Report is incorporated by reference from the Issuer's
definitive Proxy Statement relating to its Annual Meeting of Stockholders, which
will be filed with the Commission no later than April 30, 1997.

<PAGE>

                                TABLE OF CONTENTS
                                                                            Page
                                                                            ----
                                     PART I.                                   1

ITEM 1.   DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . . .   1
ITEM 2.   DESCRIPTION OF PROPERTIES. . . . . . . . . . . . . . . . . . . . .   3
          Oil and Gas Properties . . . . . . . . . . . . . . . . . . . . . .   3
          Net Production, Unit Sales and Production Cost . . . . . . . . . .   6
          Oil and Gas Reserves . . . . . . . . . . . . . . . . . . . . . . .   7
          Drilling Activity. . . . . . . . . . . . . . . . . . . . . . . . . . 9
          Other Property . . . . . . . . . . . . . . . . . . . . . . . . . .   9
ITEM 3.   LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . .   9
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY
          HOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10

                                    PART II.                                  10

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND
          RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . .  10
ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 
          OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .  11
          Plan of Operation. . . . . . . . . . . . . . . . . . . . . . . . .  11
          Capital Resources and Liquidity. . . . . . . . . . . . . . . . . .  11
          Results of Operations - Years ended December 31, 1996,
          1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . .  14
ITEM 7.   FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . .  15
ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
          ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . .36

                                    PART III.                                 36

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND 
          CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) 
          OF THE EXCHANGE ACT  . . . . . . . . . . . . . . . . . . . . . . .  36
ITEM 10.  EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . .  36
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . .  36
ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . .  36
ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . .  37

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  38

EXHIBITS


                                      (i)
<PAGE>

CERTAIN STATEMENTS CONTAINED IN THIS DOCUMENT, INCLUDING WITHOUT LIMITATION
STATEMENTS CONTAINING THE WORDS "BELIEVES', "ANTICIPATES", "INTENDS", "EXPECTS",
AND WORDS OF SIMILAR IMPORT, CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT.  SUCH FORWARD LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS
THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO
BE MATERIALLY DIFFERENT

                                     PART I.

ITEM 1.   DESCRIPTION OF BUSINESS

          Midland Resources, Inc., a Texas corporation, (the "Company", which
reference shall include the Company's majority owned subsidiaries), is an
independent oil and gas company engaged primarily in the exploration and
development of domestic oil and gas.  The Company, incorporated June 5, 1989,
was organized in 1990 with the issue of common stock and warrants in exchange
for the partnership interests of seven former public oil and gas limited
partnerships.

          The Company emphasizes the application of advanced technology to
explore for, develop and produce natural gas and oil.  The Company's historical
growth has been primarily through the acquisition and subsequent development of
oil and gas properties. In 1995, the Company added three dimensional ("3D")
seismic exploration capability.

          The Company also has the capability to conduct 3D numerical simulation
and modeling of petroleum reservoirs.  This capability should prove valuable in
the economic assessment, reservoir management, and future development of
secondary and enhanced recovery projects.  In early 1995, the Company began a
joint project with the federal government's Los Alamos National Laboratory to
develop computerized 3D reservoir modeling and simulation of the Company
operated Cope Waterflood Unit.  The simulation model, currently under active
development, will be utilized to improve reservoir management and potentially
enhance oil production by locating bypassed oil, determining new infill drilling
locations and designing optimum waterflood injection patterns for increased oil
recovery.  Management believes the Company is one of the few companies  its size
to possess this capability.

          On December 20, 1996, the Company completed the acquisition of Summit
Petroleum Corporation, an affiliate, for cash.

          Although the Company's principal properties are located in Texas, the
Company also owns leasehold interests in developed and undeveloped oil and gas
acreage in North Dakota, Illinois, Colorado and Oklahoma.

REGULATION

          The Company's exploration, production and marketing operations are
regulated at the federal, state and local levels.  Oil and gas exploration,
development and production activities are subject to various laws and
regulations governing a wide variety of matters.  For example, there are
statutes or regulations addressing conservation practices and the protection of
correlative rights, and such regulations may affect the Company's operations and
limit the quantity of oil or gas that the Company may produce and sell.  Other
regulated matters include marketing, transportation and valuation of royalty
payments. 

          Among other regulatory matters at the federal level, the Federal
Energy Regulatory Commission ("FERC") regulates interstate transportation of
natural gas under the Natural Gas Act.  The Company's gas sales are not  subject
to price controls but are affected by regulation of intrastate and interstate
gas transportation.  In an attempt to promote competition, the FERC has issued a
series of orders which have altered significantly the marketing and
transportation of natural gas.  To date, the Company has not experienced any
material adverse effect on gas marketing as a result of these FERC orders. 
However, the Company cannot predict what effect these or subsequent regulations
may have on its future gas marketing.


                                      -1-
<PAGE>

ENVIRONMENTAL

          As an owner and operator of oil and gas properties, the Company is
additionally subject to various federal, state and local environmental
regulations, including air and water quality control laws.  These laws and
regulations may, among other things, impose liability on the lessee under an oil
and gas lease for the cost of pollution clean-up resulting from operations,
subject the lessee to liability for pollution damages, and require suspension or
cessation of operations in affected areas and impose restrictions on the
injection of liquids into subsurface aquifers that may contaminate groundwater. 
Although the Company believes that it is in substantial compliance with existing
applicable environmental laws and regulations, there can be no assurance that
substantial costs for compliance will not be incurred in the future.  Moreover,
it is possible that other developments, such as stricter environmental laws,
regulations and enforcement policies thereunder, could result in additional,
presently unquantifiable, costs or liabilities to the Company.  Costs associated
with compliance with such laws have not been a material factor in the Company's
operations.

COMPETITION

          The oil and gas industry is highly competitive.  Competition for the
sale of oil and gas is principally related to pricing as it is affected by
quality and transportation costs.  The price for oil and gas is widely followed
and is generally subject to worldwide market factors.  Competition to acquire
oil and gas leases is significant and the Company will be competing with  major
oil and gas companies which have significantly greater resources.

MAJOR CUSTOMERS

          The Company had sales to the following companies that amounted to 10%
or more of revenues:

                                             1996      1995      1994
                                             ----      ----      ----
               AMOCO Production Company        -        11%        -
               HPL Resources Company           -        11%        -
               Panhandle Gas Company           -         -        16%
               Sun Refining                   15%       17%       14%
               Western Gas Resources          18%       18%       20%
               Conoco, Inc.                   12%  

          Because of the ready market for its oil and gas, the Company does not
consider itself dependent on any single customer or group of customers.

INSURANCE

          The Company maintains insurance customary for operations of a similar
nature.  No loss of production coverage has been sought.

EMPLOYEES

          On March 22, 1997, the Company had 22 full-time employees, none of
which are subject to collective bargaining arrangements.  From time to time, the
Company utilizes the services of independent contractors to perform various
field and other services.  Experienced personnel are available in all
disciplines should the need to hire additional staff arise.

OFFICE FACILITIES

          In September 1995, the Company moved its executive offices to leased
space located at 16701 Greenspoint Park Drive, Suite 200, Houston, Texas 77060. 
In November 1995, the Company purchased a 3,750 square foot building and 2.0
acres of land located at 3419 Hwy. 158, Midland, Texas, from Mr. Warley and
another individual (See NOTE F. RELATED PARTIES, to Consolidated Financial
Statements), for use as a district office, warehouse and equipment yard.  The
Company believes these facilities are adequate for its present needs.


                                      -2-
<PAGE>

ITEM 1A.  EXECUTIVE OFFICERS

          Information regarding executive officers not incorporated by reference
from the Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders is as follows.

DEAS H. WARLEY III, (54), President and Chairman of the Board of Directors of
the Company since 1990 and has been employed in the oil and gas industry since
1979. From 1989 until the present Mr. Warley has been the president and director
of Summit Petroleum Corporation ("Summit"), a public oil and gas company until
its acquisition by the Company in 1996.   Mr. Warley received a Bachelor of
Science Degree in Engineering from Arizona State University in 1971 and Master
of Science Degree in Engineering from the Air Force Institute of Technology in
1973.  Mr. Warley is a member of the National Petroleum Council, the Texas
representative to the Strategic Technological Council, and a member of the
Review Panel for the Department of Energy Natural Gas and Oil Technology
Partnership.  Mr. Warley is a registered Professional Engineer in the state of
Texas.  He is a member of the Independent Petroleum Association of America, the
Permian Basin Petroleum Association, the North Texas Oil and Gas Association,
and the Society of Petroleum Engineers.

HOWARD E. EHLER, (52), Chief Financial Officer and Vice President of Finance,
joined the Company February 14, 1997.  Mr. Ehler is a Certified Public
Accountant who has been engaged in public accounting for 30 years, with emphasis
in auditing and consulting in the oil and gas industry.  Mr. Ehler was formerly
a partner with the firm of Grant Thornton.  He is a member of the American
Institute of Certified Public Accountants (AICPA), the Texas Society of
Certified Public Accountants and the SEC Practice Section of the AICPA.  Mr.
Ehler received a BBA degree from Texas Tech University in 1966.

JESSE Q. OZBOLT, (55), Vice President of Engineering/Operations of the Company,
joined the Company in November 1995 and has been employed in the oil and gas
industry since 1969.  Prior to joining the Company, he was Vice President of
Engineering/Operations for Enex Resources Corporation, a Kingwood, Texas, based
oil and gas production company, where he had been employed since 1982.  Mr.
Ozbolt received a Bachelor of Science Degree in Civil Engineering, Magna Cum
Laude, from Duke University in 1963.  He is a member of the Society of Petroleum
Engineers.

MARILYN D. WADE, (45), Secretary and Administrative Manager of the Company since
1992, has been employed in various accounting, administrative and management
positions.  Ms. Wade has been Administrative Manager of MRO since April 1992. 
Prior to joining MRO, Ms. Wade was the accountant and office manager with
Callaway Oil and Gas from 1988, was self-employed during 1987 and 1988, and was
employed by Midland Resources, Inc. (not the registrant) from 1984 to 1987.


ITEM 2.   DESCRIPTION OF PROPERTIES

OIL AND GAS PROPERTIES

          The Company owns leasehold interests in developed and undeveloped oil
and gas acreage located in the states of Texas, North Dakota, Illinois, Colorado
and Oklahoma.  See Item. 1. Description of Business.

TITLE TO PROPERTIES

          The Company believes that its title to the various oil and gas
interests is satisfactory and consistent with the standards generally accepted
in the oil and gas industry.  The interests of the Company may be subject to one
or more royalty, overriding royalty, carried and other similar interests and
contractual arrangements customary in the industry.  The majority of the value
of the Company's properties is mortgaged to secure borrowings under the bank
credit facility.  


                                      -3-
<PAGE>

PERMIAN BASIN REGION, TEXAS

RHODA WALKER (CHERRY CANYON) FIELD

          This field is located in Ward County, Texas, in which the Company has
an interest in 9 wells which are  operated by the Company with a combined
average production rate of approximately 100 BOPD and 143 MCFD, subject to
normal declines.  During the fourth quarter of 1995, three Rhoda Walker Field
development wells were drilled at a cost to the Company of approximately
$880,000.  These wells increased oil and gas production from this field by 140%.
The Company's net revenue interest in these wells is 87.5%.

ACKERLY (DEAN) FIELD

          This field is located in Dawson County, Texas, in which the Company
has an interest in 2 wells which are  operated by the Company with a combined
average production rate of approximately 98 BOPD and 100 MCFD, subject to normal
declines.  The Wallace #3 development well was completed in January 1996 at a
cost to the Company of approximately $402,000.  The Company's net revenue
interest in these wells is 87.5%.

JAMESON (STRAWN) FIELD

          This field is located in Coke and Sterling Counties, Texas in which
the Company has an interest in 56 wells which are  operated by the Company with
a combined average production rate of approximately 118 BOPD and 1,446 MCFD,
subject to normal declines. At the time the Company acquired the Jameson
properties, there were 21 gross wells which were shut-in for various reasons by
the former operator.  The Company has returned 15 gross wells to production and
has converted nearly 40% of the wells from producing via conventional pumping
unit to a less expensive plunger lift method of artificial lift.  Before this
activity was commenced, production levels were at approximately 170 BOPD and
1,800 MCFD.  Production peaked, in 1992, at 230 BOPD and 2,100 MCFD, an increase
of 35% and 17% respectively, before resuming normal decline.  The Company's net
revenue interest in these wells ranges from 90% to 92%.

          The leasehold encompasses 8,129 gross acres which  provide
opportunities for reentries, infill drilling, and field extension development
drilling. The limits of the sand deposition have not yet been defined and a
number of locations could possibly be developed within the leasehold area.  In
April and August 1996, the Company completed two field extension development
wells at an aggregate cost of approximately $700,000.  Average aggregate
production rates for these wells are approximately 45 BOPD and 250 MCFD, subject
to normal declines.  Effective June 1, 1996, the Company acquired various
additional royalty interests from John Gordon McGill in properties in the
Jameson Field for approximately $500,000.

COPE WATERFLOOD UNIT

          The Cope Unit is located in Sterling County, Texas.  This project
encompasses 2,032 gross acres and at present has 21 gross active wells, 7 of
which are injectors.  At the time the Company acquired the Cope Unit, production
had declined to 100 BOPD.  Several shut-in wells were reactivated with total
unit production immediately improving to 137 BOPD.  The Cope Unit was operated
with a peripheral type flood pattern by former operators.  The Company has
slightly modified this pattern which has resulted in an arrest of the normal
decline and constant production levels for the last 5 years.  

          The Company is working in conjunction with Los Alamos National
Laboratory to develop a 3D mathematical simulation model of the field.  Funded
by the Department of Energy, this cooperative effort, under the Advanced
Reservoir Management Program, is the development of computer simulations to
predict fluid distribution and movement through the reservoir and, in turn,
optimize waterflood injection patterns and determine potential drilling
locations to recover bypassed hydrocarbons.

          Effective May 1, 1996, the Company acquired an additional 15.75%
working interest for approximately $79,000, and now owns approximately 77% of
the working interest in this property.  The Cope Unit produces from the
Spraberry


                                      -4-
<PAGE>

formation.  In June 1996, the Company drilled a replacement well for
one of the producing wells in the unit which was producing mostly water.  The
Cope Unit oil production has been maintained at approximately 125 barrels of oil
per day and unit produced water has been reduced substantially.
          
3D SEISMIC EXPLORATION PROGRAM

          The Company has acquired three 3D seismic exploration projects located
in Terry and Hockley Counties, Texas.  The Company will be the operator for all
three projects and has a 55% working interest in two of the projects and a 30%
working interest in the third.  The projects cover 16,610 gross acres and will
target 3 potentially productive reservoir zones in each project.  In 1996 two 
wells were drilled on one of the prospects, one was a dry hole and the Amoco
Unit No. 1 well  was completed in late 1996.  As of December 31, 1996, drilling
had commenced on wells in each of the other two prospects and the Company's
cumulative expenditures as of that date totaled approximately $1,824,000.  Of
these wells, the Caddell No.1 well in which the Company has a 55% working
interest  was completed in March 1997 at a total cost of $516,000. The second
well, Gardner No.1, is currently in the completion stage, and the Company has a
30% working interest.  Estimated cost for this well is $281,000 to the Company's
interest.

          In July 1996, a fourth 3D seismic exploration project was undertaken
at the junction of Sterling, Tom Green, and Reagan Counties, Texas. The Sugg No.
1 well was drilled and completed in this prospect during the first quarter of
1997, in a limited partnership, of which the Company is the general partner and
a 50% owner.  Through this limited partnership the Company recovered costs of
approximately $360,000 and incurred completion costs on the Sugg well of
approximately $240,000.  The Company will bear 50% of the costs of future wells
in this project.  The working interest in the leases in this project vary.  Once
a pump is in place, expected in April, 1997, this well is expected to produce at
approximately 200 BOPD. (See Plan of Operation.)

OTHER WEST TEXAS PROPERTIES

          In  August 1994, the Company acquired working interests in certain oil
and gas properties with 19 gross wells in Coke and Howard Counties, Texas, from
Ricky W. Patterson, E. W. Patterson and James A. Walton for the purchase price
of $1,950,000 which was adjusted for revenues and expenses through the closing
date.  These wells are operated by the Company and in 1996 had  a combined
average production rate of approximately 74 BOPD and 238 MCFD, subject to normal
declines.

          In addition to the above described properties, the Company owns and
operates 21 leases located within a 150 mile radius of Midland, Texas,
containing 21 gross producing wells on 2,778 gross acres.  These wells are
produced from the Yates, Spraberry and Pennsylvanian formations at depths
ranging from 1,800 feet to 9,000 feet.  The production is heavily weighted to
oil and some leases have additional development opportunities.

GULF COAST REGION, TEXAS

COPANO BAY

          The Copano Bay property is located in Aransas County, Texas,
approximately 50 miles northeast of Corpus Christi.  The leasehold encompasses
2,355 gross acres and currently has eight gross producing wells.  At the time
the Company acquired Copano Bay, it was producing approximately 65 BOPD and 465
MCFD.  The Company conducted several successful workovers, recompletions and re-
entries, and increased production, which even after some initial decline,
averaged 52 BOPD and 828 MCFD in 1996.  Several additional recompletion and
sidetracking opportunities have been identified. During 1994, 1995 and 1996,
Copano Bay properties accounted for approximately 16%, 9% and 5%, respectively,
of the Company's total oil production and approximately 40%, 28% and 16%,
respectively, of the Company's total gas production.

          During 1995, the Bureau of Economic Geology ("BEG") of the University
of Texas at Austin initiated a comprehensive geological study of the Copano Bay
Field to identify zones where oil and gas may have been bypassed and where
additional reserves may yet be developed.  The Company, as a significant
operator in the field, was asked to


                                      -5-
<PAGE>

supply data and cooperated closely with the BEG in getting the study underway. 
Results of the study will be supplied to the Company for its utilization in 
further development of the field.

          Effective June 1, 1996, the Company acquired an additional 5% working
interest from Dobbs Oil & Gas, Inc. in the Company operated Copano Bay property
in Aransas County, Texas, for approximately $177,000, and now owns approximately
68% of the working interest in this property.

REDFISH BAY

          In May 1995, the Company acquired a 50 percent working interest and
operations in three State tracts in Redfish Bay field, Nueces County, Texas in
return for a commitment to expend $1,000,000 in capital expenditures over two
years.   In February 1997, the Company sold its interests in this field for
$1,647,000 in order to concentrate its efforts in the Permian Basin area of West
Texas. The Company expects to realize an approximate $350,000 gain on this sale.

OTHER AREAS

          The Company owns other interests in Illinois, Oklahoma, Colorado,
North Dakota, Central Texas and West Texas including 91 gross producing wells. 
The value associated with these interests are small by comparison to the
Company's other properties.  Commencing in 1995, the Company has participated
with Texaco, operator of the Johnsonville Waterflood Unit in Wayne County,
Illinois, in a combined 3D seismic survey and extensive modeling project to
determine the extent of additional reserves.  The seismic data has been
processed and model construction has begun.  The preliminary findings of this
project should be completed in 1997.

          The following table sets forth information concerning the Company's
leasehold ownership interests as of December 31, 1996.


                         TABLE I  -  LEASEHOLD INTEREST
                             AS OF DECEMBER 31, 1996

                                           GROSS (b)       NET (c)
                                           ---------       -------
          Developed Acreage (a)             21,780         15,576
          Undeveloped Acreage (d)            6,640          3,197
          Net Royalty Acreage                               4,399
          Active Working Interest Wells:
               Oil                             184            118
               Gas                              39             19
          Net Royalty Wells                                     1.9

(a)       DEVELOPED ACREAGE IS ACREAGE SPACED FOR OR ASSIGNABLE TO PRODUCTIVE
          WELLS.
(b)       A GROSS WELL OR ACRE IS A WELL OR ACRE IN WHICH A WORKING INTEREST IS
          OWNED.  THE NUMBER OF GROSS WELLS IS THE TOTAL NUMBER OF WELLS IN
          WHICH A WORKING INTEREST IS OWNED.  THE NUMBER OF GROSS ACRES IS THE
          TOTAL NUMBER OF ACRES IN WHICH A WORKING INTEREST IS OWNED.
(c)       A NET WELL OR ACRE IS DEEMED TO EXIST WHEN THE SUM OF FRACTIONAL
          OWNERSHIP WORKING INTERESTS IN GROSS WELLS OR ACRES EQUALS ONE.  THE
          NUMBER OF NET WELLS OR ACRES IS THE SUM OF THE FRACTIONAL WORKING
          INTERESTS OWNED IN GROSS WELLS OR ACRES EXPRESSED AS WHOLE NUMBERS AND
          FRACTIONS THEREOF.
(d)       UNDEVELOPED ACREAGE IS OIL AND GAS ACREAGE ON WHICH WELLS HAVE NOT
          BEEN DRILLED OR TO WHICH NO PROVED RESERVES OTHER THAN PROVED
          UNDEVELOPED RESERVES HAVE BEEN ATTRIBUTED.

NET PRODUCTION, UNIT SALES AND PRODUCTION COST

          The following table summarizes the net oil and natural gas production
for the Company, the average sales price per barrel of oil and per mcf of
natural gas produced and the average production (lifting) cost per unit of
production for the years ended December 31, 1996, 1995 and 1994.


                                      -6-
<PAGE>

                TABLE II  -  PRODUCTION, PRICE AND COST DATA

<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED DECEMBER 31,              
                                                ---------------------------------------------------------- 
                                                     1996                 1995                    1994     
                                                ------------          ------------            ------------ 
   <S>                                          <C>                   <C>                     <C>
   OIL (a):
         Production (Bbls)                               215,913               166,652             171,755
         Revenue                                    $  4,566,130          $  2,879,973        $  2,732,531
         Average Bbls per day                                591                   457                 471
         Average Sales price per Bbl                $      21.15          $      17.28        $      15.91
   GAS (b):
         Production (Mcf)                              1,002,482             1,268,772        $  1,356,130
         Revenue                                    $  2,392,361          $  2,267,060        $  2,533,228
         Average Mcf per day                               2,746                 3,476               3,715
         Average sales price per Mcf                $       2.39          $       1.79        $       1.87
   PRODUCTION COSTS:
         Production cost                            $  2,981,837          $  2,509,854        $  2,423,032
         Equivalent Bbls (c)                             382,993               378,114             397,777
         Production cost per equivalent Bbl         $       7.79          $       6.64        $       6.09
         Production cost per sales dollar           $       0.43          $       0.49        $       0.46
   TOTAL REVENUES                                   $  6,958,491          $  5,147,033        $  5,265,759
</TABLE>

(a)  INCLUDES CONDENSATE.
(b)  INCLUDES NATURAL GAS LIQUIDS.
(c)  GAS PRODUCTION IS CONVERTED TO EQUIVALENT BBLS AT THE RATE OF 6 MCF PER
     BBL, REPRESENTING THE ESTIMATED RELATIVE ENERGY CONTENT OF NATURAL GAS TO
     OIL.

OIL AND GAS RESERVES

         The estimates of the Company's proved oil and gas reserves, which are
located entirely within the United States, were prepared in accordance with the
guidelines established by the SEC and Financial Accounting Standards Board.  The
estimates as of December 31, 1996, 1995, and 1994, are based on evaluations
prepared by E. Ralph Green and Associates, Independent Petroleum Engineers. For
information concerning costs incurred by the Company for oil and gas operations,
net revenues from oil and gas production, estimated future net revenues
attributable to the Company's oil reserves and present value of future net
revenues on a 10% discount rate and changes therein, see Notes to the Company's
consolidated financial statements. The Company emphasizes that reserve estimates
are inherently imprecise and that estimates of new discoveries are more
imprecise than those of producing oil and gas properties.  Accordingly, the
estimates are subject to change as further information becomes available.

     As an operator of domestic oil and gas properties, the Company has filed
Form EIA-23, "Annual Survey of Oil and Gas Reserves," with the Department of
Energy as required by Public Law 93-275 and Public Law 95-91.  There are
differences between the reserves reported on Form EIA-23 and the reserves
reported herein.  These differences are due to the fact that Form EIA-23
requires an operator to report on total reserves attributable to wells which are
operated by it, without regard to ownership.  The reserves reported herein are
on a net interest basis.

     The estimated proved oil and gas reserves and present value of estimated
future net revenues from proved oil and gas reserves for the Company for the
three years ended December 31, 1996, are summarized below:  


                                      -7-
<PAGE>

                          TABLE III  -  PROVED RESERVES
<TABLE>
<CAPTION>
                                                                          December 31                   
                                                ---------------------------------------------------------
                                                     1996                  1995                   1994   
                                                ------------          ------------           ------------
     <S>                                        <C>                   <C>                    <C>
     OIL AND LIQUIDS (BBLS):
          Proved developed - Producing             1,635,563             1,668,154              1,362,119
          Proved developed - Non-producing           426,411               250,403                101,556
          Proved undeveloped                         779,506               469,052                714,081
                                                ------------          ------------           ------------
              Total                                2,841,480             2,387,609              2,177,756
                                                ------------          ------------           ------------
                                                ------------          ------------           ------------
     NATURAL GAS (MCF):
          Proved developed - Producing             9,960,517            10,267,799             10,414,230
          Proved developed - Non-producing         3,860,883             3,863,781              2,203,390
          Proved undeveloped                       4,473,153             4,337,162              4,442,901
                                                ------------          ------------           ------------
              Total                               18,294,553            18,468,742             17,060,521
                                                ------------          ------------           ------------


     PRESENT VALUE OF ESTIMATED FUTURE NET 
          REVENUES BEFORE INCOME TAXES          $ 39,817,832          $ 17,687,654           $ 15,419,539
                                                ------------          ------------           ------------
                                                ------------          ------------           ------------
</TABLE>

The preceding tables should be read in connection with the following
definitions:  

PROVED RESERVES

          Estimated quantities of crude oil, natural gas and natural gas
     liquids which geological and engineering data demonstrate with reasonable 
     certainty to be economically producible in future years from known 
     reservoirs under existing economic and operating conditions, e.g., prices 
     and costs as of the date the estimate was made, and assuming continuation 
     of current regulatory practices using conventional production methods and 
     equipment.

PROVED DEVELOPED RESERVES

          Proved oil and gas reserves which are expected to be recovered
     from existing wells with existing equipment and operating methods. 
     Developed reserves include both producing and non-producing reserves. 
     Producing reserves are those  reserves expected to be recovered from
     existing completion intervals producing to a market as of the date of
     the appropriate reserve report.  Non-producing reserves are reserves
     that are currently shut-in awaiting a pipeline connection or in
     reservoirs behind the casing or at minor depths above or below the
     producing zone and are considered proved by production either from
     wells in the field, by successful drill-stem tests, or by core
     analyses from the particular zones.  Non-producing reserves require
     only moderate expense for recovery.   

PROVED UNDEVELOPED RESERVES

          Proved oil and gas reserves which are expected to be recoverable
     from additional wells yet to be drilled or from existing wells where a
     relatively major expenditure is required for completion.  

          In estimating oil reserves for 1996, a price of $25.00 per barrel
     was used, which is the average actual price in effect for the
     Company's oil production on January 1, 1997.  In estimating gas
     reserves for 1996, a price of $3.72 per mcf, based on prices in effect
     at January 1, 1997, was used.


                                      -8-
<PAGE>

DRILLING ACTIVITY

     The following table summarizes the number of gross and net productive and
dry exploration and development wells drilled for the years ended December 31,
1996, 1995 and 1994.

                       TABLE IV - DRILLING ACTIVITY IN WEST TEXAS

                                       For the Year Ended December 31,      
                                ---------------------------------------------
                                      1996               1995      
                                ---------------     --------------
                                Gross       Net     Gross      Net       1994
                                -----      -----    -----     -----     -----
     Exploratory:
          Productive              1         0.6       0         0         0
          Dry                     2         1.7       0         0         0
                                -----      -----    -----     -----     -----

            Total                 3         2.3       0         0         0
                                -----      -----    -----     -----     -----

     Development:
          Productive              3         2.8       4       3.7         0
          Dry                     0           0       0         0         0
                                -----      -----    -----     -----     -----

            Total                 3         2.8       4       3.7         0
                                -----      -----    -----     -----     -----


OTHER PROPERTY

     On July 11, 1995, the Company's office building located in Midland, Texas
was sold to an unrelated third party and, in September, 1995, the Company moved
its executive offices to leased space located at 16701 Greenspoint Park Drive,
Suite 200, Houston, Texas  77060.  In November 1995, the Company purchased a
3,750 square foot building and 2.0 acres land located at 3419 Hwy. 158, Midland,
Texas, from a partnership of which Mr. Warley was a 50% owner, for use as a
district office, warehouse and equipment yard.

ITEM 3.   LEGAL PROCEEDINGS

     The Company is involved in litigation arising from its attempt in late 1991
to become the general partner of 27 oil and gas limited partnerships sponsored
by Merrico Resources, Inc.  The Company is appealing a decision entered in the
United States Bankruptcy Court for the Western District of Oklahoma preventing
it from enforcing its election by the limited partners as the general partner. 
The ultimate outcome of this matter is uncertain.

     The Company is a Defendant in a lawsuit filed on July 31, 1995, styled
MANNA OIL & GAS, INC., DOBBS OIL & GAS, INC. V. MIDLAND RESOURCES, INC.,
Miresco, INC. MIDLAND RESOURCES OPERATING COMPANY, INC., Cause No. 40,677.  The
case involves certain Gulf Coast properties located in Copano Bay wherein the
Company owns a 63% working interest and is the operator of the properties.  The
Plaintiffs are (1) seeking a declarative judgment that the Company has failed to
meet the standards and procedures set out in the Operating Agreement; (2)
attempting to recover an unspecified sum; (3) are asking for an accounting for
the years 1993-1995; and (4) attorney fees and costs.  The Company believes it
has a defensible position with respect to all of the Plaintiffs' claims and
intends to defend this case very aggressively. 

     The Company filed a counterclaim against Manna Oil and Gas, Inc. ("Manna")
in which the Company is seeking specific performance of an oral contract that
the Company entered into with Manna, whereby the Company and Manna agreed that
if either party acquired any additional property interest or contract rights of
any kind in the properties that are the subject of the underlying lawsuit that
said party would offer to convey to the other party their proportionate
ownership in such newly acquired property interest or contract rights.  In the
alternative, the Company claims that Manna 


                                    -9-
<PAGE>

breached such contract, and the Company is seeking monetary damages, 
resulting from said breach of contract, as well as attorney fees and court 
costs.

     There are no material proceedings to which any director, officer, or
affiliate of the Company, or any owner of record (or beneficiary) of more than 5
percent of any class of voting securities of the Company is a party adverse to
the Company.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Response is not required.

                                    PART II.

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock and its $4.00 warrants are traded on NASDAQ
under the symbols MRIX and MRIXZ, respectively.  The Company's Common Stock and
warrants were authorized for trading on NASDAQ on May 17, 1991.  The registrar
and transfer agent is Stock Transfer Company of America, Inc., Dallas, Texas. 
As of March  26, 1997, the Company had 1,828 shareholders of record and
4,411,031 shares outstanding.

                           PRICE RANGE OF COMMON STOCK

                                                  HIGH      LOW
                                                 ------   -------
     1995:  (1)                               
          First Quarter........................       4     2 3/8
          Second Quarter.......................   3 7/8     2 5/8
          Third Quarter........................   5 3/8     3 1/2
          Fourth Quarter.......................   3 7/8     2 3/8
                                              
     1996:  (1)                               
          First Quarter........................   3 7/8     2 5/8
          Second Quarter.......................   4 1/4     3 1/8
          Third Quarter........................   3 3/4     2 7/8
          Fourth Quarter.......................   3 1/4   1 15/16



(1)  REFLECTS HIGH AND LOW TRADING RANGE INFORMATION RECEIVED FROM NASDAQ.
(2)  ON MARCH 26, 1997, THE BID PRICE WAS 5 3/4.
(3)  THESE QUOTATIONS REFLECT INTER-DEALER PRICES, WITHOUT RETAIL MARKUP,
     MARKDOWN OR COMMISSION AND MAY NOT REFLECT ACTUAL TRANSACTIONS.

     The Company has not paid any dividends on its Common Stock, and it is the
present policy of the Company not to do so, but to retain its earnings for
future growth and business activities.  The Company is also subject to certain
loan covenants which include restrictions on dividends, distributions and
redemptions. 

     On March 26, 1996 the Company issued  three year warrants to purchase
15,000 shares of its common stock at $3.50 per share to Southwest Merchant
Group, Dallas, Texas as part of the consideration for investment counseling
advice.  The Company relied upon Section 4(2) of  the Securities Act of 1933 for
an exemption from registering the warrants  based upon there being only one
purchaser, the purchasers access to Company information and the business
sophistication of the purchasers representatives.  On October 23, 1996, the
Company issued a five year warrant to purchase 10,000 shares of its common stock
at $3.50 per share to Sam Brock, a member of the Company's board of directors,
in consideration of his providing expertise and assistance in helping the
Company market its hydrocarbon production.  The Company relied upon Section 4(2)
of  the Securities Act of 1933 for an exemption from registering the 


                                     -10-
<PAGE>

warrants based upon there being only one purchaser, his knowledge of and 
access to Company information and his business sophistication.

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     This discussion should be read in conjunction with the audited financial
statements of Midland Resources, Inc. and Subsidiaries.

PLAN OF OPERATION

     The Company's initial capitalization was through the acquisition of the
interests of the seven public oil and gas income limited partnerships in
exchange for common stock and warrants of the Company.  There were 2,264,522
shares of common stock issued and, for each share of common stock issued, two
warrants were issued entitling the holder to purchase one share of common stock
at $2.50 and one share at $4.00 during the period November 1990 to November
2002.  In October  1995, the Company called for redemption its $2.50 warrants. 
Holders received a redemption payment of $0.05 per warrant for aggregate
payments of $63,373, which was charged to additional paid in capital.  997,009
of the $2.50 warrants were exercised, resulting in net proceeds of approximately
$1,831,000.  As of December 31, 1996, none of the $4.00 warrants had been
exercised.

     On December 31, 1993, the Company acquired all of the issued and
outstanding common stock of MRO through an agreement of acquisition under which
the Company issued 1,110,000 shares of common stock to Deas H. Warley III and
another former officer and director of the Company. The exchange was based on
the relative fair values of the Company and MRO, based on a determination by the
Board of Directors of each respective corporation.  The overall transaction was
subject to a fairness opinion provided by an investment banking firm.  The
acquisition of MRO expanded the Company's revenue base to include property
operations.

     On December 20, 1996, the Company completed the acquisition of Summit
Petroleum Corporation ("Summit"), an affiliated entity engaged in oil and gas
acquisition, development and exploration activities which owned interests in
many of the same properties as the Company.  The Company's total investment in
acquiring Summit is approximately $2,011,000.

     The Company has increased its proved reserves by more than 50% since 1993
through acquisitions with ascertainable additional reserve potential and a
selective program of drilling, workovers, recompletions and re-entries. 
Historically, the Company's growth has been primarily through the acquisition
and subsequent development of proved oil and gas properties.  During 1996, the
Company escalated its development and exploration activities with the drilling
of three successful development wells and three exploratory wells, one of which
was completed as a producing well. The Company intends to continue increasing
production and reserves through exploration and further development of existing
oil and gas properties and future acquisitions.  The Company estimates that it
will drill up to 38 wells in 1997 at a cost of approximately $12.6 million to
the Company's interest.  The majority of these will be development wells on
recent 3D seismic discovery locations.  Four of these will be exploratory wells
on separate features in the 3D seismic projects.

     Management believes that the cost of its exploration and development
programs will be funded from additional debt and equity financing, and to a
lesser extent from cash flows from operations.

CAPITAL RESOURCES AND LIQUIDITY

     In 1996, net cash provided by operations increased from 1995 by $321,966,
reflecting increased oil and gas revenue, partially offset by increased
exploration and production costs.  Net cash used in investing activities
increased from 1995 by $1,991,104, reflecting increased expenditures for oil and
gas properties and equipment and the purchase of Summit.  Net cash provided by
financing activities increased from 1995 by $1,333,550, reflecting additional
borrowings for property acquisition and development and the purchase of Summit. 
In 1996, cash payments for oil and gas property acquisition costs totaled
$761,476 for proved properties, $144,100 for unproved properties, and $2,391,642
for development of properties.  In 1995, acquisition costs for proven properties
were $510,832, acquisition costs for unproven properties were $198,124 and
development costs were $2,011,634. 


                                       -11-
<PAGE>

     For 1996 the Company's working capital increased $288,543 over 1995. The 
principal components of this  increase were:  (i)  a refinancing of bank debt 
in 1996 that removed approximately $1,200,000 of current liabilities, (ii) 
increased operating income for 1996, (iii) the adverse impact of approximately 
$???,000 resulting from the Redfish Bay property being held for sale in 1996, 
and (iv) the use of funds for the Company's investment in its oil and gas 
properties and the acquisition of Summit.  The Company expects that its 
future exploration and development costs will be funded from debt and/or 
equity sources and to a lesser extent from operations. Management believes 
current debt maturities can be funded from cash flow from operations.  

     At December 31, 1996, the Company has a net deferred tax asset of $330,956
which it believes can be realized based on estimates of future income from the
production of existing hydrocarbon reserves.  The net asset is primarily
composed of net operating loss carry-forwards which do not begin to expire until
2005.

     In December 1994, the Company's credit facility was increased to 
$20,000,000 with a borrowing base of $7,000,000 and its terms were extended.  
On June 1, 1995, the borrowing base was increased to $8,000,000, and 
effective the same date, this note was amended to allow 25% of the borrowing 
base to be used for working capital purposes and to decrease the interest 
rate from prime rate plus 1.5% to prime rate plus 0.75%.  In exchange, the 
bank received 150,000 warrants to purchase common stock at $4.00 per share.  
In October 1996, the borrowing base was increased to $9,500,000.  Amounts 
outstanding under this loan agreement currently bear interest at a rate 
which, at the Company's option, either fluctuates with the bank's prime rate, 
or which is based on the London Interbank offered rate.  Interest is payable 
monthly as it accrues.  The credit facility also provides for the payment of 
a commitment fee equal to  1/2 of 1% of the unused balance of the borrowing 
base; payable quarterly.  The borrowing base is reduced by $100,000 per month 
beginning April 1997 with final maturity in October 2000.  The balance of 
this note at December 31, 1996, was $8,500,000. This note is secured by the 
majority of the Company's assets.  

     In March 1, 1995, the Company entered into a one year gas swap agreement to
hedge against a portion of the price risk associated with gas price declines.  
This swap agreement expired in February 1996, and the Company has not entered
into another contract.  Losses under this contract were $21,109 and $25,860 for
1995 and 1996, respectively.

     The prices of crude oil have fluctuated significantly in recent years as
well as in recent months.  As of December 31, 1996, the Company was receiving
$25.00 per bbl as compared to $18.56 at January 1, 1996.  Fluctuations in price
have a significant impact on the Company's financial condition and liquidity. 
In the absence of rapid and dramatic decreases in oil and gas prices, management
believes it can maintain adequate liquidity for future needs.

     The following tables sets forth a summary of historical financial
information for the Company.  These tables should be read in conjunction with
the consolidated financial statements of Midland Resources, Inc. and Subsidiary
(and the related notes).  It should be noted that there are no audited financial
statements included herein for the year 1993.  These tables are not covered by
the reports of independent certified public accountants.


                                        -12-
<PAGE>

                             SUMMARY BALANCE SHEET DATA

<TABLE>
<CAPTION>
                                                                              AS OF DECEMBER 31,
                                                      --------------------------------------------------------------------
                                                          1996             1995                1994                1993      
                                                      -----------      -----------         -----------         -----------   
<S>                                                   <C>              <C>                 <C>                 <C>
Current assets                                        $ 3,644,720      $ 2,038,452         $ 1,134,999         $ 1,444,981   
Current liabilities                                     3,268,428        1,950,703           2,152,910           1,864,131   
                                                      -----------      -----------         -----------         -----------   
  Working capital                                         376,292           87,749          (1,017,911)           (419,150)  
Oil and gas properties (net)                           13,408,878        9,887,998           9,257,900           7,991,304   
Other assets                                            1,923,048        2,196,902           2,385,641           2,113,785   
Total assets                                           18,976,646       14,123,352          12,778,540          11,550,070   
Long-term debt (excluding current maturities)           7,166,421        4,524,617           4,254,042           3,616,628   
Other non-current liabilities                             364,537            -                   -                   -       
Stockholders' equity                                  $ 8,177,260      $ 7,648,032         $ 6,371,588         $ 6,069,311   
                                                      -----------      -----------         -----------         -----------   
                                                      -----------      -----------         -----------         -----------   
Stockholders' equity per common share                 $      1.86      $      1.74         $      1.90         $      1.80   
                                                      -----------      -----------         -----------         -----------   
                                                      -----------      -----------         -----------         -----------   
Shares outstanding                                      4,401,031        4,386,231           3,362,222           3,374,522   
                                                      -----------      -----------         -----------         -----------   
                                                      -----------      -----------         -----------         -----------   
</TABLE>


                            SUMMARY OF OPERATIONS

<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                      --------------------------------------------------------------------
                                                          1996             1995                1994                1993      
                                                      -----------      -----------         -----------         -----------   
<S>                                                   <C>              <C>                 <C>                 <C>
Oil and gas sales                                     $ 6,958,491      $ 5,147,033         $ 5,265,759         $ 4,569,022   
Other                                                     183,234          231,141             217,884              82,173   
                                                      -----------      -----------         -----------         -----------   
  Total operating revenues                              7,141,725        5,378,174           5,483,643           4,651,195   

Production costs                                        2,981,837        2,509,854           2,423,032           2,091,955   
Exploration costs                                         766,855          198,453               -                   -       
Depreciation, depletion and amortization                1,306,287        1,033,905           1,120,841             786,918   
Abandonments and dry hole costs                             -                3,000              41,676              25,732   
General and administrative expenses                     1,295,298        1,049,904           1,145,719           1,422,094   
Impairment costs (a)                                      114,904        1,020,670               -                   -       
                                                      -----------      -----------         -----------         -----------   
  Total operating expenses                              6,465,181        5,815,786           4,731,268           4,326,699   
                                                      -----------      -----------         -----------         -----------   
                                                          676,544         (437,612)            752,375             324,496   
Gain (loss) on sale of properties (b)                      36,308         (102,984)             81,962               -       
Other income (c)                                           61,997           38,911             169,174              51,692   
Interest expense                                         (722,447)        (611,587)           (473,048)           (296,797)  
                                                      -----------      -----------         -----------         -----------   
Income (loss) before income taxes and cumulative                                                                             
  effect of change in accounting principle                 52,402       (1,113,272)            530,463              79,391   
Income tax expense (benefit)                               30,280         (376,241)            204,769              29,457   
                                                      -----------      -----------         -----------         -----------   
Income (loss) before cumulative effect of                                                                                    
  change in accounting principle                      $    22,122      $  (737,031)        $   325,694         $    49,934   
                                                      -----------      -----------         -----------         -----------   
                                                      -----------      -----------         -----------         -----------   
Income (loss) per common share before                                                                                        
  cumulative effect of change                         $      0.01      $     (0.22)        $      0.10         $      0.02   
                                                      -----------      -----------         -----------         -----------   
                                                      -----------      -----------         -----------         -----------   
Weighted average shares outstanding                     4,395,414        3,381,592           3,368,455           2,267,563
                                                      -----------      -----------         -----------         -----------   
                                                      -----------      -----------         -----------         -----------   

</TABLE>

(a)  IN 1995, CONCURRENT WITH THE COMPANY'S ADOPTION OF THE FINANCIAL ACCOUNTING
     STANDARDS BOARD STATEMENT NO. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-
     LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" ("FAS 121"), THE
     COMPANY RECOGNIZED A CHARGE OF $1,020,670 FOR CERTAIN PROPERTIES WHICH ARE
     HELD FOR SALE. 
(b)  GAIN (LOSS) ON SALE OF PROPERTIES WAS PRINCIPALLY COMPOSED OF THE LOSS ON
     THE SALE OF THE COMPANY'S FORMER OFFICE FACILITIES IN MIDLAND, TEXAS, IN
     1995 AND A GAIN ON THE SALE OF A WORKING INTEREST IN AN OIL AND GAS
     PROPERTY TO SUMMIT PETROLEUM CORPORATION IN 1994.
(c)  IN 1994, THERE WAS OTHER INCOME FROM THE SETTLEMENT OF LITIGATION REGARDING
     A FORMER PROPERTY OPERATOR OF $120,090.


                                       -13-
<PAGE>

RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

     For 1995, oil and gas sales decreased by $118,726 or 2% from 1994.  This 
decrease resulted mostly from normal production declines.  Average gas prices
decreased from $1.87 per mcf in 1994 to $1.79 per mcf in 1995.  Average oil
prices increased from $15.91 per bbl in 1994 to $17.28 per bbl in 1995.

     During 1996, oil and gas sales increased from $5,147,033 in 1995 to 
$6,958,491; an increase of $1,811,458 or 35%.  Oil production increased from 
166,652 Bbls to 215,213 Bbls; an increase of 48,561 Bbls or 29%.  Gas 
production decreased from 1,268,772 mcf to 1,002,482 mcf; a decrease of 
266,290 mcf or 21%. Sales and net production increases resulted from price 
increases as well as from production from wells drilled and completed in the 
Jameson Field, and the Wallace and Wilson properties in late 1995 and early 
1996.  Average gas prices increased from $1.79 per mcf in 1995 to $2.39 per 
mcf in 1996.  Oil prices increased from $17.28 per bbl in 1995 to $21.15 per 
bbl in 1996.

     In 1995, production costs increased to $2,509,854; an increase of $86,822
or 4% from 1994, due primarily to property acquisitions in 1995.  In 1996,
production costs increased from $2,509,854 in 1995 to $2,981,837, an increase of
$471,983 or 19%.  This increase is attributable primarily to additional
producing wells as discussed above, as well as to production taxes increasing as
a result of increased oil and gas prices.

     During 1996 and 1995, exploration costs were $766,855 and $198,453,
respectively, which were incurred in connection with the three 3D exploration
projects discussed above.  There were no such items for 1994.

      In 1995, DD&A decreased to $1,033,905; a decrease of $86,936 or 8% due to
increased estimated oil reserves.  In 1996, DD&A was $1,306,287 as compared to
$1,033,905 in 1995, for an increase of $272,382 or 26%.  This was due primarily
to an increase in property investments resulting from the completion of
additional wells and to the acquisition of Summit.  In 1995, an impairment loss
of $1,020,670 was recognized to reduce the carrying amount of the property being
held for sale to their estimated fair value.  In 1996, the impairment loss was
$114,904.

     In 1995, general and administrative ("G&A") expenses decreased to
$1,049,904; a decrease of $95,815 or 8% from 1994, primarily due to an increase
in overhead recoveries from property operations of $119,531 and a reduction in
stockholder relation and promotion costs of $33,860, offset by increased salary
and benefit costs of $83,354.  In 1996, G&A expenses increased from $1,049,904
in 1995 to $1,295,298, an increase of $245,394 or 23%.  This increase was
attributable primarily to the write off in 1996 of approximately $115,000 of
acquisition costs associated with an attempt to acquire another public
independent oil and gas company, as well as to increased labor costs associated
with the company's relocation from Midland, Texas, to Houston, Texas.

     In 1995, there was a loss on sale of properties and equipment totaling
$102,984 primarily from the sale of the office building in Midland, Texas.  In
1996, there were gains of $36,308 primarily from the sales of oil and gas
properties.

     In 1994, there was other income from the settlement of litigation regarding
a former property operator of $120,090.  There was no such item in 1996 or 1995.

     In 1995, interest expense increased to $611,587, an increase of $138,539 or
29% as a result of additional borrowings for property acquisitions and higher
interest rates.  In 1996, interest expenses increased to $722,447, an increase
of $110,860 or 18%.  This increase is attributable to additional borrowings to
consummate the Summit acquisition, and for property acquisitions and development
projects.

     In 1994, net income was $325,694 which included management income of 
$108,000 and property operations income of $68,478 due to the acquisition of 
MRO.  In 1995, the net loss was $737,031 primarily resulting from the impairment
loss of $1,020,670, the loss on sale of properties and equipment of $102,984 
and the incurrence of exploration costs totaling $198,453.  In 1996, net 
income was $22,122, due primarily to higher prices for oil and gas production 
and lower impairment losses, partially offset by increases in production 
costs, G&A expenses and other factors discussed above.

                                     -14-
<PAGE>

ITEM 7.   FINANCIAL STATEMENTS


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors and Stockholders
Midland Resources, Inc.

We have audited the accompanying consolidated balance sheet of Midland 
Resources, Inc. and subsidiaries as of December 31, 1996, and the related 
consolidated statements of operations, stockholders' equity and cash flows 
for the year then ended.  These financial statements are the responsibility 
of the Company's management.  Our responsibility is to express an opinion on 
these financial statements based on our audit.

We conducted our audit 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 audit provides a 
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Midland
Resources, Inc. and subsidiaries at December 31, 1996, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended, in conformity with generally accepted accounting principles.




                                        GRANT THORNTON LLP

Houston, Texas
March 21, 1997


                                       -15-
<PAGE>

                       REPORT OF INDEPENDENT AUDITORS




To the Board of Directors and Stockholders
Midland Resources, Inc.

We have audited the accompanying consolidated balance sheet of Midland
Resources, Inc. and subsidiary as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the two years 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 audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Midland
Resources, Inc. and subsidiary at December 31, 1995, and the results of their
operations and cash flows for the two years ended December 31, 1995, in
conformity with generally accepted accounting principles.

As discussed in Note A to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," in 1995.




                                            ERNST & YOUNG LLP


Fort Worth, Texas
March 5, 1996


                                       -16-
<PAGE>

                   MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                          December 31,              
                                                                               -------------------------------
                                                                                  1996                 1995         
                                                                               -----------         -----------
<S>                                                                            <C>                 <C>
ASSETS
   Current assets:
     Cash                                                                      $   366,677         $   514,610      
     Accounts receivable:                                                                                           
       Oil and gas sales, net of allowance of $29,674 in 1995                      834,269             545,910      
       Related parties                                                             360,479              97,681      
       Other                                                                       359,600             178,804      
     Property held for sale                                                      1,241,515             255,073      
     Other current assets                                                          104,180             106,865      
     Deferred tax asset                                                            378,000             339,509      
                                                                               -----------         -----------
       Total current assets                                                      3,644,720           2,038,452      
                                                                                                                    
   Property and equipment, at cost                                              27,889,580          22,176,136      
   Less accumulated depreciation, depletion and amortization                    14,076,100          11,816,754      
                                                                               -----------         -----------
       Property and equipment, net                                              13,813,480          10,359,382      
   Deferred tax asset                                                                -                 262,554      
   Goodwill, net of amortization of $80,067 in 1996 and $53,377 in 1995            747,271             773,961      
   Contracts and leases, net of amortization of $78,411 in 1996                                                     
     and $99,352 in 1995                                                           414,633             287,690      
   Non-current note receivable                                                     317,759             331,857      
   Other assets                                                                     38,783              69,456      
                                                                               -----------         -----------
       Total assets                                                            $18,976,646         $14,123,352      
                                                                               -----------         -----------
                                                                               -----------         -----------
                                                                                                                    
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                
   Current liabilities:                                                                                             
     Current portion of long-term debt                                         $ 1,680,830         $ 1,224,401      
     Accounts payable and accrued expenses                                       1,194,344             726,302      
     Drilling advances                                                             393,254               -          
                                                                               -----------         -----------
       Total current liabilities                                                 3,268,428           1,950,703      
                                                                                                                    
   Long-term debt                                                                7,166,421           4,524,617      
   Deferred tax liability                                                           47,044               -          
   Payable for the purchase of subsidiary and other                                317,493               -          
                                                                               -----------         -----------
       Total liabilities                                                        10,799,386           6,475,320

   Stockholders' equity:                                                                                            
     Preferred stock, $0.01 par value; 20,000,000 shares authorized,                                                
       none issued                                                                   -                   -          
     Common stock, $0.001 par value; 80,000,000 shares                                                              
       authorized; 4,401,031 and 4,393,531 shares issued in 1996                                                    
       and 1995, respectively                                                        4,401               4,394      
     Additional paid in capital                                                  7,898,199           7,859,794      
     Treasury stock (7,300 shares in 1995) at cost                                   -                 (15,053)     
     Note receivable from officer/director                                           -                (453,641)     
     Retained earnings                                                             274,660             252,538      
                                                                               -----------         -----------
       Total stockholders' equity                                                8,177,260           7,648,032      
                                                                               -----------         -----------
       Total liabilities and stockholders' equity                              $18,976,646         $14,123,352      
                                                                               -----------         -----------
                                                                               -----------         -----------

</TABLE>
    THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
                                  STATEMENTS.


                                     -17-
<PAGE>

                  MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                        Years ended December 31,
                                                       -------------------------------------------------------
                                                          1996                    1995                  1994
                                                       ----------              -----------          ----------
<S>                                                    <C>                     <C>                  <C>
Operating revenue:
   Oil and gas sales                                   $6,958,491              $ 5,147,033          $5,265,759
   Management income                                       45,000                  102,000             108,000
   Property operations income                             111,862                   81,036              68,478
   Other                                                   26,372                   48,105              41,406
                                                       ----------              -----------          ----------

      Total operating revenue                           7,141,725                5,378,174           5,483,643


Operating costs and expenses:
   Oil and gas production                               2,981,837                2,509,854           2,423,032
   Exploration costs                                      766,855                  198,453               -    
   Depreciation, depletion and amortization             1,306,287                1,033,905           1,120,841
   Dry hole and abandonment costs                           -                        3,000              41,676
   General and administrative                           1,295,298                1,049,904           1,145,719
   Impairment of properties                               114,904                1,020,670               -    
                                                       ----------              -----------          ----------

      Total operating costs and expenses                6,465,181                5,815,786           4,731,268
                                                       ----------              -----------          ----------

                                                          676,544                 (437,612)            752,375
Other income and (expenses):
   Gain (loss) on sale of property and equipment           36,308                 (102,984)             81,962
   Interest income                                         61,997                   19,374               8,200
   Other income                                             -                       19,537             160,974
   Interest expense                                      (722,447)                (611,587)           (473,048)
                                                       ----------              -----------          ----------

      Total other income and expenses                    (624,142)                (675,660)           (221,912)
                                                       ----------              -----------          ----------

Income (loss) before income taxes                          52,402               (1,113,272)            530,463

Income taxes:
   Current state income tax expense                         -                        -                  17,669
   Deferred federal income tax expense (benefit)           30,280                 (376,241)            187,100
                                                       ----------              -----------          ----------

Net income (loss)                                       $  22,122              $  (737,031)         $  325,694
                                                       ----------              -----------          ----------
                                                       ----------              -----------          ----------

Earnings (loss) per common share                          $  0.01                 $  (0.22)            $  0.10
                                                       ----------              -----------          ----------
                                                       ----------              -----------          ----------

</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
                                 STATEMENTS.


                                     -18-

<PAGE>

                   MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                             Common Stock             Additional        Retained         Treasury       Note
                                        ------------------------       Paid in          Earnings          Stock,      Receivable
                                          Shares        Amount          Capital        (Deficit)         at cost   office/director
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>           <C>          <C>              <C>              <C>          <C>          
Balances at December 31, 1993            3,374,522     $  3,375     $  5,404,109     $  663,875       $  (2,048)        $  -    
Purchase of Treasury stock
   (11,300 shares)                           -            -                -              -             (23,417)           -    
Net income                                   -            -                -            325,694           -                -    
-----------------------------------------------------------------------------------------------------------------------------------

Balances at December 31, 1994            3,374,522        3,375        5,404,109        989,569         (25,465)           -    
Stock options exercised                     22,000           22           51,072          -               -                -    
Warrants exercised                         997,009          997        2,399,787          -               -             (453,641)
Warrants redeemed                            -            -              (63,373)         -               -                -    
Treasury stock contributed
   to ESOP (5,000 shares)                    -            -                2,577          -              10,412            -    
Warrants issued to bank                      -            -               65,622          -               -                -    
Net loss                                     -            -                -           (737,031)          -                -    
-----------------------------------------------------------------------------------------------------------------------------------

Balances at December 31, 1995            4,393,531        4,394        7,859,794        252,538         (15,053)        (453,641)
Stock options exercised                      7,500            7           17,805          -               -                -    
Additional proceeds from 1995
   warrants exercised                        -            -                9,191          -               -                -    
Treasury stock contributed
   to ESOP (7,300 shares)                    -            -               11,409          -              15,053            -    
Reduction of note receivable
   officer/director                          -            -                -                              -             453,641 
Net income                                   -            -                -             22,122                                 
-----------------------------------------------------------------------------------------------------------------------------------

Balances at December 31, 1996            4,401,031     $  4,401     $  7,898,199     $  274,660       $   -            $  -     
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                        -19-
<PAGE>

                     MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                         Years ended December 31,
                                                          -----------------------------------------------------
                                                              1996                1995                  1994
                                                          ----------         -----------            -----------
<S>                                                       <C>                <C>                    <C>
Cash flows from operating activities:
   Net income (loss)                                       $  22,122         $  (737,031)           $  325,694
   Depreciation, depletion and amortization                1,306,287           1,033,905             1,120,841
   Abandonments and dry hole costs                             -                   -                    41,676 
   Impairment of properties                                  114,904           1,020,670                 -    
   (Gain) loss on sale of  properties and equipment          (36,308)            102,984               (81,962)
   Deferred income tax expense (benefit)                      30,280            (376,241)              187,100 
   (Increase) decrease in accounts receivable
      related to operations                                 (265,521)            (58,418)               31,617 
   Increase in other current assets                           (8,300)            (62,798)               (8,101)
   Increase (decrease) in accounts payable and 
      accrued expenses related to operations                 218,581             182,293              (128,146)
   Increase (decrease) in note receivable                      -                  28,456               (50,056)
   Other                                                      94,704              20,963               (23,111)
                                                          ----------          ----------             ----------
   Net cash provided by operating activities               1,476,749           1,154,783             1,415,552

Cash flows from investing activities:
   Additions to oil and gas properties                    (3,297,218)         (2,720,590)           (2,347,193)
   Additions to other property and equipment                 (40,554)           (159,805)             (324,834)
   Sale and salvage recoveries on oil and 
      gas properties                                          32,975               -                   205,304 
   Sale of other property and equipment                        1,000              14,120                 1,500 
   Reimbursable partnership expenditures                    (360,479)              -                     -    
   Purchase of marketable securities                        (326,155)              -                     -    
   Sale of marketable securities                             350,332               -                     -    
   Purchase of Summit, less cash acquired                 (1,217,280)              -                     -     
                                                          ----------           ----------            ----------


   Net cash used in investing activities                  (4,857,379)         (2,866,275)           (2,465,223)

Cash flows from financing activities:
   Purchase of treasury stock                                  -                  -                    (23,417)
   Net proceeds from warrants exercised                        9,191           1,830,997                 -    
   Collections on note receivable from 
      officer/director                                         -                  95,000                 -    
   Warrant redemptions                                         -                 (63,373)                -    
   Net proceeds from options exercised                        29,221              51,094                 -    
   Borrowings on long-term debt                            3,770,000           1,821,000             2,886,842 
   Principal payments on long-term debt                     (983,067)         (1,826,056)           (1,832,503)
   Drilling advances                                         393,254               -                     -    
   Other                                                      14,098              (9,515)                -    
                                                          ----------           ----------            ----------


   Net cash provided by financing activities               3,232,697           1,899,147             1,030,922 
                                                          ----------           ----------            ----------


Increase (decrease) in cash                                 (147,933)            187,655               (18,749)
Cash, beginning of year                                      514,610             326,955               345,704 
                                                          ----------           ----------            ----------

Cash, end of year                                         $  366,677          $  514,610            $  326,955 
                                                          ----------           ----------            ----------
                                                          ----------           ----------            ----------
</TABLE>

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


                                       -20-
<PAGE>

                       MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

     ORGANIZATION AND BASIS OF PRESENTATION

         Midland Resources, Inc. ("Company"), was organized in 1990 with the 
    issue of common stock and warrants in exchange for oil and gas      
    partnership interests.  The Company and its wholly owned subsidiaries are
    headquartered in Houston, Texas. The Company is involved in the 
    acquisition, exploration, development and production of oil and gas and owns
    producing properties and undeveloped acreage in Texas, North Dakota,
    Colorado, Illinois and Oklahoma.  The majority of its activities are
    centered in the Permian Basin of West Texas.  Midland Resources Operating
    Company Inc. ("MRO"), a wholly owned subsidiary, is in the business of
    oil and gas property operations.  Summit Petroleum Corporation ("Summit")
    is a wholly owned subsidiary engaged in oil and gas acquisition, 
    exploration, development, production and property operations.
    (See Note B.)
          

     PRINCIPLES OF CONSOLIDATION

          The accompanying consolidated balance sheets include the accounts
     of the Company and its wholly owned subsidiaries.  All significant 
     inter-company balance sheet accounts have been eliminated in consolidation.
     All significant inter-company transactions have been eliminated from the
     consolidated statements of operations and cash flows for the years ended
     December 31, 1996, 1995 and 1994.
     
     OIL AND GAS OPERATIONS

          The Company follows the "successful efforts" method of accounting 
     for oil and gas properties.  All costs associated with the acquisition 
     and development of proved oil and gas properties are capitalized.  

          Costs associated with exploratory drilling are capitalized pending
     evaluation of drilling results.  Costs of exploratory wells which do not
     find proved results are expensed.  Geological, geophysical and delay
     rental costs are expensed as incurred.

          Depreciation, depletion and amortization of oil and gas properties 
     is computed on a property-by-property basis using the 
     units-of-production method based upon estimated oil and gas reserve 
     quantities.
     
          Oil and gas revenues are recognized under the sales method at the   
     point of delivery to the purchaser.  No significant over or under 
     produced positions between the Company and its working interest partners 
     exist.

     OTHER PROPERTY AND EQUIPMENT

          The Company's building is depreciated on the straight-line method
     over an estimated useful life of 30 years.  All other property and
     equipment is depreciated on the straight-line method over lives ranging 
     from 5 to 6 years.

     INTANGIBLE ASSETS

          Goodwill is amortized on the straight-line method over 30 years.    
     Property operating contracts are amortized on the straight-line method 
     over the lives of the respective oil and gas properties which range from 
     3 to 19 years.  The Summit management contract (see Note F.) was being   
     amortized on the straight-line method over 48 months. 


                                        -21-
<PAGE>

                       MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A.  (CONTINUED)

     TREASURY STOCK

          Treasury stock is carried at cost.  Upon reissuance, the cost of
     treasury shares held is reduced by the average cost per share.

     ACCOUNTING FOR STOCK OPTIONS

          The Company accounts for employee stock option grants in accordance 
     with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and 
     related interpretations, whereby compensation costs are recognized only 
     in situations where stock compensatory plans award intrinsic value to    
     recipients at the date of grant.

     USE OF ESTIMATES

          The preparation of financial statements in conformity with 
     generally accepted accounting principles requires management to make 
     estimates and assumptions that affect the amounts reported in the 
     financial statements and accompanying notes.  Actual results could 
     differ from those estimates. The most significant estimates affecting 
     the Company's financial statements are the determination of hydrocarbon 
     reserves, the estimated useful lives of depreciable and amortizable 
     assets, and the fair value of assets held for sale.
     
     INCOME TAXES

          The Company recognizes deferred tax assets and liabilities for the  
    future tax consequences of differences between the financial statement    
    carrying amounts of assets and liabilities and their respective tax bases.
    Deferred tax assets and liabilities are measured using enacted tax rates  
    applicable to the years in which those temporary differences are expected 
    to be recovered or settled.  The effect on deferred tax assets and      
    liabilities of a change in tax rates is recognized in income in the period
    that includes the enactment date.

     EARNINGS (LOSS) PER COMMON SHARE

          Earnings per share for 1996 is computed on 4,395,414 weighted 
     average shares of common stock outstanding during the year.  Loss per 
     share for 1995 is computed on 3,381,592 weighted average shares of 
     common stock outstanding.  Earnings per share for 1994 is computed on 
     3,368,455 weighted average shares of common stock outstanding.  In 
     accordance with generally accepted accounting principles, common stock 
     options and warrants are included as common stock equivalents only when 
     their inclusion is dilutive. The inclusion of common stock equivalents 
     in 1996, 1995 and 1994 would not have had a dilutive effect on earnings 
     (loss) per share; consequently, common stock options and warrants are 
     excluded from the earnings (loss) per share computation.

     EMPLOYEE BENEFITS

          Prior to 1995, the Company maintained a 401(k) Plan which covered 
     substantially all full-time employees.  In 1995, the Board of Directors
     authorized the restatement of the plan as the Midland Resources Operating
     Company, Inc. 401(k) Employee's Stock Ownership Plan and Trust and the  
     contribution of 5,000 shares of treasury stock to the restated plan.  An 
     additional 7,300 shares of treasury stock were contributed in 1996.  As of
     December 31, 1995 and 1996, all shares had been allocated to participants 
     in the plan.  The Company matches 


                                           -22-
<PAGE>

                        MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A. (CONTINUED)

     employee contributions up to 3 percent of gross salary.  The expense
     related to the Company's contributions and plan administration was $50,092,
     $25,985, and $24,708 in 1996, 1995 and 1994, respectively.

     ADOPTION OF ACCOUNTING PRINCIPLE

          During the fourth quarter of 1995, the Company adopted the 
     provisions of the Financial Accounting Standards Board's Statement No. 
     121, "Accounting for the Impairment of Long-Lived Assets and for 
     Long-Lived Assets to Be Disposed Of" ("FAS 121").  FAS 121 requires 
     impairment losses to be recognized on long-lived assets used in 
     operations when indicators of impairment are present and the 
     undiscounted cash flows estimated to be generated by these assets are 
     less than the assets' carrying amount.  It also requires assets held for 
     sale to be valued at the lesser of their original carrying amount or 
     fair value.  Concurrent with the adoption and a decision to market 
     certain oil and gas properties, the Company recognized a write-down of 
     $1,020,670.  In 1996, the Company recognized impairment losses of 
     $114,904.  The after tax effect of the adoption of the accounting 
     principle was an increase of the net loss by $673,642 or $0.20 per share in
     1995 and a decrease in net income of $75,837 or $0.02 per share in 1996. 
     The results of operations during 1995 of the properties held for sale was 
     a net loss of approximately $8,000.

     FINANCIAL INSTRUMENTS

          The carrying amount of cash approximates fair value.  Interest 
     rates associated with substantially all the Company's long-term debt are 
     linked to current market rates.  The rates associated with the Company's 
     standby letter of credit also approximate current market rates.  As a 
     result, management believes that the carrying amount approximates the 
     fair value of the Company's credit facilities.
     
NOTE B.  PURCHASE OF SUBSIDIARY CORPORATION

     On September 18, 1996, the Company, through MRI Acquisition Corp. (a 
wholly owned subsidiary), acquired 81.5% of the issued and outstanding common 
stock and all outstanding stock options of Summit Petroleum Corporation (See 
Note F.) for cash of $1,081,188 and cancellation of a note receivable from an 
officer/stockholder of both the Company and Summit of $479,648.  In December 
1996, the Summit stockholders approved a plan of merger whereby Summit became 
a wholly owned subsidiary of the Company.  Pursuant to this plan, 
stockholders possessing the remaining 18.5% interest (443,633 shares) will, 
upon tendering their shares, receive $0.70 per share.  The Company's 
liability for the purchase of these remaining shares, which is being funded 
through long-term borrowings under the Company's credit facility (See Note 
C.), is included as a non-current liability in the accompanying balance 
sheet.  The purchase price ($0.70 per share and $0.6375 per option) was based 
on the fair value of Summit's net assets as determined by the Board of 
Directors of each respective corporation.  The transaction was subject to a 
fairness opinion provided by a recognized investment banking firm relative to 
these values.  In addition to the purchase price, the Company incurred 
$139,254 in costs directly related to this acquisition, resulting in a total 
investment through December 31, 1996, of $2,010,633.  This acquisition is 
accounted for under the purchase method of accounting, which provides that 
the results of operations are combined from the date of acquisition 
(September 18, 1996).  In December 1996, MRI Acquisition Corp. was dissolved 
and Summit became a subsidiary of the Company.

                                     -23-
<PAGE>

                    MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE B. (CONTINUED)

     The following is a summary of the allocation of the cost to the assets
acquired and liabilities assumed in this acquisition:

     Current assets, including cash of $3,162               $  155,742
     Current liabilities                                      (250,701)
     Oil and gas properties                                  2,408,259
     Other assets                                               20,773
     Contracts and leases                                      200,000
     Deferred income tax liability 
         (non-current)                                        (279,729)
     Long-term debt                                           (243,711)
                                                          -------------

     Total                                                $  2,010,633
                                                          -------------
                                                          -------------



     The following is a summary of the pro forma results of operations as 
though this transaction had occurred on January 1, 1995.


                                          1996                1995
                                          ----                ----
     Total revenue                    $  7,749,621        $  5,921,767
                                      ------------        ------------
                                      ------------        ------------
     Net income (loss)                   $  (7,396)        $  (889,623)
                                      ------------        ------------
                                      ------------        ------------

     Earnings (loss) per weighted 
     average common share                $  (0.002)           $  (0.26)
                                      ------------        ------------
                                      ------------        ------------


                                     -24-
<PAGE>

                    MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE C.  NOTE PAYABLE AND LONG-TERM DEBT

     The Company's debt consisted of the following at December 31, 1996 and
1995:

<TABLE>
<CAPTION>
                                                                                    1996               1995
                                                                                  --------           --------
<S>                                                                             <C>                 <C>
$20,000,000 credit facility with First Union National Bank of North Carolina 
("FUNB"), expiring October 2000, and secured by oil and gas properties, 
requiring the Company to maintain certain financial and profitability ratios 
and restricting the Company's ability to incur debt, sell assets, 
substantially change the ownership or management of the Company or pay 
dividends.  The facility provided for a borrowing base of $8,000,000 at 
December 31, 1995, and $9,500,000 at December 31, 1996, with monthly 
reductions in the borrowing base of $100,000 beginning April 1997.  Interest 
is payable monthly.  At December 31, 1995, interest was computed at FUNB's 
prime (8.5%) plus 0.75%.  At December 31, 1996, interest on this loan was 
subject to the arrangement discussed below:

          Principal balance                                                     $8,500,000          $5,660,000
          Less discount thereon                                                    (25,863)            (56,896)

$150,000 revolving credit loan agreement, expiring October 1997, with
FUNB, collateralized by oil and gas properties and bearing interest at
FUNB's prime plus 0.75% and 1.5% at December 31, 1995.  Interest
payable monthly.                                                                    -                   -   

Note payable to FUNB in monthly installments of $9,000, plus interest at
a rate equal to prime (8.25% at December 31, 1996) plus 1.5%;
collateralized by a first lien on Summit's oil and gas properties.                 327,335              -   

Note payable secured by the Company's interest in a pipeline facility.
Payments, including interest at 12% per annum, are dependent upon
levels of throughput.                                                                 -                 75,384

Other, primarily secured monthly installment notes                                  45,779              70,530
                                                                                ----------          ----------


                                                                                 8,847,251           5,749,018
Less portion due within one year                                                 1,680,830           1,224,401
                                                                                ----------          ----------

                                                                                $7,166,421          $4,524,617
                                                                                ----------          ----------
                                                                                ----------          ----------
</TABLE>


     Advances under the Company's $20,000,000 credit facility currently bears 
interest, at the Company's option, based on (a) a base rate equal to the greater
of (i) the bank's prime rate (8.25% at December 31, 1996) or (ii) the rate 
published by the Federal Reserve Bank of New York; or (b) a rate based on the 
London Interbank Offered Rate (LIBOR).  Advances under (a) bear interest at 
the base rate plus 0.25% and advances under (b) bear interest at the LIBOR 
rate plus 2.75%.  As of December 31, 1996, the Company's effective interest 
rate under this arrangement was 8.75%.  The FUNB facility is subject to a 
commitment fee of 1/2 of 1% on the unused portion of the borrowing base.

     Summit's note payable to bank is subject to a loan agreement which 
provides for a borrowing base of $500,000.  This agreement restricts the 
Company's ability to incur debt, make investments and loans, pay dividends, 
sell assets, enter into merger agreements or change the nature of its 
business.  The agreement also restricts the use of loan proceeds advanced 
under the agreement and, it further requires the maintenance of certain 
financial ratios.  This agreement, which provided for an expiration date of 
December 12, 1997, was paid in full in March 1997, with the proceeds from a 
long-term borrowing by the Company under its credit facility with FUNB.  
Accordingly, this debt is presented as long-term debt in the accompanying 
financial statements.


                                      -25-
<PAGE>

                      MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE C. (CONTINUED)

     The following information relates to short term bank borrowings during 
1996 and 1995:

<TABLE>
<CAPTION>
                                                                               1996             1995  
                                                                             --------         -------- 
     <S>                                                                   <C>                <C> 
    
     Balance, December 31,                                                 $    -             $    -
     Interest rate at December 31,                                              -                 9.25%
     Maximum balance outstanding during the year                           $    -             $150,000
     Average balance during the year (computed monthly)                    $    -             $106,083
     Weighted average interest rate during the year (computed daily)            -                 9.89%
     Remaining borrowing base at December 31,                              $    -             $150,000
</TABLE>


     Future maturities of long term debt at December 31, 1996 are as follows:

              1997                                               $1,680,830
              1998                                                1,206,517
              1999                                                1,203,011
              2000                                                4,737,094
              2001                                                    3,496
              2002 and thereafter                                    16,303
                                                                 -----------
                                                                 $8,847,251
                                                                 -----------
                                                                 -----------

NOTE D.  ISSUANCE OF COMMON STOCK AND WARRANTS

     In November, 1990, the Company issued 2,264,522 shares of common stock, 
as discussed in Note A, based on an exchange value of $2.00 per share.  For 
each share of common stock issued, two warrants were issued entitling the 
holder to purchase one share of common stock at $2.50 and one share at $4.00 
during the period from November 1990 to November 2002.  On October 6, 1995, 
the 90 day common stock market price requirement (as determined in the 
Warrant Agreement) was met and the Company called its $2.50 warrants.  
Holders of record on December 22, 1995 received a redemption payment of $0.05 
per warrant for aggregate payments of $63,373, which was charged to 
additional paid in capital. 997,009 of the $2.50 warrants were exercised.  As 
of December 31, 1996,  none of the $4.00 warrants had been exercised. 

     The warrants are subject to certain antidilution provisions contained in
the warrant agreement, which could cause adjustments to the exercise price and
the number of shares issuable.

     In August 1994, the Company retained investment banking services for which
it issued 5,000 warrants per month, entitling the holder to purchase one share
of common stock at the closing market price on the day preceding the issue of
the warrant for a term of five years.  The exercise prices range from $1.75 to
$3.375.  The Company issued 30,000 warrants under this agreement, none of which
have been exercised as of December 31, 1996.


                                     -26-
<PAGE>

                    MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE D. (CONTINUED)

     Under the 1994 Midland Resources, Inc. Long-Term Incentive Plan, 115,000 
stock options with a five year term were granted to officers and other key 
employees in 1995.  As of December 31, 1995, there were 93,000 options 
outstanding under this plan.  Each option entitles the holder to purchase one 
share of common stock for the fair market value of common stock on the date 
of the grant of the option.  Under the Company's 1996 Long-Term Incentive 
Plan, an additional 400,000 options are available for grant to officers and 
key employees.  During 1996, 218,000 additional options were granted and  
options to purchase 7,500 shares of common stock were exercised and 22,000 
options expired. As of December 31, 1996, there were 251,500 options 
outstanding under this plan with exercise prices ranging from $2.375 to 
$3.813.  These options, if not exercised, are scheduled to expire in 1999 
through 2001.  As of December 31, 1996, options to purchase an additional 
448,500 shares were available for future grant.

     Under the Midland Resources, Inc. 1995 Directors' Stock Option Plan, 
20,000 stock options with a five year term were granted to directors in 1995. 
As of December 31, 1995, all 20,000 options were outstanding under this plan. 
In 1996, an additional 30,000 stock options were granted to directors. Each 
option entitles the holder to purchase one share of common stock for the fair 
market value of common stock on the date of the grant of the option. As of 
December 31, 1996, 50,000 options were outstanding at exercise prices ranging 
from $2.75 to $3.75 and 50,000 options were available for future grant.  
Options outstanding at December 31, 1996, if not exercised, are scheduled to 
expire in 1999 through 2001.

     The Summary of the status of the Company's stock option plans at 
December 31, 1996  and 1995, and changes during the years then ended is 
presented below:

<TABLE>
<CAPTION>
                                                       1996                                   1995
                                              ------------------------               ---------------------
                                                            Weighted                             Weighted
                                                            average                              average
                                                            exercise                             exercise
                                              Shares         price                   Shares        price
                                             --------      ----------               --------    ----------
<S>                                          <C>           <C>                     <C>          <C>
Options outstanding, beginning of year        113,000        $  2.52                   -             $-  
Granted                                       218,000           3.50                135,000           2.52
Expired                                       (22,000)          2.92                   -              -  
Exercised                                      (7,500)          2.38                (22,000)          2.38
                                             --------        -------               --------        -------

Options outstanding, end of year              301,500        $  3.20                113,000        $  2.51
                                             --------        -------               --------        -------

Options exercisable, end of year              241,500        $  3.08                113,000        $  2.51
                                             --------        -------               --------        -------
                                             --------        -------               --------        -------
Weighted average fair value of
     options granted during the year                         $  2.75                               $  2.13
                                                             -------                               -------
                                                             -------                               -------
</TABLE>


The following applies to all options outstanding at December 31, 1996: 

     Number outstanding                              301,500
     Range of exercise prices               $2.375 to $3.813
     Weighted average exercise price                   $3.20
     Weighted average remaining
       contractual life                           3.95 years


                                       -27-
<PAGE>

                    MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE D. (CONTINUED)

     Effective January 1, 1996, the Financial Accounting Standards Board 
(FASB) issued Statement of Financial Accounting Standards No. 123, which 
provides for an alternative method to valuation of the compensation element 
of stock based compensation plans.  The Company applies APB 25 and related 
Interpretations in accounting for stock-based compensation.  Had compensation 
costs been determined based on the fair value at the grant dates for awards 
consistent with the method of FASB Statement 123, the Company's net income 
(loss) and related per share amounts would have been reduced to the pro forma 
amounts indicated below:

                                                       1996           1995   
                                                  -----------    -------------
     Net income (loss)             As reported    $    22,122    $    (737,031)
                                   Pro forma         (245,366)        (895,861)
     Earnings (loss) per share     As reported    $      0.01    $       (0.22)
                                   Pro forma            (0.06)           (0.27)


     The fair value of each option granted is estimated on the date of the 
grant using the Black-Scholes option-pricing model with the following 
weighted-average assumptions used for the grants issued in 1995 and 1996:

          Expected volatility                75% to 110%
          Risk free rate                     6.06% to 6.49%
          Expected life of options           3 to 5 years
          Expected dividend yield            0%

     In February 1997, an additional 88,000 options were issued to employees 
at an option price of $3.125 per option.

     In February 1997, the Board of Directors approved the Midland Resources, 
Inc. 1997 Board of Directors Stock Incentive Plan which permits the issuance 
of options, warrants or other rights to acquire up to 1,235,000 shares of the 
Company's common stock.  Options to acquire an aggregate of 1,235,000 shares 
at $3.00 per share were issued to four directors, one advisory director and 
one employee.  These options are vested as certain stipulated trading prices 
for the Company's common stock are achieved and, exercisability is further 
restricted by time delay provisions which limited the number of vested shares 
that may be exercised each year beginning in March, 1998.  Also, in February,
1997, the Company issued a five year warrant to purchase 50,000 shares to a 
consultant for future services.  These options and warrants are expected to 
give rise to the recognition of compensation expenses of up to $616,250 in 
years 1997 through 2000.

     In June 1995, the Company issued 150,000 warrants to purchase common 
stock at $4.00 per share for a term  of seven years to its bank.  In exchange 
the Company's credit facility loan agreement was amended to reduce the 
interest rate by 0.75% and allow 25% of its borrowing base to be used for 
working capital purposes.  The fair value of the 


                                     -28-
<PAGE>

                    MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE D. (CONTINUED)

warrants at the date of grant was recorded as debt discount and additional 
paid in capital.  None of these warrants have been exercised as of December 
31, 1996.

NOTE E.  MAJOR CUSTOMERS

     The Company and its subsidiary operate exclusively within the United 
States and their revenues and operating income are derived predominately from 
the oil and gas industry.  Oil and gas production is sold to various 
purchasers and the receivables are generally uncollateralized.  The Company 
has not experienced significant credit losses on its oil and gas accounts and 
management is of the opinion that significant credit risk does not exist. 
Management is of the opinion that the loss of any one purchaser would not 
have an adverse effect on the ability of the Company to sell its oil and gas 
production.

     In 1996, three purchasers accounted for 18%, 12% and 15%, respectively, 
of total oil and gas revenues.  In 1995, four purchasers accounted for 18%, 
17%, 11% and 11%, respectively, of total oil and gas revenues.  In 1994, 
three purchasers accounted for 20%, 16% and 14%, respectively, of total oil 
and gas revenues.

NOTE F.  RELATED PARTIES

     Until December 1993, MRO was owned 80% by the Company's President and 
Chairman of the Board of Directors, Mr. Deas H. Warley III and 20% by a 
former Vice President and Board Member, Sal J. Pagano.  Mr. Warley currently 
owns approximately 32% of the Company's outstanding common stock and 10.3% of 
the related $4.00 warrants. 

     Effective November 1, 1995, the Company purchased a building and land in 
Midland County, Texas, for $78,996 from Mr. Warley and another individual for 
use as a district office.  Mr. Warley and the other individual each financed 
50% of the purchase price less the down payment of $10,496.  The two $34,250 
ten year notes bear interest at 7.5% and are payable in equal monthly 
installments of $407 each.  The cost to the Company was based on an 
independent written appraisal and certain improvements completed before the 
property was purchased.

     In December 1995, Mr. Warley borrowed $582,805 from the Company under an 
eighteen month term note bearing 7.5% interest,  secured by 287,947 shares of 
the Company's common stock.  Mr. Warley used these funds to exercise his 
233,122 warrants to buy common stock at $2.50 per share.  The balance of the 
note payable to Mr. Warley discussed above  was netted against this note 
receivable and he made a cash payment of $95,000 leaving a balance of 
$453,641 at December 31, 1995.  This amount is reflected in the accompanying 
balance sheet as a reduction of stockholders' equity at December 31, 1995.  
This note was paid in full in September 1996 by offsetting the balance of 
$479,648 against the payment to Mr. Warley for his stock and options in 
Summit Petroleum Corporation (See Note B.).

     MRO serves as operator for most of the Company's oil and gas properties 
and also collects and disburses revenues on certain of these properties.

     Effective January 1, 1994, the Company sold a ten percent working 
interest in the Ned Wilson property located in Ward County, Texas to Summit 
for $85,696, which was the Company's cost adjusted for revenues and expenses 
through December 31, 1993.

     Effective August 1, 1994, Summit participated with the Company in the 
acquisition of certain properties in Coke and Howard Counties.  The purchase 
price of these properties was $1,950,000, which was adjusted for revenues and 
expenses from August 1, 1994 through the closing date of August 15, 1994. 
Summit acquired ten percent of the Company's interest in these properties for 
ten percent of the purchase price adjusted for revenues and expenses and ten 
percent of the transaction costs.


                                       -29-
<PAGE>

                      MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE F. (CONTINUED)

     During 1995, Summit participated with the Company in the acquisition of 
certain oil and gas leases and seismic options in the Sunburst Project, Terry 
County, Texas, and the Latigo and Lakota Projects, Hockley County, Texas in 
exchange for a commitment from the Company and Summit to expend certain 
monies in connection with acquiring an interest in certain oil and gas 
leases, seismic options, conducting 3D geological surveys, interpretation of 
3D seismic data and the drilling of two or more test wells.  Summit acquired 
its five percent interest working interest in proportion to its share of the 
commitment.

     Effective September 1, 1995, Summit participated with the Company in the 
acquisition of additional working interests in certain Redfish Bay properties 
in Nueces County, Texas.  Summit acquired its four percent working interest 
on the same basis as the Company.

     The amounts due from related party at December 31, 1995, represent 
undistributed oil and gas revenues, joint interest expenditures incurred in 
the Company's normal operations and development of oil and gas properties as 
well as management fees due from Summit.  The amount due from a related party 
at December 31, 1996, represents reimbursements due for certain acquisition 
and exploration costs from a newly formed limited partnership for which the 
Company is general partner.  The limited partnership group is comprised of 19 
individuals of which 18 are also stockholders of the Company.  In addition, 
two of these individuals are directors of the Company.

NOTE G.  COMMITMENTS AND CONTINGENCIES

     The Company is involved in litigation arising from its attempt in late 
1991 to become the general partner of 27 oil and gas limited partnerships 
sponsored by Merrico Resources Inc.  The Company is appealing a decision 
entered in the United States Bankruptcy Court for the Western District of 
Oklahoma that precludes the Company from enforcing its election by the 
limited partners as the general partner.  The ultimate outcome of this matter 
is uncertain.

     The Company was a plaintiff in litigation which sought to recover unpaid 
revenues due from and questionable charges paid to a former property 
operator, from January 1985 to June 1987.  A settlement agreement and release 
was entered into between the Company and the defendant.  Income related to 
this matter of $120,090 was recorded in 1994.

     The Company is involved in other claims and disputes arising in the 
ordinary course of business.  Management believes the ultimate resolution of 
these matters will not have a material effect on the consolidated financial 
statements.

     The Company is contingently liable for an letter of credit in the amount 
of $50,000 issued by its bank in favor of an insurance company to secure 
performance under a $200,000 bond for its operations in Redfish Bay.

     The Company is contingently liable for an irrevocable letter of credit 
issued by its bank in favor of the seller of certain oil and gas properties 
purchased by the Company in 1995.  This letter of credit, in the amount of 
$850,000, is to secure performance by the Company of its development 
obligations with respect to these properties.  Remaining development 
obligations with respect to these properties were approximately $77,000 and 
$420,000 as of December 31, 1996 and 1995, respectively.

     The Company has exploration commitments with respect to unproven oil and 
gas properties acquired during 1995 of approximately $1,000,000 as of 
December 31, 1996.

     During 1995, the Company began leasing its executive office space and 
incurred rental expense of $34,560 in 1995 and $92,088 in 1996.  Future 
minimum rental commitments, as of December 31, 1996, for this noncancellable 
lease expiring in July 1997 are $49,885. 


                                       -30-
<PAGE>

                    MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE H.  INCOME TAXES

     The deferred tax assets and liabilities reflected in the consolidated 
balance sheets as December 31, 1996 and 1995 are as follows: 

<TABLE>
<CAPTION>
                                                  1996                1995
                                             --------------      --------------
     <S>                                     <C>                 <C>
     Deferred tax assets:
          Tax loss carry-forwards            $    1,193,719      $    1,012,225
          Other                                       9,405               3,332
          Property held for sale                       -                339,509
                                             --------------      --------------
                                                  1,203,124           1,355,066

     Deferred tax liabilities:
          Property and equipment                    619,975             655,188
          Property held for sale                    108,317                -   
          Contracts and leases                      143,876              97,815
                                             --------------      --------------

                                                    872,168             753,003
                                             --------------      --------------

     Net deferred tax asset                  $      330,956      $      602,063
                                             --------------      --------------
                                             --------------      --------------
</TABLE>


     For income tax purposes, the Company has a net loss of approximately 
$2,874,000 available for carryforward which, if not utilized, will begin to 
expire in 2005.  Summit has losses of approximately $610,000 which, if not 
utilized, will begin to expire in 2000.  Management has determined that, 
based on future expectations, it is more likely than not that the Company's 
future taxable income will be sufficient to fully utilize these losses prior 
to their expiration.

     A reconciliation of the provision for income taxes to the income taxes 
computed using the federal statutory rate for the years 1996, 1995 and 1994 
follows:

<TABLE>
<CAPTION>
                                                      1996               1995                1994
                                                   ---------         -----------         -----------
<S>                                                <C>               <C>                 <C>
Amount computed using statutory tax                $  17,817         $  (378,513)         $  180,357
Increase (reduction) in taxes resulting from:
     Nondeductible entertainment expenses              2,642               2,400               4,388
     State income tax                                    890                -                 11,662
     All other                                         8,931                (128)             (9,307)
                                                   ---------         -----------         -----------

Effective federal income tax (benefit)             $  30,280         $  (376,241)         $  187,100
                                                   ---------         -----------         -----------
</TABLE>


                                       -31-
<PAGE>

                      MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE I.  PROPERTY AND EQUIPMENT

     Property and equipment at December 31, 1996 and 1995, is comprised of 
the following:

<TABLE>
<CAPTION>
                                                    1996               1995
                                               -------------     -------------
     <S>                                       <C>               <C>
     Producing oil and gas properties          $  25,809,221     $  21,246,244
     Non-producing oil and gas properties          1,127,605           259,441
     Transportation equipment                        282,532           264,565
     Computer equipment and software                 229,155           214,809
     Office furniture and equipment                   94,299            90,465
     Land and buildings                               96,545            94,674
     Leasehold improvements                            9,014             5,938
     Wells in progress                               241,209               -  
                                               -------------     -------------

                                               $  27,889,580     $  22,176,136
                                               -------------     -------------
                                               -------------     -------------
</TABLE>

NOTE J.  HEDGING ACTIVITIES

     Effective March 1, 1995, the Company entered into a one year gas swap 
agreement to hedge against a portion of the price risk associated with gas 
price declines.  This agreement covers approximately 50% of the Company's 
total estimated gas production.  The Company's price under this agreement is 
a minimum of $1.50 per mcf with a 40% participation in prices over $1.50.  
This swap agreement expired in February, 1996, and the Company has not 
entered into another contract.  Losses under this contract were $21,109 and 
$25,860 for 1995 and 1996, respectively.  Gains or losses relating to the 
swap agreement are measured, settled and recognized at the end of each month 
as part of oil and gas sales.

NOTE K.  OIL AND GAS INFORMATION

     Capitalized costs related to the Company's oil and gas producing 
activities are as follows:

<TABLE>
<CAPTION>
                                                                      1996                  1995
                                                                 -------------         -------------
     <S>                                                         <C>                   <C>
     Proved producing properties subject to depreciation,
     depletion and amortization                                  $  25,809,221         $  21,246,244
     Less accumulated depreciation, depletion and
     amortization                                                   13,769,157            11,617,687
                                                                 -------------         -------------

                                                                    12,040,064             9,628,557
     Wells in progress                                                 241,209                 -    
     Non-producing properties                                        1,127,605               259,441
                                                                 -------------         -------------

     Net capitalized cost                                        $  13,408,878          $  9,887,998
                                                                 -------------         -------------
                                                                 -------------         -------------
</TABLE>


                                       -32-
<PAGE>

                      MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE K. (CONTINUED)

     A summary of costs incurred in acquisition, development and exploration 
of oil and gas properties is as follows:

<TABLE>
<CAPTION>
                                                                       1996                  1995                1994
                                                                  ------------            ---------         ------------
     <S>                                                          <C>                     <C>               <C>
     Acquisition costs - Proven properties                        $  2,391,228            $  510,832        $  1,854,685
     Acquisition costs - Unproven properties                           922,607               198,124               -    
     Development costs                                               2,368,448             2,011,634             460,317
     Exploration costs                                                 766,855               198,453              32,191

</TABLE>

     Depreciation, depletion and amortization per equivalent barrel of oil 
produced (gas is converted to equivalent barrels at the rate of 6 mcf per 
barrel) are as follows:

<TABLE>
<CAPTION>
                                                                       1996                  1995                1994
                                                                  ------------            ---------         ------------
     <S>                                                          <C>                     <C>               <C>
     Depreciation, depletion and amortization:
          Based on production                                     $       2.91             $   2.73          $      2.82

</TABLE>

NOTE L.  CASH FLOWS

Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
                                                                       1996                  1995                1994
                                                                  ------------            ---------         ------------
     <S>                                                          <C>                     <C>               <C>
     Cash paid during the year for:
     Interest                                                     $    625,948            $  560,456        $    470,615
     Income taxes                                                 $       -               $   30,272        $     26,557
     Significant non-cash activities:
     Issuance of warrants to bank                                 $       -               $   75,000        $       -    
     Note receivable from sale of building                        $       -               $  344,875        $       -    
     Note payable from purchase of district
          office, warehouse and yard                              $       -               $   68,500        $       -    
     Note receivable from officer/director
          for exercise of warrants, net of
          note payable                                            $       -               $  548,641        $       -    
     Treasury stock contributed to ESOP                           $   26,462              $   12,989        $       -    
     Development costs incurred, unpaid at year end               $  110,700              $    -            $       -    
     Non-cash reduction in note receivable
          officer/director                                        $  479,648              $    -            $       -    
          
</TABLE>

NOTE M.  OIL AND GAS RESERVES (UNAUDITED)

     The estimates of the Company's proved oil and gas reserves, which are
located entirely within the United States, were prepared in accordance with the
guidelines established by the Securities and Exchange Commission and Financial
Accounting Standards Board which require that reserve estimates be prepared
under existing economic and operating conditions, with no provision for price
and cost escalators, except by contractual agreement.  The estimates as of
December 31, 1996, 1995 and 1994 are based on evaluations prepared by E. Ralph
Green and Associates, Independent Petroleum Engineers.  


                                       -33-
<PAGE>

                      MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE M. (CONTINUED)

     Management emphasizes that reserve estimates are inherently imprecise and
are expected to change as new information is available and as economic
conditions in the industry change.

CHANGES IN PROVED RESERVE QUANTITIES (UNAUDITED):

<TABLE>
<CAPTION>
                                                            Oil (Bbls)          Gas (Mcf)
                                                            ----------          ----------
<S>                                                         <C>                 <C>
Proved reserves, December 31, 1993                           1,402,068          12,983,493
Extensions, discoveries and improved recovery                  571,751           3,600,305
Revision of previous estimates                                 221,209           1,102,643
Purchase of minerals-in-place                                  160,302             762,498
Sales of minerals-in-place                                      (5,819)            (32,288)
Production                                                    (171,755)         (1,356,130)
                                                            ----------          ----------

Proved reserves, December 31, 1994                           2,177,756          17,060,521
Extensions, discoveries and improved recovery                  298,140             370,722
Revision of previous estimates                                   8,285             760,412
Purchase of minerals-in-place                                   70,080           1,545,859
Production                                                    (166,652)         (1,268,772)
                                                            ----------          ----------

Proved reserves, December 31, 1995                           2,387,609          18,468,742
Sales of minerals-in-place                                      (1,521)            (16,519)
Extensions, discoveries and improved recovery                  279,444             223,243
Revision of previous estimates                                 171,677          (1,124,321)
Purchase of minerals-in-place                                   44,528             327,466
Purchase of Summit                                             175,656           1,418,424
Production                                                    (215,913)         (1,002,482)
                                                            ----------          ----------

Proved reserves, December 31, 1996                           2,841,480          18,294,553
                                                            ----------          ----------
                                                            ----------          ----------

Proved developed reserves (UNAUDITED):

     December 31, 1994                                       1,463,675          12,617,620
     December 31, 1995                                       1,918,557          14,131,580
     December 31, 1996                                       2,061,974          13,821,400

</TABLE>

                                       -34-
<PAGE>

                      MIDLAND RESOURCES, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE M.  (CONTINUED)

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
     RELATING TO PROVED RESERVES (UNAUDITED):

<TABLE>
<CAPTION>
                                                                        Years ended December 31,
                                                        --------------------------------------------------------- 
                                                              1996                1995                    1994    
                                                        --------------       -------------          ------------- 
<S>                                                     <C>                  <C>                    <C>           
Future cash inflows                                     $  139,037,425       $  79,172,668          $  67,876,078 
Future production costs                                     51,857,027          38,818,603             34,287,213 
Future development costs                                     7,231,324           5,691,375              6,027,125 
Future income taxes (a)                                     18,372,157           7,360,573              5,507,170 
                                                        --------------       -------------          ------------- 

Future net cash flows                                       61,576,917          27,302,117             22,054,570 
Annual discount (10%) for estimated
     timing of cash flows                                   29,984,568          13,001,409              9,507,627 
                                                        --------------       -------------          ------------- 
Standardized measure of discounted
     future net cash flows                               $  31,592,349       $  14,300,708          $  12,546,943 
                                                        --------------       -------------          ------------- 
                                                        --------------       -------------          ------------- 
</TABLE>


(a)  Future income taxes are computed at current statutory rates on future net 
     cash flows before income taxes less the income tax bases of the oil and 
     gas properties, available loss carry-forwards and statutory depletion 
     carryforwards.


CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE
     NET CASH FLOWS FROM PROVED RESERVES (UNAUDITED):

<TABLE>
<CAPTION>
                                                                        Years ended December 31,
                                                        --------------------------------------------------------- 
                                                              1996                1995                    1994    
                                                        --------------       -------------          ------------- 
<S>                                                     <C>                  <C>                    <C>           
Sales of oil and gas produced,
     net of production costs                             $  (4,722,529)      $  (2,386,779)         $  (2,253,972)
Net changes in price and production costs                   19,074,149           1,539,078               (381,338)
Previously estimated development costs incurred                 35,190             120,474                138,543 
Revisions of estimated future development costs                (84,478)            124,763             (1,300,266)
Revision of quantity estimates                                 167,303             722,631              1,646,549 
Purchases of minerals-in-place                                 840,715           1,070,857              1,120,026 
Acquisition of Summit                                        2,875,995               -                      -     
Sales of minerals-in-place                                     (31,888)              -                    (31,562)
Extensions and discoveries                                   1,857,974           2,114,257              1,291,585 
Net change in income taxes                                  (4,838,537)           (514,350)               183,778 
Accretion of discount                                        1,768,766           1,541,954              1,391,782 
Changes in timing of estimated cash flows and other            348,981          (2,579,120)              (119,633)
                                                        --------------       -------------          ------------- 

Changes in standardized measure                             17,291,641           1,753,765              1,685,492 
Standardized measure, beginning of year                     14,300,708          12,546,943             10,861,451 
                                                        --------------       -------------          ------------- 

Standardized measure, end of year                        $  31,592,349       $  14,300,708          $  12,546,943 
                                                        --------------       -------------          ------------- 
                                                        --------------       -------------          ------------- 
</TABLE>

                                       -35- 
<PAGE>

ITEM 8.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                 ACCOUNTING AND FINANCIAL DISCLOSURE

     None.

                                 PART III.

ITEM 9.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
            PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     The information required in this item is incorporated by reference from the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than April 30, 1997.

ITEM 10.     EXECUTIVE COMPENSATION

     The information required in this item is incorporated by reference from the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than April 30, 1997.

ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required in this item is incorporated by reference from the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than April 30, 1997.

ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required in this item is incorporated by reference from the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than April 30, 1997.


                                       -36-
<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(A)  REPORTS ON FORM 8-K:     None

(B)  EXHIBITS:

     3.1*      Articles of Incorporation
     3.2*      Bylaws
     3.3**     Articles of Amendment to the Articles of Incorporation. 
               (Previously filed as the same exhibit number with the Company's
               Annual Report on Form 10-KSB dated December 31, 1994, and
               incorporated herein by reference.)
     4.1*      Specimen Common Stock Certificate
     4.2*      Warrant Agreement for $2.50 and $4.00 warrants
     4.4*      Specimen $4.00 Warrant Certificate
     10.1      Credit agreement between the Company and First Union National 
               Bank of North Carolina dated October 31, 1996
     10.2**    1994 Midland Resources, Inc. Long-Term Incentive Plan. 
               (Previously filed as the same exhibit number the Company's Annual
               Report on Form 10-KSB dated December 31, 1994.)
     10.3**    Employment Contract between the Company and Deas H. Warley III
               dated January 1, 1995.  (Previously filed as the same exhibit
               number the Company's Annual Report on Form 10-KSB dated December
               31, 1994.)
     10.9**    Agreement of Acquisition between the Company and Miresco, Inc.
               dated December 31, 1993.  (Previously filed as the same exhibit
               number with the Company's Current Report on Form 8-K dated
               December 31, 1993.)
     10.14**   Sunburst Prospect Purchase and Sale Agreement, Stipulation of
               Interest and Exploration and Development Agreement dated July 14,
               1995, between the Company and Seneca Resources Corporation and
               Pathfinder Oil & Gas, Inc.  (Previously filed as the same exhibit
               number with the Company's Quarterly Report on Form 10-QSB dated
               June 30, 1995.)
     10.15**   Latigo Prospect Purchase and Sale Agreement, Stipulation of
               Interest and Exploration and Development Agreement dated July 14,
               1995, between the Company and Seneca Resources Corporation and
               Pathfinder Oil & Gas, Inc.  (Previously filed as the same exhibit
               number with the Company's Quarterly Report on Form 10-QSB dated
               June 30, 1995.)
     10.16**   Lakota Prospect Purchase and Sale Agreement, Stipulation of
               Interest and Exploration and Development Agreement dated July 11,
               1995, between the Company, AXEM - Blackbird L.L.C., Summit
               Petroleum Corporation and Pathfinder Oil & Gas, Inc.  (Previously
               filed as the same exhibit number with the Company's Quarterly
               Report on Form 10-QSB dated June 30, 1995.)
     10.20     Amendment to Employment Contract between the Company and Deas H.
               Warley III dated January 8, 1996
     10.21**   Agreement and Plan of Merger between the Company, MRI Acquisition
               and Summit dated July 17, 1996 (Previously files as Exhibit
               99.(a)(3) with the Company's Schedule 14D-1 dated July 18, 1996.)
     10.22     Agreement of Limited Partnership of Chalk Mountain Exploration,
               LTD dated January 14, 1997, between the Company as General
               Partner and the limited partners named therein
     10.23     The Company's 1997 Board of Directors Stock Incentive Plan
     10.24     Purchase and Sale Agreement between the Company and Redfish Bay
               Development Corporation and PI Energy Corporation dated effective
               February 1, 1997
     10.25     Warrant to purchase 10,000 shares of Common Stock issued to Sam
               R. Brock, dated October 23, 1996
     10.26     Promissory Note dated December 15, 1995, by Deas H. Warley III as
               maker, and the Company in the principal amount of $582,805 and
               repaid September 19, 1996
     21        Subsidiaries of the registrant
     23.1      Consent of Ernst & Young LLP, independent auditors dated April
               11, 1997
     23.2      Consent of Grant Thornton LLP, independent auditors dated April
               11, 1997

-------------------------------
     *    Previously filed as the same exhibit number with the Company's
          Registration Statement on Form 10 and incorporated herein by
          reference.
     **   Incorporated herein by reference as indicated.


                                       -37-
<PAGE>

                                   SIGNATURES


     Pursuant to the requirements of Section 12 of the Securities Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                       MIDLAND RESOURCES, INC.




Date:  April 14, 1997                By:/s/ Deas H. Warley III
                                          ---------------------------------
                                     Deas H. Warley III, President
          

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated: 



Date:  April 14, 1997              By:/s/ Deas H. Warley III
                                      ---------------------------------
                                   Deas H. Warley III, Chairman, President, 
                                   Director


Date:  April 14, 1997              By:/s/ Howard E. Ehler
                                      ---------------------------------
                                   Howard E. Ehler, Chief Financial Officer,
                                   Vice President


Date:  April 14, 1997              By:/s/ Robert R. Donnelly
                                      ---------------------------------
                                   Robert R. Donnelly, Director


Date:  April 14, 1997              By:/s/ Sam R. Brock 
                                      ---------------------------------
                                   Sam R. Brock, Director


Date:  April 14, 1997              By:/s/ Wayne M. Whitaker 
                                      ---------------------------------
                                   Wayne M. Whitaker, Director


Date:     April 14, 1997           By:/s/ Darrell M. Dillard
                                      ---------------------------------
                                   Darrell M. Dillard, Director

                                       -38- 
<PAGE>
                                INDEX TO EXHIBITS
                                                                    SEQUENTIALLY
      EXHIBIT                                                         NUMBERED
        NO.                         EXHIBIT                             PAGE
      -------                       -------                          -----------

(A)  REPORTS ON FORM 8-K:      None

(B)  EXHIBITS:
     3.1*           Articles of Incorporation
     3.2*           Bylaws. . 
     3.3**          Articles of Amendment to the Articles of Incorporation.
                    (Previously filed as the same exhibit number with the 
                    Company's Annual Report on Form 10-KSB dated December 31,
                    1994, and incorporated herein by reference
     4.1*           Specimen Common Stock Certificate .
     4.2*           Warrant Agreement for $2.50 and $4.00 warrants
     4.4*           Specimen $4.00 Warrant Certificate
     10.1           Credit agreement between the Company and First Union
                    National Bank of North Carolina dated October 31, 1996
     10.2**         1994 Midland Resources, Inc. Long-Term Incentive Plan.
                    (Previously filed as the same exhibit number the Company's 
                    Annual Report on Form 10-KSB dated December 31, 1994.)
     10.3**         Employment Contract between the Company and Deas H. 
                    Warley III dated January 1, 1995.  (Previously filed as the 
                    same exhibit number the Company's Annual Report on 
                    [caad 214]Form 10-KSB dated December 31, 1994.)
     10.9**         Agreement of Acquisition between the Company and Miresco, 
                    Inc. dated December 31, 1993.  (Previously filed as the same
                    exhibit number with the Company's Current Report on Form 8-K
                    dated December 31, 1993.)
     10.14**        Sunburst Prospect Purchase and Sale Agreement, Stipulation 
                    of Interest and Exploration and Development Agreement dated
                    July 14, 1995, between the Company and Seneca Resources 
                    Corporation and Pathfinder Oil & Gas, Inc.  (Previously 
                    filed as the same exhibit number with the Company's 
                    Quarterly Report on Form 10-QSB dated June 30, 1995.)
     10.15**        Latigo Prospect Purchase and Sale Agreement, Stipulation 
                    of Interest and Exploration and Development Agreement dated 
                    July 14, 1995, between the Company and Seneca Resources 
                    Corporation and Pathfinder Oil & Gas, Inc.  (Previously 
                    filed as the same exhibit number with the Company's
                    Quarterly Report on Form 10-QSB dated June 30, 1995.)
     10.16**        Lakota Prospect Purchase and Sale Agreement, Stipulation 
                    of Interest and Exploration and Development Agreement dated 
                    July 11, 1995, between the Company, AXEM - Blackbird L.L.C.,
                    Summit Petroleum Corporation and Pathfinder Oil & Gas, Inc.
                    (Previously filed as the same exhibit number with the 
                    Company's Quarterly Report on Form 10-QSB dated June 30, 
                    1995.)
     10.20          Amendment to Employment Contract between the Company and 
                    Deas H. Warley III dated January 8, 1996
     10.21**        Agreement and Plan of Merger between the Company, MRI 
                    Acquisition and Summit dated July 17, 1996. (Previously
                    files as Exhibit 99.(a)(3) with the Company's Schedule 14D-1
                    dated July 18, 1996.)
     10.22          Agreement of Limited Partnership of Chalk Mountain 
                    Exploration, LTD dated January 14, 1997, between the Company
                    as General Partner and the limited partners named therein
     10.23          The Company's 1997 Board of Directors Stock Incentive Plan
     10.24          Purchase and Sale Agreement between the Company and Redfish
                    Bay Development Corporation and PI Energy Corporation dated 
                    effective February 1, 1997
     10.25          Warrant to purchase 10,000 shares of Common Stock issued to 
                    Sam R. Brock, dated October 23, 1996
     10.26          Promissory Note dated December 15, 1995, by Deas H. 
                    Warley III as maker, and the Company in the principal amount
                    of $582,805 and repaid September 19, 1996
     21             Subsidiaries of the registrant
     23.1           Consent of Ernst & Young LLP, independent auditors dated 
                    April 11, 1997
     23.2           Consent of Grant Thornton LLP, independent auditors dated 
                    April 11, 1997
-------------------------------------
     *    Previously filed as the same exhibit number with the Company's
          Registration Statement on Form 10 and incorporated herein by
          reference.
     **   Incorporated herein by reference as indicated.

                                       -39-