<PAGE>
 
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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
       
                                 FORM 10-K/A2       

(Mark One)
   [X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                    For the fiscal year ended July 31, 1996
                                      or
   [_]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                 For the transition period from _____ to _____

                        Commission file number 0-13399

                             LATEX RESOURCES, INC.
            (Exact name of registrant as specified in its charter)

               Delaware                               73-1405081
     (State or other jurisdiction of              (I.R.S. Employer
     incorporation or organization)              Identification No.)
 
         4200 East Skelly Drive
             Suite 1000
          Tulsa, Oklahoma                               74135
(Address of principal executive offices)             (Zip Code)

      Registrant's telephone number, including area code: (918) 747-7000

          Securities registered pursuant to Section 12(b) of the Act:

<TABLE> 
<CAPTION> 
      Title of Each Class                       Name of Each Exchange on Which Registered
      -------------------                       -----------------------------------------
<S>                                                      <C> 
Common Stock, $0.01 par value per share                  Pacific Stock Exchange
Common Stock Purchase Warrants                           Pacific Stock Exchange
</TABLE> 

          Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock, $0.01 par value per share
                               (Title of Class)

          Indicate by check mark whether the Registrant (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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes  X     No
                                              -----     ------

          Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of the Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]

          The aggregate market value of the Registrant's voting stock held by
non-affiliates as of October 25, 1996 was approximately $4,830,888 (based upon
the average of the high bid and closing asked prices on such date).

          On October 25, 1996 there were 19,805,495 shares of the Registrant's
common stock issued and outstanding.

                      Documents Incorporated by Reference
                                     NONE


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--------------------------------------------------------------------------------
<PAGE>
 
                             LATEX RESOURCES, INC.
                                   FORM 10-K
                        FISCAL YEAR ENDED JULY 31, 1996

           --------------------------------------------------------
                               TABLE OF CONTENTS
                                PART I
<TABLE>
<CAPTION>
                                                                                                    Page
                                                                                                    ----
<S>        <C>                                                                                      <C>
Item 1.    Business.................................................................................   3
Item 2.    Properties...............................................................................   3
Item 3.    Legal Proceedings........................................................................  21
Item 4.    Submission of Matters to a Vote of Security Holders......................................  23

                                         PART II

Item 5.    Market for Registrant's Common Equity and Related Shareholder Matters....................  23
Item 6.    Selected Financial Data..................................................................  24
Item 7.    Management's Discussion and Analysis of Financial Condition and
            Results of Operations...................................................................  26
Item 8.    Financial Statements and Supplementary Data..............................................  37

                                         PART III


Item 10.   Directors and Executive Officers of the Registrant.......................................  38
Item 11.   Executive Compensation...................................................................  40
Item 12.   Security Ownership of Certain Beneficial Owners and Management...........................  46
Item 13.   Certain Relationships and Related Transactions...........................................  48

                                         PART IV

Item 14.   Exhibits, Financial Statement Schedules, and Reports
            on Form 8-K.............................................................................  49
           Signatures...............................................................................  61
</TABLE>


     Certain statements in this Report under the captions "Item 1. Business and
Item 2. Properties" and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations", and elsewhere in this Report
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act").  Such forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the actual result, performance or achievements of the
Company, or industry trends and results, to be materially different from any
future results, trends, performance, or achievements expressed or implied by
such forward-looking statements.  Such risks, uncertainties and other factors
include, among others, the following:  general economic and business conditions;
oil and gas and other industry conditions and trends, including supply and
demand; fluctuations in the prices for oil, gas and refined products;
competition; import protection and regulation (including the implementation of
the World Trade Organization and North American Free Trade Agreement; the loss
of any significant customers; changes in business strategy or development plans;
quality of management; availability, terms and deployment of debt and equity
capital; business abilities and judgment of personnel; availability of qualified
personnel; changes in or the failure to comply with government regulations; and
other factors referenced in this Report.  See "Item 1. Business and Item 2.
Properties - Cautionary Statement and Risk Factors."

     Without limiting the foregoing, as disclosed in "Item 1. Business and
Item 2. Properties--Proposed Merger with Alliance Resources Plc," the Company
has entered into an Agreement and Plan of Merger with Alliance Resources PLC
("Alliance") pursuant to which the Company will merge (the "Merger") with a
wholly-owned subsidiary of Alliance.  Pursuant to the Merger, two of the current
directors of the Company will become directors of Alliance, but the management
of the combined companies will otherwise consist of the current management of
Alliance.  Statements made in this Report concerning future drilling,
acquisitions, budgets, spending, capital needs, operating plans and other
activities are made on behalf of the current management of the Company and will
not be indicative of the plans of the new management or activities of the
combined companies in the event the Merger is completed.

                                       2
<PAGE>
 
                                    PART I

Item 1.   Business and Item 2. Properties.

          As used in this Form 10-K:

          "Mcf" means thousand cubic feet, "MMcf" means million cubic feet and
"Bcf" means billion cubic feet.  "Mcfe" means thousand cubic feet equivalent,
"MMcfe" means million cubic feet equivalent and "Bcfe" means billion cubic feet
equivalent.  "Bbl" means barrel, "MBbls" means thousand barrels and "MMBbls"
means million barrels. "BOE" means equivalent barrels of oil and "MBOE" means
thousands equivalent barrels of oil.  Unless otherwise indicated herein, natural
gas volumes are stated at the legal pressure base of the state or area in which
the reserves are located and at 60 (degrees) Fahrenheit. Natural gas equivalents
are determined using the ratio of six Mcf of natural gas to one Bbl of crude
oil.

          The term "gross" refers to the total leasehold acres or wells in which
the Company has a working interest. The term "net" refers to gross leasehold
acres or wells multiplied by the percentage working interest owned by the
Company.  "Net production" means production that is owned by the Company less
royalties and production due others.

          "Proved reserves" are estimated quantities of crude oil, natural gas
and natural gas liquids, which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.  "Proved developed reserves"
are those reserves which are expected to be recovered through existing wells
with existing equipment and operating methods.  "Proved undeveloped reserves"
are those reserves which are expected to be recovered from new wells on
undrilled acreage or from existing wells where a relatively major expenditure is
required for recompletion.

          The term "oil" includes crude oil, condensate and natural gas liquids.

          Unless the context requires otherwise, all references to the "Company"
include LaTex Resources, Inc., and its consolidated subsidiaries including,
LaTex Petroleum Corporation ("LaTex Petroleum"), LaTex/GOC Acquisition, Inc.
("GOCA"), Germany Oil Company, formerly known as LRI Acquisition, Inc.
("Germany"), ENPRO, Inc. ("ENPRO"), Phoenix Metals, Inc. ("Phoenix Metals"), and
LaTex Resources International, Inc. ("LaTex Resources International").

The Company

          LaTex Resources, Inc. ("the Company") is an independent oil and gas
company primarily engaged in the acquisition of producing oil and gas properties
which possess the potential for increased value through exploitation and
development.  The Company seeks to realize such potential through workovers,
recompletions, secondary recovery operations, and the drilling of development or
infill wells.  The Company is also engaged in the purchase and marketing of
crude oil and natural gas and the exploration and development of non-producing
oil and gas properties.

          The Company owns and operates producing oil and gas properties located
in 12 states, with proved reserves located primarily in the states of
Mississippi, Louisiana, Oklahoma, Texas, and Alabama.  Since July 31, 1991, the
Company has acquired approximately 4,500 MBbls of crude oil and 25.8 Bcf of
natural gas reserves involving total capital expenditures of approximately
$30,840,000 for an average acquisition cost of $3.50 per BOE.  Daily gross
production from 156 wells operated by the Company in these states currently
averages approximately 1,055 Bbls of oil and 7,600 Mcf of gas. The Company also
owns interests in 342 producing wells and units in the same states which are
operated by others.  Daily gross production from both operated and non-operated
wells, net to the Company's interest, currently averages approximately 1,000
Bbls of oil and 8,000 Mcf of gas from a total of 95 net wells.

          From the end of its first year of oil and gas operations in 1987, the
Company's proved reserves have grown from 10 MBOE to 11,048 MBOE at July 31,
1996.  At July 31, 1996, the Company's proved reserves were 6,353 MBbls of oil
and 28.2 Bcf of gas.  The Company has increased its average net daily

                                       3
<PAGE>
 
production from two Bbls of oil during 1987 to 1,000 Bbls of oil and 8,000 Mcf
of gas at July 31, 1996.  See "Item 1. Business and Item 2. Properties -
Reserves."

          The Company has agreed to sell approximately 400 non-strategic oil and
gas properties for  total consideration of approximately $1,526,000, before
adjustments.  The oil and gas reserve analysis, well count, acreage summaries
and other data included in this Item I. Business and Item 2. Properties for the
year ended July 31, 1996 do not include these properties.

Historical Background

          The Company's predecessor was incorporated as a Texas corporation in
1981 under the name Video Science Technology, Inc. ("VSTI") and was initially
organized to research, develop and market specialized video systems and products
pertaining to medical, petroleum and low power television applications.  By
1988, substantially all of VSTI's original businesses had been terminated and
VSTI had become substantially inactive.

          In December 1991, Jeffrey T. Wilson ("Wilson"), James G. Borem
("Borem") and Dewitt C. Shreve ("Shreve"), agreed to exchange (the "LaTex
Exchange Transaction") all outstanding shares of common stock of LaTex Petroleum
Corporation, an Oklahoma corporation ("LaTex Petroleum"), for a total of
7,000,000 newly issued shares of VSTI's common stock representing approximately
61% of VSTI's resulting issued and outstanding common stock.  As a result, LaTex
Petroleum became a wholly owned subsidiary of VSTI.  VSTI moved its principal
offices from Dallas, Texas to its current offices located in Tulsa, Oklahoma and
Messrs. Borem, Wilson and Shreve were elected the Directors and executive
officers of VSTI.  As a result of the LaTex Exchange Transaction, VSTI resumed
operation through its wholly-owned subsidiary, LaTex Petroleum, in the business
of acquisition of producing oil and gas properties and exploration for and
production of oil and gas.

          In May 1992, VSTI was merged (the "Reincorporation Merger") with and
into the Company (which had been formed as a wholly-owned subsidiary of VSTI
solely for the purpose of effecting the Reincorporation Merger).  As a result of
the Reincorporation Merger, the state of incorporation of the Company was
changed from Texas to Delaware and the name of the Company was changed from
"Video Science Technology, Inc." to "LaTex Resources, Inc.".   Each outstanding
share of stock of VSTI was converted into one share of stock of the Company and
the existing shareholders of VSTI automatically became shareholders of the
Company.  The Reincorporation Merger did not result in any change in the
physical location, business, management, or financial condition of the Company.

          In November 1992 the Company completed a public offering of 1,125,000
units, each unit consisting of one share of common stock and two redeemable
Stock Purchase Warrants to purchase one share of common stock.  The purchase
price for the units under the offering was $3.70 per unit.  Net proceeds to the
Company from the offering, approximately $4,226,063, were used to pay off the
Company's then existing bank debt and for working capital.

Proposed Merger With Alliance Resources Plc

          The Company has entered into an Agreement and Plan of Merger
("Alliance Merger Agreement") dated August 12, 1996 with Alliance Resources Plc,
a company organized under the laws of the United Kingdom ("Alliance"), pursuant
to which the Company will merge ("Alliance Merger") with a wholly-owned U.S.
subsidiary of Alliance.

          Under the terms of the Alliance Merger Agreement and after giving
effect to a 1 for 40 reverse stock split to be completed by Alliance, the
holders of the Company's common stock will receive 0.8806 ordinary shares of
Alliance for each share of such common stock, the holders of the Company's
Series A Convertible Preferred Stock will receive 2.6445 ordinary shares of
Alliance for each share of such Series A Convertible Preferred Stock, and the
holders of the Company's Series B Senior Convertible Preferred Stock will
receive 5.8709 ordinary shares of Alliance for each share of such Series B
Senior Convertible Preferred Stock.  Following the Alliance Merger, the holders
of the Company's common and preferred stock will own, as a group, approximately
72% of the issued and outstanding ordinary shares of Alliance and the Company
will become a wholly-owned subsidiary of Alliance.  Holders of outstanding
warrants

                                       4
<PAGE>
 
to purchase shares of the Company's common stock will receive from Alliance
replacement warrants to purchase shares of Alliance ordinary shares on
substantially the same terms.
        
          Under the terms of the Alliance Merger Agreement, the Company is
required to dispose of its interests in its unconsolidated affiliates Wexford
Technology, Inc. ("Wexford") and Imperial Petroleum, Inc. ("Imperial"), and its
interests in its wholly-owned subsidiaries LaTex Resources International, Inc.
("LaTex Resources International") and Phoenix Metals, Inc. ("Phoenix Metals").
Effective July 31, 1996, the Company has written off its $2,372,452 investment
in Wexford, its $1,812,429 investment in Imperial, and its $3,446,795 investment
in LaTex Resources International (which includes $2,491,299 in dry hole costs
and $955,496 in abandonments relating to the Company's investments in Tunisia
and Kazakhstan, respectively). Effective July 31, 1994, the Company wrote off
its $222,918 investment in Phoenix Metals. The Company has entered into a
Purchase Agreement with Imperial pursuant to which the Company will sell its
interests in Wexford, Imperial, LaTex Resources International and Phoenix Metals
to Imperial for 100,000 shares of the Company's common stock. By subsequent
agreement, Imperial granted the Company an option to repurchase its interests in
Imperial, Wexford, LaTex Resources International and Phoenix Metals for the
original purchase price of 100,000 shares of the Company's common stock. The
option is for a term of two years from the closing date of the sale by the
Company of its interests in Imperial, Wexford, LaTex Resources International and
Phoenix Metals or the Company fails to fund its proportionate share (defined as
16% for Imperial, 33% for Wexford, 50% for LaTex Resources International and 50%
of Phoenix Metals) of the ongoing expenses associated with the development of
the assets held by these companies within 30 days of being presented with an
authority for expenditure with respect to such expenses. In addition, Imperial
granted the Company a right to share in the net proceeds from any subsequent
sale by Imperial of these companies in the same proportions outlined above. See
"Exploration and Development", "Other Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Proposed Merger With Alliance Resources Plc."     

          Pursuant to the Alliance Merger, two of the current directors of the
Company will become directors of Alliance, but the management of the combined
companies will otherwise consist of the current management of Alliance.
Statements made in this Report concerning future drilling, acquisitions,
budgets, spending, capital needs, operating plans and other activities are made
on behalf of the current management of the Company and will not be indicative of
the plans of the new management or activities of the combined companies in the
event the Merger is completed.

Cautionary Statement and Risk Factors

          Cautionary Statement Regarding Forward-Looking Statements.  In the
          ---------------------------------------------------------         
interest of providing the Company's shareholders and potential investors with
certain information regarding the Company, including management's assessment of
the Company's future plans and operations, certain statements set forth in this
Report contain or are based on the Company's projections or estimates of
revenue, income, earnings per share and other financial items or relate to
management's future plans and objectives or to the Company's future economic and
financial performance.  Such statements are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are made
pursuant to and in reliance on the safe harbor provisions of such sections.

          Although any forward-looking statements contained in this report or
otherwise expressed by or on behalf of the Company are, to the knowledge and in
the judgment of the officers and directors of the Company, expected to prove
true and to come to pass, management is not able to predict the future with
absolute certainty.  Forward-looking statements involve known and unknown risks
and uncertainties which may cause the Company's actual performance and financial
results in future periods to differ materially from any projection, estimate or
forecasted result.  These risks and uncertainties include, among other things:
volatility of oil and gas prices; product supply and demand; market competition;
risks inherent in the Company's oil and gas operations both domestic and
foreign; imprecision of reserve estimates; the Company's ability to replace and
expand oil and gas reserves; the Company's ability to generate sufficient cash
flow from operations to meet its current and future obligations; the Company's
ability to access external sources of debt and equity capital; and such other
risks and uncertainties described from time to time in the Company's periodic
reports and filings with the Securities and Exchange Commission.  These and
other risks are described elsewhere in this report and in the Company's other
filings with the Securities and Exchange Commission.  Accordingly, shareholders
and potential investors are cautioned that certain events or circumstances could
cause actual results to differ materially from those projected, estimated or
predicted.  In addition, forward-looking statements are based on management's
knowledge and judgment as of the date of this report, and the Company does not
intend to update any forward-looking statements to reflect events occurring or
circumstances existing hereafter.

            History of Losses; Accumulated Deficit.  For the fiscal years ended
            --------------------------------------                             
July 31, 1996, 1995 and 1994, the Company incurred net losses of $10,230,783,
$2,491,342 and $423,341 respectively.  At July 31, 1996, the Company had an
accumulated deficit of $11,747,860 and its working capital deficit was
$28,420,291.

                                       5
<PAGE>
 
It is expected that the Company will continue to experience losses and that, in
order to achieve profitability and generate cash flow, it will be dependent upon
acquiring additional debt or equity capital and acquiring or developing
additional oil and gas properties.  There can be no assurance that the Company
will be able to do so.  See "Item 7.  Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8.  Financial
Statements and Supplementary Data."

          Limited Available Capital; Need for Additional Financing.  Without
          --------------------------------------------------------          
raising additional capital, the Company will be unable to acquire additional
producing oil and gas properties and its ability to develop its existing oil and
gas properties will be limited to the extent of available cash flow.
Accordingly, in order for the Company to achieve its business objective and
achieve profitable operations, it will be necessary to generate additional cash
flow from operations, raise additional capital or enter into joint oil and gas
development arrangements.  Management intends to fund future acquisitions and
develop its oil and gas reserves using cash flow from operations as well as
borrowings, public and private sales of debt and equity securities and joint oil
and gas development arrangements, among other possible sources.  The Company
estimates that it will need approximately $800,000 of capital to develop its
undeveloped oil and gas reserves during the year ended July 31, 1997 and an
additional $1,000,000 to develop such reserves during the following year.  The
Company expects to obtain these funds from cash flow, the proceeds from the sale
of certain non-strategic oil and gas properties, and additional borrowings.  The
Company has no present arrangements for future borrowings and its cash flow from
operations is not expected to be adequate to provide the funds needed for these
purposes.  Although the Company has agreed to sell certain non-strategic oil and
gas properties for approximately $1.5 million, before adjustments, there can be
no assurance that this transaction or other sources will provide funds in
sufficient amounts to allow the Company to successfully implement its present
business strategy of additional oil and gas property acquisitions or the
development of its existing oil and gas reserves.  The Company has no present
arrangements to raise additional capital from the sale of its securities or
joint development arrangements.  No assurance can be given as to the
availability or terms of any such additional financing or joint development
arrangements or that such terms as are available may not be dilutive to the
interests of the Company's shareholders.  See "Item 7.  Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Item 8.
Financial Statements and Supplementary Data."

          Credit Facility Covenants and Restrictions.  The Company currently
          ------------------------------------------                        
owes approximately $22,206,707 under its credit facility with the Company's
principal bank.  The interest rate on the indebtedness is, at the option of the
Company, either the lending bank's base interest rate plus 1% or up to 2% (based
on the principal balance outstanding) over the rate for borrowing dollars by the
lending bank in the London Interbank market.  The principal must be amortized at
the rate of $365,000 per month with the entire outstanding balance due March 31,
2000.  The credit facility is secured by first mortgages on all of the Company's
oil and gas properties.  The loan agreement relating to the credit facility
contains various affirmative and negative covenants including, among others, the
requirements that the Company maintain certain ratios of current assets to
current liabilities, minimum tangible net worth, restrictions on selling,
general and administrative expenses and the payment of dividends.  Material
breaches of these or other covenants which are not cured or waived could result
in a default under the loan agreement resulting in this indebtedness becoming
immediately due and payable and empowering the lender to foreclose against the
collateral for the loan.  The Company has been in default under various
affirmative and negative covenants of the loan agreement with its principal bank
with respect which the bank agreed to not take any action before November 29,
1996.  The Bank has indicated its willingness to extend its agreement to forbear
any action on the Company's default through February 28, 1997.  If the Company
cannot cure its default, the bank could declare the balance due and foreclose on
the Company's oil and gas properties.  Under such circumstances the Company's
shareholders could lose their entire investment.  See "Item 7.  Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Capital Resources and Liquidity".

          Industry Conditions; Impact on Company's Profitability.  The
          ------------------------------------------------------      
profitability and revenues of the Company are dependent, to a significant
extent, upon prevailing market prices for oil and gas.  In the past, oil and gas
prices and markets have been volatile.  Prices are subject to wide fluctuations
in response to changes in supply of and demand for oil and gas, market
uncertainty and a variety of additional factors that are beyond the control of
the Company.  Such factors include supply and demand, political conditions,
weather conditions, government regulations, the price and availability of
alternative fuels and

                                       6
<PAGE>
 
overall economic conditions.  Crude oil and natural gas prices have increased
significantly over the past 12 months.  Any decline from current oil or gas
prices would have a material adverse effect on the Company's revenues and
operating income and might, under certain conditions, require a write-down of
the book value of the Company's oil and gas properties.  If such declines were
severe enough, they could result in a reduction in the Company's borrowing base
under its credit facility with its principal bank and could require the sale of
some of its properties under unfavorable market conditions or require the
Company to seek additional debt or equity capital.  There can be no assurance
that the Company could, if the need arose, effect any sale of its debt or equity
securities on terms acceptable to the Company or on terms which would not be
dilutive to the Company's shareholders.  See "Marketing".

          Acquisition Strategy.  The Company must acquire producing properties
          --------------------                                                
or locate and develop new oil and gas reserves to replace those being depleted
by production.  Without acquisition of producing properties or successful
drilling and exploration activities, the Company's reserves and revenues will
decline.  In particular, the Company's principal producing properties are
characterized by a high initial production rate, followed by a steep decline in
production.  Subject to the availability of the required capital, the Company
intends to seek to acquire additional producing oil and gas properties.  No
funds are currently available for this purpose.  Although the Company engages in
discussions regarding the acquisition of additional properties on a regular
basis, as of the date of this report the Company has no agreements or
understandings to acquire any other properties and there can be no assurance
that the Company will be able to identify and acquire additional producing oil
and gas properties that will prove to be profitable to the Company.  The process
of integrating acquired properties into the Company's operations may result in
unforeseen difficulties and may require a disproportionate amount of
management's attention and the Company's resources.  In connection with
acquisitions, the Company could become subject to significant contingent
liabilities arising from the activities of the acquired properties to the extent
the Company assumes, or an acquired entity becomes liable for, unknown or
contingent liabilities or in the event that such liabilities are imposed on the
Company under theories of successor liability.  See "Acquisition Activities,"
"Exploitation Activities" and "Production".

          Reliance on Estimates of Proved Reserves; Depletion of Reserves.
          ---------------------------------------------------------------  
There are numerous uncertainties inherent in estimating quantities of proved oil
and gas reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer.  The reserve data set forth in this report represents estimates only.
Oil and gas reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
way, and estimates by other engineers might differ from those included in this
report.  The accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
This report contains estimates of the Company's proved oil and gas reserves and
the projected future net revenue therefrom, which have been prepared by an
independent petroleum engineering firms.  Actual future production, oil and gas
prices, revenue, capital expenditures, taxes and operating expenses may vary
substantially from those assumed in making estimates, and the Company's reserves
may be subject to material upward or downward revision and the rate of
production from oil and gas properties declines as reserves are depleted.  In
addition, the Company's ability to develop its reserves will be dependent upon
the timely availability of financing for this purpose without which the
Company's ability to produce the projected amounts of oil and gas will be
adversely affected thereby adversely affecting the projected future net revenue.
See "Reserves".

          Dependence on Other Operators.  With respect to wells not to be
          -----------------------------                                  
operated by the Company in which it owns a working interest, the independent
operators are, in some cases, privately-held companies who may have limited
financial resources.  If a third party operator experiences financial difficulty
and fails to pay for materials and services in a timely manner, the wells
operated by such third party operators could be subject to material and
workmen's liens.  In such event, the Company would incur costs in discharging
such liens.  However, the Company has no reason to believe that its current
operators are experiencing significant financial difficulties.

          Reliance on Key Personnel.  The Company is dependent upon the services
          -------------------------                                             
of its President, Jeffrey T. Wilson, its Vice President and Chief Financial
Officer, John L. Cox, its Vice President of Operations, Robert L. Hull, and its
Vice President of Exploration, John W. Heinsius.  The loss of their services
could have a material adverse effect upon the Company.  The Company does not
have employment agreements with Messrs. Wilson, Cox, Hull or Heinsius.  The
Company does not maintain insurance on the lives of

                                       7
<PAGE>
 
Messrs. Wilson, Cox, Hull or Heinsius.  See "Item 10.  Directors and Executive
Officers of the Registrant."

          Competition.  The oil and gas industry is highly competitive.  The
          -----------                                                       
Company competes with major integrated and independent oil and gas companies in
acquiring properties.  Many competitors have resources substantially exceeding
the resources of the Company.  See "Competition".

          Operational Hazards, Environmental Concerns, Insurance and Government
          ---------------------------------------------------------------------
Regulation.  The oil and gas industry involves a number of operating risks, such
----------                                                                      
as the risks of fire, blowouts, explosions, cratering, pipe failure, casing
collapse and abnormally pressured formations, the occurrence of any of which
could materially and adversely affect the Company.  The business is also subject
to environmental hazards including oil and saltwater spills, gas leaks, ruptures
and discharges of toxic gases.  These risks could result in substantial losses
to the Company due to injury and loss of life, severe damage to and destruction
of property and equipment, pollution and other environmental damage, and
suspension of operations.  As the owner of working interests in its oil and gas
properties, the Company bears its proportionate share of the obligations and
liabilities arising out of the exploration and development of those properties.
Generally, owners of working interests in oil and gas properties are jointly and
severally liable for all such obligations and liabilities.  As a result, there
exists a risk that the Company could become liable for amounts in excess of its
proportionate share of such obligations and liabilities, although generally the
Company would have a right of contribution against the other working interest
owners.  In accordance with customary industry practices, the Company maintains
insurance against some, but not all, of such risks and some, but not all of such
losses.  The occurrence of such an event not fully covered by insurance could
have a material adverse effect on the financial position and operations of the
Company.  The Company maintains insurance against some, but not all, potential
risks, and does not carry insurance covering environmental impairment
liabilities.  The Company can provide no assurance that the insurance it carries
will be adequate to cover any loss or exposure to liability, or that such
insurance will continue to be available on terms acceptable to the Company.  See
"Operational Hazards and Insurance".

          Effect of Warrants and Convertible Preferred Stock Outstanding.  The
          --------------------------------------------------------------      
Company has outstanding (i) warrants which provide for the purchase of an
aggregate of 3,034,750 shares of common stock at prices ranging from $0.75 to
$4.44 per share, (ii) shares of Series A Convertible Preferred Stock ("Series A
Preferred Stock") convertible into an aggregate of 1,350,835 shares of common
stock, if calculated as of July 31, 1996, and (iii) shares of Series B Senior
Convertible Preferred Stock ("Series B Preferred Stock") convertible into an
aggregate of 3,200,167 shares of common stock, if calculated as of July 31,
1996.  Issuances of shares of the Company's common stock upon exercise of
warrants or conversion of shares of preferred stock will have a dilutive effect
on the Company's shareholders by decreasing their percentage ownership in the
Company.

          Registration Rights.  The holders of the outstanding shares of the
          -------------------                                               
Company's Series A Preferred Stock and Senior B Preferred Stock and the holders
of warrants to purchase up to 305,000 shares of the Company's common stock have
the right to either require the Company to register shares of the Company's
common stock issuable upon conversion of such preferred stock or exercise of
such warrants under the Securities Act of 1933 ("Securities Act") or to have
such shares included in any registration statement filed by the Company, subject
to certain limitations, to enable a public sale of those shares.  In the event
the holders of a material amount of such shares should seek to have their shares
registered for sale under the Securities Act, these obligations could result in
considerable expense to the Company and the effect of the offer and sale of such
shares may be to depress the market price for the Company's common stock.
Compliance with these obligations may also interfere with the Company's ability
to raise additional capital when required.

          Authorization and Discretionary Issuance of Preferred Stock; Anti-
          -----------------------------------------------------------------
takeover Provisions.  The Company's Certificate of Incorporation authorizes the
-------------------                                                            
issuance of preferred stock with such designations, rights and preferences as
may be determined from time to time by the Board of Directors.  Accordingly, the
Board of Directors is empowered, without shareholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of holders of the
Company's common stock.  In the event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company, which could have the effect of
discouraging bids for the Company and

                                       8
<PAGE>
 
thereby prevent shareholders from receiving a premium for their shares over the
then-current market prices.  Although the Company has no present intention to
issue any additional shares of its preferred stock (other than in payment of
dividends on the Series A and Series B Preferred Stock), there can be no
assurance that the Company will not do so in the future.

          The Delaware General Corporation Law includes provisions which are
intended to encourage persons considering unsolicited tender offers or other
unilateral takeover proposals to negotiate with the Company's Directors rather
than pursue non-negotiated takeover attempts.  These existing takeover
provisions may have a significant effect on the ability of a shareholder to
benefit from certain kinds of transactions that may be opposed by the incumbent
Directors.

          Qualification Requirements for Nasdaq Securities.  The common stock of
          ------------------------------------------------                      
the Company is presently quoted on Nasdaq, which is administered by the National
Association of Securities Dealers, Inc. (the "NASD").  Until September 4, 1996,
the common stock of the Company was also listed on the Pacific Stock Exchange.
Effective September 4, 1996, the common stock was delisted by the Pacific Stock
Exchange as a result of the failure of the minimum share bid price for the
common stock to meet the minimum listing maintenance requirements of the
Exchange.  For the Company's securities to continue to be eligible for inclusion
on Nasdaq, the Company must, among other things, maintain at least $2,000,000 in
total assets and have at least $1,000,000 of capital and surplus and the bid
price of the common stock must be at least $1.00 per share, provided, however,
that, if the Company's stock falls below such minimum bid price, it will remain
eligible for continued inclusion if the market value of the public float is at
least $1,000,000 and the Company has at least $2,000,000 in capital and surplus.
While the Company presently meets the NASDAQ required standards, there can be no
assurance that it will continue to be able to do so.  If this should occur,
trading, if any, in the common stock would then continue to be conducted in the
over-the-counter market on the OTC Bulletin Board, an NASD-sponsored inter-
dealer quotation system, or in what are commonly referred to as "pink sheets."
As a result, a shareholder may find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of, the Company's securities.
In addition, if the Company's securities cease to be quoted on Nasdaq and the
Company fails to meet certain other criteria, those securities would be subject
to a Commission rule that imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors.  For transactions covered by this rule, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale.  Consequently, if the Company's securities were no longer quoted on
Nasdaq, the rule may affect the ability of broker-dealers to sell the Company's
securities and the ability of shareholders to sell their securities in the
secondary market.  See "Item 5.  Market for Registrant's Common Equity and
Related Shareholder Matters."

          Dividends Unlikely.  The Company has never declared or paid dividends
          ------------------                                                   
on its common stock and currently does not intend to pay dividends in the
foreseeable future.  The payment of dividends in the future will be at the
discretion of the Board of Directors.  In addition, the Company's credit
facility contains a provision which prohibits the payment of dividends except
for dividends on its shares of Series A and Series B Preferred Stock payable in
the form of additional shares of Series A and Series B Preferred Stock.
    
          Government Regulation.  The Company's business is subject to extensive
          ---------------------                                                 
federal, state and local laws and regulations relating to the exploration for,
development, production, marketing and transmission of oil and gas, as well as
environmental and safety matters.  Such laws and regulations have generally
become more stringent in recent years, often imposing greater liability on a
larger number of potentially responsible parties. The Company believes that it
is currently in compliance with applicable government regulations. Because the
requirements imposed by such laws and regulations are frequently changed, the
Company is unable to predict the ultimate cost of compliance with such
requirements. The states of Oklahoma, Texas and Louisiana have recently adopted
revisions to their production allowable rules under which they regulate the
quantities of natural gas which producers may produce within their respective
borders. The state of Kansas is considering similar revisions to their allowable
rules. Legislation has recently been introduced in the United States Congress to
restrict the ability of states to regulate the production of natural gas. It is
impossible at this time to determine the effect, if any, these developments may
have on the natural gas industry as a whole. The Company does not believe these
developments will materially affect its operations. There is no assurance that
federal, state or local laws and regulations enacted in the future will not
adversely affect the Company's ability to explore for,     

                                       9
<PAGE>
 
produce and market oil and natural gas.  See "Regulation" and "Recent and
Proposed Legislation."

Business Strategy

          The Company's business strategy has been and will continue to be to
increase shareholder value through the acquisition of producing oil and gas
properties and exploitation of those properties to maximize production and
ultimate reserve recovery.  The Company's growth strategy focuses on the
technical expertise of its management and employees to evaluate acquisitions and
to exploit the development potential of each oil and gas property through
recompletions, workovers, cost reduction measures or marketing efforts.

Acquisition Activities

          Historically, the Company has allocated a substantial portion of its
capital expenditures to the acquisition of producing oil and gas properties.
From July 31, 1991 through July 31, 1996, the Company completed 12 acquisitions
of oil and gas properties, involving total acquisition costs of approximately
$30,840,000 and resulting in an average reserve replacement cost of
approximately $3.50 per BOE.  During the year ended July 31, 1996, the Company
completed the acquisition of approximately  15 oil and gas properties from
Sackett Oil Company for a purchase price of approximately $2,900,000.  A portion
of these properties were subsequently sold by the Company for approximately
$2,800,000.

          To the extent that it has the capital resources to do so, the Company
intends to continue to pursue a business strategy that emphasizes reserve
additions through acquisitions.  The Company may utilize any one or a
combination of lines of credit with banks, public and private sales of debt and
equity securities, joint oil and gas development arrangements and internally-
generated cash flow to finance its acquisition efforts.  No assurance can be
given that sufficient external or internal funds will be available to fund the
Company's desired acquisitions.  See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."  The Company may
also use, where appropriate, its equity securities as all or part of the
consideration for such acquisitions.

          Prospective acquisitions are evaluated by the Company's management.
After the acquisition of oil and gas properties, management generally develops a
reservoir depletion plan to maximize production rates, ultimate reserve recovery
and cash flow generation.  Such plans consider field operating procedures,
workovers, recompletions, secondary recovery implementation, additional drilling
and such other procedures as the situation dictates.

          The Company does not have a specific budget for the acquisition of oil
and gas properties since the timing and size of acquisitions are difficult to
forecast.  However, the Company is constantly reviewing acquisition
possibilities.

Exploitation Activities

          The Company concentrates its acquisition efforts on proved producing
properties which demonstrate a potential for significant additional development
through workovers, behind-pipe recompletions, secondary recovery operations, the
drilling of development or infill wells, and other exploitation activities which
the Company may find appropriate.  The Company has pursued an active workover
and recompletion program on the properties it has acquired and intends to
continue its workover and recompletion program in the future as properties
acquired warrant.  In connection with oil and gas property acquisitions,
properties are reviewed and evaluated by the Company with a view toward taking
the appropriate actions to maximize production.  Such actions may include repair
or replacement of equipment or more extensive efforts such as recompletion in a
different producing zone or implementation of secondary recovery operations.

          The expenditures required for the Company's workover and recompletion
program have historically been financed, and it is expected that they will
continue to be financed, by borrowings and internally generated funds.

                                       10
<PAGE>
 
Production
    
          The Company owns and operates producing properties located in 12
states, with its proved reserves located primarily in the states of Mississippi,
Louisiana, Oklahoma, Texas, and Alabama. The Company operates 156 producing
wells in these areas and also owns non-operated interests in 342 producing wells
and units. Oil and gas sales from the Company's producing oil and gas properties
accounted for substantially all of the Company's revenues for the years ended
July 31, 1994, 1995, 1996, respectively. The Company continuously evaluates the
profitability of its oil, gas and related activities and has a policy of
divesting itself of unprofitable oil and gas properties or areas of operation
that are not consistent with its operating philosophy.       

                    
    
          The following map shows the locations of the Company's principal areas
of oil and gas production.       

          A United States map appears here showing oil and gas
operations and locations of major fields in Alabama, Arkansas, Colorado, 
Louisiana, Mississippi, Texas, and the Gulf of Mexico.  

          The following table sets forth certain information regarding the
Company's principal areas of oil and gas production.
<TABLE>      
<CAPTION>
 
                       SUMMARY OF MAJOR PRODUCING FIELDS

                              Avg.     Avg. Net                           Net Proved
                             Working    Revenue   Producing     Date      Reserves at
Field Name      Location    Interest   Interest     Wells     Acquired   July 31, 1996
----------      --------    --------   --------   ---------   --------   -------------      
<S>            <C>          <C>        <C>        <C>        <C>         <C>
South          Alabama       100.00%     77.66%        56    May, 1993   4,217.3 MBbls
Carlton                     
                            
Black          Alabama/       53.11%     40.66%       145    Apr., 1995  30.8 MBbls
Warrior        Mississippi                                               10,733.2 MMcf
Basin                       
                            
Wolf           Colorado       80.72%     59.41%         1    Apr., 1995  662.4 MBbls
Mountain                    
                            
War~Wink       Texas          13.20%      9.79%        45    May, 1990   100.2 MBbls
South/East                                                   and         2,165.1 MMcf
Quito                                                        Oct., 1992
                            
Tinsley        Mississippi   100.00%     76.51%         5    July, 1991  282.2 MBbls
                            
Perkins        Louisiana     100.00%     81.25%         7    Jan., 1995  236.3 MBbls

Bolton         Mississippi    96.86%     75.04%         1    Nov., 1995  36.6 MBbls
                                                                         768.9 MMcf
Ozona          Texas          52.86%     41.03%        24    Apr., 1995  1 MBbls
                                                                         969 MMcf
Turtle         Louisiana       3.43%      2.30%         6    Apr., 1995  7 MBbls
Bayou/                                                                   806 MMcf
Deer Island                 

Springhill     Arkansas            -      2.30%         6    May, 1990   10 MBbls
                                          ORRI                           667.7 MMcf
GOM State      Texas          23.62%     17.65%         2    Apr., 1995  14.6 MBbls
Tract 904                                                                560.1 MMcf
</TABLE>       
    
          The following summarizes certain information regarding the Company's
principal areas of oil and gas production activity.       

          South Carlton Field, Alabama.  The South Carlton Field is located in
          ----------------------------                                        
Clarke and Baldwin Counties in southwest Alabama.  The Company operates 56
active producing oil wells and three water injection wells.  Production is from
the Massive and Pilot sands of the Tuscaloosa Formation with daily gross
production being approximately 380 Bbls of oil.  Based on the production history
of certain infill wells previously drilled in this field and an extensive
geological and engineering review, the Company believes that additional infill
drilling potential exists for the Tuscaloosa reservoirs.  Net proven reserves to
the Company as of July 31, 1996 are 4,217.3 MBbls of oil.

          Black Warrior Basin, Mississippi and Alabama.  The Company owns
          --------------------------------------------                   
operated and non-operated working interests in 145 wells (55 operated and 90
non-operated) in Lamar, Fayette and Pickens Counties, Alabama and Lee and
Chickasaw Counties, Mississippi.  Production from these wells are from multiple
sandstones of Mississippian age and range in depth from approximately 1,900 feet
to 4,600 feet.  Net proven reserves to the Company as of July 31, 1996, are 30.8
MBbls of oil and 10,733.2 MMcf of gas.

          War-Wink South/East Quito Fields, Texas.  The Company owns non-
          ---------------------------------------                       
operated working interests in 45 active wells operated by Texaco, Chevron, Enron
and BC Operating in the War-Wink South and East Quito Fields in Ward County,
Texas.  These fields produce from the Fusselman, Atoka, Wolfcamp and Cherry
Canyon Formations at depths ranging from 6,200 feet to 17,500 feet.  Based upon
review of geological and engineering data, the Company believes that additional
behind pipe and infill drilling potential exists on these properties.  Net
proven reserves to the Company as of July 31, 1996 are 100.2 MBbls of oil and
2,165.2 MMcf of gas.

          Wolf Mountain Field, Colorado.  The Company operates one well in the
          -----------------------------                                       
Wolf Mountain Field in Routt County, Colorado.  The well produces oil at a daily
rate of 28 Bbls from the Niobrara reservoir at a depth of approximately 5,500
feet.  Additional potential exists behind the pipe to recomplete the well to
other undrained sections of the reservoir.  Net proven reserves to the Company
as of July 31, 1996 are 662.4 MBbls of oil.

          Perkins Field, Louisiana.  The Company operates seven active wells in
          ------------------------                                             
the Perkins Field which produce crude oil on gas lift from various Miocene sands
at depths ranging from approximately 6,000 to 7,500 feet.  The Perkins field is
a multiple reservoir structural feature which is nearing the later stages of
depletion.  Net proven reserves to the Company as of July 31, 1996 are 236.3
MBbls of oil.

          Tinsley Field, Mississippi.  The Tinsley Field is located in Yazoo
          --------------------------                                        
County in north central Mississippi and produces from a series of Selma-Eutaw
sands of Upper Cretaceous age.  The Company operates five active wells and two
water injection wells in the field having a daily gross production of
approximately 85 Bbls of oil.  Through extensive mapping and engineering work,
the Company believes that significant additional oil reserves may remain in
various Eutaw sand and in the underlying Tuscaloosa sand which has not been
extensively tested in the field.  Net proven reserves to the Company as of July
31, 1996 are 282.2 MBbls of oil.

          Bolton Field, Mississippi.  The Bolton Field is located in Hinds
          -------------------------            
County in west central Mississippi.

                                       11
<PAGE>
 
The Company operates two wells in the field and has non-operated interests in
four additional wells.  Production is from the Cotton Valley, Sligo, Rodessa and
Mooringsport Formations.  Daily gross production from the operated wells is 425
Mcf of gas and 20 Bbls of oil.  Based on a review of the field data, the Company
believes that significant behind pipe potential exists in several of the wells.
Net proven reserves to the Company as of July 31, 1996 are 36.6 MBbls of oil and
768.9 MMcf of gas.

          Ozona Field, Texas.  The Ozona Field is located in Crockett County in
          ------------------                                                   
west Texas.  The Company owns non-operated working interests in 24 wells which
produce from the Cisco and Canyon sand reservoirs.  Net proven reserves to the
Company as of July 31, 1996, are 1.0 MBbls of oil and 969 MMcf of gas.

          Turtle Bayou/Deer Island Fields, Louisiana.  These fields are located
          ------------------------------------------                           
in Terrebonne Parish, Louisiana.  Production is from multiple sands,
predominantly in the normal pressured upper and middle Miocene.  The Company
owns non-operated working interests in six producing wells.  Based on geological
and engineering data, the Company believes that additional development potential
exists within the field.  Net proven reserves to the Company as of July 31,
1996, are 7.0 MBbls of oil and 806 MMcf of gas.
    
          Springhill Field, Arkansas.  The Springhill Field is located in
          --------------------------                                     
Columbia County, Arkansas.  The Company owns royalty interests in six wells
operated by Sonat which produce from the Haynesville formation at a combined
rate of 16.5 MMCf of gas and 335 Bbls of oil per day.  Net proven reserves to
the Company as of July 31, 1996 are 10 MBbls of oil and 667.7 MMcf of gas.     

          GOM State Tract 904 Field, Texas.  The GOM State Tract 904 Field is
          --------------------------------                                   
located in offshore waters of Nueces County, Texas.  The Company owns interests
in two wells operated by National Energy Group which produce from the Frio sands
at a combined rate of 80 Bbls of oil and 1150 Mcf of gas per day.  Net proven
reserves to the Company as of July 31, 1996 are 14.6 MBbls of oil and 560.1 MMcf
of gas.

Marketing

          The availability of a market for oil and gas produced or marketed by
the Company is dependent upon a number of factors beyond its control which at
times cannot be accurately predicted.  These factors include the proximity of
wells to, and the available capacity of, natural gas pipelines, the extent of
competitive domestic production and imports of oil and gas, the availability of
other sources of energy, fluctuations in seasonal supply and demand, and
governmental regulation.  In addition, there is always the possibility that new
legislation may be enacted which would impose price controls or additional taxes
upon crude oil or natural gas, or both.  In the event a productive gas well is
completed in an area that is distant from existing gas pipelines, the Company
may allow the well to remain shut-in until a pipeline is extended to the well or
until additional wells are drilled to establish the existence of sufficient
producing reserves to justify the cost of extending existing pipelines to the
area.  It appears that the United States is emerging from a period of oversupply
of natural gas which has, and may still, cause delays, restrictions or
reductions of natural gas production and which has adversely affected gas
prices.  In addition, increased imports of natural gas from Canada and Mexico
have occurred and are expected to continue.  Oversupplies of natural gas can be
expected to recur from time to time and may result in depressed gas prices and
in the gas producing wells of the Company being shut-in.

          Since the early 1970's the supply and market price for crude oil has
been significantly affected by policies adopted by the member nations of OPEC.
Members of OPEC establish among themselves prices and production quotas for
petroleum products from time to time with the intent of manipulating the global
supply and price levels for crude oil.  In addition, Canada recently revised its
laws affecting the exportation of natural gas to the United States.  Mexico also
continues to fine tune its import/export policies.  The oil and gas policies of
the United States, Canada and Mexico are impacted by the Canadian/U.S. Free
Trade Agreement, the General Agreement on Tariffs and Trade, and the North
American Free Trade Agreement.  These factors are expected to increase
competition and may adversely affect the price of natural gas in certain areas
of the United States.  The Company is unable to predict the effect, if any,
which OPEC, Canadian and Mexican policies, and emerging international trade
doctrines will have on the amount of, or the prices received for, oil and
natural gas produced and sold by the Company.

                                       12
<PAGE>
 
          Changes in oil and natural gas prices significantly affect the
revenues and cash flow of the Company and the value of its oil and gas
properties.  Significant declines in the prices of oil and natural gas could
have a material adverse effect on the business and financial condition of the
Company.  The Company is unable to predict accurately whether the price of oil
and natural gas will rise, stabilize or decline in the future.  In an effort to
protect the Company against fluctuations in oil and gas prices, the Company has
entered into certain commodity hedging arrangements.  See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations."

          Substantially all of the Company's crude oil and condensate production
is sold at posted prices under short term contracts, as is customary in the
industry.  The most significant purchaser of the Company's oil and gas
production (including production sold by the Company's marketing subsidiary,
ENPRO) during the year ended July 31, 1996 was ENRON Reserve Acquisition Corp.
which accounted for 16% of the Company's oil and gas sales.  No other purchaser
of crude oil or natural gas during this period exceeded 10% of the Company's oil
and gas sales.  With respect to losses incurred by the Company as a result of
its crude and natural gas price hedging arrangements, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Capital Resources and Liquidity."

          The Company's wholly-owned subsidiary, ENPRO, purchases and resells
crude oil and natural gas in Alabama, Colorado, Louisiana, Mississippi, Montana,
New Mexico, Oklahoma and Texas.  ENPRO currently markets approximately 704 BOE
per day to refiners and large resellers.  For its services, ENPRO receives a
margin which averages approximately 9.75% of gross sales.  ENPRO currently
markets approximately 969 barrels per day of oil from wells operated by the
Company.  By aggregating barrels of crude oil purchased by ENPRO from third
parties with those purchased by ENPRO from the Company, additional revenues are
generated through what the Company believes are improved marketing practices.

          ENPRO owns a crude oil trans-shipment facility in Poyner, Texas
approximately 30 miles south of Tyler, Texas.  The facility consists of 2,410
barrels of storage capacity on four acres owned by ENPRO.   The terminal was
originally constructed and operated as a crude oil blending facility.  The
facility is presently inactive.

          The Company's gas production and gathered gas is sold primarily on the
spot market or under market sensitive long term agreements with a variety of
purchasers, including intrastate and interstate pipelines, their marketing
affiliates, independent marketing companies and other purchasers who have the
ability to move the gas under firm transportation agreements.

Exploration and Development

          General.  Development drilling opportunities available to the Company
          -------                                                              
are largely a result of the Company's acquisition of producing oil and gas
properties. Several infill and development locations exist on Company properties
currently producing oil and gas.  As a result, the Company will continue to
evaluate additional opportunities for developmental drilling on its existing
properties.

          Exploratory drilling has been minimal to date.  In the United States,
the Company reviews exploration proposals from other companies and individuals
and may from time to time participate in certain ventures where the risk-reward
ratio is sufficiently high to warrant capital outlays.  The Company does not
anticipate generating exploration projects utilizing its own staff at the
present time.  Consequently, exploratory drilling within the United States will
likely only remain a small part of the Company's business.

          Outside the United States, the Company has from time to time pursued
foreign exploration concessions which offer limited capital expenditure exposure
through the drilling commitment phase.  However, the Company's focus in the
future will be on domestic oil and gas opportunities.

          Tunisian Prospect.  On June 30, 1993, the Company's wholly-owned
          -----------------                                               
subsidiary, LaTex Resources International, together with Enterprise Tunisienne
D'Activities Petroleries, the Tunisian State Oil Company ("ETAP"), ARCO Tunisia,
Inc. ("ARCO") and Premier Pict Petroleum Ltd. (formerly Pict Petroleum (Tunisia)
Ltd.) ("Premier"), acquired from the Republic of Tunisia a permit (the "Sbiba
Permit") for the exploration and production of oil and gas from a 4,936 square
kilometer (1,220,000 acres) area (the "Permit

                                       13
<PAGE>
 
Area") located in north-central Tunisia.  The respective participating interests
of the parties in the Permit Area are 50% ETAP, 32% ARCO, 10% Premier and 8%
LaTex Resources International.

          The seismic acquisition and processing and the geological and
geophysical evaluations of the Permit Area began in September 1993.  In July
1994, the initial well location was recommended and approved by the Sbiba
Operating Committee and wellsite preparation began.  The Sbiba #1, scheduled to
be drilled to a total depth of 2,500 meters (8,200 feet), was spudded on
November 9, 1994.  The well encountered unexpected and severe overpressure zones
in the Eocene Evaporites resulting in slower than expected drilling rates and
ultimately in having to drill a sidetrack hole at 1,343 meters (4,405 feet).  A
total depth of 2,076 meters (6,810 feet) was reached before having to suspend
operations on March 5, 1995 due to overpressure concerns and the presence of
natural gas in the wellbore.  The objective reservoir, the Albo-Aptian
carbonates, was never reached or evaluated and the well was temporarily
abandoned.  Subsequently, the operator of the project, in response to a request
from the Tunisian government, permanently plugged the well and restored the
drill site.

          ARCO and Premier have indicated their interest in terminating their
participation in the Permit.  The Company is currently seeking to locate new
participants to acquire the interests of ARCO and Premier.  No assurance can be
made that new participants willing to acquire the Arco and Premier interests
will be found.

          Since inception of the Tunisian project, approximately $13,168,000 has
been expended by the participants to date, of which LaTex Resources
International's share has been approximately $2,106,880.  The Company has
insufficient capital to continue its active participation in the project and,
effective July 31, 1996, the Company has written off its entire investment in
the Sbiba Permit in the amount of $2,491,299.

          Kazakhstan Prospect.  In April 1995, the Company's wholly-owned
          -------------------                                            
subsidiary, LaTex Resources International, agreed to participate, for a 25%
interest, in a production sharing service contract to rehabilitate divisions
three, four and eight of the Uzen oil and gas field located in the Republic of
Kazakhstan, C.I.S.  Pursuant to that agreement, the Company agreed to fund the
initial $2.5 million of capital on behalf of itself and Edco Drilling Company
("Edco").  The terms of the project were to provide for immediate cash flow to
the Company's interest.  Subsequently, Delcon Petroleum Development Kazakhstan
Limited, L.L.C. ("Delcon"), as operator, entered into a service contract with
Uzenmunaigas Production Association ("UMG") to carry out the work.  The
participants in the project, pursuant to an operating agreement signed in August
1995, include Delcon (47.5%), LaTex International (25%), and Petronet (27.5%).
The objective of the Uzen project was to repair, rework and recomplete inactive
oil and gas wells in the field utilizing western technology, expertise and
capital in order to restore or enhance production from the field.  In exchange
for providing these services and risk capital, UMG was to advance to the western
participants a total of 200,000 metric tons (1.5 million barrels) of crude oil
in two increments.  The proceeds from the sale of this crude was to be utilized
in the rehabilitation project.  In addition, the western participants were to
have received reimbursement of all capital costs and expenses.  UMG and the
western participants were to each retain a 50% interest in crude oil production
above a base line of approximately 30 barrels of oil per day per well.

          During the first quarter of fiscal 1996, the Company received written
notice from both Edco and Delcon that, in their view, the Company was in breach
of its agreement with Edco.  The Company strongly disagreed with Edco's position
since the Company was in compliance with the operating agreement governing the
project.  In addition, Delcon notified the Company that UMG would seek to
further alter the terms of the service contract in a manner which the Company
believed would be detrimental to the project's viability.  There has been no
further progress on, or correspondence between the Company and Delcon or Edco
regarding, the Uzen project since the second quarter of fiscal 1996.  There can
be no assurance that the uncertainties surrounding this project will be resolved
in a manner acceptable to the Company.

          Effective July 31, 1996, the Company has written off its entire
investment in the Uzen project in the amount of $955,496.

                                       14
<PAGE>
 
Reserves
    
          Lee Keeling and Associates, Inc. ("LKA"), the Company's independent
petroleum engineering consulting firm, has made estimates of the Company's oil
and gas reserves at July 31, 1996.  LKA's report covers the estimated present
value of future net cash flows before income taxes (discounted at 10%)
attributable to the Company's proved developed reserves, as well as its proved
undeveloped reserves and estimated future net cash flows therefrom.  The oil and
gas reserve and economic data covered by the LKA report and presented below
represents substantially all of the Company's oil and gas reserves except small
interests owned by the Company in approximately 400 operated and non-operated,
non-strategic oil and gas properties which the Company sold effective August 1,
1996 and September 1, 1996 for a total sales price of $1,526,000, before
adjustments. Other small interests which the Company has retained, but which are
not included in the LKA report, are immaterial and represent less than one
percent of the total value of the Company's oil and gas reserves. The Company
believes that the summary of the LKA report presented below is fair and
accurate.    

          The quantities of the Company's proved reserves of oil and natural gas
presented below include only those amounts which the Company reasonably expects
to recover in the future from known oil and gas reservoirs under existing
economic and operating conditions.  Proved developed reserves are limited to
those quantities which are recoverable commercially at current prices and costs,
under existing regulatory practices and with existing technology.  Accordingly,
any changes in prices, operating and development costs, regulations, technology
or other factors could significantly increase or decrease estimates of the
Company's proved developed reserves.  The Company's proved undeveloped reserves
include only those quantities which the Company reasonably expects to recover
from the drilling of new wells based on geological evidence from offsetting
wells.  The risks of recovering these reserves are higher from both geological
and mechanical perspectives than the risks of recovering proved developed
reserves.

          Set forth below are estimates of the Company's net proved reserves and
proved developed reserves and the estimated future net revenues from such
reserves and the present value thereof based upon the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves in
accordance with the provisions of Statement of Financial Accounting Standards
No. 69.  "Disclosures about Oil and Gas Producing Activities."  Estimated future
net cash flows from proved reserves are determined by using estimated quantities
of proved reserves and the periods in which they are expected to be developed
and produced based on economic conditions at the date of the report.  The
estimated future production is priced at current prices at the date of the
report.  The resulting estimated future cash inflows are then reduced by
estimated future costs to develop and produce reserves based on cost levels at
the date of the report.  No deduction has been made for depletion, depreciation
or income taxes or for indirect costs, such as general corporate overhead.
Present values were computed by discounting future net revenues at 10% per
annum.

          The following table sets forth estimates of the proved oil and natural
gas reserves of the Company at July 31, 1996, as evaluated by LKA.
<TABLE>
<CAPTION>
 
                           Oil (MBbls)                     Gas (MMcf)
                  -----------------------------  ------------------------------
                  Developed  Undeveloped  Total  Developed  Undeveloped  Total
                  ---------  -----------  -----  ---------  -----------  ------
<S>               <C>        <C>          <C>    <C>        <C>          <C>
   Alabama            2,072     1,244     3,316     6,338       ---       6,338
   Louisiana            571       ---       571     2,977       ---       2,977
   Mississippi          314       141       455     4,160       ---       4,160
   Oklahoma             218       ---       218     5,724       ---       5,724
   Texas                756        15       771     6,437       415       6,852
   Other              1,022       ---     1,022     2,121       ---       2,121
                      -----     -----     -----    ------       ---      ------
   Total              4,953     1,400     6,353    27,757       415      28,172
                      =====     =====     =====    ======       ===      ======
</TABLE>

         The following table sets forth amounts as of July 31, 1996 determined
in accordance with the requirements of the applicable accounting standards, to
the estimated future net cash flows from production and sale of the proved
reserves attributable to the Company's oil and gas properties before income
taxes and the present value thereof.  Benchmark prices used in determining the
future net cash flow estimates at July 31, 1996 were $19.74 per barrel for oil
and $2.66 per MMBtu for gas.

                                       15
<PAGE>
 
<TABLE> 
<CAPTION> 

                                          At July 31, 1996
                                  --------------------------------
                                           (in thousands)
                                  Proved     Proved       Total
                                  Developed  Undeveloped  Proved
                                  Reserves   Reserves     Reserves
                                  ---------  -----------  --------
<S>                               <C>        <C>          <C>
Estimated future net cash   
 flows from proved reserves 
 before income taxes              $93,958       $7,846    $101,804
                            
Present value of estimated  
 future net cash flows from 
 proved reserves before     
 income taxes (discounted   
 at 10%)                          $51,540       $1,959    $ 53,499
</TABLE>

         The estimation of oil and gas reserves is a complex and subjective
process which is subject to continued revisions as additional information
becomes available.  Reserve estimates prepared by different engineers from the
same data can vary widely.  Therefore, the reserve data presented herein should
not be construed as being exact.  Any reserve estimate depends in part on the
quality of available data, engineering and geologic interpretation, and thus
represents only an informed professional judgment.  Subsequent reservoir
performance may justify upward or downward revision of such estimate.

         Estimates of the Company's proved reserves have never been filed or
included in reports to any federal authority or agency, other than the
Securities and Exchange Commission.

         For further information on reserves, costs relating to oil and gas
activities, and results of operations from producing activities, see Note 14 to
the Company's Consolidated Financial Statements -Supplementary Financial
Information for Oil and Gas Producing Activities incorporated by reference
herein.

Productive Wells and Acreage

         The following table sets forth the Company's producing wells and
developed acreage assignable thereto at July 31, 1996.
<TABLE>
<CAPTION>
 
                                      Productive Wells       
                            ------------------------------------
       Developed Acreage         Oil         Gas        Total
       -------------------  ------------  ----------  ----------      
       Gross          Net   Gross    Net  Gross  Net  Gross  Net
       -----          ---   -----    ---  -----  ---  -----  ---
       <S>            <C>   <C>      <C>  <C>    <C>  <C>    <C> 
                                                                
       235,820      43,960   268      65   230    30    498   95 
</TABLE>

          Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections to commence
deliveries and oil wells awaiting connection to production facilities.  Wells
which are completed in more than one producing horizon are counted as one well.
Of the gross wells reported above, 12 had multiple completions.

          At July 31, 1996, the Company held by lease a total of 67,897 gross
(10,882 net) undeveloped acres consisting of (i) 4,080 gross (510 net)
undeveloped acres in the State of Colorado, (ii) 4,997 gross (2,166 net)
undeveloped acres in the State of Louisiana, (iii) 1,960 gross (245 net)
undeveloped acres in the State of Oklahoma, (iv) 56,668 gross (7,937 net)
undeveloped acres in the State of Texas, and (v) 192 gross (24 net) undeveloped
acres located in the State of Wyoming.

Production, Unit Prices and Costs

          The following table sets forth information with respect to production
and average unit prices and costs for the periods indicated.

                                       16
<PAGE>
 
<TABLE> 
<CAPTION> 


                                       Year Ended July 31
                                 -----------------------------
                                 1994        1995         1996
                                 ----        ----         ----
       <S>                       <C>         <C>          <C>
        Production:                                   
         Gas (MMcf)              2,107       2,612        3,481
         Oil (MBbls)               335         359          405
                                                      
        Average Sales Prices:                         
         Gas (per Mcf)            1.81        1.48(1)      1.67(2)
         Oil (per Bbl)           14.56       12.86(1)     15.24(2)
                                             
        Average Production                          
         costs per BOE(3)         7.06        6.63         6.71

------------------------
</TABLE>

(1)  The Company's price hedging arrangements did not have a material effect on
     average sales prices for the year ended July 31, 1995.

(2)  After giving effect to the impact of the Company's price hedging
     arrangements with the Company's principal bank.  Without such hedging
     arrangements, the average sales prices for the year ended July 31, 1996
     would have been $15.73 for oil and $2.03 for gas.

(3)  The components of production costs may vary substantially among wells
     depending on the methods of recovery employed and other factors, but
     generally include production taxes, lease overhead, maintenance and repair,
     labor and utilities.

Drilling Activity

     During the periods indicated, the Company drilled or participated in the
drilling of the following exploratory and development wells.
<TABLE>
<CAPTION>
 
                                            Year Ended July 31
                              ---------------------------------------------
                                  1994             1995             1996
                              ------------     ------------     -----------
                              Gross   Net      Gross   Net      Gross  Net
                              -----  -----     -----  -----     -----  ----
     <S>                      <C>    <C>       <C>    <C>       <C>    <C>
     Exploratory:                                         
       Productive               0     ----       0     ----       0       0
       Non-Productive           1    0.450       1    0.250       2    1.16
                                -    -----       -    -----       -    ----
         Total                  1    0.450       1    0.250       2    1.16
                                =    =====       =    =====       =    ====
                                                                     
     Development:                                                    
       Productive               6    1.457       6    1.189       6     .46
       Non-Productive           0     ----       0     ----       1     .08
                                -    -----       -    -----       -    ----
         Total                  6    1.457       6    1.189       7     .54
                                =    =====       =    =====       =    ====
                                                               
     Total:                                                    
       Productive               6    1.457       6    1.189       6     .46
       Non-Productive           1    0.450       1    0.250       3    1.24
                                -    -----       -    -----       -    ----
         Total                  7    1.907       7    1.439       9    1.70
                                =    =====       =    =====       =    ====
</TABLE>                    
     The well information above excludes wells in which the Company has only an
overriding royalty interest.

     At July 31, 1996 the Company was not participating in the drilling or
completion of any oil and gas wells.

     All of the Company's drilling activities are conducted with independent
contractors.  The Company owns no drilling equipment.

                                       17
<PAGE>
 
Competition

     Competition in the acquisition of producing oil and gas properties and in
the exploration and production of oil and gas is intense.  In seeking to obtain
desirable producing properties, new leases and exploration prospects, the
Company faces competition from both major and independent oil and gas companies
as well as from numerous individuals.  Many of these competitors have financial
and other resources substantially in excess of those available to the Company.

     Increases in worldwide energy production capability and decreases in energy
consumption as a result of conservation efforts have brought about substantial
surpluses in energy supplies in recent years.  This, in turn, has resulted in
substantial competition for markets historically served by domestic natural gas
resources both with alternate sources of energy, such as residual fuel oil, and
among domestic gas suppliers.  As a result, there have been reductions in oil
and gas prices, widespread curtailment of gas production and delays in producing
and marketing gas after it is discovered.  Changes in government regulations
relating to the production, transportation and marketing of natural gas have
also resulted in significant changes in the historical marketing patterns of the
industry.  Generally, these changes have resulted in the abandonment by many
pipelines of long-term contracts for the purchase of natural gas, the
development by gas producers of their own marketing programs to take advantage
of new regulations requiring pipelines to transport gas for regulated fees, and
the emergence of various types of gas marketing companies and other aggregators
of gas supplies.  See "Item 1. Business and Item 2. Properties -Regulation."  As
a consequence, gas prices, which were once effectively determined by government
regulation, are now largely established by market competition.  Competitors of
the Company in this market include other producers, gas pipelines and their
affiliated marketing companies, independent marketers, and providers of
alternate energy supplies, such as residual fuel oil.

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

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

     The states of Oklahoma, Texas, Kansas, and Louisiana have adopted and are
considering revisions to their production allowable rules under which they
regulate the quantities of natural gas which may be produced within their
borders.  The stated rationale behind such prorationing legislation and
rulemaking is the conservation of natural resources, prevention of waste and
protection of the correlative rights of oil and gas interest owners by limiting
production to the available market.  It is impossible at this time to determine
the effect, if any, these developments may have on the natural gas industry as a
whole.  The Company does not believe the developments will materially affect its
operations.

                                       18
<PAGE>
 
     Certain of the Company's oil and gas leases are granted by the federal
government and administered by various federal agencies.  Such leases require
compliance with detailed federal regulations and orders which regulate, among
other matters, drilling and operations on these leases and calculation of
royalty payments to the federal government.  The Mineral Lands Leasing Act of
1920 places limitations on the number of acres under federal leases that may be
owned in any one state.  While the Company does not have a substantial federal
lease acreage position in any state or in the aggregate, the Company does own
interests in federal oil and gas leases which produce amounts of oil and gas
material to the Company  The Mineral Lands Leasing Act of 1920 and related
regulations also may restrict a corporation from holding title to federal
onshore oil and gas leases if stock of such corporation is owned by citizens of
foreign countries which are not deemed reciprocal under such Act.  Reciprocity
depends, in large part, on whether the laws of the foreign jurisdiction
discriminate against a United States person's ownership of rights to minerals in
such jurisdiction.  The purchase of shares in the Company by citizens of foreign
countries who are not deemed to be reciprocal under such Act could have an
impact on the Company's ownership of federal leases.
    
     The Company's operations are subject to extensive federal, state and local
laws and regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. Permits are
required for various of the Company's operations, and these permits are subject
to revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations, and
violations are subject to fines, injunctions or both. It is possible that
increasingly strict requirements will be imposed by environmental laws and
enforcement policies thereunder. The Company is also subject to laws and
regulations concerning occupational safety and health. The Company believes that
it is in material compliance with applicable environmental, occupational safety
and health laws and regulations. It is not anticipated that the Company will be
required in the near future to expend amounts that are material in the aggregate
to the Company's overall operations by reason of environmental, or occupational
safety and health laws and regulations, but inasmuch as such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate cost of compliance.    

     Natural Gas Sales and Transportation.  Federal legislation and regulatory
     ------------------------------------                                     
controls have historically affected the price of the gas produced by the Company
and the manner in which such production is marketed.  The transportation and
sale for resale of gas in interstate commerce are regulated pursuant to the
Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy Act of 1978 (the
"NGPA") and Federal Energy Regulatory Commission ("FERC") regulations
promulgated thereunder.  Since 1978, maximum selling prices of certain
categories of gas, whether sold in interstate or intrastate commerce, have been
regulated pursuant to the NGPA.  The NGPA established various categories of gas
and provided for graduated deregulation of price controls of several categories
of gas and the deregulation of sales of certain categories of gas.  All price
deregulation contemplated under the NGPA has already taken place.

Title to Properties
    
     As is customary in the oil and gas industry, the Company performs a minimal
title investigation before acquiring undeveloped properties, which generally
consists of obtaining a title report from legal counsel covering title to the
major properties (for example, properties comprising at least 80% by value of
the acquired properties) and due diligence reviews by independent landmen of the
remaining properties. The Company believes that it has satisfactory title to its
oil and gas properties in accordance with standards generally accepted in the
oil and gas industry and is not aware of any material title defects with respect
to any of its properties. A title opinion is obtained prior to the commencement
of any drilling operations on such properties. The Company's properties are
subject to customary royalty interests, liens incident to operating agreements,
liens for current taxes and other burdens which the Company believes do not
materially interfere with the use of or affect the value of such properties.
Substantially all of the Company's oil and gas properties are and will continue
to be mortgaged to secure borrowings under the Company's credit facilities. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations-Liquidity and Capital Resources.     

Operational Hazards and Insurance

     The operations of the Company are subject to all risks inherent in the
exploration for and production of oil and gas, including such natural hazards as
blowouts, cratering and fires, which could

                                       19
<PAGE>
 
result in damage or injury to, or destruction of, drilling rigs and equipment,
formations, producing facilities or other property, or could result in personal
injury, loss of life or pollution of the environment.  Any such event could
result in substantial expense to the Company which could have a material adverse
effect upon the financial condition of the Company to the extent it is not fully
insured against such risk.  The Company carries insurance against certain of
these risks but, in accordance with standard industry practice, the Company is
not fully insured for all risks, either because such insurance is unavailable or
because the Company elects not to obtain insurance coverage because of cost.
Although such operational risks and hazards may to some extent be minimized, no
combination of experience, knowledge and scientific evaluation can eliminate the
risk of investment or assure a profit to any company engaged in oil and gas
operations.

Other Business

     The Company has invested in the development of certain other business
interests.  While the Company continues to believe these ventures have merit,
the Company has been unable, due to its own capital requirements, to provide
sufficient financial assistance and support to achieve its original objectives
in undertaking these investments.  The continued viability of these business
ventures is in jeopardy without the infusion of substantial additional capital.
As a result of the Company's own declining financial condition and its inability
to provide any further financial assistance to these ventures, the Company has
abandoned its efforts and written off its investments and loans with respect to
these businesses.  Under the terms of the proposed merger of the Company with
Alliance Resources Plc, the Company is required to dispose of its interests in
these ventures, provided that in making such disposition the Company is not
required to pay or mitigate any of the liabilities of these businesses.  The
Company has agreed to sell these business interests to Imperial Petroleum, Inc.,
an affiliate of the Company, for 100,000 shares of the Company's common stock.
Completion of the sale is subject to, among other things, the receipt of an
opinion from an independent investment banking firm as to the fairness of the
sale to the Company's stockholders.  Even in the event the proposed merger with
Alliance Resources Plc is not completed, the Company intends to proceed with the
sale of its interests in these ventures in order to refocus its efforts on its
core oil and gas business.  See "Proposed Merger With Alliance Resources Plc."

     Crude Oil Processing.  The Company owns 5,000,000 shares of common stock of
     --------------------                                                       
Wexford Technology, Incorporated ("Wexford") representing approximately 32% of
Wexford's issued and outstanding common stock.  In addition, the Company has an
agreement with Wexford that provides for the issuance of additional Wexford
shares to the Company as an incentive for providing certain loans to Wexford.
Wexford's wholly-owned subsidiary, Waste Conversion Corp. ("Waste Conversion"),
holds the exclusive license to certain proprietary microwave technology utilized
to reclaim crude oil from oilfield waste, including tank bottoms, to reform or
blend crude oils with varying gravities, to reduce paraffin content of waxy
crude oil and to remove naturally occurring radio active material from oil field
produced fluids.  Wexford is a development-stage company.  Through December
1993, the Company had invested in Wexford $943,577 for the construction of a
commercial crude oil blending and processing facility in Troy, Alabama utilizing
the proprietary processing technology.  The facility was substantially completed
in April 1992, at which time the Company concluded that the proprietary
technology for crude oil and tank bottoms processing required no further
research and development to meet all material functional and economic
requirements necessary for commercial exploitation.  The Company has
subsequently made additional loans to Wexford and Waste Conversion for operating
capital.

     The Alabama processing facility is not commercially active and Wexford and
Waste Conversion are seeking to raise additional debt or equity capital
necessary to begin full scale commercial operations.  Wexford and Waste
Conversion are currently in default with respect to various debt and other
obligations and have received numerous demands for payment and threats of
litigation.  Effective July 31, 1996 the Company has written off its entire
investment in and loans to Wexford and Waste Conversion in the total amount of
$2,372,752.

     Mining.  The Company owns 3,798,730 shares of the common stock of Imperial
     ------                                                                    
Petroleum, Inc. ("Imperial") representing approximately 12% of Imperial's issued
and outstanding common stock.  Imperial's wholly-owned subsidiary, Ridgepointe
Mining Company, owns gold and copper mining claims in Arizona and participates
in a joint venture to explore and develop certain gold mining claims in Mexico.

                                       20
<PAGE>
 
     
     The Company's investment in Imperial and Ridgepointe consisted primarily of
loans for operating capital.  At present, Imperial is actively seeking to raise
additional debt or equity capital to fund its operations.  Imperial is currently
in default under its bank debt.  Effective July 31, 1996 the Company has written
off its entire investment in and loans to Imperial in the total amount of
$1,812,429.     

Employees

     The Company employs a total of 30 people, including 20 people in its Tulsa,
Oklahoma office and one person in its Evansville, Indiana office, whose
functions are associated with management, operations, accounting and oil and gas
marketing.  The Company employs seven people in the Tensaw, Alabama office who
are lease operators in the Company's South Carlton field, and one field person
each in the states of Louisiana and Tennessee. The Company's other field
activities are accomplished through independent contractors.  The Company
believes its relations with its employees and contractors are excellent.

Item 3.  Legal Proceedings.

     Torch/Nuevo/Panda Litigation.  In connection with the Company's sale of its
     ----------------------------                                               
subsidiaries Panda Resources, Inc. and Richfield Natural Gas, Inc. in 1993, the
Company became a party to three different lawsuits.

     On October 10, 1994, Nuevo Liquids, Inc. ("Nuevo") filed a lawsuit against
the Company and its wholly-owned subsidiary, LaTex Petroleum Corporation ("LaTex
Petroleum") styled Nuevo Liquids, Inc. v. LaTex Resources, Inc. and LaTex
                   ------------------------------------------------------
Petroleum Corp., Case No. 94-049944, District Court of Harris County, Texas,
---------------                                                             
234th Judicial District.  Nuevo alleged that the Company and LaTex Petroleum had
refused to arbitrate certain disputes arising under the Stock Purchase Agreement
dated July 15, 1993 between Nuevo and Panda Resources, Inc. ("Panda"), pursuant
to which Panda sold to Nuevo its former wholly-owned subsidiary, Richfield
Natural Gas, Inc. ("Richfield").  Under the terms of the Stock Purchase
Agreement, the Company was the guarantor of Panda's obligations to Nuevo.  The
disputed issues between Nuevo and the Company related to a post-closing final
accounting and settlement statement by which the final purchase price under the
Stock Purchase Agreement was to be adjusted to reflect certain post-closing
costs and events.

     On October 12, 1994, Torch Energy Marketing, Inc. ("Torch") filed a lawsuit
against the Company and its wholly-owned subsidiary, LaTex Petroleum styled
Torch Energy Marketing, Inc. v. LaTex Resources, Inc. and LaTex Petroleum Corp.,
------------------------------------------------------------------------------- 
Case No. 94-050945, District Court of Harris County, Texas, 270th Judicial
District.  Torch alleged that the Company and LaTex Petroleum had refused to
arbitrate certain disputes arising under the Stock Purchase Agreement dated 
July 26, 1993, between Torch and LaTex Petroleum, pursuant to which the Company
sold to Torch its former wholly-owned subsidiary, Panda. The disputed issues
between Torch and the Company related to a post-closing final accounting and
settlement by which the final purchase price under the Stock Purchase Agreement
was to be adjusted to reflect certain post-closing costs and events. On 
January 6, 1995, the Company removed both the Nuevo and Torch lawsuits to the
United States District Court for the Southern District of Texas, Houston
Division, Case No. H-95-0029.

     On March 21, 1995, the Company filed a lawsuit against its former wholly-
owned subsidiary, Panda, styled LaTex Petroleum Corporation v. Panda Resources,
                                -----------------------------------------------
Inc., Case No. CJ-95-01302, in the District Court of Tulsa County, Oklahoma.
----                                                                         
The Company sought recovery of $163,191.16 plus interest and attorneys' fees,
for the sale of natural gas to Panda for the period from June 1993, through
March 1994.

     On December 7, 1995, the company entered into a Settlement Agreement (the
"Settlement") with Torch, Nuevo, Panda, Steve Wilson and Wilson, Tucker &
Associates to settle each of the referenced lawsuits.  Pursuant to the
Settlement, the company agreed (a) to pay Nuevo $20,000 on December 7, 1995, and
an additional $30,000 over the course of 90 days following execution of the
Settlement, and (b) to pay Torch $50,000 within one year of the Settlement, an
additional $50,000 within two years of the Settlement, and an additional
$150,000 within three years of the Settlement, together with interest in the
amount of $36,000.  To secure its obligation under the Settlement, the Company
stipulated to an agreed judgment in the amount of $1,000,000 (less any amounts
paid pursuant to the Settlement) upon the Company's

                                       21
<PAGE>
 
default of its obligations under the Settlement.  Torch, Nuevo and Panda agreed
to dismiss their respective claims against the Company arising from the
referenced litigation.  In addition, the Company agreed to assume and indemnify
Panda and Torch against all obligations and amounts owed under a May 2, 1989,
agreement (the "Dewey County Contract") between Panda and Northern Natural Gas
Company relating to the transportation of natural gas through a facility located
in Dewey County, Oklahoma.  The Company has subsequently been asked to indemnify
Torch with respect to claims brought against it by Northern in a lawsuit filed
March 7, 1996, as more fully discussed below.

     Northern Natural Gas Company v. LaTex Resources, Inc., Case No. 94-049766,
     -----------------------------------------------------                     
152nd District Court of Harris County, Texas.  On October 7, 1994, Northern
Natural Gas Company ("Northern") filed a lawsuit against the Company alleging
that the Company had breached two Firm Transportation Service Agreements dated
December 1, 1990, between Northern and Panda, a former wholly-owned subsidiary
of the Company.  Northern claimed damages, including damages for anticipatory
breach, in the amount of $1,600,000, plus other actual damages and interest.  
On June 6, 1996, Northern and the Company entered into a Settlement Agreement
pursuant to which (a) the Company issued to Northern 50,000 shares of the
Company's Series B Senior Convertible Preferred Stock which are convertible
(subject to adjustment) into 333,333 shares of the Company's common stock, and
(b) the Company agreed to pay Northern $465,000 in installments of $50,000 by
June 21, 1996, $150,000 by May 1, 1997, $125,000 by May 1, 1998, and $140,000 by
May 1, 1999.  An agreed judgment was entered in the case, but Northern has
agreed not to seek to enforce the judgment unless the Company defaults in its
payment obligations.  Once the required payments have been made, Northern has
agreed to execute a release of the judgment.

     Associated Storage Corp., formerly known as Centennial Storage Corp., a
     -----------------------------------------------------------------------
subsidiary of Associated Natural Gas, Inc., a Colorado corporation v. LaTex
---------------------------------------------------------------------------
Resources, Inc., Case No. CJ-94-04711, District Court for Tulsa County,
---------------                                                        
Oklahoma.  On November 17, 1994, Associated Storage Corporation ("Associated")
filed a lawsuit against the Company alleging that the Company had breached a
July 21, 1993 agreement between Associated and the Company pursuant to which the
Company allegedly agreed to pay Associated $150,000 in connection with the sale
of the Company's former wholly-owned subsidiary, Panda Resources, Inc., and
Panda's wholly-owned subsidiary, Richfield Natural Gas, Inc.  Associated seeks
actual damages in the amount of $150,000, prejudgment interest, court costs and
attorneys' fees.

     Jones, et al. v. Hughes Eastern, et al., Case No. CV-95-133, Circuit Court
     ---------------------------------------                                   
for Lamar County, Alabama; Hubbert, et al. v. Hughes Eastern, et al., Case No.
                           -----------------------------------------          
CV-95-134, Circuit Court for Lamar County, Alabama; Perkins, et al. v. Hughes
                                                    -------------------------
Eastern, et al., Case No. CV-95-137, Circuit Court for Lamar County, Alabama.
---------------                                                               
Each of these cases is a wrongful death or personal injury action arising out of
an accident which occurred at a heater-treatment unit on the Blowhorn Creek
Millerella Oil Unit lease in Lamar County, Alabama.  Germany Oil Company, a
wholly-owned subsidiary of the Company, is a working interest owner in the oil
and gas lease relevant to the case and, together with all other working interest
owners, is a named defendant.  Each plaintiff seeks damages in the amount of $25
million.  All three cases have been referred to Germany Oil Company's insurance
carrier for defense.  Each case is in the initial stages of discovery.

     Northern Natural Gas Company v. Torch Energy Advisors, Inc., Case No. 
     -----------------------------------------------------------             
96-12462, 269th Judicial District Court of Harris County, Texas.  On March 7, 
1996, Northern Natural Gas Company ("Northern") filed this lawsuit against Torch
Energy Advisors, Inc. ("Torch" for alleged breach of a May 2, 1989, agreement
(the "Dewey County Contract") between Torch, Panda Resources, Inc. ("Panda"),
and Northern relating to the transportation of natural gas through a facility
located in Dewey County, Oklahoma.  The Company has assumed the defense of this
matter pursuant to the indemnification agreement entered into as part of the
December 7, 1995, settlement among Torch, Panda and the Company discussed above.

     In addition to the foregoing litigation, the Company is a named defendant
in lawsuits, is a party in governmental proceedings and is subject to claims of
third parties from time to time arising in the ordinary course of business.
While the outcome of lawsuits or other proceedings and claims against the
Company cannot be predicted with certainty, management does not expect these
additional matters to have a material adverse effect on the financial position
of the Company.

                                       22
<PAGE>
 
Item 4.  Submission of Matters to a Vote of Security Holders.

     On May 16, 1996 the Company held its 1995 annual meeting of shareholders to
(i) elect six directors, and (ii) ratify the selection of Briscoe Robinson Co.,
(now known as Briscoe & Burke) as the Company's independent auditors for 1996.
At the meeting the following individuals were elected directors of the Company.
Each individual elected was a director of the Company prior to the meeting.
<TABLE>
<CAPTION>
 
                                 Votes      Votes
         Director                 For      Withheld
         --------                -----     --------
       <S>                     <C>         <C> 
       Jeffrey T. Wilson       14,425,882   226,165
       Malcolm W. Henley       14,406,107   245,940
       Philip J. Wade(1)       14,403,107   248,940
       Dennis J. Strauch(2)    14,403,107   248,940
       John R. Martinson       14,420,432   231,615
       John L. Cox             14,412,432   239,615

</TABLE>
--------------------
(1)  Mr. Wade resigned as a Director of the Company on October 8, 1996.

(2)  Mr. Strauch resigned as a Director of the Company on June 24, 1996.

     The selection of Briscoe & Burke was ratified by shareholders by a vote of
14,464,929 shares for and 115,303 against with 71,815 shares abstaining.


                                    PART II

Item 5.  Market for Registrant's Common Equity and Related Shareholder Matters.

Market Information and Dividends

     The common stock of the Company (i) is traded over-the-counter and quoted
on NASDAQ under the symbol "LATX" and (ii) until September 4, 1996, was listed
on the Pacific Stock Exchange under the symbol "LAT".  Effective September 4,
1996, the Company's common stock was delisted by the Pacific Stock Exchange as a
result of the failure of the minimum bid price for the common stock to meet the
Exchange's listing maintenance requirements.

     The following table sets forth, for the periods indicated, (i) the high and
low closing bid prices per share of common stock as quoted by NASDAQ, and (ii)
the high and low closing bid prices per share of common stock as reported on the
Pacific Stock Exchange.  Bid quotations represent quotations between dealers
without adjustment for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
                                                        Pacific
                                      NASDAQ        Stock Exchange(1)
                                  ---------------  --------------------
                                   High     Low       High       Low
                                   ----     ---       ----       ---   
        <S>                       <C>      <C>     <C>         <C>
        Fiscal Year Ended July
        31, 1996:
          First Quarter           7/8       7/16       3/4       3/8
          Second Quarter          11/16     13/32      3/8       3/8
          Third Quarter           1/2       11/32      1/2       1/2
          Fourth Quarter          17/32     5/16       N/A(2)    N/A(2)
        Fiscal Year Ended July                       
        31, 1995:                                    
          First Quarter           1 7/8     1/2        1/2       1/2
          Second Quarter          1 5/16    23/32      1         3/4
          Third Quarter           15/16     1/2        7/8       1/2
          Fourth Quarter          5/8       7/16       3/8       1/4
---------------------------
</TABLE>

                                       23
<PAGE>
 
(1)  Effective September 4, 1996, the Company's common stock was delisted by the
     Pacific Stock Exchange as a result of the failure of the minimum bid price
     for the common stock to meet the Exchange's listing maintenance
     requirements.

(2)  There was no trading activity in the Company's common stock on Pacific
     Stock Exchange during the fourth quarter of fiscal 1996 and, therefore, no
     price information for this period is available.

     No cash dividends have been declared by the Company's Board of Directors
during the Company's two most recent fiscal years. The Company does not
presently intend to declare or pay dividends on the common stock.  The terms of
the Company's existing bank credit facility do not permit the Company to pay
dividends on the common stock.  Payment of dividends in the future, if any, will
depend on applicable legal and contractual restrictions, as well as the
financial condition and requirements of the Company and general business
conditions.  The Company presently intends to use its available cash flow for
expansion of the Company's business, including acquisition, development and
enhancement of oil and gas properties.

Recent Sales of Unregistered Securities

     During the year ended July 31, 1996, the Company issued (i) effective 
March 12, 1996, 58,800 shares of its common stock to Princeton Otolaryngology
Retirement Trust, an entity controlled by Dr. Howard S. Farmer, in payment of
indebtedness of Wexford Technology, Incorporated in the amount of $23,520, and
(ii) effective June 27, 1996, 85,000 shares of its common stock to Thomas J.
Patrick in payment of indebtedness of Wexford Technology, Incorporated in the
amount of $37,000.  Following the year ended July 31, 1996 the Company issued a
total of 1,690,000 shares of its common stock to various officers and employees
as described in more detail at "Item 11. Executive Compensation -- Restricted
Stock Grants".  In each of the referenced transactions, an exemption from
registration was claimed under Section 4(2) of the Securities Act of 1933, as
amended, and regulations promulgated thereunder because no public offering was
involved and the securities were issued for investment and not with a view to
the distribution thereof.  No underwriter was involved in any of the referenced
transactions nor were any underwriting discounts or commissions paid.  Each
certificate representing shares issued in the referenced transactions bears a
restrictive legend and stop transfer instructions were entered on the Company's
stock transfer records with respect thereto.

Item 6.  Selected Financial Data.

     The selected historical financial information presented in the table below
for and at the end of each of the years ended July 31, 1992, 1993, 1994, 1995
and 1996 is derived from the audited consolidated financial statements of the
Company, of which the consolidated balance sheets as of July 31, 1995 (restated)
and 1996, and the consolidated statements of income, shareholders' equity and
cash flows for the years ended July 31, 1994, 1995 (restated) and 1996 are
included under "Item 8.  Financial Statements and Supplementary Data."

     The selected financial information presented below should be read in
conjunction with the Company's audited consolidated financial statements and the
notes thereto included under Item 8 and Management's Discussion and Analysis of
Financial Condition and Results of Operations at Item 7.

                                       24
<PAGE>
 
     
               Selected Consolidated Financial and Operating Data
        (In thousands, except per share amounts and average sales data)
<TABLE>
<CAPTION>
 
 
                                                                           Years Ended
                                                                            July 31(1)
                                          =========================================================================
                                               1996            1995           1994          1993           1992
                                          ==============  ==============  ============  ============  =============
                                                           (Restated)(6)
<S>                                       <C>             <C>             <C>           <C>           <C>
Income Statement Data: 
  Revenues:
    Oil and gas sales...................  $    11,980     $     8,586     $     8,703   $     8,489   $     6,778
    Crude oil and gas marketing.........          540           1,223           2,781         2,128           210
    Lease operating and management fees.        1,011             634             601           860           561
                                          -----------     -----------     -----------   -----------   -----------
      Total operating income............       13,531          10,443          12,085        11,477         7,549
                                          -----------     -----------     -----------   -----------   -----------
  Operating expenses:
    Lease operating expense.............        6,608           5,265           4,840         4,735         4,092
    Crude oil and gas marketing.........          134             744           2,216         1,740           193
    Dry hole costs and abandonments.....        3,586             104             113           ---           ---
    General and administrative..........        2,893           2,735           2,497         2,566         1,564
    Depreciation, depletion and                                                                                   
     amoritization......................        4,706           2,711           2,214         2,899         1,724 
                                          -----------     -----------     -----------   -----------   ----------- 
      Total operating expenses..........       17,927          11,559          11,880        11,940         7,573 
                                          -----------     -----------     -----------   -----------   -----------  
  Other Income (expense):                                                                                          
    Equity in losses and write offs of
     investments in affiliates..........       (4,185)           (299)           (440)          (16)           (2)
    Gain on sale of assets..............        2,366             128             393           863           276 
    Interest income.....................          205             122              17             9            12 
    Interest expense....................       (2,410)         (1,291)           (598)         (728)         (724)
  Net loss from continuing operations     -----------     -----------     -----------   -----------   ----------- 
   before income taxes..................       (8,420)         (2,456)           (423)         (335)         (462)
  Provision for income taxes:                                                                                     
    Current.............................          ---              35             ---          (145)         (159)(2) 
                                          -----------     -----------     -----------   -----------   ----------- 
  Net loss from continuing operations...       (8,420)         (2,491)           (423)         (190)         (303)

  Income (loss) from discontinued
   operations (net of income taxes)....           ---             ---             ---           974          (962)      
  Gain (loss) on disposal of subsidiary                                                                                
   (net of income taxes)(7).............       (1,811)            ---             ---           123           ---      
                                          -----------     -----------     -----------   -----------   -----------       
  Net income (loss).....................  $   (10,231)    $    (2,491)    $      (423)  $       907   $    (1,265)(2)   
                                          ===========     ===========     ===========   ===========   ===========      
  Preferred stock dividends.............          571             133             ---           ---           ---       
  Net income (loss) for common                                                                                           
   shareholders.........................  $   (10,801)    $    (2,624)    $      (423)  $       907   $    (1,265)(2)    
  Loss per share from continuing          ===========     ===========     ===========   ===========   ===========        
   operations...........................       $(0.50)         $(0.15)         $(0.02)       $(0.01)       $(0.02)       
                                          ===========     ===========     ===========   ===========   ===========         
  Income (loss) per common share........       $(0.60)         $(0.15)         $(0.02)        $0.06        $(0.10)        
                                          ===========     ===========     ===========   ===========   ===========         
  Weighted average shares outstanding(3)   18,011,826      17,661,428      17,434,159    15,116,096    12,266,372         
                                          ===========     ===========     ===========   ===========   ===========         
                                                                                                                          
  Balance Sheet Data (end of period):
    Total assets........................  $    38,966     $    47,923     $    21,259   $    21,246   $    35,399
    Net property, plant and equipment...  $    31,945     $    37,709     $    13,077   $    12,440   $    12,304
    Working capital (deficit)...........  $   (28,420)    $    (7,119)    $    (1,111)  $    (2,117)  $   (10,353)
    Long term debt......................  $         0     $    20,635     $     4,467   $     4,868   $     2,544
    Stockholders' equity................  $     6,318     $    16,001     $    10,280   $     8,216   $     2,639
 
  Reserve and Production Data:
    Production:                                                                                                   
      Oil (MBbls).......................          405             359             335           280           213 
      Gas (MMcf)........................        3,481           2,612           2,107         1,941         1,798 
    Average sales prices:                                                                                         
      Oil (per Bbl).....................  $     15.24(4)  $     12.86(5)  $     14.56   $     17.88   $    17.64 
      Gas (per Mcf).....................  $      1.67(4)  $      1.48(5)  $      1.81   $      1.79   $     1.57 
    Proved reserves (end of period):
      Oil (MBbls).......................        6,353.1         4,036.4         4,519.9       2,455.3       1,845.5
      Gas (MMcf)........................       28,172          27,730          10,933         9,391         8,214
    Present value of estimated future
     oil and gas net revenues before                                                                              
     income taxes (discounted 10%)......  $    53,499     $    29,685     $    23,418   $    15,658   $    16,923 
</TABLE>      
(1)  Included in the Company's historical consolidated financial information for
     the years ended July 31, 1992, 1993, 1994, 1995 and 1996 are the assets,
     liabilities and results of operations of LaTex Resources, Inc. The
     financial information reflects (a) the 1991 pooling of Elite Enterprises,
     Inc. and Sable Investments Corporation and the 1993 pooling of Panda
     Resources, Inc. and its subsidiaries, Panada Exploration, Inc. and
     Richfield Natural Gas, Inc., and (b) the discontinued operations from the
     subsequent sale of Panda Resources, Inc. and Richfield Natural Gas, Inc.
     effective July 1, 1993. The financial information of ENPRO, Inc. and
     Phoenix Metals, Inc. has been included subsequent to their June 22, 1992
     and December 8, 1992 respective dates of acquisition.
(2)  LaTex Resources, Inc. and Sable Investment Corporation elected to be taxed
     as C corporations under the Internal Revenue Code effective January 1,
     1992. The net loss for fiscal 1992 is net of a proforma provision for
     income taxes of $25 that would have been provided had these entities
     elected to be taxed as C corporations effective August 1, 1991. Earnings
     per share was not affected.
(3)  The weighted average shares outstanding is as disclosed in the Notes to the
     LaTex Resources, Inc. Consolidated Financial Statements included elsewhere
     herein.
(4)  After giving effect to the impact of the Company's price hedging
     arrangements with the Company's principal bank. Without such hedging
     arrangements, the average sales prices for the year ended July 31, 1996,
     would have been $15.73 for oil and $2.03 for gas.
(5)  The Company's price hedging arrangements did not have material effect on
     average sales prices for the year ended July 31, 1995.
    
(6)  See Note 16 to the Company's Consolidated Financial Statements included 
     elsewhere herein.
(7)  See Note 1 to the Company's Consolidated Financial Statements included 
     elsewhere herein.     

                                       25
<PAGE>
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

FASB Accounting Standards

     The Financial Accounting Standards Board ("FASB") has issued Statements of
Financial Accounting Standards No. 114 ("SFAS 114"), Accounting by Creditors for
Impairment of a Loan and No. 118 ("SFAS 118"), Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures.  In general, these
statements require that impaired loans be measured by creditors at the present
value of expected future cash flows discounted at the loan's effective interest
rate or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent.  The Company has adopted SFAS
114 and 118 for the fiscal year ended July 31, 1996.

     FASB has issued Statement of Financial Accounting Standard No. 119 ("SFAS
119"), Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments.  This statement generally requires disclosures about
amounts, nature and terms of derivative financial instruments.  The Company has
adopted SFAS 119 for the fiscal year ended July 31, 1996.

     FASB has issued Statement of Financial Accounting Standard No. 121 ("SFAS
121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of.  This statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  If the sum of the
undiscounted future cash flows is less than the carrying amount of the asset, an
impairment loss is recognized.  This statement is effective for financial
statements for fiscal years beginning after December 15, 1995.  The Company
intends to adopt SFAS 121 for the fiscal year ending July 31, 1997.  The Company
expects the adoption of SFAS 121 will not have a material effect on its
financial statements.

     FASB has issued Statement of Financial Accounting Standard No. 123 ("SFAS
123"), Accounting for Stock-Based Compensation.  This statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans.  This statement defines a fair value based method of
accounting for an employee stock option or similar equity instrument plan.
Under the fair value based method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service period,
which is usually the vesting period.  This statement is effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The Company intends to adopt the disclosure requirements of SFAS 123 for the
fiscal year ending July 31, 1997.

Results of Operations

     The Company follows the "successful efforts" method of accounting for its
oil and gas properties whereby costs of productive wells and productive leases
are capitalized and depleted on a unit-of-production basis over the life of the
remaining proved reserves.  Depletion of capitalized costs is provided on a
prospect-by-prospect basis.  Exploratory expenses, including geological and
geophysical expenses and annual delay rentals, are charged to expense as
incurred.  Exploratory drilling costs, including the cost of stratigraphic test
wells, are initially capitalized, but charged to expense if and when the well is
determined to be unsuccessful.
    
     The factors which most significantly affect the Company's results of
operations are (i) the sale prices of crude oil and natural gas, (ii) the level
of oil and gas sales, (iii) the level of lease operating expenses, (iv) the
level of exploratory activities, and (v) the level of and interest rates on
borrowings.  Total sales volumes and the level of borrowings are significantly
impacted by the degree of success the Company experiences in its efforts to
acquire oil and gas properties and its ability to maintain or increase
production from existing oil and gas properties through its development and
production enhancement activities. The Company does not expect compliance 
with applicable government regulations, including environmental regulations, to 
have a material effect on the Company's liquidity, capital commitments or 
results of operations.      
    
     The following table reflects certain historical operating data for the
periods presented.       

                                      26
<PAGE>
 
<TABLE>
<CAPTION>
                                                     Year Ended July 31
                                              --------------------------------
                                                  1994     1995         1996
                                                  ----     ----         ----  
 
<S>                                           <C>       <C>         <C>
Net Sales Volumes:
 Oil (MBbls)                                       335      359         405
 Natural gas (MMcf)                              2,107    2,612       3,481
 Oil equivalent (MBOE)                             686      794         985

Average Sales Prices:
 Oil (per Bbl)                                 $ 14.56  $ 12.86(1)  $ 15.24(2)
 Natural gas (per Mcf)                         $  1.81  $  1.48(1)  $  1.67(2)
                                                                      
Operating Expenses per BOE of Net Sales:                              
 Lease operating                               $  6.29  $  5.91     $  5.82
 Severance tax                                 $  0.77  $  0.72     $  0.89
 General and administrative                    $  3.75  $  3.56     $  2.94
 Depreciation, depletion and amortization      $  3.23  $  3.34     $  4.60
--------------------------------------
</TABLE>
(1)  The Company's price hedging arrangements did not have a material effect on
     average prices for the year ending July 31, 1995.

(2)  After giving effect to the impact of the Company's price hedging
     arrangements with the Company's principal bank.  Without such hedging
     arrangements, the average sales prices for the year ended July 31, 1996
     would have been $15.73 for oil and $2.03 for gas.

     Relatively modest changes in either oil or gas prices significantly impact
the Company's results of operations and cash flow and could significantly impact
the Company's borrowing capacity.  Prices received by the Company for sales of
oil and natural gas have fluctuated significantly from period to period. The
Company's ability to maintain current borrowing capacity and to obtain
additional capital on attractive terms is substantially dependent on oil and gas
prices. Domestic spot oil prices have ranged from a low of approximately $11 per
barrel in July 1986 to a high of approximately $40 per barrel in October 1991,
with a current price of approximately $24 per barrel.  The fluctuations in oil
prices during these periods reflect market uncertainty regarding OPEC's ability
to control the production of its member countries, as well as concerns related
to the global supply and demand for crude oil.  Since the end of the Gulf War in
early 1991, crude oil prices have experienced continued weakness, primarily as a
result of OPEC's inability to maintain disciplined production quotas by member
countries and the uncertainty associated with Iraq's return to the crude oil
export market.  These factors continue to overhang the market and will create
significant price volatility for the foreseeable future.

     Natural gas prices received by the Company fluctuate generally with changes
in the spot market price for gas.  Spot market gas prices have generally
declined in recent years because of lower worldwide energy prices as well as
excess deliverability of natural gas in the United States.  However, natural gas
prices have rebounded recently and appear to be poised for further
strengthening. Domestic spot natural gas prices have ranged from a low of
approximately $0.90 per Mcf in January 1992 to a high of approximately $2.70 per
Mcf in April 1996, with a current price of approximately $2.10 per Mcf.
Environmental concerns coupled with recent increases in the use of natural gas
to produce electricity have combined to improve prices.  Under FERC Order 636,
U.S. pipelines have been made more accessible to both buyers and sellers of
natural gas and, as a result, natural gas will be able to more effectively
compete for market share with other end-use energy forms.  All of this suggests
a continued improvement in the demand for natural gas over the long term.

     Within the oil and gas business, it appears that the substantial
restructuring of the major and large independent companies is slowing.  The
merger activity of the 1980's has waned, and despite the continued exodus by
U.S. companies to international ventures, it appears that the mid-1990's will be
a "settling in" time for most companies.  Nevertheless, there remains a large
inventory of properties available for acquisition within the United States.
However, it is anticipated that as crude oil and natural gas prices stabilize
and strengthen, fewer companies will be inclined to sell their properties in the
future.

                                      27
<PAGE>
 
     The Company's principal source of cash flow is the production and sale of
its crude oil and natural gas reserves, which are depleting assets.  Cash flow
from oil and gas sales depends upon the quantity of production and the price
obtained for such production.  Except as affected by the Company's current
commodity hedging arrangement, an increase in prices permits the Company to
finance its operations to a greater extent with internally generated funds.  A
decline in oil and gas prices reduces the cash flow generated by the Company's
operations, which in turn reduces the funds available for servicing debt,
acquiring additional oil and gas properties and exploring for an developing new
oil and gas reserves.

     In addition to the foregoing, the results of the Company's operations vary
due to seasonal fluctuations in the sales prices and volumes of natural gas.  In
recent years, natural gas prices have been generally higher in the fall and
winter.  Due to these seasonal fluctuations, results of operations for
individual quarterly periods may not be indicative of results which may be
realized on an annual basis.

     The following events have directly affected the comparability of the
results of operations and financial position of the Company during the periods
presented:

     .    During the period between July 31, 1992 and July 31, 1996, the Company
          completed 12 oil and gas property acquisitions that added substantial
          amounts of proved oil and gas reserves for a total expenditure of
          approximately $30.8 million.  As a result of these transactions, the
          Company's equivalent proved reserves increased approximately 560% in
          fiscal 1992, 125% in fiscal 1993, 58% in fiscal 1994, 3.5% in fiscal
          1995 and 68% in fiscal 1996, and the Company's oil and gas production,
          revenues, lease operating expenses, interest expense and net income
          have increased significantly.

     .    The Company acquired Panda Resources in February 1993 and subsequently
          sold Panda's gas marketing and storage operations in July 1993.

     .    In April 1995 the Company completed the acquisition of Germany Oil
          Company which approximately doubled the Company's oil and gas
          properties and added significantly to the Company's liabilities.  The
          acquisition was accounted for using the purchase method of accounting.
          In connection with this acquisition, the Company refinanced its senior
          debt, issued preferred stock and entered into hedging arrangements
          with respect to sales prices for its oil and gas production.

     .    In December 1995 the Company completed the sale of certain oil and gas
          properties it had acquired from Phillips Petroleum and Sackett Oil
          Company for approximately $2,857,275 net cash to the Company.

     .    In March 1995 the Company acquired Germany Oil Company in a purchase
          transaction.  The assets of Germany Oil consisted primarily of oil and
          gas properties.  In recording the transaction, the Company failed to
          allocate the purchase price to all assets acquired as required by
          generally accepted accounting principles.  During fiscal 1996 the
          Company, based on the reports of independent petroleum engineers,
          reallocated the adjusted purchase price as of the date of acquisition.
          Accordingly, the Company's consolidated financial statements for the
          year ended July 31, 1995 have been restated.

     Year ended July 31, 1996 Compared to year ended July 31, 1995.  Total
     -------------------------------------------------------------        
revenues from the Company's operations for the year ended July 31, 1996 were
$15,006,816 before reduction by $1,475,653 as a result of losses incurred from
the Company's oil and gas price hedging arrangements.  This compares to total
revenues of $10,442,679 for the year ended July 31, 1995, which includes hedging
gains of $157,301.  The increase is attributable to a 15% increase in oil and
gas prices and the inclusion of the oil and gas operations of the Company's
wholly-owned subsidiary, Germany Oil Company, for the full year ended July 31,
1996.  The increased revenues were partially offset by lower revenues from the
Company's crude oil marketing activities.

     Total operating expenses for the year ended July 31, 1996 were $17,926,639
compared to $11,559,488 for the same period a year earlier.  Lease operating
expense increased 20% to $6,608,089

                                      28
<PAGE>
 
compared to the prior year primarily as a result of including the full year of
operations of Germany Oil, while expenses associated with the Company's
marketing operations decreased $610,155 due to reduced oil and gas marketing
activity.

     Depreciation, depletion and amortization expense increased from $2,710,574
in fiscal 1995 to $4,705,912 in fiscal 1996 primarily as a result of the
acquisition of Germany Oil.

     General and administrative expenses for the year ended July 31, 1996 were
$2,893,146 compared to $2,736,261 for the prior year due to routine increases in
the Company's administrative expenses.

     The Company incurred dry hole costs of $2,630,541 during the year ended
July 31, 1996 which was principally due to the write-off of the Company's
investment in the Tunisian Prospect.  The Company also wrote off its investment
in the Kazakhstan Prospect in the amount of $955,496.  See "Item 1.  Business
and Item 2. Properties -- Exploration and Development".

     The Company's equity in the net losses of its unconsolidated affiliates,
Wexford Technology, Incorporated and Imperial Petroleum, Inc. was $298,839
during the fiscal year July 31, 1995.  The current year equity in the losses or
earnings from these unconsolidated affiliates was not subject to determination
by the Company and, therefore, is included in the write off of the investment in
and advances to these affiliates in the total amount of $4,184,881 for the
fiscal year ended July 31, 1996.  See "Item 1. Business and Item 2. Properties -
- Other Business".

     The Company recognized gains on the sale of assets of $2,365,807 from the
disposition of non-strategic oil and gas properties during the fiscal year ended
July 31, 1996, an increase of $2,237,881 from the preceding year.

     The Company had a net loss from continuing operations for the year ended
July 31, 1996 of $8,420,401 ($0.50 per common share), compared to a net loss
from continuing operations of $2,491,342 ($0.15 per common share) for the year
ended July 31, 1995.  The increase in the net loss from continuing operations is
primarily a result of the write off of the cost of the Company's activities in
Tunisia and Kazakhstan (reflected as dry hole cost and abandonments), hedging
contract losses, and equity in losses and write-offs of investments in
affiliates.  These increases were partially offset by a gain on the sale of
assets.

     The Company also incurred additional losses of $1,810,382 from discontinued
operations in connection with litigation arising out of the sale of its Panda
subsidiary in July 1993.  As a result, the Company incurred a net loss of
$10,801,404 ($0.60 per common share) for the year ended July 31, 1996 compared
to a net loss of $2,624,142 ($0.15 per common share) for the prior year.

     Year ended July 31, 1995 compared to year ended July 31, 1994.  Total
     -------------------------------------------------------------        
revenues from the Company's operations for the year ended July 31, 1995 were
$10,442,679 compared to $12,085,364 for the year ended July 31, 1994.  The
decrease is primarily attributable to a 13% decrease in oil and gas prices which
also resulted in lower revenues from the Company's crude oil marketing
activities.  The reduced revenues were partially offset by an increase in oil
and gas sales volume as a result of the acquisition of Germany Oil Company
effective in April 1995.  However, oil and gas sales revenues for the fourth
quarter of fiscal 1995 increased 46% compared to revenues in the fourth quarter
of fiscal 1994 as a result of the acquisition of Germany Oil.  The Company
anticipates that oil and gas sales revenues will further increase in subsequent
quarters due to this acquisition.

     Total operating expenses for the year ended July 31, 1995 were $11,559,488
compared to $11,880,094 for the same period a year earlier.  Lease operating
expense increased nine percent to $5,264,858 compared to the prior year
primarily as a result of the acquisition of Germany Oil, while expenses
associated with marketing operations decreased $1,472,684 due to lower product
prices.

     Depreciation, depletion and amortization expense increased from $2,213,823
during fiscal 1994 to $2,710,574 during fiscal 1995 as a result of the
acquisition of Germany Oil and due to an increase in depletion rates as a result
of the year-end price impact on the Company's base of oil and gas reserves.

                                       29
<PAGE>
 
     General and administrative expenses for the year ended July 31, 1995 were
$2,736,267 compared to $2,496,567 for the prior period.  The increase was due to
increases in the Company's legal and accounting fees associated with the closing
of the acquisition of Germany Oil in April 1995.

     The Company incurred losses from unconsolidated affiliates of $298,839
during the current fiscal year, with $216,998 of the losses attributable to
Wexford Technology Incorporated, a development stage company engaged in the
crude oil tank bottoms business.  See "Item 1. Business and Item 2. Properties -
Other Business."

     The Company recognized gains on the sale of assets of $127,926 from the
disposition of non-strategic oil and gas properties during the fiscal year ended
July 31, 1995, a reduction from gains of $265,281 in the previous year.

     The Company had an after-tax net loss from continuing operations for the
year ended July 31, 1995 of $2,491,342 ($0.15 per common share) compared to a
net loss of $423,341 ($0.02 per common share) for the year.  The increase in the
net loss is a result of lower oil and gas prices and increased operating,
financing, professional, and amortization costs associated with the purchase of
Germany Oil.

     Year ended July 31, 1994 compared to year ended July 31, 1993.  Total
     -------------------------------------------------------------        
revenues from the Company's operations for the year ended July 31, 1994 were
$12,085,366 as compared to $11,477,045 for the year ended July 31, 1993.  The
increase in revenues is primarily due to the Swift Energy acquisition and
increased marketing margins from the sale of the Company's production in the
South Carlton field in Alabama which were offset partially by a reduction in
crude oil prices from $17.88 per barrel to $14.56 per barrel.

     Total operating expenses for the year ended July 31, 1994 were $11,880,094
compared to $11,934,000 for the same period a year earlier.  Lease operating
expense increased two percent to $4,840,000 compared to the prior year primarily
as a result of the acquisition of oil and gas properties from Swift Energy,
while expenses from marketing operations were up $476,410 due to increased
marketing efforts on the South Carlton field.

     Depreciation, depletion and amortization expense in fiscal 1994 decreased
to $2,213,823 from $2,899,459 for the comparable period a year ago due to
significant downward revisions of oil and gas reserves in July 1993 for the
Wheat field in Loving County, Texas and the Flora field wells in Madison County,
Mississippi.  Both of these properties were sold during the fiscal year with the
Company recording significant gains on sale.

     General and Administrative expenses for the year ended July 31, 1994 were
$2,496,567 compared to $2,560,000 for the prior period.  These expenses are
within 1% of the previous year's results reflecting the Company's commitment to
control overhead.

     The Company had an after-tax net loss from continuing operations for the
year ended July 31, 1994 of $423,341 ($0.02 per common share) compared to a net
loss of $190,147 ($0.01 per common share) for the same period a year ago.  The
Company wrote off its $222,918 investment in its Phoenix Metals, Inc. subsidiary
during fiscal 1994.  To date this subsidiary has been unable to obtain financing
to initiate operations.  The Company's equity in the net losses of its
unconsolidated affiliates was $216,998 during the current fiscal year, with
$174,050 of the losses attributable to Wexford Technology, Incorporated, a
start-up company engaged in the crude oil tank bottoms business.  See "Item 1.
Business and Item 2.  Properties --  Other Business."

     The Company recognized gains on the sale of assets of $392,592, primarily
from the sale of non-strategic oil and gas assets during the fiscal year ended
July 31, 1994, a reduction of $470,888 from the previous fiscal year which
included the settlement of a natural gas contract in that period.

     The net loss of the Company for the year ended July 31, 1994 was $423,341
($0.02 per common share) compared to net income of $906,839 ($0.06 per common
share) for the previous year.  The decrease in net income is a result of a
$1,882,685 net gain (after income taxes) resulting primarily from the sale of a
gas purchasing contract in the prior period in addition to the write off of
Phoenix Metals and the

                                       30
<PAGE>
 
Company's share of the losses of the unconsolidated affiliates.

Capital Resources and Liquidity

     The Company's capital requirements relate primarily to the acquisition of
developed oil and gas properties and undeveloped leasehold acreage and
exploration and development activities.  In general, because the Company's oil
and gas reserves are depleted by production, the success of its business
strategy is dependent upon a continuous acquisition and exploration and
development program.

     Historically, the Company's operating needs and capital expenditures have
been funded by borrowings under its bank credit facilities and cash flow from
operations.   As a result of significant capital expenditures since 1991, the
Company has experienced a decrease in its short-term liquidity and a decline in
its working capital.  In connection with the Company's acquisition of Germany
Oil in April 1995, the Company's new credit facility provided a source of long-
term financing.  As a result of the Germany Oil acquisition, the Company assumed
approximately $4.3 million in liabilities and accounts payable which created a
significant working capital deficit.  The Company immediately began a program
designed to reduce these liabilities through negotiated reductions in amounts
owed and term payments out of the Company's cash flow.  At July 31, 1996, the
Company had current assets of $4.2 million and current liabilities of $32.6
million which resulted in negative working capital of $28.4 million.  This
compares to the Company's current assets of $4.2 million and current liabilities
of $11.3 million, which resulted in negative working capital of $7.1 million, at
July 31, 1995.  The increase in the Company's working capital deficit during
fiscal 1996 is primarily due to the current liability classification at July 31,
1996 of all indebtedness of the Company to its principal bank (see "Financing
Arrangements"), additional litigation costs principally resulting from
discontinued operations of $1.8 million, and increases in royalty and vendor
payables in the amount of $1.8 million resulting from the Company's inability to
fund its current obligations due primarily to product hedging losses of $1.5
million.  These amounts were partially offset by an increase in oil and gas
receivables resulting from higher product prices of approximately $500,000.  The
long-term portion of the Company's debt to its principal bank was $20.6 million
at July 31, 1995.  At July 31, 1994, the long-term portion of the Company's debt
to its principal bank was $4.5 million and negative working capital was $1.11
million.  The decline in the Company's working capital during the last two years
is primarily the result of the Company's assumption of approximately $4.3
million of indebtedness associated with the acquisition of Germany Oil and the
continued funding of its international operations and two unconsolidated
affiliates.  Subject to the availability of capital, the Company intends to
continue to pursue its program to achieve an orderly liquidation of the Germany
Oil indebtedness.  There can be no assurance that, without an infusion of
additional debt or equity capital, the Company will be able to timely liquidate
these liabilities.  
    
     In order to address the Company's deteriorating financial condition,
management's plans to reduce the Company's working capital deficit include
curtailment of the development of its undeveloped properties, strategic sales of
certain of its oil and gas properties and the aggressive reduction of
administrative and such other costs that have been determined to be non-
essential.  Initially, management would immediately seek to sell approximately
$6-7 million of non-operated oil and gas properties.  These properties have been
previously identified and sales information compiled to effect a rapid sale. A
substantial amount of the proceeds from any such sale would be used to pay down
trade creditors. A second sale of oil and gas properties would then be pursued.
This sale could require up to 12 months to complete in an orderly fashion, and
would seek to eliminate the balance of the Company's debt to its principal
lender and trade creditor payables. Significant staff reductions, salary
adjustments and a reduction in the level of discretionary spending and capital
expenditures on its properties would accompany both sales of properties.
Ultimately, the plan anticipates the Company would close its Tulsa office,
eliminate 15 office staff employees and all of its field level employees, and
relocate its principal office to Evansville, Indiana. The Company would no
longer seek to operate any oil and gas properties. There can be no assurance
that the Company will be able to successfully execute the foregoing plan. Under
the terms of its credit facility with its principal bank, implementation of this
plan would be subject to the bank's prior approval. In the event the proposed
merger of the Company and Alliance Resources Plc is not completed and the bank
does not approve implementation of the plan, it may become necessary for the
Company to seek protection from its creditors.       
    
     Management plans also include consideration of alliances or other
partnership arrangements or potential merger opportunities. The Company has
retained investment banking counsel to advise it on the possible sale of equity
securities as well as to introduce and assist in the evaluation of potential
merger and partnering opportunities. Management anticipates that these efforts
will result in the introduction to the Company of third parties with interests
and resources which may be compatible with the financial needs of the Company.
There can be no assurance that the Company will be able to successfully locate
and negotiate any alliance or partnership arrangement or merger transaction.
     

     As part of the Company's effort to reduce its working capital shortage, the
Company has entered into the proposed merger transaction with Alliance Resources
Plc. See "Item 1. Business and Item 2. Properties -Proposed Merger with Alliance
Resources Plc."  
    
     For the year ended July 31, 1996, the Company's operating activities
resulted in positive cash flow of $3,359,885 compared to a positive cash flow of
$1,742,623 for the year ended July 31, 1995. The improvement in cash flow is due
to additional cash provided by operating activities, principally through
increased accounts payable and accrued expenses. For the year ended July 31,
1994, the Company's operating activities resulted in a positive cash flow of
$951,001 compared to providing deficit cash flow of $2,596,354 for the year
ended July 31, 1993.        

     Investing activities of the Company used $206,426 in net cash flow for the
year ended July 31, 1996 to fund the Company's oil and gas activities.
Investing activities of the Company used $16,750,182 in net cash flow for the
year ended July 31, 1995 compared to using $3,551,072 in net cash flow for the
year ended July 31, 1994.  The increase in investing activities in fiscal 1995
was primarily due to the drilling of the first exploration well on the Company's
Tunisian prospect.  Investing activities of the Company used $3,588,429 in net
cash flow for the year ended July 31, 1993.  The decrease in cash flow used in
investing activities during fiscal 1994 compared to fiscal 1993 was a result of
a reduced number of oil and gas property acquisitions by the Company.

     Financing activities used $3,448,351 in net cash flow for the year ended
July 31, 1996 compared to $15,113,389 provided in net cash flow for the year
ended July 31, 1995 and $1,665,499 provided for the year ended July 31, 1994.
The increase during fiscal 1996 was a result of the monthly amortization of the

                                       31
<PAGE>
 
Company's indebtedness to its principal bank and additional debt reduction upon
the sale of oil and gas properties.  The increase in fiscal 1995 compared to
fiscal 1994 was a result of the Company's new credit facility with Bank of
America associated with the Company's acquisition of Germany Oil Company in
April 1995.  As a result of the Company's default under certain provisions of
its credit facility with Bank of America, the Company does not currently
anticipate being able to increase its level of borrowing under such credit
facility.

     The domestic spot price for crude oil has ranged from $11.00 to $40.00 per
barrel over the past ten years.  To the extent that crude oil prices continue
fluctuating in this manner, the  Company expects material fluctuations in
revenues from quarter to quarter which, in turn, could adversely affect the
Company's ability to timely service its debt to its principal bank and fund its
ongoing operations and could, under certain circumstances, require a write-down
of the book value of the Company's oil and gas reserves.

     Since the Company is engaged in the business of acquiring producing oil and
gas properties, from time to time it acquires certain non-strategic and marginal
properties in some of its purchases.  A portion of the Company's on-going
profitability is related to the disposition of these non-strategic properties on
a regular basis.  The  Company expects to continue to pursue sales of these
types of properties in the future.  In most cases the revenue from these
properties is insignificant and in many cases does not exceed the lease
operating expense.  As a result, a portion of the Company's capital resources
are generated by the sale of assets from continuing operations.  Sales of non-
strategic and minor interests oil and gas properties accounted for $2,365,807 in
gains during fiscal 1996, $127,248 in gains during fiscal 1995, and $565,932 in
gains during fiscal 1994.  The Company expects to pursue a more aggressive
policy of disposition of oil and gas properties in fiscal 1997.  Additionally,
the Company incurred a loss in fiscal 1994 of $173,340 on the disposition of the
40,000 shares of Electric & Gas Technology, Inc. common stock acquired in 1991.

     Capital Expenditures.  The timing of most of the Company's capital
     --------------------                                              
expenditures is discretionary.  Currently there are no material long-term
commitments associated with the Company's capital expenditure plans.
Consequently, the Company has a significant degree of flexibility to adjust the
level of such expenditures as circumstances warrant.  The Company primarily uses
internally generated cash flow and proceeds from the sale of oil and gas
properties to fund capital expenditures, other than significant acquisitions,
and to fund its working capital deficit.  If the Company's internally generated
cash flows should be insufficient to meet its debt service or other obligations,
the Company may reduce the level of discretionary capital expenditures or
increase the sale of non-strategic oil and gas properties in order to meet such
obligations.  The level of the Company's capital expenditures will vary in
future periods depending on energy market conditions and other related economic
factors.  The Company anticipates that its cash flow will not be sufficient to
fund its domestic operations and debt service at their current levels for the
next year.  As a result, the Company anticipates that it will be necessary to
increase the level of sales of the Company's oil and gas properties or seek
additional equity capital, of which there can be no assurance.  The Company's
proposed merger with Alliance Resources Plc, if completed, would be a source of
such equity capital.  See "Item 1.  Business and Item 2. Properties - Proposed
Merger with Alliance Resources Plc."

     Substantially all of the Company's capital expenditures over its recent
history have been made to acquire oil and gas properties.  During fiscal 1993,
1994, 1995 and 1996, the Company made a number of significant acquisitions of
oil and gas properties.  During the year ended July 31, 1993, the Company
completed two acquisitions of oil and gas properties for a cost of approximately
$3,013,000.  During the year ended July 31, 1994, the Company completed one
acquisition of oil and gas properties for a cost of approximately $1,740,000.
During the year ended July 31, 1995 the Company completed the acquisition of
Germany Oil for a cost of approximately $18.1 million.  Subsequent to July 31,
1995, the Company participated with Oakland Petroleum Operating Company in the
acquisition of producing oil and gas properties from Sackett Oil Company and The
Prudential Insurance Company of America for a total purchase price of
$5,850,000, less adjustments.  The properties are located in Texas, Louisiana
and California.  Of the total purchase price, the Company paid $2,885,320 for
the properties located in Texas and Louisiana.  The Company provided Oakland a
loan in the principal amount of $2,300,000 to finance Oakland's purchase of the
properties.  This acquisition was funded through additional borrowings under the
Company's principal credit facility.  The Company's strategy is to continue to
expand its reserve base

                                       32
<PAGE>
 
principally through acquisitions of producing oil and gas properties.  As a
result, it is likely that capital expenditures will exceed cash provided by
operating activities in years where significant growth occurs in the Company's
oil and gas reserve base. In such cases, additional external financing is likely
to be required.

     The Company intends to continue its practice of reserve replacement and
growth through the acquisition of producing oil and gas properties, although at
this time it is unable to predict the number and size of such acquisitions, if
any, which will be completed.  The Company's ability to finance its oil and gas
acquisitions is determined by its cash flow from operations and available
sources of debt and equity financing.  Exclusive of potential acquisitions and
subject to the availability of capital, the Company presently anticipates
capital expenditures in fiscal 1997 of approximately $800,000 for oil and gas
property enhancement activities.
    
     Financing Arrangements.  Since July 31, 1991, the Company has made 12
     ----------------------                                               
acquisitions of oil and gas properties.  These acquisitions have been financed
primarily through borrowings under the Company's bank credit facilities and
through internal cash flow.  The Company's acquisition of Germany Oil Company,
including the cash portion of the purchase price paid by the Company for the
volumetric production payments and overriding interests acquired from ENRON
Reserve Acquisition Corp. and the cash portion of the consideration paid by the
Company pursuant to the exchange offer, were financed through borrowings by the
Company under a credit facility pursuant to a Credit Agreement dated as of March
31, 1995 (the "Credit Agreement") between Bank of America, NT and SA ("Bank")
and the Company's wholly-owned subsidiaries, LaTex Petroleum, Germany Oil and
LaTex/GOC Acquisition ("Borrowers").  In addition, under the credit facility the
Company and the Borrowers refinanced the Company's then existing indebtedness to
the Company's former principal lender.  The Company and its wholly-owned
subsidiary, ENPRO, have guaranteed the obligations of the Borrowers under the
Credit Agreement.     

     Under the Credit Agreement, the Bank agreed to make loans to the Borrowers
(i) in the amount of $23,000,000 (the "Acquisition Loan") for the purposes of
refinancing the Borrower's then existing indebtedness, partially funding the
acquisition of Germany Oil Company and for working capital, and (ii) in the
amount of $2,000,000 (the "Development Loan") for additional approved
development drilling, workover or recompletion work on oil and gas properties
mortgaged by the Borrowers to the Bank as security for the loans under the
Credit Agreement.  On July 31, 1996, the outstanding balance of the loans was
$22,206,707.

     Advances under the Credit Agreement maintained from time to time as a "Base
Rate Loan" bear interest, payable monthly, at a fluctuating rate equal to the
higher of (i) the rate of interest announced from time to time by the Bank as
its "reference rate", plus 1%, or (ii) the "Federal Funds Rate" (as defined in
the Credit Agreement) plus 1 1/2%.  Advances under the Credit Agreement
maintained from time to time as a "LIBO Rate Loan" bear interest, payable on the
last day of each applicable interest period (as defined in the Credit
Agreement), at a fluctuating rate equal to the LIBO Rate (Reserve Adjusted) (as
defined in the Credit Agreement) plus 2%.  As of July 31, 1996, all advances to
the Company under the Credit Agreement are maintained as LIBO Rate Loans which
currently bear interest at the annual rate of 7.5%.

     Principal on any loans under the Credit Agreement is currently repayable in
monthly installments of $322,500 (net of Oakland Petroleum's monthly principal
payment of $42,500) plus an additional payment equal to the positive difference,
if any, between the net proceeds from Borrower's oil and gas production (as
defined in the Credit Agreement) times a variable dedicated percentage (as
defined in the Credit Agreement) and the minimum monthly payment.  All unpaid
principal and accrued interest under the Credit Agreement is due March 31, 2000.

     The Company's indebtedness to the Bank under the Credit Agreement is
secured by mortgages on all of the Company's producing oil and gas properties
and pledges of the stock of the Company's subsidiaries, LaTex Petroleum, Germany
Oil Company, LaTex/GOC Acquisition and ENPRO.  On a semi-annual basis, the value
of the oil and gas properties securing loans under the Credit Agreement is
redetermined by the Bank based upon its review of the Company's oil and gas
reserves.  To the extent that the aggregate principal amount of all loans under
the Credit Agreement exceeds the collateral value

                                       33
<PAGE>
 
as determined by the Bank, the Company must either pay the Bank an amount
sufficient to eliminate such excess, or provide additional oil and gas
properties as security for the loans having a value satisfactory to the Bank.

     Under the Credit Agreement, the Company has also granted an affiliate of
the Bank an overriding royalty interest in all of the Company's existing
producing oil and gas properties, other than those situated in the State of
Oklahoma (the "Bank ORRI").  The Bank ORRI is 6.3% of Company's net revenue
interest in each property.  The Bank is not entitled to the Bank ORRI on any
property acquired after closing of the financing.  On the later to occur of (i)
March 31, 1998 or (ii) at such time as the Bank has received a 15% internal rate
of return on the $25,000,000 commitment amount under the Credit Agreement, the
Bank ORRI will be adjusted downward to 2.1%.

     As a condition to the Bank making the loans under the Credit Agreement, the
Company's subsidiary, LaTex Petroleum, has entered into hedging agreements
designed to enable the Company to obtain agreed upon net realized prices for the
Company's oil and gas production and designed to protect the Company against
fluctuations in interest rates with respect to the principal amounts of all
loans under the Credit Agreement.  Under the current hedging arrangements with
the Bank, the Company pre-sold certain volumes of its gas production for a three
year period beginning April 1, 1995 at a fixed price of $1.806 per MMBTU.  The
dedicated annual volumes for gas average 2,605,384 MMcf in fiscal 1996,
1,948,592 MMcf in fiscal 1997 and 1,115,296 MMcf in fiscal 1998.  In addition,
the Company placed a price "collar" on certain volumes of its oil production
between $16.50 per barrel and $19.82 per barrel.  The dedicated annual volumes
for oil average 324,288 Bbls in fiscal 1996, 279,828 Bbls in fiscal 1997 and
170,344 Bbls in fiscal 1998.  Interest rate protection was provided based on an
interest rate swap at 7.47%.  The effect of these hedging arrangements has been
to reduce the Company's working capital in fiscal 1996 by $1,979,956 as a result
of additional payments to the Bank above scheduled principal and interest
payments.  At July 31, 1996, the future impact of the hedging agreements are
anticipated to result in additional losses of $3,649,287 based upon the
prevailing commodity prices and interest rate at that time.  See "Inflation and
Pricing" and Note 15 to the Company's consolidated financial statements at 
Item 8.

     The Credit Agreement contains affirmative and negative covenants which
impose certain restrictions and requirements on the Company, including:
limitations on the amount of additional indebtedness the Company may incur;
prohibition against payment by the Company of cash dividends; requirements that
the Company maintains a current ratio (current assets to current liabilities) of
at least 1.0 to 1.0, tangible net worth of at least $5.0 million, no less than
$500,000 in cash equivalent investments on hand at any given time, and no less
than $500,000 in working capital; limitations on the ability of the Company to
sell assets or to merge or consolidate with or into any other person; and
requirements that the Company maintain a consolidated current ratio of at least
1.0 to 1.0 and consolidated tangible net worth of at least $10 million.
    
     During the year ended July 31, 1996, the Company was in violation of
various provisions of the Credit Agreement.  The Company has acknowledged to the
Bank these events of default and, pursuant to a Forbearance Agreement between
the Company and the Bank dated July 23, 1996, as amended, the Bank agreed to
delay enforcement of its rights under the Credit Agreement and related loan
documents as a result of these events of default until the earlier of November
29, 1996, the occurrence of any default by the Company under the terms of
Forbearance Agreement, the occurrence of any additional default by the Company
under the Credit Agreement, or the Company's cure of the defaults.  The Bank has
indicated its willingness to further amend the Forbearance Agreement to extend
its agreement to forbear any action on the Company's default through February
28, 1997.  Under the terms of the Forbearance Agreement, the Company agreed to
(a) obtain promissory notes from Imperial Petroleum, Inc. ("Imperial"), Wexford
Technology, Inc. ("Wexford"), and LaTex Resources International evidencing their
indebtedness to the Company at August 16, 1996 in the amounts of $677,705,
$1,372,799 and $3,363,000, respectively, (b) obtain from Imperial a lien on and
security interest in certain of Imperial's assets (subject to existing perfected
liens and security interests) to secure Imperial's indebtedness to the Company,
and (c) pay all unpaid overriding royalties due LaSalle Street National
Resources Corporation in three monthly installments, beginning August 1, 1996,
with interest at the Bank's prime rate plus two percent.  The company believes 
that it is in compliance with the terms of the Forebearance Agreement.     

     In addition, in accordance with the requirements of the Forbearance
Agreement, the Company and Bank entered into Amendment No. 2 to Amended and
Restated Credit Agreement dated as of August 16,

                                       34
<PAGE>
 
1996 ("Amendment No. 2") pursuant to which each of the Borrowers and Guarantors
under the Credit Agreement granted Bank a security interest in substantially all
of their assets which had not otherwise been previously pledged to the Bank
under the Credit Agreement.  In addition, the Company granted to the Bank a
security interest in the indebtedness owed to the Company by Imperial, Wexford
and LaTex, together with a security interest in the collateral pledged to the
Company by Imperial to secure Imperial's indebtedness to the Company, which
consists primarily of unpatented mining claims in the states of Arizona and
Montana.  In addition, the Company granted the Bank a security interest in the
shares of common stock Wexford and Imperial owned by the Company.

     The Company has dedicated a significant portion of its available revenues
and cash flows to remaining current in its payment obligations to the Bank.  In
addition, proceeds from sales of oil and gas properties by the Company have been
used to further reduce the Company's indebtedness to the Bank, with only limited
amounts of such proceeds being made available to fund the Company's working
capital needs.  As a result, the Company continues to fall further behind in
making required payments to royalty owners and vendors.  The effect of the
continuation of this policy, over the long term, will be to increase the
Company's accounts payable while reducing its debt to the Bank.  Because the
level of required payments to the Bank remains constant over the term of the
Credit Agreement, the rate at which the Company's accounts payable deficit
increases will become greater with time and, ultimately may jeopardize certain
of the Company's oil and gas leases.

     The Company believes that its cash flow from operations will be
insufficient to meet its anticipated capital requirements for the foreseeable
future.  As a result, the Company will be required to increase the level of
sales of its oil and gas properties, seek additional equity capital, or
restructure its existing Credit Agreement with the Bank, none of which can be
assured.  However, because future cash flows and the availability of debt or
equity financing are subject to a number of variables, such as the level of
production and the prices of oil and gas, there can be no assurance that the
Company's capital resources will be sufficient to maintain current operations or
planned levels of capital expenditures.

Proposed Merger With Alliance Resources Plc

     As a result of the demands placed upon the Company by the Bank, the
Company's continuing working capital deficit, its deteriorating financial
condition and inability of the Company to raise additional debt or equity
capital, management of the Company, in the fourth quarter of fiscal 1996,
determined to seek an equity infusion through a strategic merger with a suitable
merger candidate.  Management's primary objective in seeking a merger partner
was to solve the working capital deficit of the Company through an equity
infusion while minimizing dilution to the shareholders.  Although the Company
considered several potential transactions, Alliance Resources Plc ("Alliance")
emerged as the candidate most likely to meet the objectives of the Company.
Subsequent to year end the Company agreed, subject to shareholder approval and
satisfaction of certain other conditions, to enter into an agreement pursuant to
which the Company will merge with Alliance.  It is anticipated that the merger
will provide the Company with sufficient capital resources to eliminate its
existing working capital deficit, refinance the Company's senior debt and
eliminate the hedging agreements, and provide development capital for
exploration of the Company's oil and gas properties.  In addition, the Company
believes that the combination of the two companies provides strategic benefits
to the Company important to its long term growth and the enhancement of
shareholder value.  Although Alliance's domestic oil and gas operations are
significantly smaller than the Company's, the Company believes that the merger
will enhance the overall financial strength of the Company and provide a stable
platform from which future growth can be achieved.  The strategic objectives of
the combined Company will be to continue a policy of structured and stable
growth in the domestic U.S. oil and gas sector while implementing projects in
Western Europe, the Middle East and the former Soviet Union.

     As a result of the refocus of the Company on its core oil and gas
operations and under the terms of the merger agreement with Alliance, the
Company has agreed to dispose of its interests in Wexford Technology, Inc.,
Imperial Petroleum, Inc., LaTex Resources International, Inc. and Phoenix
Metals, Inc.  Despite attempts by management to locate potential purchasers for
these business interests, the financial condition of these entities and
additional capital requirements to achieve stable operations and cash flow have
been significant impediments to their sale.  As a result, Imperial Petroleum,
Inc., an affiliate of the Company, has agreed to acquire the Company's interest
in these companies for 100,000 shares of the

                                       35
<PAGE>
 
Company's common stock.  Imperial is controlled by the Company's President and
largest stockholder, Jeffrey T. Wilson.  Mr. Wilson will contribute to Imperial
the 100,000 shares of the Company's common stock to be used by Imperial in
acquiring the Company's interest in these companies.  Prior to the completion of
the sale, the Company will obtain an opinion from an independent investment
banking firm as to the fairness of the transaction to its stockholders.  See
"Item 1. Business and Item 2. Properties --Proposed Merger with Alliance
Resources Plc."

Seasonality

     The results of operations of the Company are somewhat seasonal due to
seasonal fluctuations in the price for crude oil and natural gas.  Recently,
crude oil prices have been generally higher in the third calendar quarter and
natural gas prices have been generally higher in the first calendar quarter.
Due to these seasonal fluctuations, results of operations for individual
quarterly periods may not be indicative of results which may be realized on an
annual basis.

Inflation and Prices

     In recent years, inflation has not had a significant impact on the
Company's operations or financial condition.  The generally downward pressure on
oil and gas prices during most of such periods has been accompanied by a
corresponding downward pressure on costs incurred to acquire, develop and
operate oil and gas properties as well as the costs of drilling and completing
wells on properties.

     In connection with the execution of the Credit Agreement with the Bank, the
company has entered into a crude oil and natural gas hedging arrangement
designed to enable the Company to receive a net realized price of not less than
$1.81 per MMBtu of natural gas and $16.50 per barrel of crude oil on sale of the
volumes of crude oil and natural gas set forth in the Credit Agreement.

     Prices obtained for oil and gas production depend upon numerous factors
that are beyond the control of the Company, including the extent of domestic and
foreign production, imports of foreign oil, market demand, domestic and world-
wide economic and political conditions, and government regulations and tax laws.
Prices for both oil and gas have fluctuated significantly in 1996 and 1995.  The
following table sets forth the average price received by the Company for each of
the last two years and the effects of the hedging arrangement described below.

<TABLE>

                    Oil              Oil              Gas              Gas
               (excluding the   (including the   (excluding the   (including the
                 effects of       effects of       effects of       effects of
 Year Ended       hedging          hedging          hedging          hedging
   July 31     transactions)    transactions)    transactions)    transactions)
-------------  --------------   --------------   --------------   --------------
<S>            <C>              <C>              <C>              <C> 
    1996           $ 15.73           $ 15.24          $ 2.03          $ 1.67
    1995           $ 12.86           $ 12.86          $ 1.48          $ 1.48
</TABLE>

     The Company has entered into a master agreement to hedge the price of its
oil and natural gas.  The purpose of the hedging arrangement is to provide
protection against price drops and to produce a measure of stability in the
volatile environment of oil and natural gas spot pricing.  With respect to the
losses incurred by the Company as a result of this hedging arrangement, see
"Capital Resources and Liquidity -- Financing Arrangements".  The following
table provides a summary of the Company's financial contracts.

                                       36
<PAGE>
 
<TABLE>
<CAPTION>
 
                               Gas             
------------------------------------------------------------ 
                                                  Contract
                        Percent of Direct       Floor Price
      Period            Production Hedged        (per mcf)
-------------------     ------------------      ------------
<S>                     <C>                     <C>
 08/01/96-07/31/97              79%                $16.50
                                          
 08/01/97-03/27/98              75%                $16.50
                                          
                                          
<CAPTION>                                 
                               Oil        
------------------------------------------------------------ 
                                                 Contract
                        Percent of Direct       Floor Price
      Period            Production Hedged        (per mcf)
-------------------     -----------------       ------------
<S>                     <C>                     <C>   
 08/01/96-07/31/97              71%                $ 1.81

 08/01/97-03/27/98              68%                $ 1.81
</TABLE>

     In addition, the Company has entered into interest rate hedging agreements
designed to protect the Company against fluctuations in interest rates with
respect to its indebtedness to the Bank under the Credit Agreement.

Item 8.  Financial Statements and Supplementary Data.

             Audited Financial Statements of LaTex Resources, Inc.

<TABLE>
                                                                            Page
                                                                            ----
   <S>                                                                      <C>
 
   Independent Auditor's Report............................................  F-1
   Consolidated Balance Sheets as of July 31, 1996 and 1995................  F-3
   Consolidated Statements of Operations for the years ended
       July 31, 1996, 1995 and 1994;.......................................  F-4
   Consolidated Statements of Stockholders' Equity for the years
       ended July 31, 1996, 1995 and 1994;.................................  F-5
   Consolidated Statements of Cash Flows for the years ended July 31,
    1996, 1995
       and 1994;...........................................................  F-6
   Notes to Consolidated Financial Statements..............................  F-8
 
</TABLE>

                                       37
<PAGE>
 
                                   PART III

Item 10. Directors and Executive Officers of the Registrant.

Directors and Executive Officers

     The following table sets forth certain information regarding the directors,
executive officers and key employees of the Company.
 
      Name                   Age     Position
      ----                   ---     --------                   
                                 
      Jeffrey T. Wilson      43      Director, Chairman of the Board, President,
                                     and Chief Executive Officer
                                 
      John L. Cox            46      Director, Vice President and Chief
                                     Financial Officer
                                 
      Malcolm W. Henley      45      Director and Vice President of Marketing
                                 
      John R. Martinson      61      Director
                                 
      Robert L. Hull         44      Vice President of Operations
                                 
      John W. Heinsius       46      Vice President of Exploration
                                 
      Stacey D. Smethers     28      Secretary


     Jeffrey T. Wilson has been a Director, Chairman of the Board and Chief
     -----------------                                                     
Executive Officer of the Company since December 1991.  Mr. Wilson was a Director
and Executive Vice President of Vintage Petroleum, Inc. ("Vintage") from May
1990 to July 1991. He was Vice President--Production of Vintage from January
1984 to May 1990 and Manager--Acquisitions of Vintage from May 1983 to January
1984.  From August 1980 to May 1983, Mr. Wilson was an engineer with Netherland,
Sewell & Associates, Inc, a petroleum engineering consulting firm, where his
assignments included annual reserve appraisals, reserve acquisition appraisals
and field studies.  From May 1975 to August 1980, he gained experience in the
oil and gas industry with Exxon Company U.S.A. in various engineering and
supervisory capacities in the Louisiana and South Texas areas.  Mr. Wilson holds
a Bachelor of Science Degree in Mechanical Engineering from the Rose-Hulman
Institute of Technology.

     John L. Cox has served as a Director of the Company since November 1995.
     -----------                                                              
Mr. Cox became Vice President of Finance and Chief Financial Officer of the
Company in January 1996.  From February 1992 to December 1995, Mr. Cox held the
position of Controller for the Company.  Mr. Cox held the positions of
Controller of Panada Exploration and Assistant Controller of Panda Resources
from November 1990 to January 1993.  Prior to that time, he held various
managerial positions with Reading & Bates Petroleum Corporation.  Mr. Cox holds
a Bachelor of Science Degree in Accounting from Oklahoma City University.

     Malcolm W. Henley has been Vice President of Marketing of the Company since
     -----------------                                                          
June 1992.  Mr. Henley was elected to the Company's Board of Directors in
September 1993.  Mr. Henley has been Chairman of the Board, President, Chief
Executive and Chief Operating officer of the Company's wholly-owned subsidiary
ENPRO, Inc. since August, 1984.  From 1981 to 1984, Mr. Henley served as Manager
of Operations for a natural gas pipeline company subsidiary of Champlin
Petroleum (now Union Pacific Resources).  From 1976 to 1979 he served as Vice
President and General Manager of Utilities Pipeline Company and between 1975 and
1976 held various positions with Continental Oil Company. Mr. Henley

                                       38
<PAGE>
 
has a Bachelor of Arts Degree in Business Administration from Oklahoma State
University and an Associates Degree in Petroleum Land Technology from Tulsa
Junior College.
    
     John R. Martinson has been a Director of the Company since May 4, 1995.
     -----------------
From 1988 to 1996, Mr. Martinson was a principal in the investment banking firm
of Wood Roberts, Inc. where he engaged primarily in initiating and advising on
merger transactions and arranging financing in the petroleum industry. In
January 1996 Wood Roberts, Inc. joined J L Ogden & Co. to form Wood Roberts,
LLC. in order to pursue, in addition to its investment banking activities, fund
management advisory activities. In 1995 Mr. Martinson was a principal in the
merchant banking firm Martinson, O'Dell & Ogden, L.L.C., specializing in
corporate and project finance. From 1973 to 1988 Mr. Martinson was an
independent oil operator and investor. During this period he founded and managed
companies involved in oil and gas exploration and development, crude oil and
products trading, refining and marketing, natural gas gathering and processing,
and electric utility load management. Prior to that Mr. Martinson spent seven
years in the international division of Mobil Corporation, three years with
Kidder Peabody & Co. and four years with Oppenheimer & Co. Mr. Martinson earned
his Bachelor of Science in Engineering Degree at Princeton University and holds
a Masters in Business Administration Degree (with honors) from Northwestern
University.
     
     Robert L. Hull has been Vice President of Operations of the Company since
     --------------                                                           
January 1992.  Prior to joining the Company, Mr. Hull had been employed for
seven years with Vintage Petroleum, Inc. in the position of Senior Operations
Engineer.  Prior to that time, Mr. Hull had been employed by other oil related
companies, including Dowell-Schlumberger, Equitable Gas Co., Ladd Petroleum,
Unit Corp. and Mapco.  Mr. Hull holds a Bachelor of Science Degree in Geology
from the University of Pittsburgh.

     John W. Heinsius has been Vice President of Exploration since February
     ----------------                                                      
1993.  From October 1989 to February 1993, Mr. Heinsius held the positions of
Vice President of Exploration and Manager of Gas supply for Panda Resources,
Inc.  Mr. Heinsius held the positions of Director of Exploration and Manager of
Gas Marketing for Transok, Inc. from 1985 to October 1989.  Prior to this time,
he held the titles of Exploration Manager and Vice President of Exploration for
Buttonwood Petroleum, Chief Geologist for Indian Wells Oil Co., Staff Geologist
for Ladd Petroleum Corp. and Exploration Geologist for Texaco, Inc.  Mr.
Heinsius holds a Bachelor of Arts Degree in Geology from Hope College and a
Master of Science Degree in Geology from Western Michigan University.

     Stacey D. Smethers has been Secretary of the Company since November 15,
     ------------------                                                     
1995.  Ms. Smethers has been Executive Assistant to the President of ENPRO, Inc.
and Marketing Representative for the Company from August 1992 to present.  Ms.
Smethers has more than seven years of varied experience in the oil and gas
industry.  Her areas of concentration include marketing, administration, and
petroleum land management.  Her prior titles include Executive Assistant,
Operations Analyst, Credit Analyst, and Secretary.

     Each director is elected for a period of one year at the Company's annual
meeting of shareholders and serves until his successor is duly elected by the
shareholders.  Directors who are not officers of the Company receive no cash
compensation for their services.  Officers are elected by and serve at the will
of the Board of Directors.  There are no family relationships between any
director, officer or person nominated or chosen to become a director or officer
and any other such person.

     The Board of Directors has established a Compensation Committee whose
current members are Jeffrey T. Wilson and John R. Martinson.  The Compensation
Committee reviews the Company's executive compensation policies and practices
and administers the Company's 1993 Incentive Stock Plan.  See "Compensation
Committee Interlocks and Insider Participation."  The Board of Directors of the
Company has not established an audit or any other committee.  Directors of the
Company do not receive fees for their services as directors.

Section 16(a) Reporting Deficiencies

     Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act")
requires the Company's directors and officers, and persons  who own more than
10% of a registered class of the Company's equity securities, to file initial
reports of ownership on Form 3 and reports of changes in ownership on Forms 4
and 5 with the Securities and Exchange Commission (the "SEC") and the National
Association of Securities Dealers ("NASD").  Such persons  are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.

     Based upon a review of Form 3, 4 and 5 filings made by the Company's
officers and directors during the fiscal year ended July 31, 1996 under Section
16(a) of the Exchange Act, the Company believes that: (i) Jeffrey T. Wilson,
Chief Executive Officer, Chairman of the Board, President, and a Director of the

                                       39
<PAGE>
 
Company, failed to timely file one statement of change in beneficial ownership
on Form 4, respecting one transaction involving his acquisition of options to
purchase common stock; (ii) John L. Cox, Chief Financial Officer, Vice
President, and a Director of the Company, failed to timely file one statement of
change in beneficial ownership on Form 4, respecting one transaction involving
his acquisition of options to purchase common stock; (iii) Malcolm W. Henley,
Vice President of Marketing, and a Director of the Company, failed to timely
file one statement of change in beneficial ownership on Form 4, respecting one
transaction involving his acquisition of options to purchase common stock; (iv)
Philip J. Wade, a Director of the Company until his resignation on October 8,
1996, failed to timely file two statements of change in beneficial ownership on
Form 4, respecting 12 transactions involving the disposition of common stock of
the Company; (v) Robert L. Hull, Vice President of Operations, failed to timely
file one statement of change in beneficial ownership on Form 4, respecting one
transaction involving his acquisition of options to purchase common stock; (vi)
John W. Heinsius, Vice President of Exploration, failed to timely file one
statement of change in beneficial ownership on Form 4, respecting one
transaction involving his acquisition of options to purchase common stock; (vii)
John R. Martinson, a Director of the Company, failed to timely file one
statement of change in beneficial ownership on Form 4, respecting one
transaction involving his acquisition of warrants to purchase common stock;
(viii) Stacey D. Smethers, Secretary of the Company, failed to timely file one
statement of change in beneficial ownership on Form 4, respecting one
transaction involving her acquisition of options to purchase common stock.  All
of the referenced delinquent filings have now been made.  Except as set forth
above, the Company believes that its current officers and directors have made
all requisite filings under Section 16(a) of the '34 Act on a timely basis.

Item 11. Executive Compensation.

     The table below sets forth, in summary form, (1) the compensation paid, for
the years shown, to Jeffrey T. Wilson, the Company's Chairman of the Board,
President and Chief Executive Officer, and the four other highest-paid executive
officers of the Company serving as executive officers on July 31, 1996 (the
"Named Officers"); (2) the stock options and stock appreciation rights granted
to the Named Officers for the years shown; and (3) long-term payouts and other
compensation to the Named Officers for the years shown.

                                       40
<PAGE>
 
                          Summary Compensation Table
<TABLE>
<CAPTION>
                                                                            Long Term Compensation
                                                                  ---------------------------------------- 
                                     Annual Compensation                     Awards             Payouts
                          --------------------------------------------------------------------------------
                                                                    Restricted   Securities
                                                    Other Annual      Stock      Underlying       LTIP      All Other
Name and Principal                Salary    Bonus   Compensation      Awards      Options/       Payouts   Compensation
Position                    Year    ($)      ($)       ($)(1)          ($)        SARs (#)         ($)         ($)
---------------------------------------------------------------------------------------------------------------------------
<S>                         <C>   <C>       <C>     <C>               <C>          <C>             <C>       <C>
Jeffrey T. Wilson,          1996  100,800     ---       ---             ---      200,000(2)       ---            ---
Chairman, President         1995   97,200     200       ---             ---      150,000(3)       ---            ---
and Chief Executive         1994   96,000     ---       ---             ---          ---          ---            ---
Officer                                                 
                                                        
John L. Cox,                1996   74,200     ---       ---             ---      150,000(2)       ---            ---
Vice President and          1995   55,500     200       ---             ---       50,000(3)       ---            ---
Chief Financial Officer     1994   54,000     500       ---             ---       25,000(4)       ---            ---
                                                        
Malcolm W. Henley,          1996   91,000     ---       ---             ---      150,000(2)       ---            ---
Vice President of           1995   85,050     200       ---             ---       50,000(3)       ---            ---
Marketing                   1994   84,000     500       ---             ---      100,000(5)       ---            ---
                                                        
John W. Heinsius,           1996   90,400     ---       ---             ---      150,000(2)       ---            ---
Vice President of           1995   83,100     200       ---             ---       50,000(3)       ---            ---
Exploration                 1994   82,000     500       ---             ---       50,000(4)       ---            ---
                                                        
Robert L. Hull,             1996   90,400     ---       ---             ---      150,000(2)       ---            ---
Vice President of           1995   83,100     200       ---             ---       50,000(3)       ---            ---
Operations                  1994   82,000     500       ---             ---      125,000(6)       ---            ---
                                                        
Dewitt C. Shreve,           1996    9,300     ---       ---             ---          ---          ---            ---
Executive Vice President    1995   72,900     ---       ---             ---     50,000(3)(7)      ---            ---
                            1994   72,000     ---       ---             ---    100,000(8)(7)      ---            ---
</TABLE>
------------------------------
(1)  None of the executive officers listed received perquisites or other
     personal benefits that exceeded the lesser of $50,000 or 10 percent of the
     salary and bonus for such officers.

(2)  Reflects options issued pursuant to the Company's 1993 Incentive Stock Plan
     exercisable at any time until December 5, 2000, at an exercise price of
     $0.4375 per share, the fair market value of the Company's common stock at
     the time of grant.  By agreement between the holder of the referenced
     options and the Company, effective October 21, 1996, the referenced options
     were terminated.  See "Restricted Stock Grants".

(3)  Reflects options issued pursuant to the Company's 1993 Incentive Stock Plan
     exercisable at any time until August 1, 2000 at an exercise price of $0.47
     per share, the fair market value of the Company's common stock on the date
     of grant.  By agreement between the holder of the referenced options and
     the Company, effective October 21, 1996, the referenced options were
     terminated.  See "Restricted Stock Grants".

(4)  Reflects options issued pursuant to the Company's 1993 Incentive Stock Plan
     exercisable at any time until May 25, 1999 at an exercise price of $0.875
     per share, the fair market value of the Company's common stock on the date
     of grant.  By agreement between the holder of the referenced options and
     the Company, effective October 21, 1996, the referenced options were
     terminated.  See "Restricted Stock Grants".

(5)  Reflects (a) options issued pursuant to the Company's 1993 Incentive Stock
     Plan to purchase 50,000 shares of common stock exercisable at any time
     until May 25, 1999 at an exercise price of $0.875 per share, the fair
     market value of the Company's common stock on the date of grant, and (b)
     options issued pursuant to the Company's 1993 Incentive Stock Plan to
     purchase 50,000 shares of common stock, issued in replacement of 50,000
     non-qualified options issued to Mr. Henley in 1992, exercisable at any time
     until May 25, 1999 at an exercise price of $0.875 per share, the fair

                                       41
<PAGE>
 
     market value of the Company's common stock on the date of grant. By
     agreement between Mr. Henley and the Company, effective October 21, 1996,
     the referenced options were terminated. See "Restricted Stock Grants".

(6)  Reflects (a) options issued pursuant to the Company's 1993 Incentive Stock
     Plan to purchase 50,000 shares of common stock exercisable at any time
     until May 25, 1999 at an exercise price of $0.875 per share, the fair
     market value of the Company's common stock on the date of grant, and (b)
     options issued pursuant to the Company's 1993 Incentive Stock Plan to
     purchase 75,000 shares of common stock, issued in replacement of 75,000
     non-qualified options issued to Mr. Hull in 1992, exercisable at any time
     until May 25, 1999 at an exercise price of $0.875 per share, the fair
     market value of the Company's common stock on the date of grant. By
     agreement between Mr. Hull and the Company, effective October 21, 1996, the
     referenced options were terminated. See "Restricted Stock Grants".

(7)  Mr. Shreve resigned his positions as Executive Vice President and a
     Director of the Company on January 31, 1996, and his options lapsed at that
     time.

(8)  Reflects (a) options issued pursuant to the Company's 1993 Incentive Stock
     Plan to purchase 50,000 shares of common stock exercisable at any time
     until May 25, 1999 at an exercise price of $0.875 per share, the fair
     market value of the Company's common stock on the date of grant, and (b)
     options issued pursuant to the Company's 1993 Incentive Stock Plan to
     purchase 50,000 shares of common stock, issued in replacement of 50,000
     non-qualified options issued to Mr. Shreve in 1992, exercisable at any time
     until May 25, 1999 at an exercise price of $0.875 per share, the fair
     market value of the Company's common stock on the date of grant.

Stock Options

     The table below sets forth, in summary form, with respect to the Named
Officers, (i) the name of such officer receiving grants of stock options from
the Company during the fiscal year ended July 31, 1996; (ii) the number of
securities underlying the options; (iii) the percent such grant represents of
the total options granted to employees during the fiscal year ended July 31,
1996; (iv) the per-share exercise price of the options granted; (v) the
expiration date of the options; and(vi) the potential realizable value at
assumed annual rates of stock price appreciation.

              Option Grants in Fiscal Year Ended July 31, 1996(1)
<TABLE>
<CAPTION>
                                                                                       Potential Realizable
                                                                                         Value at Assumed
                                                                                       Rates of Stock Price
                                                                                         Appreciation for
                                 Individual Grants                                         Option Term
-----------------------------------------------------------------------------------  ----------------------
                                          Percent of
                         Number of           Total
                         Securities      Options/SARS
                         Underlying       Granted to       Exercise or
                        Options/SARS     Employees in      Base Price    Expiration
         Name           Granted (#)       Fiscal Year       ($/Share)       Date       5% ($)       10% ($)
----------------------  ------------   -----------------   -----------   ----------   --------     --------
<S>                     <C>            <C>                 <C>           <C>         <C>        <C>
Jeffrey T. Wilson          200,000           20.77%          $0.4375     12/05/2000   $111,676     $140,920

John L. Cox                150,000           15.58%          $0.4375     12/05/2000   $ 83,756     $105,690

Malcolm W. Henley          150,000           15.58%          $0.4375     12/05/2000   $ 83,756     $105,690

John W. Heinsius           150,000           15.58%          $0.4375     12/05/2000   $ 83,756     $105,690

Robert L. Hull             150,000           15.58%          $0.4375     12/05/2000   $ 83,756     $105,690

Dewitt C. Shreve(2)          ---              ---              ---          ---          ---         ---
-----------------------------------
</TABLE>

(1)  By agreement between each of the individuals, other than Dewitt C. Shreve,
     set forth in the table and the Company, effective October 21, 1996 the
     referenced options were terminated.  See

                                       42
<PAGE>
 
     "Restricted Stock Grants."

(2)  Mr. Shreve resigned his positions as Executive Vice President and Director
     of the Company on January 31, 1996 and his options lapsed at that time.

     During the year ended July 31, 1996 (i) no restricted stock awards were
granted, (ii) other than as set forth above, no stock options or stock
appreciation rights were granted, (iii) no options or stock appreciation rights
were exercised, and (iv) no awards under any long-term incentive plan were made
to any of the Named Officers.

     The following table sets forth information relating to the exercises of
stock options by each of the Company's Named Officers during the year ended July
31, 1996 and the value of unexercised stock options as of July 31, 1996.


                   Aggregated Option Exercises in the Fiscal
                          Year Ended July 31, 1996 and
                         July 31, 1996 Option Values(1)
<TABLE>
<CAPTION>
                           Option Exercises
                             During Year
                         Ended July 31, 1996      Number of Securities
                        ---------------------
                         Number of               Underlying Unexercised       Value of Unexercised
                          Shares                       Options at             In-the-Money Options
                         Acquired     Value          July 31, 1996              at July 31, 1996
                                               --------------------------  --------------------------
     Name               on Exercise  Realized  Unexercisable  Exercisable  Unexercisable  Exercisable
     ----               -----------  --------  -------------  -----------  -------------  -----------
<S>                     <C>          <C>       <C>            <C>          <C>            <C>
Jeffrey T. Wilson           --       $  --         ---          350,000      $ ---         $  ---
                                                                               
John L. Cox                 --       $  --         ---          225,000        ---            ---
                                                                               
Malcolm W. Henley           --          --         ---          300,000        ---            ---
                                                                               
John W. Heinsius            --          --         ---          250,000        ---             --
                                                                               
Robert L. Hull              --          --         ---          325,000        ---             --
                                                                               
Dewitt C. Shreve (2)        --          --         ---              ---        ---             --
---------------------------------
</TABLE>

(1)  By agreement between each of the individuals, other than Dewitt C. Shreve,
     set forth in the table and the Company, effective October 21, 1996 the
     referenced options were terminated.  See "Restricted Stock Grants."

(2)  Mr. Shreve resigned his positions as Executive Vice President and Director
     of the Company on January 31, 1996 and his options to purchase 150,000
     shares lapsed at that time.

     The following table sets forth information relating to the repricing of
stock options held by any executive officer.

                                       43
<PAGE>
 
                            Option Repricing Table
<TABLE>
<CAPTION>
                                                          Market                                    
                                         Number of        Price                                
                                         Securities         of         Exercise                 Length of Original
                                         Underlying       Stock        Price at       New          Option Term
                             Date of      Repriced       at Time        Time of     Exercise    Remaining at Date
Name and Position           Repricing     Options      of Repricing    Repricing     Price         of Repricing
-----------------           ---------    ----------    ------------    ---------    --------    ------------------
<S>                         <C>          <C>           <C>             <C>          <C>         <C>
Malcolm W. Henley,           May 24,         50,000           $0.91        $2.47       $.875    3 years, 7 months
 Vice President of            1994                                                            
 Marketing (1)                                                                                
                                                                                              
Robert L. Hull,              May 24,         25,000           $0.91        $2.47       $.875    3 years, 7 months
 Vice President               1994           50,000           $0.91        $ .85       $.875     1 year, 8 months
 of Operations (2)                                                                            
                                                                                              
Dewitt C. Shreve,            May 24,         50,000           $0.91        $2.47       $.875    3 years, 7 months
 Executive Vice               1994                                                            
 President (3)                                                                                
---------------------------------    
</TABLE>

(1)  Reflects options issued pursuant to the Company's 1993 Incentive Stock Plan
     to purchase 50,000 shares of common stock, issued in replacement of 50,000
     non-qualified options issued to Mr. Henley in 1992, exercisable at any time
     until May 25, 1999 at an exercise price of $0.875 per share, the fair
     market value of the Company's common stock on the date of grant. By
     agreement between Mr. Henley and the Company, effective October 21, 1996
     the referenced options were terminated. See "Restated Stock Grants".

(2)  Reflects options issued pursuant to the Company's 1993 Incentive Stock Plan
     to purchase 75,000 shares of common stock, issued in replacement of 75,000
     non-qualified options issued to Mr. Hull in 1992, exercisable at any time
     until May 25, 1999 at an exercise price of $0.875 per share, the fair
     market value of the Company's common stock on the date of grant. By
     agreement between the Mr. Hull and the Company, effective October 21, 1996
     the referenced options were terminated. See "Restated Stock Grants".

(3)  Reflects options issued pursuant to the Company's 1993 Incentive Stock Plan
     to purchase 50,000 shares of common stock, issued in replacement of 50,000
     non-qualified options issued to Mr. Shreve in 1992, exercisable at any time
     until May 25, 1999 at an exercise price of $0.875 per share, the fair
     market value of the Company's common stock on the date of grant. Mr. Shreve
     resigned his positions as Executive Vice President and Director of the
     Company on January 31, 1996 and his options lapsed at that time.

Incentive Stock Plan

     The Board of Directors adopted the LaTex Resources, Inc. 1993 Incentive
Stock Plan (the "Plan") effective December 8, 1993 and the Shareholders approved
the Plan at the Company's Annual Meeting on June 2, 1994.  The Plan is
administered by a Compensation Committee consisting of not less than three
members of the Board of Directors and a special committee appointed by the Board
of Directors, as necessary, consisting of not less than three members of the
Board, who are a "disinterested persons" within the meaning of Securities and
Exchange Commission ("SEC") Rule 16b-3, as in effect prior to August 1996, to
address decisions regarding participation by directors and executive officers.

     The aggregate number of shares of the Company's common stock issuable under
the Plan is 2,000,000.  The Plan authorizes the Committee to grant to key
employees options ("Options") to purchase the Company's common stock which may
be in the form of incentive stock options ("ISOs"), or in the form of non-
statutory options ("Non-Statutory Options").  Additionally, the Committee may
grant stock

                                       44
<PAGE>
 
appreciation rights ("SARs") in connection with such Options.  The term of each
Option shall be for such period as the Committee shall determine but no longer
than ten years from the date of grant or five years to an individual who is a
10% shareholder of the Company.  The aggregate fair market value exercisable by
an individual optionee during any calendar year under all stock option plans of
the Company may not exceed $100,000.  The exercise price per share for the
common stock covered by any Options shall be determined by the Committee,
provided that in the case of an ISO, the per share exercise price shall be not
less than the fair market value (or in the case of an ISO granted to an
individual who at the time is a 10% shareholder, 110% of the fair market value)
of one share of common stock.

     The Plan additionally authorizes the Committee to grant restricted common
stock ("Restricted Stock") to key employees.  The Committee may designate a
restriction period with respect to such shares of not less than one year but not
more than five years during which an employee will not be permitted to sell,
transfer, pledge or assign shares of Restricted Stock awarded to him provided,
that within such limitations, the Committee may provide for the lapse of such
restrictions where deemed appropriate.

     Through July 31, 1996, the Company has granted ISOs under the Plan to
Messrs. Wilson, Cox, Henley, Heinsius, and Hull as described in the Summary
Compensation Table and the Option Grants Table above, for a total of 1,450,000
shares (excluding options for 150,000 shares granted to Mr. Shreve which lapsed
upon his resignation as an officer and Director of the Company on January 31,
1996), as well ISOs under the Plan to non-executive officer employees for a
total of 240,000 shares.  By agreement between the holders of all outstanding
ISOs and the Company, effective October 21, 1996 all outstanding ISOs were
terminated.  See "Restricted Stock Grants."

Restricted Stock Grants

     Effective October 21, 1996, each holder of options granted under the
Company's 1993 Incentive Stock Plan agreed to terminate all options held and
received grants of restricted common stock of the Company ("Restricted Stock").
The following table sets forth options cancelled and shares of Restricted Stock
issued with respect to each of the Company's Named Officers and other employees
of the Company as a group.
<TABLE>
<CAPTION>
                                                               Shares of
                                                            Restricted Stock
      Name of Option Holder              Options Cancelled      Granted 
      ---------------------              -----------------  ----------------
      <S>                                <C>                <C>
    
      Jeffrey T. Wilson                       350,000           300,000
      John Cox                                225,000           225,000
      Malcolm Henley                          300,000           300,000
      John Heinsius                           250,000           250,000
      Robert Hull                             325,000           325,000
      Dewitt Shreve(1)                            ---               ---
      Other Employees as a Group              240,000           290,000
                                            ---------         ---------
    
                 Total                      1,690,000         1,690,000
                                            =========         =========
----------------
</TABLE>

(1)  Mr. Shreve resigned his positions as Executive Vice President and Director
     of the Company on January 31, 1996, and his options lapsed at that time.

     The terms of the Restricted Stock provide that a holder may not sell,
transfer, or otherwise dispose of any shares of Restricted Stock as long as the
Company has the right to a forfeiture of the Restricted Stock.  In the event
that a holder's employment with the Company shall terminate for any reason other
than death or total disability prior to the earlier of (a) February 1, 1997, or
(b) a Change in Control occurs with respect to the Company, the holder shall
immediately forfeit any right to the shares of Restricted Stock for which the
restrictions have not otherwise lapsed.  For the purpose of the Restricted
Stock, a "Change in Control" will be deemed to have occurred with respect to the
Company if:  (a) any person becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 50% or more of the
combined voting power of the Company's then outstanding securities; (b)
individuals who constitute the Company's Board of Directors on the date of grant
of the Restricted Stock cease for any

                                       45
<PAGE>
 
reason to constitute at least a majority thereof; (c) there is a merger or
consolidation of the Company in which the Company does not survive as an
independent company; or (d) the business of the Company is disposed of by the
Company pursuant to a partial or complete liquidation of the Company, a sale of
assets (including stock of a subsidiary) of the Company, or otherwise.

Compensation Committee Interlocks and Insider Participation

     During the fiscal year ended July 31, 1996, Jeffrey T. Wilson, John R.
Martinson and Dennis G. Strauch served as members of the Compensation Committee
of the Board of Directors of the Company.  Mr. Strauch resigned his position as
Director of the Company and member of the Compensation Committee on June 24,
1996.  Mr. Wilson was, during the fiscal year, Chairman of the Board, President
and Chief Executive Officer of the Company.  With respect to certain
relationships between the Company and Messrs. Wilson and Martinson, see "Item
13. Certain Relationships and Related Transactions."

     During the last completed fiscal year, (i) no executive officer of the
Company served as a member of the Compensation Committee (or other board
committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of another entity, one of whose
executive officers served on the Compensation Committee of the Company; (ii) no
executive officer of the Company served as a director of another entity, one of
who executive officers served on the Compensation Committee of the Company; and
(iii) no executive officer of the Company served as a member of the compensation
committee (or other board committee performing equivalent functions or, in the
absence of any such committee, the entire board of directors) of another entity,
one of whose executive officers served as a director of the Company.

Employment Agreements

     The Company has no employment agreements with any of its officers or
employees.   All officers of the Company devote substantially all their entire
business time and energies to the Company.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

     As of October 25, 1996, the Company had 19,805,495 issued and outstanding
shares of common stock.  The following table sets forth, as of October 25, 1996,
the number and percentage of shares of common stock of the Company owned
beneficially by (i) each director of the Company, (ii) each Named Officer of the
Company named in the Summary Compensation Table in Item 11 above, (iii) all
directors and executive officers of the Company as a group, and (iv) each person
known to the Company to own of record or beneficially more than 5% of the
Company's common stock.  Except as otherwise indicated, the persons named in the
table have sole voting and investment power with respect to the shares
indicated.  As of October 25, 1996, the Company had 502 holders of common stock
of record.

                                       46
<PAGE>
 
<TABLE>     
<CAPTION>
       Name of                           Number of Shares
       Beneficial Owner (1)             Beneficially Owned  Percent of Class (1)
       --------------------             ------------------  --------------------
       <S>                              <C>                 <C>
                                       
       Jeffrey T. Wilson (2)(3)           4,135,000                 20.9%
                                       
       A. Dean Fuller                     1,058,000                  5.3%
                                       
       Dewitt C. Shreve (4)                  41,862                   *
                                       
       Malcolm W. Henley (2)(5)             510,000                  2.6%
                                       
       John R. Martinson (6)                536,000                  2.6%
                                       
       John W. Heinsius (2)(5)              271,500                  1.4%
                                       
       Robert L. Hull (2)(5)                325,000                  1.6%
                                       
       John L. Cox (2)(5)                   230,500                  1.2%

       ENRON Reserve Acquisition
       Corp.                              3,296,173                 14.3%

       All Executive Officers and         5,597,000                 28.3%
       Directors as a group             
       (7 persons) (1)(8)
</TABLE>       
------------------------------

* less than one percent.

(1)  Based upon 19,805,495 issued and outstanding shares of common stock at
     October 25, 1996.  Shares of common stock which an individual has the right
     to acquire within 60 days pursuant to the exercise of options, warrants, or
     other convertible securities are deemed to be outstanding for the purpose
     of computing the percentage ownership of such individual, but are not
     deemed to be outstanding for the purpose of computing the percentage
     ownership of any other person or group shown in the table.

(2)  The mailing address of Messrs. Wilson, Henley, Heinsius, Hull and Cox is
     4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma  74135.

(3)  Includes 300,000 shares of Restricted Stock (See "Item 11. Executive
     Compensation -- Restricted Stock Grants".) and excludes 300,000 shares held
     by the Old National Bank in Evansville, Indiana, Trustee of the Jeffrey T.
     and Annalee Wilson Irrevocable Family Trust for the benefit of the Wilson
     children.

(4)  The mailing address of Mr. Shreve is 2909 Cole Avenue, Suite 100, Dallas,
     Texas 75204.  Mr. Shreve resigned his positions as Executive Vice President
     and a Director of the Company on January 31, 1996.

(5)  Includes: (a) with respect to Mr. Henley, 300,000 shares of Restricted
     Stock; (b) with respect to Mr. Heinsius, 250,000 shares of Restricted
     Stock; (c) with respect to Mr. Hull, 325,000 shares of Restricted Stock;
     and (d) with respect to Mr. Cox 225,000 shares of Restricted Stock.  See
     "Item 11.  Executive Compensation -- Restricted Stock Grants".
    
(6)  Includes presently exercisable warrants to purchase 436,000 shares held by
     Wood Roberts, Inc., a corporation under the control of Mr. Martinson.  The
     mailing address of Mr. Martinson is Suite 3150, 1210 Louisiana Street,
     Houston, Texas, 77007.     
    
(7)  Incudes 3,296,173 shares issuable upon conversion of 494,426 presently
     convertible shares of the Company's Series B Senior Convertible Preferred
     Stock.      
    
(8)  Excludes shares owned by Dewitt C. Shreve who resigned his positions as an
     officer and Director of the Company on January 31, 1996.      

     With respect to the change in control of the Company which would result
upon completion of the proposed merger of the Company with Alliance Resources
Plc, see "Item 1. Business and Item 2. Properties -- Proposed Merger with
Alliance Resources Plc."

                                       47
<PAGE>
 
Item 13. Certain Relationships and Related Transactions.

     In connection with the sale by the Company of Panda Resources, Inc. in July
1993, the Company entered into separate agreements dated September 22, 1993 with
Philip J. Wade and Dean Fuller pursuant to which the Company and Messrs. Wade
and Fuller agreed to terminate their Non-Competition Agreements in exchange for
payment by the Company, on or before November 21, 1993, of $25,000 each to
Messrs. Wade and Fuller.  In connection with the termination of the Non-
Competition Agreements, Jeffrey T. Wilson, Chairman, President and Chief
Executive Officer of the Company, assumed the indebtedness of Messrs. Wade and
Fuller to the Company in the principal amounts of $162,788 and $176,863,
respectively.  At July 31, 1995, Mr. Wilson owed the Company a total of $339,651
pursuant to his assumption of this indebtedness.  The Company has forgiven this
and additional indebtedness of Mr. Wilson to the Company as discussed below.

     As of July 31, 1996 and subsequent to July 31, 1996, the Company agreed to
forgive the indebtedness of various officers, directors and employees to the
Company at July 31, 1996 as follows:
<TABLE>
<CAPTION>
                                       Amount of              Amount of
                                      Indebtedness          Indebtedness
                                     Forgiven as of      Forgiven Subsequent
                                     July 31, 1996        to July 31, 1996
                                     --------------      -------------------
<S>                                  <C>                 <C>
                                                    
Malcolm W. Henley                    $   58,138                 $ 37,655
 Director and Vice President                        
 of Marketing                                       
                                                    
Robert L. Hull                       $   ---                    $ 25,032
 Vice President of Operations                       
                                                    
Jeffrey T. Wilson                    $  180,000                 $321,483
 Chairman of the Board and                          
 Chief Executive Officer                            
                                                    
Other Employees                      $   ---                    $  2,550
                                     ----------                 --------
                                                    
          Total                      $  238,138                 $386,720
                                     ==========                 ========
</TABLE>

     A portion of the Company's oil and gas production is sold to its wholly-
owned subsidiary, ENPRO, under short-term contracts.  The Company believes that
the terms of such contracts are fair and reasonable.  The Company receives no
less from the sale of production to ENPRO than it would receive from sales to
unrelated third parties.

     Since January 1993 the Company has leased a condominium located in Tulsa,
Oklahoma owned by Jeffrey T. Wilson, Chairman and Chief Executive Officer of the
Company.  Under the terms of the oral lease arrangement, the Company pays Mr.
Wilson approximately $1,100 per month.  The condominium is used by the Company
to house its out of town employees and guests.  At July 31, 1996, the Company
owed Mr. Wilson approximately $8,000 for unpaid rent.

     With respect to transactions between the Company and its affiliates,
Wexford Technology, Inc., and Imperial Petroleum, Inc., see "Item 1. Business
and Item 2. Properties - Other Business."

     In connection with the proposed merger of the Company and Alliance
Resources Plc, the Company has entered into a Purchase Agreement with Imperial
Petroleum, Inc. ("Imperial") dated September 30, 1996 pursuant to which the
Company has agreed to sell to Imperial its interests in Imperial, Wexford
Technology, Inc., LaTex Resources International, Inc. and Phoenix Metals, Inc.
for 100,000 shares of the Company's common stock.  Effective July 31, 1996 the
Company has written off its investments in Imperial, Wexford and LaTex Resources
International in the total amount of $5,139,642.  Effective July 31, 1994 the
Company wrote off its investment in Phoenix Metals in the total amount of
$222,918.  Imperial is controlled by Jeffrey T. Wilson, Chairman, President and
Chief Executive Officer of the Company.  Mr. Wilson will contribute to Imperial
the 100,000 shares of the Company's common stock to be used by

                                       48
<PAGE>
 
Imperial in acquiring the Company's interest in these companies.  See "Item 1.
Business and Item 2. Properties - Exploration and Development" and "Other
Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Proposed Merger with Alliance Resources."
    
     The Company was previously a party to an agreement with Wood Roberts, Inc.
("WRI"), a company controlled by John R. Martinson, a Director of the Company,
pursuant to which WRI acted as a financial advisor to the Company.  Under the
agreement, the Company paid WRI a monthly fee of $4,000 and agreed to pay WRI a
success fee in connection with any merger or acquisition involving a party
introduced to the Company by WRI, and any financing facility arranged by WRI.
WRI assisted the Company in obtaining its credit facility with Bank of America.
Through July 31, 1996, the Company paid WRI cash retainer and success fees of
$55,000.  In addition, the Company has issued to WRI six year common stock
purchase warrants to purchase 536,000 shares at $0.75 per share, of which WRI
has exercised and purchased 100,000 shares. As of March 4, 1996, the financial
advisor agreement between the Company and WRI was terminated by agreement of the
parties. By separate agreement the Company agreed to pay Wood Roberts, LLC. a
fee of $240,000 upon completion of the proposed merger with Alliance Resources
Plc and a fee equal to 0.5% of the amount of any credit facility obtained by the
Company from a bank or other financial institution introduced to the Company by
Wood Roberts in order to refinance its indebtedness to Bank of America.      

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)  Financial Statements (included at Item 8. Financial Statements and
     Supplemental Data):

          Audited Financial Statements of LaTex Resources, Inc.

               Independent Auditor's Report;
               Consolidated Balance Sheets as of July 31, 1996 and 1995;
               Consolidated Statements of Operations for the years ended
                    July 31, 1996, 1995, and 1994;
               Consolidated Statements of Stockholders' Equity for the years
                    ended July 31, 1996, 1995 and 1994;
               Consolidated Statements of Cash Flows for the years ended 
                    July 31, 1996,
                    1995 and 1994; and
               Notes to Consolidated Financial Statements.

(b)  Reports on Form 8-K.

     No reports on Form 8-K were filed by the Company with the Securities and
Exchange Commission during the fourth quarter of the Company's fiscal year ended
July 31, 1996.

(c)  Exhibits.

Exhibit
Number                              Description                             Page
-------                             -----------                             ----
2.1      Agreement and Plan of Merger dated February 10, 1993, 
         among Panda Resources, Inc., LRI Acquisition Corp., and 
         the Registrant. (10)

2.2      Agreement and Plan of Merger dated March 31, 1995, among 
         Germany Oil Company, LRI Acquisition, Inc., and the 
         Registrant.  (16)

2.3      Purchase and Sale Agreement dated March 30, 1995, between 
         ENRON Reserve Acquisition Corp., ENRON Capital & Trade 
         Resources Corp., LaTex/GOC Acquisition, Inc., and 
         the Registrant.  (17)

                                       49
<PAGE>
 
Exhibit
Number                              Description                             Page
------                              -----------                             ----

3.1      Certificate of Incorporation of the Registrant.  (1)

3.2      Bylaws of the Registrant. (2)

4.1      Form of common stock certificate of the Registrant (filed as
         Exhibit 4.1 to the Registrant's Registration Statement on Form
         S-1, Registration No. 33-49452 (the "Registration Statement")).

4.2      Form of common stock Purchase Warren of the Registrant (filed as
         Exhibit 4.2 to the Registration Statement").

4.3      Form of Warrant Agreement (filed as Exhibit 4.3 to the
         Registration Statement).

4.4      Form of Underwriters' Warrant (filed as Exhibit 4.4 to the
         Registration Statement).

4.5      Certificate of Designation, Voting Powers and Rights of Series A
         Convertible Preferred Stock of the Registrant.  (18)

4.6      Certificate of Designation, Voting Powers and Rights of Series B
         Senior Convertible Preferred Stock of the Registrant.  (9)

9.       Voting Trust Agreement.  Not applicable.

10.1     Limited Partnership Agreement by and between LaTex Petroleum
         Corporation, Mid-Continent Energy, Inc., and Panada Exploration,
         Inc., dated October 26, 1990 (filed as Exhibit 10.1 to the
         Registration Statement).

10.2     Letter Agreement by and between Elite Enterprises, Inc.,
         Mid-Continent Energy, Inc., and Panada Exploration dated
         December 12, 1990 (filed as Exhibit 10.2 to the Registration
         Statement).

10.3     Loan Agreement for the principal amount of $100,000 by and
         between LaTex Petroleum Corporation and First Texas Bank dated
         January 23, 1991 (filed as Exhibit 10.3 to the Registration
         Statement).

10.4     Lease Agreement by and between Sable Investment Corporation and
         2800 East Skelly Drive, an Oklahoma partnership, dated March 20,
         1991 (filed as Exhibit 10.4 to the Registration Statement).

10.5     Lease Agreement by and between Elite Enterprises, Inc. and 2800
         East Skelly Drive, an Oklahoma partnership, dated March 20, 1991
         (filed as Exhibit 10.5 to the Registration Statement).

10.6     Asset Sale Agreement for sale of oil and gas properties by and
         between Latex Petroleum Corporation, Vintage Petroleum, Inc. and
         American Exploration Company dated March 11, 1991 (filed as
         Exhibit 10.6 to the Registration Statement).

10.7     General Partnership Agreement by and between Elite Enterprises,
         Inc. and Panada Exploration, Inc., dated June 7, 1991 (filed as
         Exhibit 10.7 to the Registration Statement).

10.8     Purchase Agreement for sale of oil and gas properties by and
         between Latex Petroleum Corporation and Presidio Exploration,
         Inc., dated September 25, 1991 (filed as Exhibit 10.8 to the
         Registration Statement).

10.9     Promissory Note in the principal sum of $50,150 by and between
         ENPRO, Inc., and Elite Enterprises, Inc., dated September 27,
         1991 (filed as Exhibit 10.9 to the Registration Statement).

                                       50
<PAGE>
 
Exhibit
Number                              Description                             Page
------                              -----------                             ----

10.10    Lease Agreement by and between LBR Associates, an Indiana
         limited partnership, and LaTex Petroleum Corporation dated
         October 3, 1991 (filed as Exhibit 10.10 to the Registration
         Statement).

10.11    Purchase Agreement for sale of oil and gas properties by and
         between Latex Petroleum Corporation and Chevron U.S.A., Inc.,
         dated October 23, 1991 (filed as Exhibit 10.11 to the
         Registration Statement).

10.12    Assignment and Substitution Agreement by and between LaTex
         Petroleum Corporation, Chevron U.S.A. and Fig Equity Exchange,
         Inc., dated November 13, 1991 (exhibits omitted) (filed as
         Exhibit 10.12 to the Registration Statement).

10.13    Participation Agreement by and between Geodyne Tunisia, Ltd.,
         Panada Exploration, Inc., Latex Petroleum Corporation and
         Concord International, Corp. dated November 21, 1991 (filed as
         Exhibit 10.13 to the Registration Statement).

10.14    Purchase and Sale Agreement for sale of oil and gas properties
         by and between Latex Petroleum Corporation and Sun Operating
         Limited Partnership dated November 25, 1991 (filed as Exhibit
         10.14 to the Registration Statement).

10.15    Purchase Agreement for sale of oil and gas properties by and
         between Latex Petroleum Corporation and Presidio Exploration,
         Inc., dated November 27, 1991. (3)

10.16    Letter Agreement for the sale of oil and gas properties by and
         between Latex Petroleum Corporation and Sands Reserve Company
         dated December 1, 1991 (filed as Exhibit 10.16 to the
         Registration Statement).

10.17    Letter Agreement for the sale of oil and gas properties by and
         between Latex Petroleum Corporation and Sands Reserve Company
         dated December 1, 1991 (filed as Exhibit 10.17 to the
         Registration Statement).

10.18    Letter Agreement by and between Latex Petroleum Corporation and
         Sands Reserve Company dated December 2, 1991 (filed as Exhibit
         10.18 to the Registration Statement).

10.19    Amendment to General Partnership Agreement by and between Elite
         Enterprises Limited Partnership and Panada Exploration, Inc.,
         dated December 16, 1991 (filed as Exhibit 10.19 to the
         Registration Statement).

10.20    Agreement and Plan of Merger by and between Latex Petroleum
         Corporation, Sable Investment Corporation and Elite Enterprises,
         Inc., dated December 16, 1991. (4)

10.21    Agreement to Exchange Stock and Plan of Reorganization by and
         between Video Science Technology, Inc., Jeffrey T. Wilson, James
         G. Borem and Dee C. Shreve dated December 18, 1991. (5)

10.22    Letter Agreement by and between Trans-Exchange Corporation and
         Jeffrey T. Wilson dated January 22, 1992 (filed as Exhibit 10.22
         to the Registration Statement).

10.23    Second Amended and Restated Credit Agreement by and between
         Latex Petroleum Corporation and Bank of Oklahoma, National
         Association, effective January 31, 1992 (filed as Exhibit 10.23
         to the Registration Statement).

                                       51
<PAGE>
 
Exhibit
Number                              Description                             Page
------                              -----------                             ----

10.24    Stock Option Agreement by and between the Registrant and Cynthia
         A. Helms dated January 31, 1992 (filed as Exhibit 10.24 to the
         Registration Statement).

10.25    Stock Option Agreement by and between the Registrant and Robert
         Hull dated January 31, 1992 (filed as Exhibit 10.25 to the
         Registration Statement).

10.26    Letter from Director General of Energy, Republic of Tunisia
         dated February 11, 1992 (filed as Exhibit 10.26 to the
         Registration Statement).

10.27    Agreement to Terminate the General Partnership Agreement of
         Elite/Panada General Partnership by and between Latex Petroleum
         Corporation, successor by merger to Elite Enterprises, Inc., and
         Panada Exploration, Inc., dated February 13, 1992 (filed as
         Exhibit 10.27 to the Registration Statement).

10.28    Purchase Agreement for sale of oil and gas properties by and
         between the Registrant and Amax Exploration, Inc., dated
         February 14, 1992. (6)

10.29    Agreement by and between Latex Petroleum Corporation and Virgle
         Land-roth and Eclipse Petroleum Corporation dated as of February
         17, 1992 (filed as Exhibit 10.29 to the Registration Statement).

10.30    Promissory Note in the principal sum of $50,200 by and between
         ENPRO, Inc., and LaTex Petroleum Corporation dated February 28,
         1992 (filed as Exhibit 10.30 to the Registration Statement).

10.31    Promissory Note in the principal sum of $600,000 by and between
         Latex Petroleum Corporation and Bank of Oklahoma, National
         Association, dated February 28, 1992 (filed as Exhibit 10.31 to
         the Registration Statement).

10.32    Promissory Note in the principal sum of $3,280,000 by and
         between Latex Petroleum Corporation and Bank of Oklahoma,
         National Association, dated February 28, 1992 (filed as Exhibit
         10.32 to the Registration Statement).

10.33    Restated Guaranty Agreement by and between Jeffrey T. Wilson and
         Annalee C. Wilson and Bank of Oklahoma, National Association,
         dated February 28, 1992 (filed as Exhibit 10.33 to the
         Registration Statement).

10.34    Guaranty Agreement by and between Latex Petroleum Corporation
         and David L. Wright dated March 4, 1992 (filed as Exhibit 10.34
         to the Registration Statement).

10.35    Guaranty Agreement by and between Latex Petroleum Corporation
         and Ed J. Wright dated March 4, 1992 (filed as Exhibit 10.35 to
         the Registration Statement).

10.36    Amendment to Second Amended and Restated Credit Agreement by and
         between Latex Petroleum Corporation and Bank of Oklahoma,
         National Association, dated March 19, 1992, effective as of
         February 28, 1992 (exhibits omitted).  (Filed as Exhibit 10.36
         to the Registration Statement).

10.37    Purchase and Sale Agreement for sale of oil and gas properties
         by and between Latex Petroleum Corporation and American
         Exploration Company dated March 20, 1992 (filed as Exhibit 10.37
         to the Registration Statement).

10.38    Security Agreement by and between Latex Petroleum Corporation
         and Phoenix Metals, Inc., dated March 27, 1992 (filed as Exhibit
         10.38 to the Registration Statement).

                                       52
<PAGE>
 
Exhibit
Number                              Description                             Page
------                              -----------                             ----

10.39    Promissory Note in the principal sum of $10,000 by and between
         LaTex Petroleum Corporation and Phoenix Metals, Inc., dated
         March 27, 1992 (filed as Exhibit 10.39 to the Registration
         Statement).

10.40    Security Agreement by and between the Registrant and Bank of
         Oklahoma, National Association, dated March 30, 1992 (filed as
         Exhibit 10.40 to the Registration Statement).

10.41    Letter of Intent to License Certain Equipment and Proprietary
         Processes by and between the Registrant, Carlton B. Foster, and
         Waste Conversion Corporation dated March 31, 1992 (filed as
         Exhibit 10.41 to the Registration Statement).

10.42    Agreement and Plan of Merger by and between the Registrant and
         Video Science Technology, Inc., dated April 16, 1992.  (7)

10.43    Letter from LaTex Petroleum Corporation dated April 20, 1992, to
         Brumbaugh & Fulton amending lease agreement (filed as Exhibit
         10.43 to the Registration Statement).

10.44    Agreement to Exchange Stock by and between the Registrant and
         ENPRO, Inc., dated April 21, 1992 (filed as Exhibit 10.44 to the
         Registration Statement).

10.45    Purchase and Sale Agreement for sale of oil and gas properties
         by and between LaTex Petroleum Corporation and TOTAL Minatome
         Corporation dated April 27, 1992 (filed as Exhibit 10.45 to the
         Registration Statement).

10.46    Letter Agreement for sale of stock by and between the Registrant
         and Agri-Quest Mining, Inc., dated May 28, 1992 (filed as
         Exhibit 10.46 to the Registration Statement).

10.47    Letter Agreement by and between Latex Petroleum Corporation and
         TOTAL Minatome Corporation dated June 1, 1992 (filed as Exhibit
         10.47 to the Registration Statement).

10.48    Loan Agreement in the principal sum of $200,000 by and between
         LaTex Petroleum Corporation and First Texas Bank dated June 1,
         1992 (filed as Exhibit 10.48 to the Registration Statement).

10.49    Guaranty by and between S. Mort Zimmerman and First Texas Bank
         dated June 1, 1992 (filed as Exhibit 10.49 to the Registration
         Statement).

10.50    Security Agreement by and between Trans-Exchange Corporation and
         First Texas Bank dated June 1, 1992 (filed as Exhibit 10.50 to
         the Registration Statement).

10.51    Owner's Consent to pledge by S. Mort Zimmerman for
         Trans-Exchange Corporation dated June 1, 1992 (filed as Exhibit
         10.51 to the Registration Statement).

10.52    Security Agreement by and between Gary S. Williky and First
         Texas Bank dated June 1, 1992 (filed as Exhibit 10.52 to the
         Registration Statement).

10.53    Owner's Consent to pledge by Gary S. Williky dated June 1, 1992
         (filed as Exhibit 10.53 to the Registration Statement).

10.54    Promissory Note in the principal sum of $85,145.55 by and
         between LaTex Petroleum Corporation and ENPRO, Inc., dated 
         June 1, 1992 (filed as Exhibit 10.54 to the Registration 
         Statement).

                                       53
<PAGE>
 
Exhibit
Number                              Description                             Page
------                              -----------                             ----

10.55    Employment Contract by and between ENPRO, Inc., and Malcolm W.
         Henley dated June 1, 1992 (filed as Exhibit 10.55 to the
         Registration Statement).

10.56    Letter from LaTex Petroleum Corporation dated June 2, 1992, to
         Brumbaugh & Fulton amending lease agreements (filed as Exhibit
         10.56 to the Registration Statement).

10.57    Letter Agreement by and between the LaTex Petroleum Corporation
         and Ed Wright dated July 6, 1992 (filed as Exhibit 10.57 to the
         Registration Statement).

10.58    Loan Agreement in the principal sum of $200,000 by and between
         LaTex Petroleum Corporation and First Texas Bank dated August
         28, 1992 (filed as Exhibit 10.58 to the Registration Statement).

10.59    Promissory Note in the principal sum of $249,351 from I.B.
         Energy, Inc., to LaTex Petroleum Corporation dated June 1, 1992
         (filed as Exhibit 10.59 to the Registration Statement).

10.60    Letter Agreement between LaTex Petroleum Corporation and I.B.
         Energy, Inc., dated September 30, 1992 (filed as Exhibit 10.60
         to the Registration Statement).

10.61    Form of Share Escrow Agreement between Jeffrey T. Wilson, James
         G. Borem, the Registrant, and Bank of Oklahoma, National
         Association (filed as Exhibit 10.61 to the Registration
         Statement).

10.62    Agreement to Exchange Stock by and between the Registrant,
         Wright & Wright, Inc., Ed J. Wright, David L. Wright, and
         Phoenix Metals, Inc., dated September 24, 1992 (filed as Exhibit
         10.62 to the Registrant's Annual Report on Form 10-K for the
         fiscal year ended July 31, 1993 (the "1993 Form 10-K")).

10.63    Stock Purchase Agreement by and between the Herokas Foundation,
         James C. Hadsell and Zaskia Siefert-Hadsell, Howard Finley and
         the Registrant dated January 29, 1993 (filed as Exhibit 10.63 to
         the 1993 Form 10-K).

10.64    Stock Subscription Agreement by and between J.R. Bothe &
         Associates, Inc., and the Registrant dated January 29, 1993
         (filed as Exhibit 10.64 to the 1993 Form 10-K).

10.65    Non-Competition Agreement dated February 10, 1993, between the
         Registrant and Philip J. Wade. (11)

10.66    Non-Competition Agreement dated February 10, 1993, between the
         Registrant and A. Dean Fuller. (12)

10.67    Registration Rights Agreement by and among the Registrant,
         Philip J. Wade, A. Dean Fuller, Robert R. Firth, Mark E.
         Repasky, Charles M. Kelley, Donald B. Pettine, and Steven L.
         Wilson dated February 10, 1993 (filed as Exhibit 10.67 to the
         1993 Form 10-K).

10.68    Stock Subscription Agreement by and between Joseph Shoaf, an
         individual, and the Registrant dated March 25, 1993 (filed as
         Exhibit 10.68 to the 1993 Form 10-K).

10.69    Purchase and Sale Agreement between Mobil Exploration &
         Producing U.S., Inc., and Panada Exploration, Inc., dated as of
         January 15, 1993 (filed as Exhibit 10.69 to the 1993 Form 10-K).

                                       54
<PAGE>
 
Exhibit
Number                              Description                             Page
------                              -----------                             ----

10.70    Purchase and Sale Agreement by and between AMAX Oil & Gas, Inc.,
         and LaTex Petroleum Corporation dated March 16, 1993 (filed as
         Exhibit 10.70 to the 1993 Form 10-K).

10.71    Loan Agreement among LaTex Petroleum Corporation, Panada
         Exploration, Inc., Panda Resources, Inc., and First Interstate
         Bank of Texas, N.A., dated April 15, 1993, together with
         exhibits (filed as Exhibit 10.71 to the 1993 Form 10-K).

10.72    Stock Subscription Agreement by and between the Registrant and
         Howard Finley dated May 10, 1993 (filed as Exhibit 10.72 to the
         1993 Form 10-K).

10.73    Letter Agreement by and between Geodyne Resources, Inc., and the
         Registrant dated November 27, 1992 (filed as Exhibit 10.73 to
         the 1993 Form 10-K).

10.74    Letter Agreement by and between ARCO Tunisia, Inc., and Geodyne
         Tunisia Ltd. dated April 2, 1993 (filed as Exhibit 10.74 to the
         1993 Form 10-K).

10.75    Agreement by and between Geodyne Tunisia Ltd. and Warren
         American Oil Company dated May 4, 1993 (filed as Exhibit 10.75
         to the 1993 Form 10-K).

10.76    Operating Agreement among ARCO Tunisia, Inc., PICT Petroleum
         (Tunisia) Limited, and Geodyne Tunisia Ltd. dated July 9, 1993,
         but effective June 30, 1993 (filed as Exhibit 10.76 to the 1993
         Form 10-K).

10.77    Letter Agreement by and between AMAX Oil and Gas, Inc., and
         LaTex Petroleum Corporation dated May 6, 1993 (filed as Exhibit
         10.77 to the 1993 Form 10-K).

10.78    Promissory Note in the principal sum of $254,288.35 by and
         between LaTex Petroleum Corporation and AMAX Oil and Gas, Inc.,
         dated May 6, 1993 (filed as Exhibit 10.78 to the 1993 Form 10-K).

10.79    Stock Purchase Agreement by and between Panda Resources, Inc.,
         and Nuevo Liquids, Inc., dated as of July 16, 1993. (13)

10.80    Stock Purchase Agreement by and between the Registrant and Torch
         Energy Marketing, Inc., dated July 26, 1993. (14)

10.81    Letter Agreement between the Registrant and Waste Conversion
         Corporation dated August 3, 1993, as agreed to August 11, 1993
         (filed as Exhibit 10.81 to the 1993 Form 10-K).

10.82    Agreement by and between the Registrant and Philip J. Wade dated
         September 22, 1993 (filed as Exhibit 10.82 to the 1993 
         Form 10-K).

10.83    Agreement by and between the Registrant and A. Dean Fuller dated
         September 22, 1993 (filed as Exhibit 10.83 to the 1993 
         Form 10-K).

10.84    Letter of LaTex Petroleum Corporation requesting consent of
         First Interstate Bank of Texas, N.A., dated September 23, 1993,
         together with consent of First Interstate Bank and exhibits
         (filed as Exhibit 10.84 to the 1993 Form 10-K).

10.85    Stock Subscription Agreement by and between the Registrant and
         Salaheddine Caid Essebsi dated October 8, 1993 (filed as Exhibit
         10.85 to the 1993 Form 10-K).

10.86    Promissory Note in the principal sum of $25,000 by and between
         Malcolm W. Henley and LaTex Petroleum Corporation dated 
         December 28, 1992 (filed as Exhibit 10.86 to the 1993 
         Form 10-K).

                                       55
<PAGE>
 
Exhibit
Number                              Description                             Page
------                              -----------                             ----

10.87    Promissory Note in the principal sum of $25,000 by and between
         Dewitt C. Shreve and LaTex Petroleum Corporation dated March 15,
         1993 (filed as Exhibit 10.87 to the 1993 Form 10-K).

10.88    Promissory Note in the principal sum of $29,089 by and between
         Malcolm W. Henley and ENPRO, Inc., dated July 30, 1993, marked
         "Paid" (filed as Exhibit 10.88 to the 1993 Form 10-K).

10.89    Promissory Note in the principal sum of $5,000 by and between
         Malcolm W. Henley and ENPRO, Inc., dated September 28, 1993
         (filed as Exhibit 10.89 to the 1993 Form 10-K).

10.90    Promissory Note in the principal sum of $250,000 by and between
         LaTex Resources International, Inc., and James G. Borem dated
         October 5, 1993 (filed as Exhibit 10.90 to the 1993 Form 10-K).

10.91    Promissory Note in the principal sum of $130,000 by and between
         LaTex Resources International, Inc., and Dewitt C. Shreve dated
         October 5, 1993 (filed as Exhibit 10.91 to the 1993 Form 10-K).

10.92    Promissory Note in the principal sum of $100,000 by and between
         the Registrant and James G. Borem dated October 21, 1993 (filed
         as Exhibit 10.92 to the 1993 Form 10-K).

10.93    Promissory Note in the principal sum of $30,000 by and between
         LaTex Resources International, Inc., and Dewitt C. Shreve dated
         February 2, 1994 (filed as Exhibit 10.73 to the Registrant's
         Annual Report on Form 10-K for the fiscal year ended July 31,
         1994 (the "1994 Form 10-K")).

10.94    Promissory Note in the principal sum of $50,000 by and between
         LaTex Resources International, Inc., and James G. Borem dated
         February 2, 1994 (filed as Exhibit 10.94 to the 1994 Form 10-K).

10.95    Promissory Note in the principal sum of $50,000 by and between
         the Registrant and James G. Borem dated February 15, 1994 (filed
         as Exhibit 10.95 to the 1994 Form 10-K).

10.96    Letter Agreement by and between LaTex Petroleum Corporation and
         Petroleum Discovery Systems, Inc., dated December 2, 1992, as
         agreed to December 3, 1992 (filed as Exhibit 10.96 to the 1994
         Form 10-K).

10.97    Letter Agreement by and between the Registrant and J.R. Bothe &
         Associates, Inc., dated December 23, 1992 (filed as Exhibit 10.
         97 to the 1994 Form 10-K).

10.98    Letter Agreement by and between LaTex Petroleum Corporation and
         Gulf Russia Ltd. dated December 27, 1992 (filed as Exhibit 10.98
         to the 1994 Form 10-K).

10.99    Letter Agreement by and between the Registrant and Premier
         Capital Ltd. dated January 19, 1993, as agreed to January 29,
         1993 (filed as Exhibit 10.99 to the 1994 Form 10-K).

10.100   Agreement and Plan of Merger by and among the Registrant, MOE
         Acquisition, Inc., Waste Conversion Corp., and Joseph W. Conerly
         dated November 17, 1993 (filed as Exhibit 10.100 to the 1994
         Form 10-K).
10.101   1993 Incentive Stock Plan, effective December 8, 1993 (filed as
         Exhibit 10.101 to the 1994 Form 10-K).

                                       56
<PAGE>
 
Exhibit
Number                              Description                             Page
------                              -----------                             ----

10.102   First Amendment to Loan Agreement among LaTex Petroleum
         Corporation, Panada Exploration, Inc., and First Interstate Bank
         of Texas, N.A., dated October 1, 1993 (exhibits omitted) (filed
         as Exhibit 10.102 to the 1994 Form 10-K).

10.103   Second Amendment to Loan Agreement by and between LaTex
         Petroleum Corporation and First Interstate Bank of Texas, N.A.,
         dated January 18, 1994 (exhibits omitted) (filed as 
         Exhibit 10.103 to the 1994 Form 10-K).

10.104   Third Amendment to Loan Agreement by and between LaTex Petroleum
         Corporation and First Interstate Bank of Texas, N.A., dated 
         July 26, 1994, (filed without exhibits) (filed as Exhibit 10.104 
         to the 1994 Form 10-K).

10.105   Purchase and Sale Agreement by and among LaTex Petroleum
         Corporation, LoIn Energy, Inc., and Swift Energy Company dated
         as of January 14, 1994.  (15)

10.106   Offshore Securities Subscription Agreement by and between the
         Registrant and Brentwood Financial Ltd. dated January 28, 1994
         (filed as Exhibit 10.106 to the 1994 Form 10-K).

10.107   Offshore Securities Subscription Agreement by and between the
         Registrant and Investment Development Corporation dated January
         28, 1994 (filed as Exhibit 10.107 to the 1994 Form 10-K).

10.108   Offshore Securities Subscription Agreement by and between the
         Registrant and Gilford Manor Ltd. dated January 28, 1994 (filed
         as Exhibit 10.108 to the 1994 Form 10-K).

10.109   Offshore Securities Subscription Agreement by and between the
         Registrant and Tesoma Overseas, Inc., dated January 28, 1994
         (filed as Exhibit 10.109 to the 1994 Form 10-K).

10.110   Warrant Certificate for purchase of the Registrant's common
         stock issued to Baytree Associates, Inc., dated January 26, 1994
         (filed as Exhibit 10.110 to the 1994 Form 10-K).

10.111   Purchase and Sale Agreement by and between LaTex Petroleum
         Corporation and Confed Oil Incorporated dated August 10, 1994
         (filed as Exhibit 10.111 to the 1994 Form 10-K).

10.112   Credit Agreement dated as of March 31, 1995, among Bank of
         America National Trust and Savings Association, LaTex Petroleum
         Corporation, LaTex/GOC Acquisition, Inc., and LRI Acquisition,
         Inc.  (20)

10.113   Amended and Restated Credit Agreement dated as of October 20,
         1995, among Bank of America National Trust and Savings
         Association, LaTex Petroleum Corporation, LaTex/GOC Acquisition,
         Inc., and Germany Oil Company (formerly known as LRI
         Acquisition, Inc.) (filed as Exhibit 10.113 to the Registrant's
         Annual Report on Form 10-K for the fiscal year ended July 31,
         1995 (the "1995 Form 10-K")).
    
+10.114  Amendment No. 1 to Amended and Restated Credit Agreement dated
         December 29, 1995, among Bank of America National Trust and
         Savings Association, LaTex Petroleum Corporation, LaTex/GOC
         Acquisition, Inc., and Germany Oil Company (formerly known as
         LRI Acquisition, Inc.).      

                                       57
<PAGE>
 
Exhibit
Number                              Description                             Page
------                              -----------                             ----
    
+10.115  Amendment No. 2 to Amended and Restated Credit Agreement dated
         August 16, 1996, among Bank of America National Trust and
         Savings Association, LaTex Petroleum Corporation, LaTex/GOC
         Acquisition, Inc., and Germany Oil Company (formerly known as
         LRI Acquisition, Inc.).

+10.116  Forbearance Agreement dated July 25, 1996, among Bank of America
         National Trust and Savings Association, LaTex Petroleum
         Corporation, LaTex/GOC Acquisition, Inc., Germany Oil Company
         (formerly known as LRI Acquisition, Inc.), Enpro, Inc., and the
         Registrant.

+10.117  Agreement and Plan of Merger dated August 12, 1996, among
         Alliance Resources Plc, Alliance Resources (Delaware), Inc., and
         the Registrant.

+10.118  Purchase Agreement dated September 30, 1996, between the
         Registrant and Imperial Petroleum, Inc.

+10.119  Letter Agreement dated November 27, 1995, among Rauscher Pierce
         & Clark, Inc., Rauscher Pierce & Clark Limited, and the
         Registrant.

+10.120  Letter Agreement dated April 23, 1996, between Wood Roberts,
         LLC, and the Registrant.

+10.121  Letter Agreement dated July 22, 1996, between Wood Roberts, LLC,
         and the Registrant.

+10.122  Letter Agreement dated July 22, 1996, between Wood Roberts, LLC,
         and the Registrant.

+10.123  Settlement Agreement dated as of December 7, 1995, among Torch
         Energy Marketing, Inc., Nuevo Liquids, Inc., Panda Resources,
         Inc., Wilson Tucker & Associates, Steve Wilson, an individual,
         and the Registrant.

+10.124  Settlement Agreement dated as of June 6, 1996, between Northern
         Natural Gas Company and the Registrant.

+10.125  Letter Agreement dated November 8, 1996 between Rauscher, Pierce
         & Clark and the Registrant.
 
+10.126  First Amendment to Forbearance Agreement dated October 15, 1996
         among Bank of America National Trust and Savings Association,
         LaTex Petroleum Corporation, LaTex/GOC Acquisition, Inc.,
         Germany Oil Company (formerly known as LRI Acquisition, Inc.),
         ENPRO, Inc. and the Registrant.
    
+11      Statement re: computation of per share earnings.      
 
 12      Statement re: computation of ratios.  Not applicable.

 13      Annual Report to security holders, Form 10-Q, or quarterly
         report to security holders.  Not applicable.

 16.1    Letter of Registrant dated November 1, 1991 informing Lane,
         Gorman, Trubitt and Company of change in certifying accountants
         to Jackson, Brophy and Company. (8)

 16.2    Letter of Registrant's counsel dated April 10, 1992 informing
         Jackson, Brophy and Company of change in certifying accountants
         to Briscoe and Robinson Co. (9)

 18      Letter re: change in accounting principles.  Not applicable.

                                       58
<PAGE>
 
Exhibit
Number                              Description                             Page
------                              -----------                             ----

21       Subsidiaries of the Registrant (filed as Exhibit 21 to the 1995
         Form 10-K).

22       Published report regarding matters submitted to vote of security
         holders.  Not applicable.
    
+23.1    Consent of Briscoe & Burke       

+23.2    Consent of Lee Keeling and Associates, Inc.     

24       Power of Attorney.  Not applicable.

27       Financial Data Schedule.  Not applicable.

28       Information from reports furnished to state insurance
         authorities.  Not applicable.

99.1     Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
         dated January 1, 1991, regarding oil and gas reserves of the
         Registrant (filed as Exhibit 28.1 to the Registration Statement).

99.2     Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
         dated July 31, 1991, regarding oil and gas reserves of the
         Registrant (filed as Exhibit 28.2 to the Registration Statement).

99.3     Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
         dated January 1, 1992, regarding oil and gas reserves of the
         Registrant (filed as Exhibit 28.3 to the Registration Statement).

99.4     Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
         dated July 31, 1992, regarding oil and gas reserves of the
         Registrant (filed as Exhibit 28.4 to the Registration Statement).

99.5     Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
         dated September 7, 1993; regarding oil and gas reserves of the
         Registrant (filed as Exhibit 99.5 to the 1993 Form 10-K).

99.6     Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
         dated October 21, 1994, regarding oil and gas reserves of the
         Registrant (filed as Exhibit 99.6 to the 1994 Form 10-K).

99.7     Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
         dated November 3, 1995, regarding oil and gas reserves of the
         Registrant as of July 31, 1995 (filed as Exhibit 99.7 to the
         1995 Form 10-K).
    
+99.8    Estimates of reserves by Lee Keeling and Associates, Inc. dated
         October 30, 1996 regarding oil and gas reserves of the
         Registrant as of July 31, 1996.     

------------------------------
* Filed herewith.
    
+Previously filed.     
(1)  Incorporated herein by reference to Exhibit 4.1 to the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     June 16, 1992.

(2)  Incorporated herein by reference to Exhibit 4.2 to the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     June 16, 1992.

(3)  Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     February 18, 1992.

(4)  Incorporated herein by reference to Exhibit 2.2 to the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     January 10, 1992.

                                       59
<PAGE>
 
(5)  Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     January 10, 1992.

(6)  Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on 
     May 1, 1992.

(7)  Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     June 16, 1992.

(8)  Incorporated herein by reference to Exhibit 16.1 to the Registrant's
     Current Report on Form 8-K filed with the Securities and Exchange
     Commission on December 11, 1991, and subsequently amended under cover of
     Form 8 Amendment No. 2 filed with the Commission on May 1, 1992, and Form 8
     Amendment No. 3 filed with the Commission on May 26, 1992.

(9)  Incorporated herein by reference to Exhibit 16.1 to the Registrant's
     Current Report on Form 8-K filed with the Securities and Exchange
     Commission on April 23, 1992, and subsequently amended under cover of Form
     8 filed with the Commission on May 26, 1992.

(10) Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     February 24, 1993, and subsequently amended under cover of Form 8 Amendment
     No. 1 filed with the Commission on April 26, 1993, and Form 8 Amendment No.
     2 filed with the Commission on May 20, 1993.

(11) Incorporated herein by reference to Exhibit 28.1 to the Registrant's
     Current Report on Form 8-K filed with the Securities and Exchange
     Commission on February 24, 1993, and subsequently amended under cover of
     Form 8 Amendment No. 1 filed with the Commission on April 26, 1993, and
     Form 8 Amendment No. 2 filed with the Commission on May 20, 1993.

(12) Incorporated herein by reference to Exhibit 28.2 to the Registrant's
     Current Report on Form 8-K filed with the Securities and Exchange
     Commission on February 24, 1993, and subsequently amended under cover of
     Form 8 Amendment No. 1 filed with the Commission on April 26, 1993, and
     Form 8 Amendment No. 2 filed with the Commission on May 20, 1993.

(13) Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     August 9, 1993, and subsequently amended under cover of Form 8 Amendment
     No. 1 filed with the Commission on October 12, 1993.

(14) Incorporated herein by reference to Exhibit 2.2 to the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     August 9, 1993, and subsequently amended under cover of Form 8 Amendment
     No. 1 filed with the Commission on October 12, 1993.

(15) Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     February 10, 1994.

(16) Incorporated herein by reference to Exhibit 2.1 of the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     April 12, 1995.

(17) Incorporated herein by reference to Exhibit 2.2 of the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     April 12, 1995.

(18) Incorporated herein by reference to Exhibit 4.1 of the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     April 12, 1995.

(19) Incorporated herein by reference to Exhibit 4.2 of the Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     April 12, 1995.

(20) Incorporated herein by reference to Exhibit 28.1 of the Registrant's
     Current Report on Form 8-K filed with the Securities and Exchange
     Commission on April 12, 1995.

                                       60
<PAGE>
 
                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                      LaTex Resources, Inc.
        
Date: March 12, 1997                  /s/ Jeffrey T. Wilson  
                                      -----------------------------------------
                                      Jeffrey T. Wilson, President
                                      and Chief Executive Officer


     Pursuant to the requirements of the Securities 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 dates indicated:

Signature                     Title                           Date      
---------                     -----                           ---- 

        
/s/ Jeffrey T. Wilson         Director, Chairman of the       March 12, 1997
------------------------      Board, President and Chief               
Jeffrey T. Wilson             Executive Officer
                              (Principal Executive Officer)     
                              
                              

/s/ John L. Cox               Director, Vice President and    March 12, 1997
------------------------      Chief Financial Officer                  
John L. Cox       
                              


/s/ Malcolm W. Henley         Director and Vice               March 12, 1997
------------------------      President of Marketing                   
Malcolm W. Henley                                       


                        
--------------------           Director                       March __, 1997
John R. Martinson
          
                                       61
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------



Board of Directors
LaTex Resources, Inc.
Tulsa, Oklahoma


We have audited the accompanying consolidated balance sheets of LaTex Resources,
Inc. and subsidiaries (the "Company") as of July 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended July 31, 1996, 1995, and 1994.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at 
July 31, 1996 and 1995 and the results of the Company's operations and its cash
flows for the years ended July 31, 1996, 1995, and 1994, in conformity with
generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern.  As discussed in Note 1 to
the consolidated financial statements, the Company has incurred a significant
net loss for the year ended July 31, 1996 and has working capital deficiencies
and consolidated tangible net worth deficiencies.  As discussed in Notes 1 and 5
to the consolidated financial statements, the Company was not in compliance with
certain financial covenants of its credit agreement with its primary lender at
July 31, 1996.  These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1.  The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty and do not include any adjustments to the classification of assets
and liabilities that might result should the Company be unable to continue as a
going concern.

                                       F-1
<PAGE>
 
As discussed in Note 16, the consolidated financial statements as of and for the
year ended July 31, 1995 have been restated to correct the accounting for the
acquisition of Germany Oil Company.


                                                        /s/ Briscoe & Burke
                                                          BRISCOE & BURKE
                                                    Certified Public Accountants


November 6, 1996 except as to
information presented in Notes 1
and 5, for which the date is
November 30, 1996
Tulsa, Oklahoma

                                       F-2
<PAGE>
 
                             LaTex RESOURCES, INC.

                          Consolidated Balance Sheets

                             July 31, 1996 and 1995
<TABLE>     
<CAPTION>
 
ASSETS                                              1996          1995       
                                                ------------  -------------  
                                                                (Restated)   
<S>                                             <C>           <C> 
Current assets:       
  Cash                                          $     19,337  $    314,229   
  Accounts receivable - net of                                               
    allowance for doubtful                                                   
    accounts of $0 in 1996                                                   
    and $135,000 in 1995                           3,324,309     2,836,596   
  Accounts and notes receivable -                                            
    other (Note 3)                                   515,820       696,688   
  Inventories                                        175,493        90,976   
  Other current assets                                27,587        84,791   
  Assets held for sale                               164,792       144,990   
                                                ------------  ------------   
                                                                             
      Total current assets                         4,227,338     4,168,270   
                                                ------------  ------------   
                                                                             
Property and equipment, at cost                                              
  Oil and gas properties (using                                              
    successful efforts  method)                   41,264,573    39,638,656   
  Exploration prospects in progress                        -     3,363,000   
  Other depreciable assets                           854,259       954,415   
                                                ------------  ------------   
                                                                             
                                                  42,118,832    43,956,071   
Accumulated depreciation and                                                 
depletion                                         10,173,524     6,247,190   
                                                ------------  ------------   
                                                                             
Net property and equipment                        31,945,308    37,708,881   
                                                ------------  ------------   
                                                                             
Other assets:                                                                
  Notes receivable, net of                                                   
    current portion (Note 3)                         757,500             -   
  Deposits and other assets                          130,734       137,559   
  Accounts and notes receivable -                                            
    related parties (Note 3)                         392,297       590,605   
  Investments in and advances                                                
    to affiliates (Note 3)                                 -     3,647,480   
  Intangible assets, net of                                                  
    amortization                                   1,512,899     1,670,384   
                                                ------------  ------------   
                                                                             
      Total other assets                           2,793,430     6,046,028   
                                                ------------  ------------   
                                                                             
                                                                             
      TOTAL ASSETS                              $ 38,966,076  $ 47,923,179   
                                                ============  ============   
<CAPTION> 

LIABILITIES and STOCKHOLDERS' EQUITY                1996          1995     
                                                ------------  ------------ 
                                                               (Restated)  
<S>                                             <C>           <C> 
Current liabilities:                                                       
  Accounts payable                              $  9,057,707  $  4,544,406 
  Accounts payable - other                           132,000     2,959,284 
  Accrued expenses payable                           607,055       139,113 
  Current portion of long-term debt                                        
    (Note 5)                                      22,235,867     3,644,723 
                                                ------------  ------------ 
                                                                           
    Total current liabilities                     32,032,629    11,287,526 
                                                ------------  ------------ 
                                                                           
                                                                           
Long-term debt, net of current portion                                     
  (Note 5)                                                 -    20,634,809 
Other liabilities (Note 11)                          615,000             -
                                                ------------  ------------  
    Total liabilities                             32,647,629    31,922,335
                                                ------------  ------------ 
                                                                      
Stockholders' equity                                              
  Preferred stock - par value $0.01;                             
    5,000,000 shares authorized:                                  
    Series A convertible preferred stock
    ($10 liquidation preference),                         
    449,828 and 441,018 issued and                                
    outstanding, at July 31, 1996                      4,498         4,410 
    and 1995 respectively (Note 10)    
    Series B convertible preferred stock
    ($10 liquidation preference),                                 
    480,025 and 381,100 issued and                                        
    outstanding, at July 31, 1996 and 1995          
    respectively (Note 10)                             4,800         3,811    
  Common stock - par value $.01,                                          
    50,000,000 authorized; issued and                                     
    outstanding 19,123,995                                                
    18,880,195, at July 31, 1996 and 1995
    respectively                                     191,240       188,802 
  Additional paid-in capital                      18,355,134    17,149,383 
  Treasury stock 1,008,500 and 958,000                                    
    shares, respectively                            (489,365)     (399,106)
  Accumulated deficit                            (11,747,860)     (946,456)
                                                ------------  ------------ 

    Total stockholders' equity                     6,318,447    16,000,844 
                                                ------------  ------------

  Commitments and contingencies (Note 11)                         
                                                                  
    TOTAL LIABILITIES and                                         
      STOCKHOLDERS' EQUITY                      $ 38,966,076  $ 47,923,179   
                                                ============  ============   
</TABLE>      

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

                                      F-3
<PAGE>
 
                             LaTex RESOURCES, INC.

                     Consolidated Statements of Operations

                   Years Ended July 31, 1996, 1995, and 1994
<TABLE>     
<CAPTION>
 
                                                                                        1996         1995         1994           
                                                                                    ------------  -----------  -----------       
                                                                                                   (Restated)
<S>                                                                                 <C>           <C>          <C>               
Revenues:                                                                                                                        
  Oil and gas revenue (Note 15)                                                     $ 11,979,982  $ 8,585,453  $ 8,703,100       
  Crude oil and gas marketing                                                            540,156    1,223,188    2,780,543       
  Lease operations and management fees                                                 1,011,025      634,038      601,723       
                                                                                    ------------  -----------  -----------       
                                                                                                                                 
     Total operating income                                                           13,531,163   10,442,679   12,085,366       
                                                                                    ------------  -----------  -----------       
Operating expenses:                                                                                                              
  Lease operating expense                                                              6,608,089    5,264,858    4,840,638       
  Cost of crude oil and gas marketing                                                    133,455      743,610    2,216,294       
  Dry hole costs and abandonments (Note 6)                                             3,586,037      104,179      112,772       
  General and administrative                                                           2,893,146    2,736,267    2,496,567       
  Depreciation, depletion, and amortization                                            4,705,912    2,710,574    2,213,823       
                                                                                    ------------  -----------  -----------       
                                                                                                                                 
     Total operating expense                                                          17,926,639   11,559,488   11,880,094       
                                                                                    ------------  -----------  -----------       
                                                                                                                                 
Net operating income (loss)                                                           (4,395,476)  (1,116,809)     205,272       
                                                                                                                                 
Other income (expense):                                                                                                          
  Equity in losses and write-offs of investments in affiliates                        (4,184,881)    (298,839)    (439,916)      
  Gain on sale of assets                                                               2,365,807      127,926      392,592       
  Interest expense (Note 15)                                                          (2,556,856)  (1,291,064)    (598,335)      
  Interest income                                                                        351,005      122,540       17,046       
                                                                                    ------------  -----------  -----------       
                                                                                                                                 
Net loss from continuing operations before income taxes                               (8,420,401)  (2,456,246)    (423,341)      
                                                                                                                                 
Income tax expense                                                                             -       35,096            -       
                                                                                    ------------  -----------  -----------       
                                                                                                                                 
Net loss from continuing operations                                                   (8,420,401)  (2,491,342)    (423,341)      
Loss on disposal of subsidiary, net of income taxes (Note 1)                          (1,810,382)           -            -       
                                                                                    ------------  -----------  -----------       
                                                                                                                                 
Net loss                                                                             (10,230,783)  (2,491,342)    (423,341)      
                                                                                                                                 
Preferred stock dividends                                                                570,621      132,800            -       
                                                                                    ------------  -----------  -----------       
                                                                                                                                 
Net loss for common shareholders                                                    $(10,801,404) $(2,624,142) $  (423,341)      
                                                                                    ============  ===========  ===========       
Loss per share from continuing operations                                           $       (.50) $      (.15) $      (.02)      
                                                                                    ============  ===========  ===========       
Loss per share for common shareholders                                              $       (.60) $      (.15) $      (.02)      
                                                                                    ============  ===========  ===========       
Weighted average number of shares outstanding                                         18,011,826   17,661,428   17,434,159       
                                                                                    ============  ===========  ===========       
</TABLE>      

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

                                       F-4
<PAGE>
 
                             LaTex RESOURCES, INC.

                Consolidated Statements of Stockholders' Equity

                   Years Ended July 31, 1996, 1995, and 1994

<TABLE>    
<CAPTION>

                                                                      Common Stock           Additional                       
                                                  Preferred    --------------------------    Paid-in       Retained                 
                                                    Stock         Shares      Par Value      Capital       Earnings                 
                                                 ------------  ------------  ------------  ------------  -------------              
<S>                                              <C>           <C>           <C>           <C>           <C>                        
Balance July 31, 1993                            $          -    16,345,195  $    163,452  $  6,226,613  $  2,101,027               

Issued for acquisition of stock of                                                                                        
  Wexford Technology, Inc. (Note 6)                         -       100,000         1,000       330,350             -               
Issued pursuant to private placement (Note 1)               -     2,000,000        20,000     1,995,843             -               
Issued for consulting services                              -        35,000           350       139,650             -               
Net loss                                                    -             -             -             -      (423,341)              
                                                 ------------  ------------  ------------  ------------  ------------               

Balance July 31, 1994                                       -    18,480,195       184,802     8,692,456     1,677,686               

Issued for debt                                             -       150,000         1,500        96,938             -               
Issued for acquisition of                                                                                                           
  Germany Oil Company (Note 1)                          8,088       250,000         2,500     8,227,322             -               
Purchase of Treasury Stock                                  -             -             -             -             -               
Issued for dividends                                      133             -             -       132,667      (132,800)              
Net loss (Restated)                                         -             -             -             -    (2,491,342)              
                                                 ------------  ------------  ------------  ------------  ------------               

Balance July 31, 1995 (Restated)                        8,221    18,880,195       188,802    17,149,383      (946,456)              
                                                 ------------  ------------  ------------  ------------  ------------               

Issued for services                                         -       100,000         1,000        77,125             -               
Issued for debt of affiliate                                -       143,800         1,438        59,082             -               
Issued for legal settlement (Note 11)                     500             -             -       499,500             -               
Purchase of Treasury Stock                                  -             -             -             -             -               
Issued for dividends                                      577             -             -       570,044      (570,621)              
Net loss                                                    -             -             -             -   (10,230,783)              
                                                 ------------  ------------  ------------  ------------  ------------               

Balance July 31, 1996                            $      9,298  $ 19,123,995  $    191,240  $ 18,355,134  $(11,747,860)              
                                                 ============  ============  ============  ============  ============               

<CAPTION> 

                                                                    Total             
                                                   Treasury     Stockholders'         
                                                     Stock          Equity            
                                                 -------------  --------------        
<S>                                              <C>            <C>                   
Balance July 31, 1993                            $   (275,000)   $  8,216,092         
                                                                                      
Issued for acquisition of stock of                                                    
  Wexford Technology, Inc. (Note 6)                         -         331,350         
Issued pursuant to private placement (Note 1)                                         
Issued for consulting services                              -       2,015,843         
Net loss                                                    -         140,000         
                                                            -        (423,341)        
                                                 ------------    ------------         
                                                                                      
Balance July 31, 1994                                (275,000)     10,279,944         
Issued for debt                                             -          98,438         
Issued for acquisition of                                                             
  Germany Oil Company (Note 1)                              -       8,237,910         
Purchase of Treasury Stock                           (124,106)       (124,106)        
Issued for dividends                                        -               -         
Net loss (Restated)                                         -      (2,491,342)        
                                                 ------------    ------------         
                                                                                      
Balance July 31, 1995 (Restated)                     (399,106)     16,000,844         
                                                 ------------    ------------         
                                                                                      
Issued for services                                         -          78,125         
Issued for debt of affiliate                                -          60,520         
Issued for legal settlement (Note 11)                       -         500,000         
Purchase of Treasury Stock                            (90,259)        (90,259)        
Issued for dividends                                        -               -         
Net loss                                                    -     (10,230,783)        
                                                 ------------    ------------         
                                                                                      
Balance July 31, 1996                            $   (489,365)   $  6,318,447         
                                                 ============    ============         
</TABLE>     

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

                                       F-5
<PAGE>
 
                             LaTex RESOURCES, INC.

                     Consolidated Statements of Cash Flows

                   Years Ended July 31, 1996, 1995, and 1994
<TABLE>     
<CAPTION>
 
 
                                                                                      1996            1995           1994    
                                                                                  ------------    ------------   ------------ 
                                                                                                   (Restated)                
<S>                                                                               <C>             <C>             <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
                                                                                                                             
  Net loss                                                                        $(10,230,783)   $ (2,491,342)  $   (423,341)
  Adjustments to reconcile net loss to net cash                                                               
    provided by operating activities:                                                                         
      Depreciation, amortization, and depletion                                      4,705,912       2,710,574      2,213,823
      Gain on sale of assets                                                        (2,365,807)       (127,926)      (392,592)
      Equity in losses and write-offs of investments in affilates                    4,184,881         298,839        439,916
      Dry hole costs and abandonments                                                3,586,037         104,179        112,772
      Interest income                                                                 (150,467)        (64,231)             -
      Loss on disposal of subsidiary                                                 1,810,382               -              -
  Changes in assets and liabilities, net of effects from acquisition:                                         
      Accounts receivable                                                              (17,248)      1,073,004        787,602
      Accounts receivable - related party                                              198,288         (76,591)        82,208
      Accrued expenses payable                                                         467,942         (34,017)      (363,271)
      Accounts payable                                                                 596,038         390,146     (1,518,425)
      Other assets                                                                      44,227        (170,979)      (127,334)
      Other liabilities                                                                615,000               -              -
      Inventories                                                                      (84,517)        130,967        139,643
                                                                                  ------------    ------------   ------------
                                                                                                                             
Net cash provided by operating activities                                            3,359,885       1,742,623        951,001
                                                                                  ------------    ------------   ------------ 

CASH FLOWS FROM INVESTING ACTIVITIES:

  Proceeds from sale of investments                                                          -               -        136,218
  Proceeds from sale of property and equipment                                       3,984,491         357,445        736,200
  Purchases of property and equipment                                               (3,774,264)     (4,815,409)    (4,257,229)
  Increase in accounts and notes receivable-other                                   (2,300,000)              -              -
  Decrease in accounts and notes receivable-other                                    1,032,500               -              -
  Reorganization cost                                                                        -               -        (66,558)
  Acquisition of Germany Oil Company, net of cash acquired                                   -     (10,592,292)             -
  Advances to unconsolidated affiliates and notes receivable                          (326,394)     (1,575,820)       (99,703)
  Purchases of Treasury stock                                                          (90,259)       (124,106)             -
                                                                                  ------------    ------------   ------------
 
Net cash used for investing activities                                            $ (1,473,926)   $(16,750,182)  $ (3,551,072)
                                                                                  ------------    ------------   ------------
</TABLE>      

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

                                       F-6
<PAGE>
 
                             LaTex RESOURCES, INC.

                     Consolidated Statements of Cash Flows
                                        
                   Years Ended July 31, 1996, 1995, and 1994

<TABLE>     
<CAPTION>
 
 
                                                                                         1996          1995          1994      
                                                                                      -----------   -----------   -----------  
                                                                                                     (Restated)                
<S>                                                                                   <C>          <C>            <C>          
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                          
                                                                                                                               
  Deferred loan costs                                                                 $  (137,186)  $(1,483,143)  $   (15,344) 
  Proceeds from notes payable                                                           6,233,192    26,837,059     2,585,000  
  Payments on notes payable                                                            (8,276,857)  (10,100,527)   (3,060,000) 
  Proceeds from notes payable - shareholder                                                     -             -       490,000  
  Payments on notes payable - shareholder                                                       -      (140,000)     (350,000) 
  Proceeds from the issuance of common stock                                                    -             -     2,015,843  
                                                                                      -----------   -----------   -----------  
                                                                                                                               
Net cash provided by (used for) by financing activities                                (2,180,851)   15,113,389     1,665,499  
                                                                                      -----------   -----------   -----------  
                                                                                                                               
Net increase (decrease) in cash and cash equivalents                                     (294,892)      105,830      (934,572) 
                                                                                                                               
Cash and cash equivalents beginning of year                                               314,229       208,399     1,142,971  
                                                                                      -----------   -----------   -----------  
                                                                                                                               
Cash and cash equivalents end of year                                                 $    19,337   $   314,229   $   208,399  
                                                                                      ===========   ===========   ===========  
Supplemental disclosures of cash flow information:                                                                             
Cash paid during the year for:                                                                                                 
  Interest                                                                            $ 2,403,158   $ 1,307,264   $   598,335  
  Income taxes                                                                              5,275         7,739       200,648  
                                                                                      ===========   ===========   ===========  
                                                                                                                               
Supplemental schedules of noncash investing and financing activities:                                                          
                                                                                                                               
  Note receivable in exchange for property                                            $         -   $         -   $ 1,342,506  
  Common stock issued to acquire stock of Wexford Technology, Inc.                              -             -       331,350  
  Common stock issued for services                                                         78,125        98,438       140,000  
  Common stock issued to acquire Germany Oil Company                                            -       144,530             -  
  Preferred stock issued to acquire Germany Oil Company                                         -     8,093,380             -  
  Preferred stock issued for legal settlement                                             500,000             -             -  
  Common stock issued to pay off debt of unconsolidated affiliate                          60,520             -             -  
</TABLE>      

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

                                      F-7
<PAGE>
 
                  Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994



1.   ORGANIZATION, FINANCIAL CONDITION AND BUSINESS COMBINATIONS

     Organization - LaTex Resources, Inc. (the Company) is an oil and gas
     ------------
     company engaged in the acquisition of and enhancements to producing oil and
     gas properties. The Company's principal oil and gas production operations
     are conducted in Oklahoma, Texas, Louisiana, Mississippi and Alabama. The
     Company, until the fourth quarter of fiscal 1996, was also involved in the
     exploration and development of oil and gas prospects located in Tunisia and
     Kazakhstan, C. I. S.

     Financial Condition - The Company's aggressive policy of oil and gas
     -------------------
     property acquisitions, unsuccessful foreign oil and gas exploration and
     unsuccessful investments in their unconsolidated affiliates, along with
     substantial operating losses for the current and preceding two years, has
     resulted in a working capital deficit and non-compliance with certain loan
     covenants at July 31, 1996. (See Note 5)

     The items of non-compliance have not been waived by the lender for the year
     ended July 31, 1996 and the Company was operating under a "forbearance"
     agreement. The "forbearance period" was from July 26, 1996 to November 29,
     1996. The Company is currently seeking an extension of the forbearance
     agreement until such time as the proposed Alliance Resources Plc merger
     (See Note 17) can be consummated.
    
     The Company's financial statements for the year ended July 31, 1996 have
     been prepared on a going concern basis which contemplates the realization
     of assets and the settlement of liabilities and commitments in the normal
     course of business. The Company incurred a net loss of $10,230,783 for the
     year ended July 31, 1996 and as of July 31, 1996 has an accumulated deficit
     of $11,747,860 and a deficit working capital of $27,805,291.      
    
     Management plans to reduce the working capital deficit include curtailment
     of the development of its undeveleloped properties, strategic sales of
     certain of its oil and gas properties and the aggressive reduction of
     administrative and such other costs that have been determined to be non
     essential. Management plans also include consideration of alliances or
     other partnership arrangements or potential merger opportunities.     
    
     The Company has retained investment banking counsel to advise it on the
     possible sale of equity securities as well as to introduce and assist in
     the evaluation of potential merger and partnering opportunities. Management
     expects that these efforts will result in the introduction of other parties
     with interests and resources which may be compatible with that of the
     Company (See Note 17).       

    
     There can be no assurance that the Company will be able to successfully
     execute the foregoing plans.    

    
                                       F-8
<PAGE>
 
                             LaTex RESOURCES, INC.

                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


1.   ORGANIZATION, FINANCIAL CONDITION AND BUSINESS COMBINATIONS (continued)

     Disposition of Panda Resources, Inc. and Its Wholly Owned Subsidiary
     --------------------------------------------------------------------
     Richfield Natural Gas, Inc., July 1993
     -------------------------------------- 

     In July 1993 the Company sold its wholly owned subsidiary, Panda Resources,
     Inc., and Panda's wholly owned subsidiary, Richfield Natural Gas, Inc.
     Final post closing adjustments were in dispute until December 1995 when a
     settlement agreement by the various parties resulted in a judgment against
     LaTex Resources, Inc. in the amount of $1,810,382. This amount is reflected
     in the 1996 consolidated financial statement as a loss on disposal of
     discontinued subsidiaries.

     Proceeds from Private Placement
     -------------------------------

     On January 26, 1994, pursuant to a private placement, the Company issued
     2,000,000 newly issued shares of common stock.

     Proceeds from this offering were as follows:

<TABLE> 
           <S>                                    <C> 
           Gross proceeds                         $  2,200,061
           Less: Commissions                           165,000
                 Legal fees                             10,000
                 Other expenses                          9,218
                                                  ------------

                          Net proceeds            $  2,015,843
                                                  ============
</TABLE> 

     Acquisition of Germany Oil Company
     ----------------------------------
        
     Effective March 31, 1995 through a series of transactions, the Company
     acquired all of the issued and outstanding stock of Germany Oil Company
     ("Germany") in exchange for 250,000 and 11,800 of the Company's common and
     Series A Convertible Preferred Stock, respectively. The ratio of the number
     of shares received by the stockholders of Germany was determined through
     arms length negotiations between the Chairman of the Board and President of
     the Company and the President of Germany. The Company also issued 370,000
     shares of the Series B Convertible Preferred Stock and $8,900,000 in cash
     to retire a volumetric production payment and acquire all of the related
     contract rights mortgages, vendor liens and security interests. In
     addition, the Company paid $1,742,294 in cash, issued 427,038 shares of its
     Series A Convertible Preferred Stock and $87,998 in notes payable to
     acquire and retire certain indebtedness of Germany. The transaction was
     accounted for as a purchase. The fair value of assets and liabilities of
     Germany at date of acquisition follows:       

<TABLE> 
           <S>                                             <C> 
           Current assets                                  $     773,088
           Current liabilities                                (4,309,479)
           Oil and gas properties                             22,504,593
                                                           -------------

                                                           $  18,968,202
                                                           =============
</TABLE> 
    
     The consolidated statements of operations include the results of operations
     of Germany Oil Company since the acquisition date. The following is a
     statement of pro forma revenues, loss before income taxes, net loss, and
     net loss per share for the years ended July 31, 1995 and 1994 based upon
     the assumption that Germany Oil Company was acquired at the beginning of
     each of the periods:


<TABLE> 
<CAPTION> 

                                                  
                                                    1995         1994
                                                    ----         ----
                                                      (in thousands
                                                  except per share data

            <S>                                   <C>           <C> 
            Revenues                              $  16,358     $  19,957
                                                  =========     =========
            Loss before income tax                $  (3,307)    $  (1,795)
                                                  =========     =========      
            Net loss                              $  (3,382)    $  (1,795)
                                                  =========     =========      
            Net loss per share                    $     .19)    $    (.10)
                                                  =========     =========
</TABLE> 
                                                                             

                                       F-9
<PAGE>
 
                             LaTex RESOURCES, INC.

                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


2.   SUMMARY OF ACCOUNTING POLICIES

     A summary of the significant accounting policies consistently applied in
     the preparation of the accompanying consolidated financial statements is as
     follows.

     Principles of Consolidation
     ---------------------------

     The consolidated financial statements include the accounts of the Company
     and its wholly owned subsidiaries. All significant intercompany accounts
     have been eliminated in consolidation.

     Inventories
     -----------

     Included in inventories at July 31, 1996 and 1995 are crude oil inventories
     at market value of $175,493 and $90,976, respectively.

     Accounting Estimates
     --------------------

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

     Financial Instruments
     ---------------------

     The fair value of current assets and current liabilities are assumed to be
     equal to their reported carrying amounts due to the short maturities of
     these financial instruments. Due to the Company's financial position, it is
     not practicable to estimate the fair value of the Company's long-term debt;
     additional information pertinent to its value is provided in Note 5 to the
     consolidated financial statements.

     The Company is required, by agreement with its primary lender (Bank of
     America), to participate in various hedging programs, executed by Bank of
     America, to protect against fluctuations in oil gas prices and interest
     rates. See Note 15 for discussion of the fair market value of these
     contracts.

     The carrying value of all other financial instruments approximates fair
     value.



                                       F-10
<PAGE>
 
                             LaTex RESOURCES, INC.

                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


2.   SUMMARY OF ACCOUNTING POLICIES (continued)

     Concentrations of Credit Risk
     -----------------------------

     Financial instruments that potentially subject the Company to significant
     concentrations of credit risk consist principally of cash investments and
     accounts receivable. The Company places its cash investments with high
     quality financial institutions and limits the amount of exposure to any one
     institution. In the case of default of any one financial institution, no
     cash investments exist that are not covered by the FDIC. The Company's
     revenues are derived principally from uncollateralized sales to customers
     in the oil and gas industry. The concentration of credit risk in a single
     industry affects the Company's overall exposure to credit risk because
     customers may be similarly affected by changes in economic and other
     conditions. The Company has not experienced significant credit losses on
     such receivables. The Company performs periodic evaluations of its
     customers' financial condition and generally does not require collateral.

     Revenue Recognition
     -------------------
    
     The Company recognizes oil and gas revenue in the month of production.
     Crude oil and gas marketing revenue is recognized in the month of delivery.
         

     Property, Equipment, Depreciation and Depletion
     -----------------------------------------------
        
     The Company uses the successful efforts method to account for costs in the
     acquisition and exploration of oil and natural gas reserves. Costs to
     acquire mineral interests in proved reserves, and to drill and equip
     development wells are capitalized. Geological and geophysical costs and
     costs to drill exploratory wells which do not find proved reserves are
     expensed. Undeveloped oil and gas properties which are individually
     significant are periodically assessed for impairment of value and a loss is
     recognized at the time of impairment by providing an impairment allowance.
     The remaining unproved oil and gas properties are aggregated and an overall
     impairment allowance is provided based on Company experience. Depletion and
     depreciation are calculated on the units of production method based upon
     current estimates of oil and gas reserves provided by management. Upon
     sale, retirement or abandonment of proved and unproved properties the cost
     and related accumulated depreciation and depletion are eliminated from the
     respective accounts and the resulting gain or loss is included in current
     earnings.     

     Non oil and gas property and equipment are stated at cost. Depreciation is
     computed by the straight-line method over the estimated useful lives of non
     oil and gas assets. Expenditures which significantly increase values or
     extend useful lives are capitalized. Expenditures for maintenance and
     repairs are charged to expenses as incurred. Upon sale or retirement, the
     cost and related accumulated depreciation are eliminated from the
     respective accounts and the resulting gain or loss is included in current
     earnings.    

     Intangible Assets
     -----------------

     Intangible assets consist primarily of debt issuance costs. Debt issuance
     costs are amortized over the term of the related debt.


                                       F-11
<PAGE>
 
                             LaTex RESOURCES, INC.

                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


2.   SUMMARY OF ACCOUNTING POLICIES (continued)

     Income Taxes
     ------------

     Deferred tax assets and liabilities are recognized for the estimated future
     tax consequences attributable to differences between the financial
     statement carrying amounts of existing assets and liabilities and their
     respective tax bases. Deferred tax assets and liabilities are measured
     using enacted tax rates in effect for the year 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.

     Gas Balancing
     -------------

     The Company follows the sales method of accounting for gas imbalances. A
     liability is recorded only if the Company's excess takes of natural gas
     volumes exceed its estimated remaining recoverable reserves. No receivables
     are recorded for those wells when the Company has taken less than its
     ownership share of gas production.

     Earnings Per Common Share
     -------------------------

     Earnings per common share is computed based upon the weighted average
     common shares outstanding. Outstanding stock options and warrants of LaTex
     Resources are excluded from the weighted average shares outstanding since
     their effect on the earnings per share calculation is immaterial or
     antidilutive.

     FASB Accounting Standards
     -------------------------

     The Financial Accounting Standards Board has issued Statement of Financial
     Accounting Standards No. 119 (SFAS 119), Disclosure about Derivative
     Financial Instruments and Fair Value of Financial Instruments. This
     Statement generally requires disclosures about amounts, nature, and terms
     of derivative financial instruments. The Company has adopted SFAS 119 for
     the fiscal year ended July 31, 1996.

     The Financial Accounting Standards Board has issued Statement of Financial
     Accounting Standards No. 121 (SFAS 121), Accounting for the Impairment of
     Long-Lived Assets and for Long-Lived Assets to be Disposed of. This
     Statement requires that long-lived assets and certain identifiable
     intangibles to be held and used by an entity be reviewed for impairment
     whenever events or changes in circumstances indicate that the carrying
     amount of an asset may not be recoverable. If the sum of the undiscounted
     future cash flows is less than the carrying amount of the asset, an
     impairment loss is recognized. This Statement is effective for financial
     statements for fiscal years beginning after December 15, 1995. The Company
     intends to adopt SFAS 121 for the fiscal year ending July 31, 1997. The
     Company expects the adoption of SFAS 121 will not have a material effect on
     its financial statements.



                                       F-12
<PAGE>
 
                             LaTex RESOURCES, INC.

                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


2.   SUMMARY OF ACCOUNTING POLICIES (continued)

     The Financial Accounting Standards Board has issued Statement of Financial
     Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
     Compensation. This Statement establishes financial accounting and reporting
     standards for stock-based employee compensation plans. This Statement
     defines a fair value based method of accounting for an employee stock
     option or similar equity instrument plan. Under the fair value based
     method, compensation cost is measured at the grant date based on the value
     of the award and is recognized over the service period, which is usually
     the vesting period. This Statement is effective for transactions entered
     into in fiscal years that begin after December 15, 1995. The Company
     intends to adopt the disclosure requirements of SFAS 123 for the fiscal
     year ending July 31, 1997.

     Reclassification
     ----------------

     Certain amounts in the 1995 and 1994 consolidated financial statements have
     been reclassified to conform with the 1996 presentation.


3.   ACCOUNTS AND NOTES RECEIVABLE AND INVESTMENTS IN AND ADVANCES TO AFFILIATES

<TABLE>
<CAPTION>
 
     Accounts and Notes Receivable - Related Parties
     -----------------------------------------------
                                                       1996         1995
                                                    -----------  ----------
                                                                 (Restated)
     <S>                                            <C>          <C>
     Accounts receivable - officers,          
       directors and employees                      $  100,481   $  354,261
     Note receivable - officers,              
       directors, shareholders                
       and employees (See Note 12)                     291,816      236,344
                                                    ----------   ----------
                                              
       Total                                        $  392,297   $  590,605
                                                    ==========   ==========
                                              
     Accounts and Notes Receivable - Other    
     -------------------------------------    
                                                        1996        1995
                                                    ----------   ----------
                                                                 (Restated)
                                              
     Oakland Petroleum Operating Company, Inc.      $1,267,500   $        -
                                              
     Panda Resources, Inc.                                   -      584,172
                                              
     Other accounts receivable from           
       third parties                                     5,820      112,516
                                                     ----------  ----------
                                              
       Less current maturities                         515,820      696,688
                                                     ----------  ----------
                                              
       Total                                        $  757,500   $        -
                                                     ==========  ==========
</TABLE>
                                       F-13
<PAGE>
 
                                 LaTex RESOURCES, INC.

                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


3.   ACCOUNTS AND NOTES RECEIVABLE AND INVESTMENTS IN AND ADVANCES TO AFFILIATES
             
     The non-interest bearing note receivable from Oakland Petroleum Operating,
     Inc. (Oakland) represents the balance due to the Company for a loan entered
     into with the Company's primary lender for a joint purchase of property.
     The original amount was approximately $2,300,000 of which $1,267,500 was
     still outstanding at July 31, 1996. The note receivable is offset by a
     comparable amount included in the Company's long-term debt. Oakland pays
     all principal and interest payments directly to the Company's primary
     lender. The Company has a collateral interest in the Oakland properties.
     Interest income has been imputed at the Company's borrowing rate with its
     primary lender.     

     Investments in and Advances to Affiliates
     -----------------------------------------

     Investments in and advances to affiliates includes the following:

<TABLE>
<CAPTION>
 
                                                   1996         1995
                                                -----------  -----------
                                                             (Restated)
                              
     <S>                                        <C>          <C> 
     Wexford Technology, Inc.                   $         -  $ 1,987,898
     Imperial Petroleum, Inc.                             -    1,640,609
     Others                                               -       18,973
                                                -----------  -----------
       Total                                    $         -  $ 3,647,480
                                                ===========  ===========
</TABLE>

     See Note 6 - WRITE OFFS.


 4.  INCOME TAXES

     The provisions for income taxes are as follows:

<TABLE> 
<CAPTION> 

                                                  1996      1995      1994
                                                --------  --------  --------
                                                         (Restated)
                                                        (in thousands)
     <S>                                        <C>       <C>       <C> 
     Current:                               
        State                                   $      -  $     35  $      -
                                                ========  ========  ========
</TABLE> 


                                       F-14
<PAGE>
 
                             LATEX RESOURCES, INC.

                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


 4.  INCOME TAXES (continued)

     Income taxes differed from the amounts computed by applying the U.S.
     federal tax rate of 34% as a result of the following: 

<TABLE> 
<CAPTION>
 
                                               1996       1995       1994
                                            ---------  ---------- ---------
                                                       (Restated)
                                                     (in thousands)
    <S>                                    <C>        <C>        <C>
     Computed "expected" tax benefit        $(3,478)   $   (835)  $   (144)
     State income taxes net of federal
       benefit                                   (1)         12          -
     Increase in valuation allowance
       for deferred tax assets                3,844         294         93
     Equity in net losses of affiliates           -         102         72
     Excess statutory depletion                (152)        237          3
     Other                                     (213)        225        (24)
                                             -------   --------   ---------
       Actual income tax expense            $     -    $     35   $      -
                                            ========   ========   ========
</TABLE> 

     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets and liabilities are presented below:

<TABLE>
<CAPTION>
                                            1996       1995       1994
                                          --------  ----------  --------
                                                    (Restated)
                                                  (in thousands)
<S>                                       <C>       <C>         <C>
     Deferred tax liabilities:
       Property, plant and equipment      $ 1,574      $1,390   $   401
                                          -------      ------   -------
 
          Total deferred tax liabilities    1,574       1,390       401
                                          -------      ------   -------
 
     Deferred tax assets:
       Net operating losses                 4,300       1,521       350
       Investment write-downs                 917           -         -
       Percentage depletion carryforward      392         240       133
       Accrued expenses not deductible
         until paid                           180           -         -
       Other                                    5           5         -
                                          -------      ------   -------
 
         Total deferred tax assets          5,794       1,766       483
                                          -------      ------   -------
 
         Valuation allowance               (4,220)       (376)      (82)
                                          -------      ------   -------
 
         Net deferred tax assets            1,574       1,390       401
                                          -------      ------   -------
          Net deferred tax
            asset (liability)             $     -      $    -   $     -
                                          =======      =======  =======
</TABLE> 

                                      F-15
<PAGE>
 
                             LaTex RESOURCES, INC.

                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


 4.  INCOME TAXES (continued)

     A valuation allowance is required when it is more likely than not that all
     or a portion of the deferred tax assets will not be realized. The ultimate
     realization of the deferred tax assets is dependent upon future
     profitability. Accordingly, a valuation allowance has been established to
     reduce the deferred tax assets to a level which, more likely than not, will
     be realized.

     The Company has net operating loss (NOL) carryforward to offset its
     earnings of approximately $11,390,000. Additionally, approximately
     $10,490,000 of NOL carryforwards are available to offset the future
     separate company earnings of Germany. If not previously utilized, the net
     operating losses will expire in varying amounts from 2006 to 2011.
 
 
 5.  NOTES PAYABLE

<TABLE> 
<CAPTION> 
                                                   1996          1995
                                               ------------  ------------
                                                              (Restated)
 
     <S>                                       <C>           <C> 
     Bank note (A)                             $ 22,206,707  $ 24,210,000
 
     Other                                           29,160        69,532
                                               ------------  ------------
 
     Total                                       22,235,867    24,279,532
 
     Less - current maturities                   22,235,867     3,644,723
                                               ------------  ------------
 
     Long-term debt, net                       $          -  $ 20,634,809
                                               ============  ============
</TABLE>

     (A)  Note payable dated April 18, 1995, for $23,000,000 with option of an
          additional $2,000,000 for six months for approved workovers,
          recompletions and development drilling of specified reserves.
          Principal due monthly of $365,000 including Oakland Petroleum Co.
          payment of $42,500 monthly. Interest due monthly at the higher of a
          Base Rate (the higher of the Bank of America Reference Rate and the
          Federal Fund Rate plus .5% per annum) plus 1% per annum and the London
          Interbank Offered Rate plus 2%. The current rate at July 31, 1996 was
          7.469%. Matures March 30, 2000. Amounts outstanding are secured by
          mortgages which cover certain of the Company's oil and gas properties.

     The Company's existing debt agreements contain certain covenants, including
     maintaining a positive current ratio of 1.0, excluding current portion of
     long-term debt, maintaining a minimum tangible net worth of $10,000,000,
     maintaining a minimum cash or cash equivalents balance of $500,000,
     maintaining working capital of at least $500,000, the negative covenant
     related to permitted investments, and the covenant relating to default on
     other indebtedness in excess of $50,000.



                                       F-16
<PAGE>
 
                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994

 5.  NOTES PAYABLE (continued)

     The Company was not in compliance with the current ratio, cash equivalent,
     minimum tangible net worth, and working capital covenants at July 31, 1995.
     The items of non-compliance were subsequently waived by the lender for the
     year ended July 31, 1995 and through January 31, 1996. The Company was not
     in compliance with the above noted covenants at July 31, 1996 and was
     operating under a "forbearance" agreement discussed in Note 1 to the
     financial statements. The "forbearance" agreement expired on November 29,
     1996 and the bank has not extended the agreement. The debt agreement
     contains various acceleration provisions of the due date in the event of
     non-compliance. Accordingly, the entire unpaid balance has been classified
     as a current liability at July 31, 1996.

 6.  WRITE OFFS

     Investments
     -----------

     During the fourth quarter of fiscal 1996, the Company wrote off its
     investments in Wexford Technology, Incorporated (Wexford) and Imperial
     Petroleum, Inc. (Imperial). The Company has not been able to obtain
     reliable current financial information, accordingly, summarized financial
     information is not presented.
         
     The Company acquired 32.3% of Wexford through a series of transactions
     culminating in May 1994. During the fourth quarter of fiscal 1996, the
     Company recorded a charge to earnings of $2,372,452 to write off its
     investment. Wexford is presently in default on its bridge debt and has
     received numerous written demands for payment and correspondence
     threatening litigation. Included in the write off was $1,462,765 in notes
     receivable.
      
     The Company owns 12% of the common stock of Imperial and certain officers,
     directors and employees of the Company own 28.8%. During the fourth quarter
     of fiscal 1996, the Company recorded a charge to earnings of $1,812,429 to
     write off this investment. Imperial is currently in default on its bank
     debt. Included in the write off of the Company's investment was $722,603 in
     notes receivable.     
         
     Wexford and Imperial are both development stage enterprises that are
     seeking capital infusion to complete their facilities and achieve
     commercial operations. Neither Wexford nor Imperial have been able to raise
     additional debt or equity capital. Further, there can be no assurance,
     assuming Wexford and Imperial successfully raise additional funds or enter
     into a business alliance, that they will achieve commercial operations or
     positive cash flow. The Company is not a guarantor of any debt incurred by
     Wexford or Imperial.     
     
     Exploration Prospects
     ---------------------

     During the fourth quarter of fiscal year 1996, the Company recorded a
     charge to earnings of $955,496 to write off costs incurred in connection
     with a venture in Kazakhstan C.I.S. Subsequent to July 31, 1996, the
     Company received written notice that the Company may be in breach of its
     agreements related to the venture. The Company believes it is in
     substantial compliance with the operating agreement governing the project.
     In addition, the Company has been notified that Uzenmunaigaz, the regional
     production association for the Middle Caspian Basin, may seek to further
     alter the terms of a contract in a manner which the Company believes would
     be detrimental to the project's viability.


                                        F-17
<PAGE>
 
                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


 6.  WRITE OFFS (continued)

     During fiscal 1993 the Company, through a subsidiary, acquired an interest
     in a permit granted by the Republic of Tunisia for the exploration and
     production of oil and gas from a 4,936 square kilometer (1,220,000 acres)
     area located in north-central Tunisia. Initial seismic acquisition
     activities began in 1994. The first exploratory well was spudded in fiscal
     1995. This well was drilled and temporarily abandoned prior to reaching the
     objective depth.
    
     In fiscal 1996, the operator of the project, in response to a request from
     the Tunisian government, permanently plugged the well and restored the well
     site. The Company has insufficient capital to continue the project and, due
     to the limited time remaining on the exploration permit, decided to abandon
     the project and write off its investment of $2,491,299.       


  7. SAVINGS AND PROFIT SHARING PLAN

     The Company maintains an employee savings and profit sharing plan (the
     Plan) which covers substantially all of its employees. The Plan is
     comprised of a 401(k) savings portion and a noncontributory defined
     contribution portion. Employees are qualified to participate after
     approximately one year of service. Participation in the 401(k) plan is
     voluntary, and the Company matches contributions up to four percent of the
     employees' salary at a rate of 33 1/3 percent of the employee's
     contribution. Employees are allowed to contribute the maximum amount
     allowed by the Internal Revenue Code each year, subject to
     nondiscrimination rules.

     The noncontributory defined contribution portion of the Plan allows the
     Company to share annual profits with employees. Annual payments to the Plan
     are elective. Management elected to make no contributions to the Plan for
     1996, 1995, or 1994. The Company is under no obligation to make
     contributions to the Plan in the future.


  8. STOCK OPTIONS

     Stock Option Plan
     -----------------

     The 1993 Incentive Stock Plan (the "Plan") was effective December 8, 1993.

     The Plan is administered by a Compensation Committee consisting of not less
     than three members of the Board of Directors and a special committee
     appointed by the Board of Directors, as necessary.

     The aggregate number of shares of the Company's Common Stock issuable under
     the Plan is 2,000,000. Such stock will be made available from the Company's
     authorized but unissued Common Stock or from Stock held as Treasury Stock.


                                      F-18
<PAGE>
 
                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


  8. STOCK OPTIONS (continued)

     Options and Appreciation Rights
     -------------------------------

     This Plan authorizes the Committee to grant to key employees options to
     purchase the Company's Common Stock which may be in the form of incentive
     stock options ("ISO's"), or in the form of non-statutory options ("Non-
     Statutory Options"). The term of each option shall be for such period as
     the Committee determines but no longer than ten years from the date of
     grant or five years to an individual who is a 10% stockholder of the
     Company.
    
     The aggregate fair market value exercisable by an individual optionee
     during any calendar year under all stock option plans of the Company may
     not exceed $100,000. The exercise price per share for the Common Stock
     covered by any Options shall be determined by the Committee and, provided
     that in the case of an ISO and the per share exercise price shall be not
     less than the fair market value (or in the case of an ISO granted to an
     individual who at the time is a 10% Stockholder, 110% of the fair market
     value) of one share of Common Stock. Options to purchase 1,690,000 shares
     of common stock were granted under the Plan. 

     Stock option activity during the periods indicated is as follows:

                                                                  Weighted
                                                                   Average
                                         Number of                Exercise
                                          Shares                   Price
                                       ------------             ------------
                                                 
       Balance at July 31, 1993                  -              $      -
         Granted                           619,000                 0.875
                                           -------               
       Balance at July 31, 1994            619,000                 0.875
         Forfeited                         (12,000)                0.875 
                                       ------------            
       Balance at July 31, 1995            607,000                 0.875 
         Granted                         1,448,000                 0.448
         Forfeited                        (365,000)                0.764
                                       ------------            
       Balance at July 31, 1996          1,690,000              $  0.533
                                       ============           
     At July 31, 1996, the range of exercise prices and weighted-average
     remaining contractual life of outstanding options was $0.4375 to $0.875 and
     3.77 years, respectively. (See Note 17)    

     Restricted Stock Awards
     -----------------------

     The Plan authorizes the Committee to grant restricted Common Stock
     ("Restricted Stock") to key employees. The Committee may designate a
     restriction period with respect to such shares of not less than one year
     but not more than five years (the "Restriction Period") during which an
     employee will not be permitted to sell, transfer, pledge or assign shares
     of Restricted Stock awarded to him, provided that within such limitations,
     the Committee may provide for the lapse of such restrictions installments
     where deemed appropriate. Upon termination of employment during the
     Restriction Period for any reason, all shares of Restricted Stock with
     respect to which restrictions have not yet expired will be forfeited by the
     employee and returned to the Company.

     The Plan also authorizes the Committee to award tax gross-up rights which
     entitle the grantee to cash payments from the Company at such time as
     income and/or excise tax liabilities arise with respect to grants under the
     Plan. Tax gross-up rights may be granted coincident with or after the date
     of grant of the related Option or Restricted Stock awards. No restricted
     shares have been issued at July 31, 1996. (See Note 17)

 9.  WARRANTS

     As of July 31, 1996, the Company, in connection with the sale of previously
     unissued common stock, has 2,700,000 Warrants outstanding. The sale
     included 2,587,500 of the Warrants which were detachable from the
     Stock/Warrant Units upon issuance and trade separately from the Units and
     Common Stock. Unless exercised, the 2,587,500 Warrants automatically expire
     on November 19, 1997. Pursuant to the terms of the Warrants, the Board of
     Directors of the Company may reduce the exercise price, $4.25, of the
     Warrants and may also extend the period during which the Warrants may be
     exercised. The Warrants may be redeemed by the Company at a price of $0.01
     per Warrant with 30 days prior written notice by the Company.


                                       F-19
<PAGE>
 
                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994

 9.  WARRANTS (continued)

     In addition, the Company issued Warrants to the underwriter of the offering
     for $.01 per Warrant (underwriter Warrants) to purchase up to 112,500 units
     for $4.44 per unit. These Warrants are exercisable, in part or whole, until
     November 16, 1997. The Company also has agreed to register, at its sole
     cost and expense, all or a portion of the underwriter Warrants and/or the
     shares issuable, upon the exercise of the Warrants during the period
     November 10, 1993 to November 16, 1997.
        
     The Company issued 1,080,000 Warrants in connection with private placements
     of its common stock. The Company during 1995 issued 536,000 Warrants to a
     related party (See Note 12), of which, 100,000 were exercised.      

     At July 31, 1996, the range of exercise prices of outstanding Warrants was
     $.75 to $4.44. These Warrants expire at various dates from January 1997 to
     October 2001. It is the intent that the Warrants will be converted into
     Alliance Resources Plc (See Note 17) Warrants at a ratio of .8806 for 1. 
     

     Stock Warrant activity during the periods indicated is as follows:
<TABLE>      
<CAPTION>
                          Date      Number of   Convertible   Stock Price
                          Issued     Warrants     Shares      at Issuance
                          ------    ---------   -----------   -----------
      <S>                 <C>       <C>         <C>           <C>
                     
     Balance at      
       July 31, 1993                3,700,000     2,518,750
       Issued              1/26/94     80,000        80,000        $1.813
                                    ---------   -----------
                     
     Balance at      
       July 31, 1994                3,780,000     2,598,750
       Issued              6/12/95    500,000       500,000         0.469
       Exercised                     (100,000)     (100,000)
                                    ---------   -----------
                     
     Balance at      
       July 31, 1995                4,180,000     2,998,750
       Issued             11/30/95     36,000        36,000         0.469
                                    ---------   -----------
                     
     Balance at      
       July 31, 1996                4,216,000     3,034,750
                                    =========     =========     
</TABLE>       

10.  PREFERRED STOCK

     The Board of Directors has the authority to issue 5,000,000 shares of
     Preferred Stock, in one or more series, and to fix the rights, preferences,
     qualifications, privileges, limitations or restrictions of each such series
     without any further vote or action by the shareholders, including the
     dividend rights, dividend rate, conversion rights, voting rights, terms of
     redemption (including sinking fund provisions), redemption price or prices,
     liquidation preferences and the number of shares constituting any series or
     the designations of such series.
        
     The Company's Series A Convertible Preferred Stock (i) pays annual
     dividends at the rate of $0.20 per share payable quarterly in cash (or, if
     payment of cash dividends is prohibited by the Company's senior lender,
     payable in additional shares of Series A Convertible Preferred Stock), (ii)
     has no voting rights except as otherwise required under Delaware law, (iii)
     has a liquidation preference over shares of the Company's common stock of
     $10.00 per share plus accrued and unpaid dividends, (iv) is redeemable at
     the option of the Company at a redemption price of $10.00 per share plus
     accrued and unpaid dividends, (v) is convertible by the holder into shares
     of the Company's common stock at a conversion price of $3.33 per share, and
     (vi) has piggyback registration rights in the event the Company seeks to
     make a registered public offering of its common stock. The aggregate
     liquidation preference of the Series A Convertible Preferred Stock at July
     31, 1996 and 1995 is $4,498,280 and $4,410,180, respectively.      
    
     The Series B Convertible Preferred Stock (i) pays annual dividends at the
     rate of $1.20 per share payable quarterly in cash (or, if payment of cash
     dividends is prohibited by the Company's senior lender, payable in
     additional shares of Series B Convertible Preferred Stock), (ii) has no
     voting rights except as otherwise required under Delaware law, (iii) has a
     liquidation preference over shares of the Company's Series A Convertible
     Preferred Stock and the Company's common stock of $10.00 per share plus
     accrued and unpaid dividends, (iv) is redeemable at the option of the
     Company at a redemption price of $10.00 per share plus accrued and unpaid
     dividends, and (v) is convertible by the holder into shares of the
     Company's common stock at an initial conversion price of $1.50 per share,
     subject to adjustment from time to time to prevent dilution. By separate
     agreement, the Company has granted certain demand registration rights and
     piggyback registration rights in the event the Company seeks to make a
     registered public offering of its common stock. The aggregate liquidation
     preference of the Series B Convertible Preferred Stock at July 31, 1996 and
     1995 is $4,800,250 and $3,811,000.     
    
     Preferred stock, by class, is as follows: 
    
<TABLE>   
<CAPTION>

                                                  Class A  Class B
                                                  -------  -------
<S>                                               <C>      <C>
     Balance July 31, 1993                              -        -
                                                  -------  -------
     Balance July 31, 1994                              -        -
                                                  -------  -------
     Issued for acquisition of Germany
       Oil Company                                438,838  370,000

     Issued for dividends                           2,180   11,100
                                                  -------  -------
     Balance July 31, 1995                        441,018  381,100

     Issued for legal settlement                        -   50,000

     Issued for dividends                           8,810   48,925
                                                  -------  -------
     Balance July 31, 1996                        449,828  480,025
                                                  =======  ======= 
</TABLE>          
     
                                     F-20
<PAGE>
 
                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


11.  LITIGATION, COMMITMENTS AND CONTINGENCIES
    
     Litigation
     ----------

     On October 7, 1994, Northern Natural Gas Company ("Northern") filed a
     lawsuit against the Company alleging that the Company had breached two firm
     transportation Service Agreements dated December 1, 1990, between Northern
     and Panda Resources, Inc. ("Panda"), a former wholly-owned subsidiary of
     the Company. On June 6, 1996, Northern and the Company entered into a
     Settlement Agreement pursuant to which (a) the Company issued to Northern
     50,000 shares of the Company's Series B Senior Convertible Preferred Stock
     which are convertible (subject to adjustment) into 333,333 shares of the
     Company's common stock, and (b) the Company agreed to pay Northern $465,000
     in installments of $50,000 by June 21, 1996, $150,000 by May 1, 1997,
     $125,000 by May 1, 1998, and $140,000 May 1, 1999. An agreed judgment was
     entered in the case, but Northern has agreed not to seek to enforce the
     judgment unless the Company defaults in its payment obligations. Once the
     required payments have been made, Northern has agreed to execute a release
     of the judgment. These amounts have been reflected in the Company's
     consolidated financial statements at July 31, 1996.       
    
     On November 17, 1994, Associated Storage Corporation ("Associated") filed a
     lawsuit against the Company alleging that the Company had breached a July
     21, 1993 agreement between Associated and the Company. Associated seeks
     actual damages in the amount of $150,000, prejudgment interest, court
     costs, and attorneys' fees. Associated has filed a motion for summary
     adjuration which was denied by the court. The Company has asked Associated
     to submit to mediation.       
    
     In connection with the sale of Panda, the Company became a party in
     disputes between Torch Energy Marketing, Inc. ("Torch"), NUEVO Liquids, Inc
     ("NUEVO") and Panda. On December 7, 1995, the Company entered into a
     Settlement Agreement (the "Settlement") to settle all matters related to
     the sale of its former wholly owned subsidiaries, Panda and Richfield
     Natural Gas, Inc. Pursuant to the Settlement, the Company agreed to pay to
     the plaintiffs (a) $20,000 on December 7, 1995, and an additional $30,000
     over the course of 90 days following execution of the Settlement, and (b)
     to pay $50,000 within one year of the Settlement, an additional $50,000
     within two years of the Settlement, and an additional $150,000 within three
     years of the Settlement, together with interest in the amount of $36,000.
     The Company has accrued the costs associated with this settlement agreement
     and has made all required payments under the agreement. To secure its
     obligation under the Settlement, the Company stipulated in an agreed
     judgment that it would be liable in the amount of $1,000,000 (less any
     amounts paid pursuant to the Settlement) upon the Company's default of its
     obligations under the Settlement. In addition, the Company agreed to assume
     and indemnify the plaintiffs against all obligations and amounts owed under
     a May 2, 1989 agreement between Panda and Northern relating to the
     transportation of natural gas through a facility located in Dewey County,
     Oklahoma. Pursuant to this indemnification, the Company has been asked to
     indemnify one of the plaintiffs with respect to claims brought against it
     by Northern in a lawsuit filed March 7, 1996, as more fully discussed
     below.       
    
     On March 7, 1996, Northern Natural Gas Company ("Northern") filed a lawsuit
     against Torch Energy Advisors, Inc. ("Torch") for alleged breach of a May
     2, 1989 agreement (the "Dewey County Contract") between Torch, Panda and
     Northern relating to the transportation of natural gas through a facility
     located in Dewey County, Oklahoma. The Company has assumed the defense of
     this matter pursuant to the indemnification agreement entered into as part
     of the December 7, 1995, settlement among Torch, Panda and the Company
     discussed above. Northern contends that Panda failed to transport the
     required volumes and that the deficiency resulted in a requirement that
     Panda pay a total of $973,000, representing the percentage of the costs of
     constructing the facilities calculated under the contract formula. Northern
     sued Torch under a written guaranty agreement and has claimed, in addition,
     that Torch denuded the assets of Panda and is therefore liable for the
     debts of Panda. The Company maintains that, if litigation is unsuccessfull
     to the Company, Northern would only be entitled to the amount of the
     contractually required volumes.       
    
     Germany Oil Company is a named defendant in three wrongful death actions
     involving an accident which occurred at a heater-treatment unit on the
     Blowhorn Creek Millerella Oil Unit lease in Lamar County, Alabama. Each
     plaintiff seeks damages in the amount of $25 million. The three matters are
     in the initial stages of discovery and have been referred to Germany Oil
     Company's insurance carrier. Germany has an approximate 10% ownership
     interest of the property. Management believes that liability insurance
     coverage is adequate to cover any potential loss.
     
     


                                       F-21
<PAGE>
 
                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


11.  LITIGATION, COMMITMENTS AND CONTINGENCIES (continued)
                
     Contingencies 
     -------------
     In addition to the foregoing litigation, the Company is named defendant in
     lawsuits, is a party in governmental proceedings, and is subject to claims
     of third parties from time to time arising in the ordinary course of
     business. While the outcome of lawsuits or other proceedings and claims
     against the Company cannot be predicted with certainty, management does not
     expect these additional matters to have a material adverse effect on the
     financial position of the Company.        
     
     Commitments
     -----------

     The Company leases office space and certain property and equipment under
     various lease agreements. As of July 31, 1996, future lease commitments
     were approximately as follows:

                      Year Ending
                        July 31,
                      -----------

                         1997                          $    168,000
                         1998                               142,000
                                                       ------------

                           Total minimum payments      $    310,000
                                                       ============




                                       F-22
<PAGE>
 
                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994

12.  RELATED PARTY TRANSACTIONS
         
    
     In regard to the modification and cancellation of the non-compete
     agreements with the two previous majority shareholders of Panda, Mr.
     Jeffrey T. Wilson, an officer and director of the Company, assumed the
     notes receivable due the Company by two former shareholders in the amount
     of $339,650 plus accrued interest. The Board has voted to forgive $380,624,
     representing the total notes and accrued interest, due from Mr. Wilson. The
     Board has also voted to forgive $58,138 due to the Company from Mr. Malcolm
     W. Henley, an officer and director of the Company.

     Since January 1993 the Company has leased a condominium located in Tulsa,
     Oklahoma owned by Jeffrey T. Wilson. Under terms of the oral lease
     agreement, the Company pays Mr. Wilson approximately $1,100 per month. At
     July 31, 1996, the Company owed Mr. Wilson approximately $8,000 for unpaid
     rent.

     The Company has entered into an agreement to sell its interests in its
     wholly owned subsidiaries, LaTex Resources International, Inc. and Phoenix
     Metals, Inc., and its investments in Wexford Technology, Inc. and Imperial
     Petroleum, Inc. (See Note 17). Mr. Wilson is a major stockholder of
     Imperial Petroleum, Inc.
    
     The Company was previously a party to an agreement with Wood Roberts, Inc.
     ("WRI"), a company controlled by John R. Martinson, a Director of the
     Company, pursuant to which WRI acted as a financial advisor to the Company.
     Under the agreement, the Company paid WRI a monthly fee of $4,000 and
     agreed to pay WRI a success fee in connection with any merger or
     acquisition involving a party introduced to the Company by WRI, and any
     financing facility arranged by WRI. Through July 31, 1996, the Company paid
     WRI cash retainer and success fees of $55,000. In addition, the Company has
     issued to WRI six year common stock purchase warrants to purchase 536,000
     shares at $.75 per share, of which WRI has exercised and purchased 100,000
     shares (See Note 8). As of March 4, 1996, the financial advisor agreement
     between the Company and WRI was terminated by agreement of the parties. By
     separate agreement, the Company agreed to pay Wood Roberts, LLC. a fee of
     $240,000 upon completion of the proposed merger with Alliance Resources Plc
     and a fee equal to 0.5% of the amount of any credit facility obtained by
     the Company from a bank or other financial institution introduced to the
     Company by Wood Roberts in order to refinance its indebtedness to Bank of
     America.      

     The Company from time to time, has made loans to certain officers,
     directors and stockholders. The loans are evidenced by demand notes payable
     due on or before December 31, 1996, bearing interest at various rates.
     

13.  BUSINESS SEGMENTS

     The Company's operations involve oil and gas exploration, production and
     lease operations. Additionally, crude oil and crude oil by-products are
     marketed through a wholly owned subsidiary. Intersegment sales are made at
     prices prevailing in the industry at the time of sale. The following table
     sets forth information with respect to the industry segments of the
     Company.
<TABLE>
<CAPTION>
                               1996       1995       1994
                            ----------  ---------  ---------
                                        (Restated)
                                      (in thousands)
<S>                         <C>         <C>        <C>
Revenues:
 Oil and gas
  production and
  lease operations            $12,991    $ 9,220    $ 9,305
 Marketing                        540      1,223      2,780
                              -------    -------    -------
 Total revenues                13,531     10,443     12,085
     
 Intersegment                   3,658      3,023      2,884
                              -------    -------    -------
                              $17,189    $13,466    $14,969
                              =======    =======    ======= 

 
Operating income (loss):
 Oil and gas
  production and
  lease operations            $(4,477)   $(1,440)   $  (187)
 Marketing                         78        231        317
 Other                              4         93         75
                              -------    -------    -------
 
Net operating income
   (loss)                     $(4,395)   $(1,116)   $   205
                              =======    =======    =======
</TABLE>

The Company sold 16% of its consolidated oil and gas revenue to Enron Reserve
Acquisition Corporation for the year ended July 31, 1996.  The Company had no
other purchasers in excess of 10% of consolidated oil and gas revenue.


                                       F-23
<PAGE>
 
                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


13.  BUSINESS SEGMENTS (continued)
<TABLE>
<CAPTION>
 
                                      1996       1995       1994
                                    --------   --------   --------
                                              (Restated)
                                            (In thousands)
<S>                           <C>       <C>         <C>
     Identifiable assets:
       Oil and gas production       $31,830    $37,371    $12,677
       Marketing                        429        606        620
       Other                          6,707      9,946      7,962
                                    -------    -------    -------

                                    $38,966    $47,923    $21,259
                                    =======    =======    =======


     Depreciation, depletion,
       and amortization:
       Oil and gas production       $ 4,210    $ 2,403    $ 1,984
       Marketing                          3          5          7
       Other                            493        303        223
                                    -------    -------    -------

                                    $ 4,706    $ 2,711    $ 2,214
                                    =======    =======    =======


     Capital expenditures:
        Oil and gas production      $ 3,759    $ 4,759    $ 4,205
        Marketing                         -          -          -
        Other                            15         56         52
                                    -------    -------    -------

                                    $ 3,774    $ 4,815    $ 4,257
                                    =======    =======    =======
</TABLE> 



14.  SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES

     Results of Operations from Oil and Gas Producing Activities
     -----------------------------------------------------------

     The following sets forth certain information with respect to the Company's
     results of operations from oil and gas producing activities for the years
     ended July 31, 1996, 1995 and 1994. All of the Company's oil and gas
     producing activities are located within the United States. The dry hole
     costs include $2,491,299 related to the Tunisia project.


                                       F-24
<PAGE>
 
                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994

14.  SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
     (continued)
<TABLE>
<CAPTION>
 
                                        1996            1995         1994
                                      ----------      ----------   ----------
                                                     (Restated)
                                                   (In thousands)
     <S>                              <C>             <C>          <C>
                                 
     Revenues                         $   11,980      $    8,585   $    8,703
     Production costs                      5,737           4,693        4,312
     Gross production taxes                  871             572          529
     Dry hole costs and          
        abandonments                       3,586             104          113
     Depreciation and depletion            4,210           2,403        1,984 
                                      ----------      ----------   ----------
                                 
     Results of operations       
       before income taxes                (2,424)            813        1,765
     Income tax expense                        -               -          671
                                      ----------      ----------   ----------
     Results of operations       
       (excluding corporate      
       overhead and interest     
       costs)                         $   (2,424)     $      813   $    1,094
                                      ==========      ==========   ==========
</TABLE> 
 
<TABLE> 
 
     Capitalized Costs and Costs Incurred Relating to Oil and Gas Producing Activities
     ---------------------------------------------------------------------------------
<CAPTION> 
 
                                        1996            1995         1994
                                      ----------      ----------   ----------
                                                     (Restated)
                                                   (In thousands)
     <S>                              <C>             <C>          <C>
 
     Proven properties                $   40,316      $   38,690   $   16,208
     Unproven properties                     949           4,312            -
                                      ----------      ----------   ----------
                               
       Total capitalized costs            41,265          43,002       16,208
                               
     Less - accumulated        
       depreciation and        
       depletion                           9,435           5,631        3,555
                                      ----------      ----------   ----------
                               
       Net capitalized costs          $   31,830      $   37,371   $   12,653
                                      ==========      ==========   ==========
                               
     Costs incurred during     
       the year:               
         Property acquisition  
           costs                      $        -      $        -   $        -
         Exploration costs                 2,631             104          113
         Development costs                 1,480             763          787
         Purchase of minerals  
           in place                        2,800          22,613        1,740
</TABLE>
                                       F-25

<PAGE>
 
                             LaTex RESOURCES, INC.

                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


14.  SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
     (continued)

     Estimated Quantities of Proved Oil and Gas Reserves (Unaudited)
     ---------------------------------------------------------------

     The estimates of proved oil and gas reserves utilized in the preparation of
     the consolidated financial statements were prepared by independent
     petroleum engineers at July 31, 1996. Such estimates are in accordance with
     guidelines established by the Securities and Exchange Commission and the
     Financial Accounting Standards Board, which require that reserve reports be
     prepared under existing economic and operating conditions with no provision
     for price and cost escalations except by contractual arrangements. The
     Company's reserves are located onshore in the United States.

     The Company emphasizes that reserve estimates are inherently imprecise.
     Accordingly, the estimates are expected to change as more current
     information becomes available. In addition, a portion of the Company's
     proved reserves are undeveloped, which increases the imprecision inherent
     in estimating reserves which may ultimately be produced.

     Proved reserves are estimated quantities of crude oil, natural gas, and
     natural gas liquids which geological and engineering data demonstrate with
     reasonable certainty to be recoverable in future years from known
     reservoirs under existing economic and operating conditions. Proved
     developed reserves are those which are expected to be recovered through
     existing wells with existing equipment and operating methods. The following
     is an analysis of the Company's proved oil and gas reserves.
<TABLE>
<CAPTION>
 
                                                     Oil (MBbls)  Gas (MMcf)
                                                     -----------  ----------
     <S>                                             <C>          <C> 
                                                 
     Proved reserves at July 31, 1993                    2,455.3       9,391
     Revisions of previous estimates                       423.3         346
     Extensions, discoveries and other additions         2,075.9       2,215
     Production                                           (335.3)     (2,107)
     Purchases of reserves-in-place                        112.4       1,924
     Sales of reserves-in-place                           (211.7)       (836)
                                                     -----------  ----------
     Proved reserves at July 31, 1994                    4,519.9      10,933
                                                
     Revisions of previous estimates                    (1,686.8)     (1,793)
     Extensions, discoveries and other additions               -           -
     Production                                           (359.0)     (2,612)
     Purchases of reserves-in-place                      1,562.3      21,202
     Sales of reserves-in-place                                -           -
                                                     -----------  ----------
     Proved reserves at July 31, 1995 (Restated)         4,036.4      27,730
</TABLE>



                                       F-26
<PAGE>
 
                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


14.  SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
     (continued)
<TABLE>
<CAPTION>
 
                                                 Oil (MBbls)      Gas (MMcf)
                                                 -----------      ----------
     <S>                                         <C>              <C> 
 
     Revisions of previous estimates                 2,566.8           3,888
     Extensions, discoveries and other additions           -               -
     Production                                       (405.0)         (3,481)
     Purchases of reserves-in-place                    248.7           2,190
     Sales of reserves-in-place                        (93.9)         (2,155)
                                                 -----------      ----------
 
     Proved reserves at July 31, 1996                6,353.0          28,172
                                                 ===========      ==========
 
<CAPTION> 
                                                 Oil (MBbls)      Gas (MMcf)
                                                 -----------      ----------
     <S>                                         <C>              <C> 
     Proved developed reserves at
       July 31, 1993                                 2,217.0           8,858
       July 31, 1994                                 3,843.0           9,495
       July 31, 1995 (Restated)                      4,036.4          27,730
       July 31, 1996                                 4,952.9          27,757
</TABLE>

     Subsequent to year end, the Company has entered into letters of intent with
     two parties to sell oil and gas properties for approximately $1,500,000.
     The Company chose not to include those properties in its reserve appraisal
     at July 31, 1996.

     Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
     ---------------------------------------------------------------------------
     Oil and Gas Reserves (Unaudited)
     --------------------------------

     The "Standardized Measure of Discounted Future Net Cash Flows Relating to
     Proved Oil and Gas Reserves" (Standardized Measure) is a disclosure
     requirement under SFAS No. 69. The Standardized Measure does not purport to
     present the fair market value of proved oil and gas reserves. This would
     require consideration of expected future economic and operating conditions,
     which are not taken into account in calculating the Standardized Measure.

     Under the Standardized Measure, future cash inflows were estimated by
     applying year-end prices, adjusted for fixed and determinable escalations,
     to the estimated future production of year-end proved reserves. Future cash
     inflows were reduced by the estimated future production and development
     costs based on year-end costs to determine pre-tax cash inflows. Future
     income taxes were computed by applying the statutory tax rate to the excess
     of pre-tax cash inflows over the Company's tax basis in the associated
     proved oil and gas properties. Tax credits and permanent differences were
     also considered in the future income tax calculation. Future net cash
     inflows after income taxes were discounted using a 10% annual discount rate
     to arrive at the Standardized Measure.



                                       F-27

<PAGE>
 
                             LaTex RESOURCES, INC.
 
                   Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


14.  SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
     (continued)
<TABLE>
<CAPTION>
 
                                                          Year Ended
                                          -------------------------------------------
                                          July 31, 1994  July 31, 1995  July 31, 1996
                                          -------------  -------------  -------------
                                                          (Restated)
                                                        (In thousands)
     <S>                                   <C>            <C>            <C>
                                   
     Future cash inflows                   $     87,093   $     99,585   $    181,566
     Future costs - future production 
       and development costs                     49,490         43,794         79,763
                                          -------------  -------------  -------------
                                   
     Future net cash inflows before
       income tax expense                        37,603         55,791        101,803
                                   
     Future income tax expense                    9,151          8,705         25,486
                                          -------------  -------------  -------------
                                   
     Future net cash flows                       28,452         47,086         76,317
                                   
     10% annual discount for estimated
       timing of cash flows                      14,175         22,130         35,869
                                          -------------  -------------  -------------
                                   
     Standardarized Measure of     
     discounted future net cash    
     flows                                $      14,277  $      24,956  $      40,448
                                          =============  =============  =============
</TABLE>

     Changes in Standardized Measure of Discounted Future Net Cash Flows
     -------------------------------------------------------------------
     Relating to Proved Oil and Gas Reserves (Unaudited)
     ---------------------------------------------------

     The following is an analysis of the changes in the Standardized Measure
     during the periods presented:
<TABLE>
<CAPTION>

                                                          Year Ended
                                          -------------------------------------------
                                          July 31, 1994  July 31, 1995  July 31, 1996
                                          -------------  -------------  -------------
                                                          (Restated)
                                                        (In thousands)
     <S>                                   <C>            <C>            <C>
Standardized Measure -            
  beginning of year                       $       9,993  $      14,277   $     24,956
Increases (Decreases)             
  Sales, net of production costs                 (3,799)        (3,800)        (5,779)
  Net change in sales prices,     
    net of production costs                       2,600         (9,108)        20,712
  Discoveries and extensions,     
    net of related future         
    development production costs                  4,762              -              -
  Changes in estimated future     
    development costs                            (1,521)         1,182         (2,889)
  Revisions of previous           
    quantity estimates                              225         (4,260)        11,260
  Accretion of discount                               -          1,428          2,181
  Net change in income taxes                          -            236         (8,944)
  Purchases of reserves-in-place                  2,459         20,700          2,093
  Sales of reserves-in-place                       (974)             -         (3,142)
  Timing of production of         
    reserves and other                              532          4,301              -
                                          -------------  -------------  -------------
Standardized Measure - end of year        $      14,277  $      24,956  $      40,448
                                          =============  =============  =============

</TABLE>

                                       F-28

<PAGE>
 
                   Note to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994

15.  HEDGING

     Oil and Gas - The Company is required, by agreement with its primary lender
     -----------
     (Bank of America), to participate in a price protection program, executed
     by Bank of America, for a majority of its gas sales for a 36 month period
     until March 31, 1998. Oil is hedged at a floor of $16.50/Bbl and a ceiling
     of $19.82/Bbl based on projected monthly production. Gas is hedged at
     $1.806/MMBtu based on projected monthly production. The production rates
     were calculated by Bank of America from reserve report data and are fixed
     by Bank of America. The monthly hedge amount is calculated by Bank of
     America from published market rates. The current hedging agreement does not
     allow for full benefit from prices above the ceiling amount.

     The hedging gains or losses for the years ended July 31, 1996 and 1995 are
     as follows:

<TABLE>     
<CAPTION> 
                                                           1996          1995  
                                                       ----------     ----------
                                                                      (Restated)
         <S>                                           <C>            <C> 
         Oil                                           $  (200,447)   $  (4,397)
         Gas                                            (1,275,206)     161,698
                                                       -----------    ---------
           Net hedging income (loss)                   $(1,475,653)   $ 157,301
                                                       ===========    ========= 

</TABLE>      

     The hedging gains and losses are included in oil and gas revenue for the
     years indicated.

     Interest - The Company is required, by agreement with its primary lender
     --------
     (Bank of America), to participate in an interest rate protection program,
     executed by Bank of America, until February 29, 2000, for its debt to its
     primary lender. Interest is hedged to achieve a fixed rate of 7.49% based
     on a fixed amortization schedule determined at loan origination. The
     hedging losses for the year ended July 31, 1996 and 1995 are $504,303 and
     $80,151, respectively, and are included in interest expense for the years
     indicated.

     The off-balance sheet liability for all future hedging commitments based on
     current year end prices and rates are as follows:

<TABLE>     
         <S>                                           <C> 
         Oil                                           $   669,405   
         Gas                                             1,688,202   
         Interest                                        1,291,680
                                                       -----------   
           Net liability                               $ 3,649,287   
                                                       ===========   
</TABLE>      


                                     F-29
<PAGE>
 
                  Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994

16.  RESTATEMENT OF PRIOR YEAR

     Effective March 31, 1995 the Company acquired Germany Oil Company
     ("Germany") in a purchase transaction. The net assets acquired consisted
     primarily of oil and gas properties. In connection with the transaction the
     Company failed to allocate the purchase price to all assets acquired as
     required by generally accepted accounting principles. During fiscal 1996
     the Company, based on the reports of independent petroleum engineers,
     reallocated the adjusted purchase price as of the date of acquisition.
     Accordingly, the previously reported 1995 amounts have been restated as
     follows:
<TABLE> 
<CAPTION> 

                                                                     Statement of
                                        Asset        Liability       Operations
                                      Increase       (Increase)      (Increase)
                                     (Decrease)       Decrease        Decrease
                                     -----------     -----------     -----------
       <S>                           <C>             <C>             <C> 
       Oil and gas properties        $ 7,859,993     $         -     $         -
       Goodwill                       (9,929,199)              -               -
       Deferred loan cost                871,270               -               -
       Accounts payable                                1,197,936
       Goodwill amortization            (220,650)              -         220,650
       Depletion expense                 (49,283)              -          49,283
       Amortization expense               58,085               -         (58,085)
                                     -----------     -----------     -----------
            Total                    $(1,409,784)    $ 1,197,936     $   211,848
                                     ===========     ===========     ===========

    
     As a result of the restatement, loss per share decreased by $0.01 per
     share.     
</TABLE> 

17.  SUBSEQUENT EVENTS

     Proposed Merger With Alliance Resources Plc - As a result of the demands
     -------------------------------------------
     placed upon the Company by its primary lender, the Company's continuing
     working capital deficit, its deteriorating financial condition and the
     inability of the Company to raise additional debt or equity capital,
     management of the Company, in the forth quarter of fiscal 1996, determined
     to seek an equity infusion through a strategic merger with a suitable
     merger candidate. Management's primary objective in seeking a merger
     partner was to solve the working capital deficit of the Company through an
     equity infusion while minimizing dilution to the shareholders. Although the
     Company considered several potential transactions. Alliance Resources Plc
     ("Alliance") emerged as the candidate most likely to meet the objectives of
     the Company. The Company has entered into an Agreement and Plan of Merger
     ("Alliance Merger Agreement") dated August 12, 1996 with Alliance Resources
     Plc, a company organized under the laws of the United Kingdom ("Alliance"),
     Pursuant to which the Company will merge ("Alliance Merger") with a wholly-
     owned U.S. subsidiary of Alliance.

                                     F-30
<PAGE>
 
                  Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994

17.  SUBSEQUENT EVENTS (continued)

     Under the terms of the Alliance Merger Agreement and after giving effect to
     a 1 for 40 reverse stock split to be completed by Alliance, the holders of
     the Company's common stock will receive 0.8806 ordinary shares of Alliance
     for each share of such common stock, the holders of the Company's Series A
     Convertible Preferred Stock will receive 2.6445 ordinary shares of Alliance
     for each share of such Series A Convertible Preferred Stock, and the
     holders of the Company's Series B Senior Convertible Preferred Stock will
     receive 5.8709 ordinary shares of Alliance for each share of such Series B
     Senior Convertible Preferred Stock. Following the Alliance Merger, the
     holders of the Company's common and preferred stock will own, as a group,
     approximately 72% of the issued and outstanding ordinary shares of Alliance
     and the Company will become a wholly-owned subsidiary of Alliance. Holders
     of outstanding warrants to purchase shares of the Company's common stock
     will receive from Alliance replacement warrants to purchase shares of
     Alliance ordinary shares on substantially the same terms.

     It is anticipated that the merger will provide the Company with sufficient
     capital resources to eliminate its existing working capital deficit,
     refinance the Company's senior debt and eliminate the hedging agreements,
     and provide development capital for exploration of the Company's oil and
     gas properties. In addition, the Company believes that the combination of
     the two companies provides strategic benefits to the Company important to
     its long-term growth and the enhancement of shareholder value. Although
     Alliance's domestic oil and gas operations are significantly smaller than
     the Company's, the Company believes that the merger will enhance the
     overall financial strength of the Company and provide a stable platform
     from which future growth can be achieved. The strategic objectives of the
     combined Company will be to continue a policy of structured and stable
     growth in the domestic U.S. oil and gas sector while implementing projects
     in Western Europe, the Middle East and the former Soviet Union.
    
     Under the terms of the Alliance Merger Agreement, the Company is required
     to dispose of its interests in its unconsolidated affiliates, Wexford
     Technology, Inc. ("Wexford") and Imperial Petroleum, Inc. ("Imperial"), and
     its interests in its wholly-owned subsidiaries LaTex Resources
     International, Inc. ("LaTex Resources International") and Phoenix Metals,
     Inc. ("Phoenix Metals"). Effective July 31, 1996, the Company has written
     off its $1,812,429 investment in Imperial, its $2,372,452 investment in
     Wexford, and its $955,496 Investment in LaTex Resources International. The
     Company has entered into a Purchase Agreement with Imperial pursuant to
     which the Company will sell its interests in Wexford, Imperial, LaTex
     Resources International and Phoenix Metals to Imperial for 100,000 shares
     of the Company's common stock. Imperial is controlled by the Company's
     President and largest stockholder, Jeffrey T. Wilson. Prior to the
     completion of the sale, the Company intends to obtain an opinion from an
     independent investment banking firm as to the fairness of the transaction
     to the Company's stockholders.      

                                     F-31

<PAGE>
 
                  Notes to Consolidated Financial Statements

                         July 31, 1996, 1995, and 1994


17.   SUBSEQUENT EVENTS(continued)
        
      Effective October 21, 1996, each holder of options granted under the
      Company's 1993 Incentive Stock Plan agreed to terminate all options held
      and receive grants of restricted common stock of the Company. 1,690,000
      options were canceled and 1,690,000 shares of restricted common stock were
      granted. The terms of the Restricted Shares provide that a holder may not
      sell, transfer, or otherwise dispose of any Restricted Shares as long as
      the Company has the right to a forfeiture of the Shares. The terms of the
      Restricted Stock provide that in the event that a holder's employment with
      the Company shall terminate for any reason other than death or total
      disability prior to the earlier of (a) February 1, 1997, or (b) a change
      in control occurs with respect to the Company, the holder shall
      immediately forfeit any right to the shares of Restricted Stock for which
      the restrictions have not otherwise lapsed. Compensation expense of
      $528,125, reflecting the market value of the Company's publicly traded
      stock on the date of grant, was recorded on that date. It is the intent
      that the holders of the restricted stock will convert their shares to
      Alliance ordinary shares on substantially the same basis as the Company's
      common stockholders. The Company did not grant any tax gross-up rights in
      connection with the issuance of the restricted stock.     

      Disposition of Oil and Gas Properties - Subsequent to year end, the
      -------------------------------------
      Company has entered into letters of intent with two parties to sell oil
      and gas properties for approximately $1,500,000. The Company chose not to
      include those properties in its reserve appraisal at July 31, 1996. The
      Company does not expect the transaction to have a significant impact on
      the results of operations.      










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