<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC  20549
                                  FORM 10-QSB

     [ X  ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934
                       FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
                                       or
     [    ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934
                For the period from____________________to_______________________

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

                       Commission file number 0-19753

                           GOTHIC ENERGY CORPORATION
             (Exact name of registrant as specified in its charter)

                 OKLAHOMA                             22-2663839
     (State or other jurisdiction of                (IRS Employer
     incorporation or organization)               Identification No.)

             5727 SOUTH LEWIS, #700, TULSA, OKLAHOMA    74105-7148
                   (Address of principal executive offices)
                                 918-749-5666
             (Registrant's telephone number, including area code)

     Check whether the issuer (1) has filed all reports required to be filed by
   Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
   preceding 12 months (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 
                                            ---     ---
 
                    APPLICABLE ONLY TO CORPORATE ISSUERS:
                                        
     As of August 12, 1998, 16,261,640 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.

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

                       Commission file number 333-52225

                         GOTHIC PRODUCTION CORPORATION
             (Exact name of registrant as specified in its charter)

             OKLAHOMA                             73-1539475
     (State or other jurisdiction of            (IRS Employer
     incorporation or organization)           Identification No.)

          5727 SOUTH LEWIS, #700, TULSA, OKLAHOMA    74105-7148
                   (Address of principal executive offices)
                                 918-749-5666
             (Registrant's telephone number, including area code)

     Check whether the issuer (1) has filed all reports required to be filed by
   Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
   preceding 12 months (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
                                           ---     ---
 
                     APPLICABLE ONLY TO CORPORATE ISSUERS:
                                        
     As of August 12, 1998,100 shares of the Registrant's Common Stock, $1.00
par value, were outstanding.
<PAGE>
 
                           GOTHIC ENERGY CORPORATION
                         GOTHIC PRODUCTION CORPORATION
                                        
This Quarterly Report on Form 10-QSB is filed by Gothic Energy Corporation (file
number 0-19753) pursuant to Section 13 of the Securities Exchange Act of 1934,
as amended, and by Gothic Production Corporation (file number 333-52225)
pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended.
See Note 6 to Notes to Unaudited Consolidated Financial Statements.


                               TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

                                                                            PAGE
     ITEM 1 - FINANCIAL STATEMENTS
 
     Consolidated Unaudited Balance Sheets
     December 31, 1997 and June 30, 1998..........................            3
 
     Consolidated Unaudited Statements of Operations
     Six Months ended June 30, 1997 and 1998......................            4
 
     Consolidated Unaudited Statements of Operations
     Three Months ended June 30, 1997 and 1998....................            5
 
     Consolidated Unaudited Statements of Cash Flows
     Six Months ended June 30, 1997 and 1998......................            6
 
     Notes to Unaudited Consolidated Financial Statements.........            7
 
     Report of Review by Independent Accountants..................           17
 
     ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
 
     Management's Discussion and Analysis or Plan of Operations...           18
                                        

PART II - OTHER INFORMATION

     Item 2 - Changes in Securities and Use of Proceeds...........           29
 
     Item 6 - Exhibits and Reports on Form 8-K....................           30
 
     Signatures...................................................           31
                                        

                                       2
<PAGE>
 
                   GOTHIC ENERGY CORPORATION AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
                   (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
                                        
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,                JUNE 30,
                             ASSETS                                      1997                      1998
                             ------                                  ------------                --------
                                                                                                (Unaudited)
<S>                                                                  <C>                        <C>
CURRENT ASSETS:
  Cash and cash equivalents                                                 $ 16,722                  $  8,010
  Available-for-sale investments                                                 406                         -
  Natural gas and oil receivables                                              3,200                     5,936
  Receivable from officers and employees                                          82                        75
  Other                                                                           78                       146
                                                                            --------                  --------
  TOTAL CURRENT ASSETS                                                        20,488                    14,167
 
PROPERTY AND EQUIPMENT:
  Natural gas and oil properties on full cost method:
    Properties being amortized                                                94,168                   307,558
    Unproved properties not subject to amortization                            2,103                     2,103
  Deposit for natural gas and oil property acquisition                        23,750                         -
  Gas gathering  and processing  system                                        5,404                         -
  Equipment, furniture and fixtures                                              558                       710
  Accumulated depreciation, depletion and amortization                        (9,456)                  (22,956)
                                                                            --------                  --------
PROPERTY AND EQUIPMENT, NET                                                  116,527                   287,415
OTHER ASSETS, NET                                                              1,360                    14,983
NOTE RECEIVABLE FROM OFFICER AND DIRECTOR                                        167                         -
                                                                            --------                  --------
TOTAL ASSETS                                                                $138,542                  $316,565
                                                                            ========                  ========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
  Accounts payable trade                                                    $  2,081                  $  1,675
  Revenues payable                                                             1,553                     4,013
  Accrued interest and dividends                                               4,018                     5,700
  Accrued liabilities                                                            182                       128
                                                                            --------                  --------
TOTAL CURRENT LIABILITIES                                                      7,834                    11,516
 
LONG-TERM DEBT, NET                                                          117,704                   296,735

GAS IMBALANCE LIABILITY                                                          551                     6,213
 
STOCKHOLDERS' EQUITY:
  Series B Redeemable Preferred stock, par value $.05,
    authorized 500,000 shares; issued and outstanding 50,000
    shares                                                                         -                    31,834
  Common stock, par value $.01, authorized 100,000,000 shares;
    issued and outstanding 16,261,640 shares                                     162                       162
  Additional paid in capital                                                  36,043                    42,997
  Accumulated deficit                                                        (23,462)                  (72,723)
  Unrealized loss on available-for-sale investments                             (121)                        -
  Note receivable                                                               (169)                     (169)
                                                                            --------                  --------
TOTAL STOCKHOLDERS' EQUITY                                                    12,453                     2,101
                                                                            --------                  --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                  $138,542                  $316,565
                                                                            ========                  ========
</TABLE>

                             See accompanying notes

                                       3
<PAGE>
 
                   GOTHIC ENERGY CORPORATION AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

                                        
<TABLE>
<CAPTION>
                                                                         FOR THE SIX MONTHS ENDED
                                                                                 JUNE 30,
                                                                  ----------------------------------------
                                                                        1997                    1998
                                                                  -----------------      -----------------
<S>                                                               <C>                    <C>
REVENUES:
  Natural gas and oil sales                                              $ 8,025               $ 27,921
  Gas system revenues                                                      2,179                      -
  Well operations                                                            631                  1,152
                                                                         -------               --------
    TOTAL REVENUES                                                       $10,835               $ 29,073
                                                                                            
COSTS AND EXPENSES:                                                                         
  Lease operating expenses                                                 3,222                  7,495
  Gas system expenses                                                      1,742                      -
  Depreciation, depletion and amortization                                 2,673                 13,755
  General and administrative expense                                       1,041                  1,512
  Severance for former officer                                                 -                    258
                                                                         -------               --------
Operating income                                                           2,157                  6,053
Interest expense and amortization of debt issuance costs                  (2,926)               (17,094)
Interest and other income                                                     20                    179
Loss on sale of investments                                                    -                   (305)
                                                                         -------               --------
                                                                                            
LOSS BEFORE EXTRAORDINARY ITEM                                           $  (749)              $(11,167)
                                                                                            
LOSS ON EARLY EXTINGUISHMENT OF DEBT                                           -                 31,459
                                                                         -------               --------
NET LOSS                                                                    (749)               (42,626)
                                                                                            
PREFERRED DIVIDEND ($35.38 AND $65.92 PER PREFERRED SHARE)                   196                  2,464
                                                                                            
PREFERRED DIVIDEND  AMORTIZATION OF PREFERRED DISCOUNT                         -                  4,171
                                                                         -------               --------
NET LOSS AVAILABLE FOR COMMON SHARES                                     $  (945)              $(49,261)
                                                                         =======               ========
LOSS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM,                                            
   BASIC AND DILUTED                                                     $  (.07)              $  (1.09)
                                                                         =======               ========
NET LOSS PER COMMON SHARE, BASIC AND DILUTED                             $  (.07)              $  (3.03)
                                                                         =======               ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                12,820                 16,262
                                                                         =======               ========
</TABLE>

                             See accompanying notes

                                       4
<PAGE>
 
                   GOTHIC ENERGY CORPORATION AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)


                                        
<TABLE>
<CAPTION>
                                                                       FOR THE THREE MONTHS ENDED
                                                                                 JUNE 30,
                                                                    --------------------------------
                                                                        1997                1998
                                                                    ---------------    --------------
<S>                                                                 <C>                 <C>
REVENUES:
  Natural gas and oil sales                                                 $ 3,318          $ 11,405
  Gas system revenues                                                           910                 -
  Well operations                                                               325               566
                                                                            -------          --------
    TOTAL REVENUES                                                          $ 4,553          $ 11,971
                                                                                         
COSTS AND EXPENSES:                                                                      
  Lease operating expenses                                                    1,521             2,831
  Gas system expenses                                                           639                 -
  Depreciation, depletion, and amortization                                   1,438             6,311
  General and administrative expense                                            493               857
                                                                            -------          --------

Operating income                                                                462             1,972
Interest expense and amortization of debt issuance costs                     (1,740)           (9,061)
Interest and other income                                                         2                13
Loss on sale of investments                                                       -               (40)
                                                                            -------          --------
                                                                                         
LOSS BEFORE EXTRAORDINARY ITEM                                              $(1,276)         $ (7,116)
                                                                                         
LOSS ON EARLY EXTINGUISHMENT OF DEBT                                              -             4,398
                                                                            -------          --------
                                                                                         
NET LOSS                                                                     (1,276)          (11,514)
                                                                                         
PREFERRED DIVIDEND ($16.61 AND $31.91 PER PREFERRED SHARE)                       92             1,490
                                                                                         
PREFERRED DIVIDEND  AMORTIZATION OF PREFERRED DISCOUNT                            -             4,171
                                                                            -------          --------
NET LOSS AVAILABLE FOR COMMON SHARES                                        $(1,368)         $(17,175)
                                                                            =======          ========
LOSS PER COMMON SHARE BEFORE                                                             
   EXTRAORDINARY ITEM, BASIC AND DILUTED                                    $  (.10)         $   (.79)
                                                                            =======          ========
NET LOSS PER COMMON SHARE, BASIC AND DILUTED                                $  (.10)         $  (1.06)
                                                                            =======          ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                   13,172            16,262
                                                                            =======          ========
</TABLE>

                             See accompanying notes

                                       5
<PAGE>
 
                   GOTHIC ENERGY CORPORATION AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                          FOR THE SIX MONTHS ENDED
                                                                                 JUNE 30,
                                                               ----------------------------------------------
                                                                        1997                      1998
                                                               --------------------      --------------------
<S>                                                            <C>                       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                               $   (749)                $ (42,626)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED
    BY OPERATING ACTIVITIES:
    Depreciation, depletion and amortization                                  2,673                    13,755
    Amortization of discount and loan costs                                     954                     1,173
    Loss on early extinguishment of debt                                          -                    31,459
    Accretion of interest on discount notes                                       -                     1,579
 
CHANGES IN ASSETS AND LIABILITIES:
    Increase in accounts receivable                                             (60)                   (2,729)
    Increase in other current assets                                           (214)                      (68)
    Increase in accounts and revenues payable                                   442                     2,054
    Decrease in gas imbalance payable                                          (405)                        -
    (Decrease) increase in accrued liabilities                                 (198)                      576
    Decrease in other assets                                                    494                         -
                                                                           --------                 ---------
 
NET CASH PROVIDED BY OPERATING ACTIVITIES                                  $  2,937                 $   5,173
 
NET CASH USED BY INVESTING ACTIVITIES:
    Collection of note receivable from officer and director                       -                       167
    Purchase of available-for-sale investments                                    -                      (462)
    Proceeds from sale of investments                                             -                     1,359
    Proceeds from sale of property and equipment                                305                    43,025
    Purchase of property and equipment                                      (27,964)                 (217,476)
    Property development costs                                               (1,406)                   (6,158)
                                                                           --------                 ---------
 
NET CASH USED BY INVESTING ACTIVITIES                                      $(29,065)                $(179,545)
 
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from short-term borrowings                                      14,500                    60,000
    Payment of short-term borrowings                                              -                   (60,000)
    Proceeds from long-term borrowings                                       36,250                   429,340
    Payments of long-term borrowings                                        (23,411)                 (257,934)
    Proceeds from sale of preferred stock, net                                    -                    73,475
    Redemption of preferred stock, net                                            -                   (40,809)
    Proceeds from exercise of common stock warrants                             325                         -
    Payment of loan and offering fees                                        (1,369)                  (38,271)
    Other                                                                       (70)                     (141)
                                                                           --------                 ---------
 
NET CASH PROVIDED BY FINANCING ACTIVITIES                                  $ 26,225                 $ 165,660
NET CHANGE IN CASH AND CASH EQUIVALENTS                                          97                    (8,712)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                  207                    16,722
                                                                           --------                 ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                   $    304                 $   8,010
                                                                           ========                 =========
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID                                   $  1,973                 $  14,342
                                                                           ========                 =========
</TABLE>
                             See accompanying notes

                                       6
<PAGE>
 
                   GOTHIC ENERGY CORPORATION AND SUBSIDIARY
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                        
NOTE 1.  GENERAL AND ACCOUNTING POLICIES

     ORGANIZATION AND NATURE OF OPERATIONS - The consolidated financial
statements include the accounts of Gothic Energy Corporation, (the "Company"),
and its subsidiary, Gothic Production Corporation ("Gothic Production"), since
its formation in March of 1998. The Company is primarily engaged in the business
of acquiring, developing and exploiting oil and gas reserves in Oklahoma, Texas,
New Mexico and Kansas. Substantially all of the Company's natural gas and oil
production is being sold regionally in the "spot market" or under short-term
contracts, not extending beyond twelve months.

     PREPARATION OF FINANCIAL STATEMENTS  - The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.  Actual results could differ from those
estimates.  The December 31, 1997 consolidated balance sheet data was derived
from the audited financial statements but does not include all disclosures
required by generally accepted accounting principles.  The financial statements
should be read in conjunction with the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997.

     In the opinion of management of the Company, the accompanying financial
statements contain all adjustments, none of which were other than normal
recurring accruals, necessary to present fairly the financial position of the
Company as of June 30, 1998, and the results of its operations and cash flows
for the periods ended June 30, 1997 and 1998.  The results of operations for the
periods presented are not necessarily indicative of the results of operations to
be expected for the full year.

     INCOME (LOSS) PER COMMON SHARE - Income (loss) per common share before
extraordinary item and net income (loss) per common share are computed in
accordance with Statement of Financial Accounting Standards No. 128 ("FAS 128"),
which is effective for reporting periods ending after December 15, 1997. FAS 128
requires the restatement of prior year's loss per share to conform to the new
standard. Presented in the Consolidated Statements of Operations is a
reconciliation of loss available to common shareholders. There is no difference
between actual weighted average shares outstanding, which are used in computing
basic income (loss) per share and diluted weighted average shares, which are
used in computing diluted income (loss) per share because the effect of
outstanding options and warrants would be antidilutive. Warrants and options to
purchase approximately 21,307,000 shares were outstanding as of June 30, 1998
which were not included in the computation of diluted loss per share.

     RECENTLY ISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS - In June 1997, the
Financial Accounting Standards Board ("FASB") issued FAS 130, "Reporting
Comprehensive Income", and FAS 131, "Disclosures about Segments of an Enterprise
and Related Information," effective for fiscal years beginning after December
15, 1997. The adoption of FAS 130 did not have a material effect in the
Company's financial statements, as there was no material difference between net
income (loss) and comprehensive income (loss). FAS 131 does not effect the
Company as only one segment is reported by the Company.

     In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133").  FAS 133 is effective for fiscal
years beginning after June 15, 1999, but earlier application is permitted as of
the beginning of any fiscal quarter subsequent to June 15, 1998.  FAS 133
standardizes the accounting for derivative

                                       7
<PAGE>
 
NOTE 1.  GENERAL AND ACCOUNTING POLICIES (CONTINUED)

instruments by requiring that all derivatives be recognized as assets and
liabilities and measured at fair value. Upon the Statement's initial
application, all derivatives are required to be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
In addition, all existing hedging relationships must be designated, reassessed,
documented and the accounting conformed to the provisions of FAS 133. Due to the
limited nature of the Company's hedging activities, the Company does not expect
the adoption of FAS 133 to have a significant impact on its financial position
or results of operations when adopted.


NOTE 2.  OIL AND GAS PROPERTY ACQUISITIONS AND DISPOSITIONS

     AMOCO ACQUISITION  On January 23, 1998, the Company completed the
acquisition from Amoco Production Company ("Amoco"), a subsidiary of Amoco
Corporation, of certain producing natural gas properties, located in the
Anadarko and Arkoma Basins of Oklahoma.  The purchase price was $237.5 million,
including a $23.7 million deposit paid in November 1997 upon signing of the
purchase agreement, subject to certain post-closing adjustments.  Amoco also
received warrants to purchase 1.5 million shares of the Company's common stock
for $3.00 per share, with an estimated fair value at the date of acquisition of
approximately $1.2 million, and certain producing properties having a value of
less than $1.8 million.  The acquisition and related fees and expenses were
financed through an amended and restated credit facility with Bank One, Texas,
NA. ("Bank One") (See Note 4) and the issuance of $37.0 million of Series A
Preferred Stock (see Note 5).  The Company acquired interests in 821 gross wells
and assumed operations of 291 of the properties.  The Company also acquired
approximately 10,000 net undeveloped acres located throughout the Anadarko Basin
as well as substantial mineral and overriding royalty interests.  In connection
with the Amoco Acquisition, the Company entered into a transition agreement
which provides for a payment of $540,000 per month to be made to Amoco
commencing January 1, 1998 for the operation and administration of the
properties acquired.  This transition payment was made by the Company for
January and February 1998.  Since March 1, 1998, the Company has operated the
properties.  The transition agreement established effective control for the
Company over the properties, and accordingly, January 1, 1998 has been used as
the effective date for the Amoco Acquisition for accounting purposes.

     CHESAPEAKE DISPOSITIONS  On April 27, 1998, the Company sold to Chesapeake
Energy Corporation ("Chesapeake") for $20.0 million, a 50% interest in its
natural gas and oil properties in the Arkoma basin and sold for $10.5 million, a
50% participation right in substantially all of the Company's undeveloped
acreage (see Note 3, "The Chesapeake Transaction").  In addition, in a separate
transaction, on May 28, 1998, the Company sold to Chesapeake for $6.0 million
its interest in certain natural gas and oil properties.

NOTE 3.  RECAPITALIZATION

     On April 27, 1998, the Company completed a series of transactions which
recapitalized the Company through (i) the transfer of all of the Company's
natural gas and oil assets to Gothic Production, (ii) the issuance by the
Company of shares of its Series B Preferred Stock, (iii) the sale of interests
in natural gas and oil properties for $20.0 million, subject to closing
adjustments, (iv) the execution of a participation agreement granting a 50%
interest in substantially all of the Company's undeveloped acreage for
consideration of $10.5 million, (v) the issuance by the Company of its 14 1/8 %
Senior Secured Discount Notes Due 2006, (vi) the issuance by Gothic Production
of its 11 1/8% Senior Secured Notes Due 2005 and (vii) the repayment and/or
refinancing of substantially all of the Company's then existing debt and
preferred securities (together the "Recapitalization"). Certain transactions
undertaken in the Recapitalization are described in greater detail below.

                                       8
<PAGE>
 
NOTE 3.   RECAPITALIZATION (CONTINUED)

     Corporate Restructuring

     Gothic Production was organized as a wholly owned subsidiary of the Company
in March 1998. At the closing of the Recapitalization, the Company transferred
to Gothic Production its ownership of all its natural gas and oil properties.
The natural gas and oil assets collateralize Gothic Production 's obligations
under a credit facility with Bank One (the "Credit Facility") and the 11 1/8%
Senior Secured Notes.

     THE CHESAPEAKE TRANSACTION

     On April 27, 1998, the Company completed several agreements with
Chesapeake, pursuant to which the Company (i) executed a participation agreement
granting a 50% interest in substantially all of Gothic Production's undeveloped
acreage for consideration of $10.5 million, (ii) sold for $20.0 million, subject
to closing adjustments, a 50% interest in Gothic Production's natural gas and
oil properties in the Arkoma basin, and (iii) sold for $39.5 million, 50,000
shares of the Company's Series B Preferred Stock, having a liquidation value of
$50.0 million, and ten-year warrants to purchase, at an exercise price of $0.01
per share, 2,439,246 shares of the Company's Common Stock. Such warrants had an
estimated fair value of $4.9 million on the date of issuance.

     FINANCING TRANSACTIONS

     The following financing transactions were also completed as part of the
Recapitalization:

11 1/8% Senior Secured Notes.................   Gothic Production sold $235.0
                                                million principal amount of 11
                                                1/8% Senior Secured Notes

14 1/8% Senior Secured Discount Notes........   The Company sold approximately
                                                $60.2 million initial principal
                                                amount ($104.0 million principal
                                                amount at maturity) of 14 1/8 %
                                                Senior Secured Discount Notes
                                                due 2006 collateralized by the
                                                outstanding capital stock of
                                                Gothic Production held by the
                                                Company and seven-year common
                                                stock purchase warrants
                                                exercisable at $2.40 per share
                                                to purchase 825,000 shares of
                                                Common Stock. The estimated fair
                                                value of such warrants was
                                                approximately $554,000 on the
                                                date of issuance.
 

                                       9
<PAGE>
 
NOTE 3.  RECAPITALIZATION (CONTINUED)

Series B Preferred Stock and Warrants........   The Company sold for $39.5
                                                million, 50,000 shares of its
                                                Series B Preferred Stock, having
                                                a liquidation preference of
                                                $50.0 million, and ten-year
                                                common stock purchase warrants
                                                exercisable at $0.01 per share
                                                to purchase 2,439,246 shares of
                                                Common Stock. The estimated fair
                                                value of such warrants was
                                                approximately $4.9 million on
                                                the date of issuance.
 
Arkoma Property Sales........................   The Company sold for $20.0
                                                million, subject to closing
                                                adjustments, a 50% interest in
                                                its natural gas and oil
                                                properties in the Arkoma basin.
 
Credit Facility..............................   Gothic Production, with the
                                                Company as guarantor, entered
                                                into the Credit Facility with
                                                Bank One which provides among
                                                other things, an initial
                                                borrowing availability of
                                                approximately $25.0 million.

     REPAYMENTS AND REDEMPTIONS

     The net proceeds of approximately $350.5 million from the Recapitalization
described above were applied to repay or redeem the following:

12 1/4% Senior Notes.........................   These notes, outstanding in the
                                                principal amount of
                                                approximately $99.3 million,
                                                were redeemed for approximately
                                                $102.3 million, inclusive of a
                                                1% redemption premium and
                                                accrued interest.
 
Series A Preferred Stock....................    These shares were redeemed for
                                                $38.7 million, inclusive of a 1%
                                                redemption premium and payment-
                                                in-kind dividends through the
                                                redemption date.
 
Credit Facility.............................    An aggregate of $206.4 million
                                                of indebtedness owing to Bank
                                                One was repaid.

                                       10
<PAGE>
 
NOTE 4.   FINANCING ACTIVITIES

     CREDIT FACILITY

     On April 27, 1998, in connection with the Recapitalization of the Company,
including repayment of $206.4 million of indebtedness owing to Bank One,
including accrued interest, Gothic Production, with the Company as guarantor,
entered into the Credit Facility.

     The Credit Facility consists of a revolving line of credit, with an initial
Borrowing Base of $25.0 million.  Borrowings initially are limited to being
available for the acquisition and development of natural gas and oil properties,
letters of credit and general corporate purposes.  The Borrowing Base will be
redetermined at least semi-annually and the initial redetermination is scheduled
for October 1, 1998. The principal is due at maturity, April 30, 2001. Interest
is payable monthly calculated at the Bank One Base Rate, as determined from time
to time by Bank One. Gothic Production may elect to calculate interest under a
London Interbank Offered Rate ("LIBOR") plus 1.5% (or up to 2.0% in the event
the loan balance is greater than 75% of the Borrowing Base). Gothic Production
is required to pay a commitment fee on the unused portion of the Borrowing Base
equal to 1/2 of 1% per annum. Under the Credit Facility, Bank One holds first
priority liens on substantially all of the natural gas and oil properties of
Gothic Production, whether currently owned or hereafter acquired. Gothic
Production currently has no amount outstanding under the Credit Facility.

     The Credit Facility requires, among other things, semi-annual engineering
reports covering oil and natural gas reserves on the basis of which semi-annual
and other redeterminations of the borrowing base and monthly commitment
reduction are made.  The Credit Facility also includes various affirmative and
negative covenants, including, among others, (i) prohibitions against additional
indebtedness unless approved by the lenders, subject to certain exceptions, (ii)
prohibitions against the creation of liens on the assets of the Company, subject
to certain exceptions, (iii) prohibitions against cash dividends, (iv)
prohibitions against hedging positions unless consented to by Bank One, (v)
prohibitions on asset sales, subject to certain exceptions, (vi) restrictions on
mergers or consolidations, (vii) a requirement to maintain a ratio of current
assets to current liabilities of 1.0 to 1.0, and (viii) a minimum interest
coverage ratio of not less than 1.5 to 1.0 as of the end of each quarter
calculated quarterly beginning with the quarter ending June 30, 1998 and
increasing to 2.0 to 1.0 as of the end of each quarter beginning with the
quarter ending March 31, 1999.  The Credit Facility includes covenants
prohibiting cash dividends, distributions, loans or advances to third parties,
subject to certain exceptions.  If Gothic Production is required to purchase or
redeem any portion of the 11 1/8% Senior Secured Notes, or if any portion of the
11 1/8% Senior Secured Notes become due, the Borrowing Base is subject to
reduction.  Gothic Production is required to escrow interest payments due on the
Notes at such times as its borrowings under the Credit Facility equal or exceed
75% of the Borrowing Base. Events of default include the non-payment of
principal, interest or fees, a default under other outstanding indebtedness, a
breach of the representations and warranties contained in the loan agreement,
material judgements, bankruptcy or insolvency, a default under certain covenants
not cured within a grace period, and a change in the management or control of
the Company. Gothic Production was not in compliance with the minimum interest
coverage of at least 1.5 to 1.0 for the quarter ended June 30, 1998. Gothic
Production received a waiver of compliance with the covenant for the quarter
ended June 30, 1998.

     The amount of borrowings available under the Credit Facility depend upon
the determination of the Borrowing Base by Bank One.  The Borrowing Base is
subject to periodic redetermination, at the discretion of Bank One, based on a
review of reserve and other information.  A reduction in the Borrowing Base
could require the repayment of outstanding indebtedness under the Credit
Facility in excess of the redetermined Borrowing Base, and would limit available
borrowings thereunder.

                                       11
<PAGE>
 
NOTE 4.   FINANCING ACTIVITIES  (CONTINUED)

     11-1/8% SENIOR SECURED NOTES

     The 11-1/8% Senior Secured Notes ("Senior Secured Notes") issued by Gothic
Production  are fully and unconditionally guaranteed by the Company.  The
aggregate principal amount of Senior Secured Notes outstanding is $235.0 million
issued under an indenture dated April 21, 1998 (the "Senior Note Indenture").
The Senior Secured Notes bear interest at 11-1/8% per annum payable semi-
annually in cash in arrears on May 1 and November 1 of each year commencing
November 1, 1998.  The Senior Secured Notes mature on May 1, 2005. All of the
obligations of Gothic Production  under the Senior Secured Notes are
collateralized by a second priority lien on substantially all of Gothic
Production's natural gas and oil properties, subject to certain permitted liens.

     Gothic Production may, at its option, at any time on or after May 1, 2002,
redeem all or any portion of the Senior Secured Notes at redemption prices
decreasing from 105.563%, if redeemed in the 12-month period beginning May 1,
2002, to 100.00% if redeemed in the 12-month period beginning May 1, 2004 and
thereafter plus, in each case, accrued and unpaid interest thereon.
Notwithstanding the foregoing, at any time prior to May 1, 2002, Gothic
Production may, at its option, redeem all or any portion of the Senior Secured
Notes at the Make-Whole Price (as defined in the Senior Note Indenture) plus
accrued or unpaid interest to the date of redemption.  In addition, in the event
Gothic Production consummates one or more Equity Offerings (as defined in the
Senior Note Indenture) on or prior to May 1, 2001, Gothic Production, at its
option, may redeem up to 33-1/3% of the aggregate principal amount of the Senior
Secured Notes with all or a portion of the aggregate net proceeds received by
Gothic Production  from such Equity Offering or Equity Offerings at a redemption
price of 111.125% of the aggregate principal amount of the Senior Secured Notes
so redeemed, plus accrued and unpaid interest thereon to the redemption date;
provided, however, that following such redemption, at least 66-2/3% of the
original aggregate principal amount of the Senior Secured Notes remains
outstanding.

     Following the occurrence of any Change of Control (as defined in the Senior
Note Indenture), Gothic Production will offer to repurchase all outstanding
Senior Secured Notes at a purchase price equal to 101% of the aggregate
principal amount of the Senior Secured Notes, plus accrued and unpaid interest
to the date of repurchase.

     The Senior Note Indenture under which the Senior Secured Notes were issued
contains certain covenants limiting Gothic Production with respect to or
imposing restrictions on the incurrence of additional indebtedness, the payment
of dividends, distributions and other restricted payments, the sale of assets,
creating, assuming or permitting to exist any liens (with certain exceptions) on
its assets, mergers and consolidations (subject to meeting certain conditions),
sale leaseback transactions, and transactions with affiliates, among other
covenants.

     Events of default under the Senior Note Indenture include the failure to
pay any payment of principal or premium when due, failure to pay for 30 days any
payment of interest when due, failure to make any optional redemption payment
when due, failure to perform any covenants relating to mergers or
consolidations, failure to perform any other covenant or agreement not remedied
within 30 days of notice from the Trustee under the Senior Note Indenture or the
holders of 25% in principal amount of the Senior Secured Notes then outstanding,
defaults under other indebtedness of Gothic Production or the Company causing
the acceleration of the due date of such indebtedness having an outstanding
principal amount of $10.0 million or more, the failure of Gothic Production to
be a wholly owned subsidiary of the Company, and certain other bankruptcy and
other court proceedings, among other matters.

                                       12
<PAGE>
 
NOTE 4.   FINANCING ACTIVITIES  (CONTINUED)

     14 1/8% SENIOR SECURED DISCOUNT NOTES

     The 14 1/8% Senior Secured Discount Notes (the "Discount Notes") were
issued by the Company under an indenture (the "Discount Note Indenture") dated
April 21, 1998 in such aggregate principal amount and at such rate of interest
as generated gross proceeds of $60.2 million. The Company also issued seven-year
warrants to purchase, at an exercise price of $2.40 per share, 825,000 shares of
the Company's Common Stock with the Discount Notes. The estimated fair value of
such warrants was approximately $554,000 on the date of issuance. The Discount
Notes were issued at a substantial discount from their principal amount and
accrete at a rate per annum of 14 1/8%, compounded semi-annually, to an
aggregate principal amount of $104.0 million at May 1, 2002. Thereafter, the
Discount Notes accrue interest at the rate of 14 1/8% per annum, payable in cash
semi-annually in arrears on May 1 and November 1 of each year, commencing
November 1, 2002. The Discount Notes mature on May 1, 2006. The Discount Notes
are secured by a first priority lien against the outstanding shares of capital
stock of Gothic Production.

     The Company may, at its option, at any time on or after May 1, 2003, redeem
all or any portion of the Discount Notes at redemption prices decreasing from
107.063% if redeemed in the 12-month period beginning May 1, 2003 to 100.00% if
redeemed in the 12-month period beginning May 1, 2005 and thereafter plus, in
each case, accrued and unpaid interest thereon. Notwithstanding the foregoing,
at any time prior to May 1, 2003, the Company may, at its option, redeem all or
any portion of the Discount Notes at the Make-Whole Price (as defined in the
Discount  Note Indenture) plus accrued or unpaid interest to the date of
redemption.  In addition, in the event the Company consummates one or more
Equity Offerings (as defined in the Discount  Note Indenture) on or prior to May
1, 2001, the Company, at its option, may redeem up to 33-1/3% of the Accreted
Value (as defined in the Discount  Note Indenture) of the Discount Notes with
all or a portion of the aggregate net proceeds received by the Company from such
Equity Offering or Equity Offerings at a redemption price of 114.125% of the
Accreted Value of the Discount Notes so redeemed, plus accrued and unpaid
interest thereon to the redemption date; provided, however, that following such
redemption, at least 66-2/3% of the Accreted Value of the Discount Notes remains
outstanding.

     Following the occurrence of any Change of Control (as defined in the
Discount  Note Indenture), the Company will offer to repurchase all outstanding
Discount Notes at a purchase price equal to, prior to May 1, 2002,  101% of the
Accreted Value of the Discount Notes on the date of repurchase, plus accrued and
unpaid interest to the date of repurchase and thereafter, 101% of the aggregate
principal amount of the Discount Notes plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of repurchase.

     The Discount  Note Indenture under which the Discount Notes were issued
contains certain covenants limiting the Company with respect to or imposing
restrictions on the incurrence of additional indebtedness, the payment of
dividends, distributions and other restricted payments, the sale of assets,
creating, assuming or permitting to exist any liens (with certain exceptions) on
its assets, mergers and consolidations (subject to meeting certain conditions),
sale leaseback transactions, and transactions with affiliates, among other
covenants.

     Events of default under the Discount  Note Indenture include the failure to
pay any payment of principal or premium when due, failure to pay for 30 days any
payment of interest when due, failure to make any optional redemption payment
when due, failure to perform any covenants relating to mergers or
consolidations, failure to perform any other covenant or agreement not remedied
within 30 days of notice from the Trustee under the Discount Note Indenture or
the holders of 25% in principal amount of the Discount Notes then outstanding,
defaults under other indebtedness of the Company causing the acceleration of the
due date of indebtedness having an outstanding principal amount of $10.0

                                       13
<PAGE>
 
NOTE 4.   FINANCING ACTIVITIES  (CONTINUED)

million or more, the failure of Gothic Production to be a wholly owned
subsidiary of the Company, and certain other bankruptcy and other court
proceedings, among other matters.

     12 1/4% SENIOR NOTES DUE 2004

     On September 9, 1997, the Company issued $100.0 million principal amount of
12 1/4% Senior Notes Due 2004.  On January 23, 1998, the Company obtained
consents to the amendment of the Company's outstanding 12 1/4% Senior Notes.  Of
the consideration given for the consents, $15.0 million was paid by the issuance
of 15,000 shares of Series A Preferred Stock (see Note 3) and $5.8 million was
paid in cash.  These consent fees totaling $20.8 million together with
unamortized discount and debt issue costs of $5.3 million and a $1.0 million
early redemption premium related to the 12 1/4 % Senior Notes have all been
written off as an extraordinary loss during the quarter ended March 31, 1998, as
the terms of the consent constitute a substantial modification of the terms of
the 12 1/4% Senior Notes.

     In connection with obtaining the consents, the Company agreed to raise a
total of at least $45.0 million of equity by February 28, 1998 and at least
$100.0 million from the sale of senior subordinated notes by March 31, 1998.  In
the event the Company failed to comply with either of these agreements, until
such conditions were met, the interest rate on the 12 1/4% Senior Notes
increased by 1% until the additional equity was raised and also by 1% until the
senior subordinated notes were sold, provided, if the senior subordinated notes
were not sold by June 30, 1998, the interest rate on the 12 1/4% Senior Notes
increased by 2% until such senior subordinated notes were sold.  Such additional
equity was not sold by February 28, 1998.   Pursuant to such consents, the
holders of the 12 1/4% Senior Notes agreed that the Company had the right to
redeem such notes through March 31, 1998 at 100% of the principal amount thereof
and at 101% of the principal amount thereof through April 30, 1998 when such
redemption right expired.  On April 27, 1998, as part of the Company's
Recapitalization, the Senior Notes and all accrued interest were paid in full.
(See Note 3)

NOTE 5.   STOCKHOLDERS' EQUITY

     PREFERRED STOCK OFFERINGS

     Series B Preferred Stock and Warrants. On April 27, 1998, as part of the
Recapitalization, the Company issued 50,000 shares of Series B Preferred Stock
with an aggregate liquidation value of $50.0 million, and ten-year warrants to
purchase, at an exercise price of $0.01 per share, 2,439,246 shares of the
Company's Common Stock.  The estimated fair value of such warrants was $4.9
million on the date of issuance.  The Series B Preferred Stock, with respect to
dividend rights and rights on liquidation, winding-up and dissolution, ranks
senior to all classes of Common Stock of the Company and senior to all other
classes or series of any class of preferred stock.  Holders of the Series B
Preferred Stock are entitled to receive dividends payable at a rate per annum of
12% of the aggregate Liquidation Preference of the Series B Preferred Stock
payable in additional shares of Series B Preferred Stock; provided that after
April 1, 2000, at the Company's option, it may pay the dividends in cash.
Dividends are cumulative and will accrue from the date of issuance and are
payable quarterly in arrears.

     At any time prior to April 30, 2000, the Series B Preferred Stock may be
redeemed at the option of the Company in whole or in part, at 105% of the
Liquidation Preference payable in cash out of the net proceeds from a public or
private offering of any equity security, plus accrued and unpaid dividends
(whether or not declared), which shall also be paid in cash.  At any time on or
after April 30, 2000, the Series B Preferred Stock may be redeemed at the option
of the Company in whole or in part, in cash at a redemption price equal to the
Liquidation Preference.

                                       14
<PAGE>
 
NOTE 5.   STOCKHOLDERS' EQUITY (CONTINUED)

     The Company is required to redeem the Series B Preferred Stock on June 30,
2008 at a redemption price equal to the Liquidation Preference payable in cash
or, at the option of the Company, in shares of Common Stock valued at the fair
market value at the date of such redemption.

     Except as required by Oklahoma law, the holders of Series B Preferred Stock
are not entitled to vote on any matters submitted to a vote of the stockholders
of the Company.

     The Series B Preferred Stock is convertible at the option of the holders on
or after April 30, 2000 into the number of fully paid and non-assessable shares
of Common Stock determined by dividing the Liquidation Preference by the higher
of (i) $2.04167 or (ii) the fair market value on the date the Series B Preferred
Stock is converted.  Notwithstanding the foregoing, no holder or group shall be
able to convert any shares of Series B Preferred Stock to the extent that the
conversion of such shares would cause such holder or group to own more than
19.9% of the outstanding Common Stock of the Company.

     Series A Preferred Stock and Warrants.  On January 23, 1998, the Company
issued an aggregate of 37,000 shares of Series A Preferred Stock, inclusive of
the shares issued as part of the consent fee described above, with each share
having a liquidation preference of $1,000.  The shares of Series A Preferred
Stock were redeemable at any time upon payment in cash of 101% of the
liquidation preference, inclusive of accrued but unpaid dividends, and the
shares were mandatorily redeemable on December 31, 2004.  The shares of Series A
Preferred Stock entitled the holders to receive cumulative dividends payable in
additional shares of Series A Preferred Stock at a rate per annum initially of
14% of the liquidation preference of the Series A Preferred Stock increasing on
April 1, 1998 and each 90-day period thereafter that the Series A Preferred
Stock remained outstanding by 1%, but not to exceed a maximum dividend per annum
of 20%, excluding any other adjustments to the dividend rate.   The issuance of
the shares provided a portion of the cash paid as consideration in the Amoco
Acquisition and a fee in connection with an amendment obtained from the holders
of certain terms of the Company's 12 1/4% Senior Notes.

     Concurrently with the sale of the Series A Preferred Stock, the Company
issued five-year Warrants to purchase an aggregate of 1,175,778 shares of Common
Stock exercisable at the lesser of $2.75 per share or the average of the daily
closing bid prices commencing five days and ending one day before the date of
exercise, subject to reduction to $0.01 per share under certain circumstances.
The estimated fair value of such Warrants was approximately $941,000 on the date
of issuance.

     In March 1998, the Company obtained consents from the holders of
approximately 95% of the Series A Preferred Stock and the related warrants to
extend through April 30, 1998 the date on which (i) the warrant exercise price
on existing warrants will reduce to $0.01 and (ii) such holders would receive
additional warrants.  On April 27, 1998, as part of the Company's
Recapitalization Plan, all 37,000 shares of the Series A Preferred Stock were
redeemed and all accrued dividends paid. (See Note 3)

                                       15
<PAGE>
 
NOTE 6.   SUMMARIZED FINANCIAL INFORMATION

     Gothic Production Corporation was organized in March 1998 as a wholly owned
subsidiary of the Company. On April 27, 1998, the Company transferred to Gothic
Production its ownership of all its natural gas and oil properties. Following is
the summarized financial information related to Gothic Production as of June 30,
1998 and for the six month and three month periods ended June 30, 1998. (in
thousands)

<TABLE>
<CAPTION>
                                                                As of June 30, 1998
                           -------------------------------------------------------------------------------------------
                                                                                                  Gothic Energy 
                                  Gothic Energy                   Gothic Production                Corporation
                                   Corporation                    Corporation/(1)/                 Consolidated
                           ---------------------------   -----------------------------   ------------------------------
<S>                        <C>                           <C>                             <C>
Current assets                       $      -                      $ 14,167                          $ 14,167
Non-current assets                      2,191                       300,207                           302,398
Current liabilities                     1,052                        10,464                            11,516
Non-current liabilities                61,735                       241,213                           302,948
</TABLE>

<TABLE>
<CAPTION>
                                                       For the six months ended June 30, 1998
                           --------------------------------------------------------------------------------------------
                                                                                                  Gothic Energy 
                                  Gothic Energy                   Gothic Production                Corporation
                                   Corporation                    Corporation/(1)/                 Consolidated
                           ---------------------------   -----------------------------   ------------------------------
<S>                        <C>                           <C>                             <C>
Total revenues                            $ 21,033                        $ 8,040                       $ 29,073
Operating costs and                   
   expenses                                 16,172                          6,848                         23,020
Interest expense and                  
   amortization of debt               
   issuance cost                            12,527                          4,567                         17,094
Loss before                           
   extraordinary item                       (7,834)                        (3,333)                       (11,167)
Net loss                                   (39,268)                        (3,358)                       (42,626)
</TABLE>


<TABLE>
<CAPTION>
                                                      For the three months ended June 30, 1998
                           --------------------------------------------------------------------------------------------
                                                                                                  Gothic Energy 
                                  Gothic Energy                   Gothic Production                Corporation
                                   Corporation                    Corporation/(1)/                 Consolidated
                           ---------------------------   -----------------------------   ------------------------------
<S>                        <C>                           <C>                             <C>
Total revenues                           $ 3,931                        $ 8,040                       $ 11,971
Operating costs and                   
   expenses                                3,151                          6,848                          9,999
Interest expense and                  
   amortization of debt               
   issuance cost                           4,494                          4,567                          9,061
Loss before                           
   extraordinary item                     (3,783)                        (3,333)                        (7,116)
Net loss                                  (8,156)                        (3,358)                       (11,514)
 
</TABLE>
/(1)/   Since the Recapitalization on April 27, 1998

                                       16
<PAGE>
 
                        INDEPENDENT ACCOUNTANT'S REPORT



To the Board of Directors and Stockholders:

     We have reviewed the accompanying consolidated balance sheet of Gothic
Energy Corporation and Subsidiary as of June 30, 1998 and the related
consolidated statements of operations for the three and six month periods ended
June 30, 1998, and the consolidated statement of cash flows for the six-month
period ended June 30, 1998.  These financial statements are the responsibility
of the Company's management.

     We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants.  A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters.  It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole.  Accordingly, we do not express such an opinion.

     Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.

     We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended (not presented herein); and in our report dated
March 13, 1998, we expressed an unqualified opinion on those  consolidated
financial statements.  In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1997 is fairly stated
in all material respects in relation to the consolidated balance sheet form
which it has been derived.


PricewaterhouseCoopers LLP


Tulsa, Oklahoma
August 10, 1998

                                       17
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------------------------------------------------------------------

     The following discussion relates to the operating history of the Company.
Gothic Production was organized in March 1998 for the purpose of facilitating
the Recapitalization.  As part of the Recapitalization, Gothic Production
succeeded to the natural gas and oil operations of the Company.  Accordingly,
following the Recapitalization, the Company, as the parent corporation, operates
solely as a holding company with the outstanding capital stock of Gothic
Production as its only material asset.  The discussion herein of the Company
includes the operating results and assets of the natural gas and oil properties
that were transferred to Gothic Production on April 27, 1998.

GENERAL

     The Company's results of operations have been significantly affected by its
acquisition of producing natural gas and oil properties over the last two years.
During January 1998, the Company completed the Amoco Acquisition for a purchase
price of approximately $239.9 million.  This acquisition included approximately
239.9 Bcfe.  During 1997, the Company completed seven acquisitions (the "1997
Acquisitions") of producing natural gas and oil properties for an aggregate
purchase price of approximately $52.8 million.  These acquisitions included an
aggregate of approximately 102.2 Bcfe.

     The 1997 Acquisitions and the Amoco Acquisition were financed primarily
through borrowings under the Company's Credit Facilities throughout 1997 and
1998 and the sale of the Company's 12 1/4% Senior Notes in September 1997.  In
April 1998, the Company completed a series of transactions that recapitalized
the Company.  See Note 3 of the Notes to Unaudited Consolidated Financial
Statements herein.

     Part of the Company's overall strategy is to divest itself of nonstrategic
properties. During April and May of 1998, the Company sold to Chesapeake for
$20.0 million and $6.0 million, respectively, certain interests in its natural
gas and oil properties, with reserves of approximately 33.0 Bcfe.

     The following table reflects certain summary operating data for the periods
presented:

RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                 Three Months Ended June 30,            Six Months Ended June 30,
                                             ------------------------------------  ------------------------------------
                                                   1997               1998               1997               1998
                                             -----------------  -----------------  -----------------  -----------------
<S>                                          <C>                <C>                <C>                <C>
                                                             (in thousands, unless otherwise indicated)
Net Production:
   Oil (Mbbls)                                          39                 52                 76                138
   Natural gas (Mmcf)                                1,522              5,710              2,932             12,666
   Natural gas equivalent (Mmcfe)                    1,757              6,022              3,388             13,494
                                               
Oil and Natural Gas Sales:                     
   Oil                                              $  757            $   725             $1,638            $ 2,024
   Natural gas(1)                                    2,561             10,680              6,387             25,897
                                                    ------            -------             ------            -------
   Total                                            $3,318            $11,405             $8,025            $27,921
                                                    ======            =======             ======            =======
                                               
Average Sales Price:                           
   Oil (Bbl)                                        $19.44            $ 13.94             $21.59            $ 14.67
   Natural gas (Mcf)/(1)/                             1.68               1.87               2.18               2.04
   Natural gas equivalent (Mcfe)                      1.89               1.89               2.37               2.07
                                               
Expenses ($ per Mcfe):                         
   Lease operating/(2)//(3)/                        $ 0.68            $  0.38             $ 0.76            $  0.47
   General and administrative/(4)/                    0.28               0.14               0.31               0.11
   Depreciation, depletion and                        
    amortization/(5)/                                 0.82               1.05               0.79               1.02
-------------------------------------------
</TABLE>
(1)  The natural gas sales amount and natural gas price per mcf for the three
     month period ended June 30, 1998 reflect a downward adjustment of
     approximately $400,000 to correct an over accrual which was made in the
     first quarter.
(2)  Includes lease operating costs and production taxes and is net of well
     operator overhead reimbursement billed to working interest owners which is
     recorded as well operations revenue.
(3)  The 1998 lease operating expense amount includes $1.1 million of non-
     recurring costs associated with the Amoco Acquisition transition.
(4)  Excludes a non-recurring severance payment to a former officer in 1998.
(5)  Represents depreciation, depletion and amortization of oil and natural gas
     properties only.

                                       18
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
------------------------------------------------------------------------------

     SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997

     Revenues were $29.1 million for the six months ended June 30, 1998, as
compared to $10.8 million for the six months ended June 30, 1997.  This
represents a 169% increase in total revenue for the period.  Natural gas and oil
sales for the six months ended June 30, 1998 increased $19.9 million (249%) to
$27.9 million, with $2.0 million from oil sales and $25.9 million from natural
gas sales, as compared to natural gas and oil sales of $8.0 million for the six
months ended June 30, 1997, with $1.6 million from oil sales and $6.4 million
from natural gas sales. The increase in natural gas and oil sales was primarily
the result of a 332% increase in natural gas production and a 82% increase in
oil production in 1998 compared to 1997. The increase in volumes of oil and gas
sold resulted primarily from the Amoco Acquisition and those 1997 Acquisitions
which were completed in the later half of that year. Oil sales in 1998 were
based on the sale of 138,000 barrels at an average price of $14.67 per barrel as
compared to 76,000 barrels at an average price of $21.59 per barrel in 1997.
Natural gas sales in 1998 were based on the sale of 12,666,000 Mcf at an average
price of $2.04 per Mcf compared to 2,932,000 Mcf at an average price of $2.18
per Mcf in 1997. Also included in the Company's revenue total for the six months
ended June30, 1997 is $2.2 million related to the sale of natural gas and
related products from the Company's interest in the Sycamore System, an Oklahoma
gathering system processing plant and storage facility acquired effective
January 1, 1997. The Company's interest in the Sycamore System and gas
processing and gathering systems acquired from Amoco were sold effective January
1, 1998 for $6.0 million.

     The Company incurred lease operating expenses for the six months ended June
30, 1998 of $7.5 million compared with lease operating expenses of $3.2 million
for the six months ended June 30, 1997.  Lease operating expenses include
approximately $1.9 million and $516,000, respectively, in production taxes which
the Company incurred from its share of production in 1998 and 1997.  The
increase in lease operating expenses is primarily due to the 298% increase in
natural gas and oil production (on an Mcfe basis) resulting primarily from the
Amoco Acquisition and those 1997 Acquisitions which were completed in the later
half of that year.   Lease operating expenses as a percentage of natural gas and
oil sales were 27% in 1998 as compared to 40% in 1997.

     Depreciation, depletion and amortization expense was $13.8 million for the
six months ended June 30, 1998 as compared to $2.7 million for the six months
ended June 30, 1997.  The increase resulted primarily from the increased
production associated with the properties acquired in the Amoco Acquisition and
those 1997 Acquisitions which were completed in the later half of that year.

     General and administrative costs were $1.5 million for the six months ended
June 30, 1998, as compared to $1.0 million for the six months ended June 30,
1997.  This increase was primarily the result of additional personnel and other
costs related to the Amoco Acquisition and the administrative costs incurred in
operating the wells acquired in the Amoco Acquisition.  Although general and
administrative six month costs increased approximately $471,000 during 1998, the
six month costs per Mcfe decreased from $0.31 in 1997 to $0.11 in 1998.

     Interest and debt issuance costs were $17.1 million for the six months
ended June 30, 1998 as compared to $2.9 million for 1997.  The increase
primarily relates to interest on the Company's 12 1/4% Senior Notes which were
issued in September 1997, interest on the 11 1/8% Senior Secured Notes which
were issued in April 1998 by Gothic Production, interest on the 14 1/8% Senior
Secured Discount Notes which were issued in April 1998 by the Company, and
amortization of the costs incurred to complete the 1998 Notes offerings and
amendments to the Bank One Credit Facility. The Company incurred interest costs
of $5.4 million with Bank One, $4.2 million related to the 12 1/4% Senior Notes,
$4.6 million related to the 11 1/8% Senior Secured Notes, $1.6 million related
to the 14 1/8% Senior Secured Discount Notes, $1.2 million as amortization of
loan costs and $105,000 with other parties.

                                       19
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
------------------------------------------------------------------------------

     The Company earned $179,000 in interest and other income during the six
months ended June 30, 1998 compared to $20,000 in 1997.  The Company also
recorded a loss of $305,000 on the sale of investments during the 1998 period.

     The Company recorded an extraordinary loss on early extinguishment of debt
in the amount of $31.5 million (reflecting the payment of $20.8 million in
consent fees, the write-off of $6.3 million in unamortized discount and debt
issuance costs and the write-off of $4.4 million in unamortized loan costs with
Bank One) in the six months ending June 30, 1998.  The loss was recognized as a
result of amendments to the Company's 12 1/4% Senior Notes which constituted a
substantial modification to the terms of the Company's 12 1/4% Senior Notes and
the retirement of the Company's  original credit facility with Bank One.

     The Company also incurred $1.4 million in preferred dividends on its Series
A Preferred Stock and $1.1 million in preferred dividends on its Series B
Preferred Stock during the six months ended June 30, 1998, compared to $196,000
in preferred dividends on its 7 1/2% Cumulative Convertible Preferred Stock in
1997.  All of the shares of the 7 1/2% Cumulative Convertible Preferred Stock
were converted into Common Stock prior to December 31, 1997.  The 1998 preferred
dividends are composed of the 14% annual dividend rate for approximately three
months in connection with the Series A Preferred Stock and the 12% annual
dividend rate for approximately two months in connection with the Series B
Preferred Stock.  The Company also recognized $4.2 million as preferred dividend
amortization of preferred discount during the six months ended June 30, 1998, of
which $3.9 million related to the write-off of discount costs when the Series A
Preferred Stock was redeemed in April 1998.  The remaining $300,000 relates to
two months of amortization of the discount resulting from the sale of the Series
B Preferred Stock and the issuance of related warrants (exercise price of $.01).

THREE MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THREE MONTHS ENDED JUNE 30,
1997.

     Revenues were $12.0 million for the three months ended June 30, 1998, as
compared to $4.6 million for the three months ended June 30, 1997.  This
represents a 161% increase in total revenue for the period.  Natural gas and oil
sales for the three months ended June 30, 1998 increased $8.1 million (245%)  to
$11.4 million, with $725,000 from oil sales and $10.7 million from natural gas
sales, as compared to natural gas and oil sales of $3.3 million for the three
months ended June 30, 1997, with $757,000 from oil sales and $2.6 million from
natural gas sales.  The increase in natural gas and oil sales was primarily the
result of a 275% increase in natural gas production in 1998 compared to 1997.
The increase in volumes of oil and gas sold resulted primarily from the Amoco
Acquisition and those 1997 Acquisitions which were completed in the later half
of that year.  Oil sales in 1998 were based on the sale of 52,000 barrels at an
average price of $13.94 per barrel as compared to 39,000 barrels at an average
price of $19.44 per barrel in 1997.  Natural gas sales in 1998 were based on the
sale of 5,710,000 Mcf at an average price of $1.87 per Mcf compared to 1,522,000
Mcf at an average price of $1.68 per Mcf in 1997.   The 1998 gas sales amount
and average gas price reflects a downward adjustment of approximately $400,000
to correct an over accrual which was made in the first quarter of 1998.
Excluding this adjustment, the Company would have realized an average natural
gas price of $1.93 per Mcf for natural gas actually sold during the three months
ended June 30, 1998.

     The Company incurred lease operating expenses for the three months ended
June 30, 1998 of $2.8 million compared with lease operating expenses of $1.5
million for the three months ended June 30, 1997.  Lease operating expenses
include approximately $827,000 and $216,000, respectively, in production taxes
which the Company incurred from its share of production in 1998 and 1997.  The
increase in lease operating expenses is primarily due to the

                                       20
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
------------------------------------------------------------------------------

increase in natural gas and oil production resulting primarily from the Amoco
Acquisition and those 1997 Acquisitions which were completed in the later half
of that year.

     Depreciation, depletion and amortization expense was $6.3 million for the
three months ended June 30, 1998 as compared to $1.4 million for the three
months ended June 30, 1997.  The increase resulted primarily from the increased
production associated with the properties acquired in the Amoco Acquisition and
those 1997 Acquisitions which were completed in the later half of that year.

     General and administrative costs were $857,000 for the three months ended
June 30, 1998, as compared to $493,000 for the three months ended June 30, 1997.
This increase was primarily the result of additional personnel and other costs
related to the Amoco Acquisition and the administrative costs incurred in
operating the wells acquired in the Amoco Acquisition.

     Interest and debt issuance costs were $9.1 million for the three months
ended June 30, 1998 as compared to $1.7 million for 1997.  The increase
primarily relates to interest on the Company's 12 1/4% Senior Notes which were
issued in September 1997, interest on the 11 1/8% Senior Secured Notes which
were issued in April 1998 by Gothic Production, interest on the 14 1/8% Senior
Secured Discount Notes which were issued in April 1998 by the Company, and
amortization of the costs incurred to complete the 1998 notes offerings and
amendments to the Bank One Credit Facility. The Company incurred interest costs
of $1.6 million with Bank One, $1.0 million related to the 12 1/4% Senior Notes,
$4.6 million related to the 11 1/8% Senior Secured Notes, $1.6 million related
to the 14 1/8% Senior Secured Discount Notes, and $253,000 as amortization of
loan costs.

     The profitability and revenues of the Company are dependent, to a
significant extent, upon prevailing spot market prices for natural gas and oil.
In the past, natural gas and oil prices and markets have been volatile.  Prices
are subject to wide fluctuations in response to changes in supply of and demand
for natural gas and oil, 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 overall economic conditions.
Natural gas and oil prices have fluctuated significantly over the past twelve
months.

     Subsequent to June 30, 1998 the natural gas industry experienced a
significant decline in natural gas prices. The Company's reserves were
determined at June 30, 1998 using a natural gas price of approximately $2.25 per
Mcf. At August 7, 1998, the natural gas price received by the Company fell to
approximately $1.70 per Mcf. Had the August 7, 1998 prices been used in the
evaluation, the decline in natural gas prices would have resulted in a provision
to reduce the oil and natural gas properties of approximately $76 million. Based
on rules promulgated by the SEC, the Company evaluates any impairment of its
natural gas and oil properties, based on prevailing prices as of the end of each
quarter, and accordingly, the actual amount of impairment if any, will not be
determinable until the end of the third quarter.

                                       21
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
------------------------------------------------------------------------------

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

     Since 1994, the Company's principal sources of cash have been bank
borrowings, the sale of equity and debt securities and cash flow from
operations.  The following summary table reflects comparative cash flows for the
Company for the six months ended June 30, 1997 and 1998:

<TABLE>
<CAPTION>
                                                                                 SIX MONTHS ENDED JUNE 30,
                                                                          --------------------------------------
                                                                                  1997                1998
                                                                          --------------------------------------
                                                                                      (IN THOUSANDS)
                                                                          --------------------------------------
<S>                                                                       <C>                     <C>
 
Net cash provided by operating activities                                        $  2,937          $   5,173
Net cash used in investing activities                                             (29,065)          (179,545)
Net cash provided by financing activities                                          26,225            165,660
</TABLE>

     Net cash provided by operations was $5.2 million for the six months ended
June 30, 1998 as compared to net cash provided by operations of $2.9 million for
the same period in 1997.  The operating cash flows for the six months ended June
30, 1998 relate primarily to the increased income from operations resulting from
the Amoco Acquisition and the 1997 Acquisitions, partially offset by related
interest costs and changes in working capital.

     The Company used $179.5 million of net cash in investing activities for the
six months ended June 30, 1998 compared to net cash used of $29.1 million for
the same period in 1997. This increase was primarily due to cash paid of $217.5
million to complete the Amoco Acquisition and well enhancement costs of
approximately $6.2 million. These uses were partially offset by proceeds of
$20.0 million received from the sale of half the Company's interest in the
Arkoma Basin to Chesapeake, $10.5 million received from Chesapeake for the right
to participate in up to 50% of substantially all of the Company's undeveloped
acreage, $6.0 million received from the sale of the Company's gas gathering and
processing system and $6.0 million received from the sale of interests in
certain natural gas and oil properties during 1998.

                                       22
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
------------------------------------------------------------------------------

     Net cash provided by financing activities for the six months ended June 30,
1998 was $165.7 million compared to $26.2 million provided in 1997.  The June
30, 1998 amount includes proceeds from short and long-term debt related to the
Amoco Acquisition and subsequent Recapitalization of $429.3 million and proceeds
from the issuance of the Company's Series A and Series B Preferred Stock of
$73.5 million, partially offset by the redemption of the Series A Preferred
Stock and accrued dividends for $40.8 million, payment of $38.3 million in 12
1/4% Senior Notes consent fees and other bank and offering fees and payments of
short and long-term debt of $257.9 million.

OUTSTANDING INDEBTEDNESS AND OTHER SECURITIES

     Credit Facility. On April 27, 1998, in connection with the
Recapitalization, Gothic Production, with the Company as guarantor, entered into
a Credit Facility.

     The Credit Facility consists of a revolving line of credit, with an initial
Borrowing Base of $25.0 million.  Borrowings initially are limited to being
available for the acquisition and development of natural gas and oil properties,
letters of credit and general corporate purposes.  The Borrowing Base will be
redetermined at lease semi-annually and the initial redetermination is scheduled
for October 1, 1998.  The principal is due at maturity, April 30, 2001.
Interest is payable monthly calculated at the Bank One Base Rate, as determined
from time to time by Bank One. Gothic Production may elect to calculate interest
under a London Interbank Offered Rate ("LIBOR") plus 1.5% (or up to 2.0% in the
event the loan balance is greater than 75% of the Borrowing Base). Gothic
Production is required to pay a commitment fee on the unused portion of the
Borrowing Base equal to 1/2 of 1% per annum. Under the Credit Facility, Bank One
holds first priority liens on substantially all of the natural gas and oil
properties of Gothic Production, whether currently owned or hereafter acquired.
Gothic Production currently has no amount outstanding under the Credit Facility.

     The Credit Facility requires, among other things, semi-annual engineering
reports covering oil and natural gas reserves on the basis of which semi-annual
and other redeterminations of the borrowing base and monthly commitment
reduction are made.  The Credit Facility also includes various affirmative and
negative covenants, including, among others, (i) prohibitions against additional
indebtedness unless approved by the lenders, subject to certain exceptions, (ii)
prohibitions against the creation of liens on the assets of the Company, subject
to certain exceptions, (iii) prohibitions against cash dividends, (iv)
prohibitions against hedging positions unless consented to by Bank One, (v)
prohibitions on asset sales, subject to certain exceptions, (vi) restrictions on
mergers or consolidations, (vii) a requirement to maintain a ratio of current
assets to current liabilities of 1.0 to 1.0, and (viii) a minimum interest
coverage ratio of not less than 1.5 to 1.0 as of the end of each quarter
calculated quarterly beginning with the quarter ending June 30, 1998 and
increasing to 2.0 to 1.0 as of the end of each quarter beginning with the
quarter ending March 31, 1999.  The Credit Facility includes covenants
prohibiting cash dividends, distributions, loans or advances to third parties,
subject to certain exceptions.  If Gothic Production is required to purchase or
redeem any portion of the 11 1/8% Senior Secured Notes, or if any portion of the
11 1/8% Senior Secured Notes become due, the Borrowing Base is subject to
reduction.  Gothic Production is required to escrow interest payments due on the
Notes at such times as its borrowings under the Credit Facility equal or exceed
75% of the Borrowing Base. Events of default include the non-payment of
principal, interest or fees, a default under other outstanding indebtedness, a
breach of the representations and warranties contained in the loan agreement,
material judgements, bankruptcy or insolvency, a default under certain covenants
not cured within a grace period, and a change in the management or control of
the Company. Gothic Production was not in compliance with the minimum interest
coverage of at least 1.5 to 1.0 for the quarter ended June 30, 1998. Gothic
Production received a waiver of compliance with the covenant for the quarter
ended June 30, 1998.

                                       23
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
------------------------------------------------------------------------------

     The amount of borrowings available under the Credit Facility depend upon
the determination of the Borrowing Base by Bank One.  The Borrowing Base is
subject to periodic redetermination, at the discretion of Bank One, based on a
review of reserve and other information.  A reduction in the Borrowing Base
could require the repayment of outstanding indebtedness under the Credit
Facility in excess of the redetermined Borrowing Base, and would limit available
borrowings thereunder.

     11-1/8% SENIOR SECURED NOTES The 11-1/8% Senior Secured Notes ("Senior
Secured Notes") issued by Gothic Production  are fully and unconditionally
guaranteed by the Company.  The aggregate principal amount of Senior Secured
Notes outstanding is $235.0 million issued under an indenture dated April 21,
1998 (the "Senior Note Indenture").  The Senior Secured Notes bear interest at
11-1/8% per annum payable semi-annually in cash in arrears on May 1 and November
1 of each year commencing November 1, 1998. .  The Senior Secured Notes mature
on May 1, 2005. All of the obligations of Gothic Production  under the Senior
Secured Notes are collateralized by a second priority lien on substantially all
of Gothic Production's natural gas and oil properties, subject to certain
permitted liens.

     Gothic Production may, at its option, at any time on or after May 1, 2002,
redeem all or any portion of the Senior Secured Notes at redemption prices
decreasing from 105.563%, if redeemed in the 12-month period beginning May 1,
2002, to 100.00% if redeemed in the 12-month period beginning May 1, 2004 and
thereafter plus, in each case, accrued and unpaid interest thereon.
Notwithstanding the foregoing, at any time prior to May 1, 2002, Gothic
Production may, at its option, redeem all or any portion of the Senior Secured
Notes at the Make-Whole Price (as defined in the Senior Note Indenture) plus
accrued or unpaid interest to the date of redemption.  In addition, in the event
Gothic Production consummates one or more Equity Offerings (as defined in the
Senior Note Indenture) on or prior to May 1, 2001, Gothic Production, at its
option, may redeem up to 33-1/3% of the aggregate principal amount of the Senior
Secured Notes with all or a portion of the aggregate net proceeds received by
Gothic Production  from such Equity Offering or Equity Offerings at a redemption
price of 111.125% of the aggregate principal amount of the Senior Secured Notes
so redeemed, plus accrued and unpaid interest thereon to the redemption date;
provided, however, that following such redemption, at least 66-2/3% of the
original aggregate principal amount of the Senior Secured Notes remains
outstanding.

     Following the occurrence of any Change of Control (as defined in the Senior
Note Indenture), Gothic Production will offer to repurchase all outstanding
Senior Secured Notes at a purchase price equal to 101% of the aggregate
principal amount of the Senior Secured Notes, plus accrued and unpaid interest
to the date of repurchase.

     The Senior Note Indenture under which the Senior Secured Notes were issued
contains certain covenants limiting Gothic Production with respect to or
imposing restrictions on the incurrence of additional indebtedness, the payment
of dividends, distributions and other restricted payments, the sale of assets,
creating, assuming or permitting to exist any liens (with certain exceptions) on
its assets, mergers and consolidations (subject to meeting certain conditions),
sale leaseback transactions, and transactions with affiliates, among other
covenants.

     Events of default under the Senior Note Indenture include the failure to
pay any payment of principal or premium when due, failure to pay for 30 days any
payment of interest when due, failure to make any optional redemption payment
when due, failure to perform any covenants relating to mergers or
consolidations, failure to perform any other covenant or agreement not remedied
within 30 days of notice from the Trustee under the Senior Note Indenture or the
holders of 25% in principal amount of the Senior Secured Notes then outstanding,
defaults under other indebtedness of Gothic Production or the Company

                                       24
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
------------------------------------------------------------------------------

causing the acceleration of the due date of such indebtedness having an
outstanding principal amount of $10.0 million or more, the failure of Gothic
Production to be a wholly owned subsidiary of the Company, and certain other
bankruptcy and other court proceedings, among other matters.

     14-1/8% SENIOR SECURED DISCOUNT NOTES.  The 14-1/8% Senior Secured Discount
Notes (the "Discount Notes") were issued by the Company under an indenture (the
"Discount Note Indenture") dated April 21, 1998 in such aggregate principal
amount and at such rate of interest as generated gross proceeds of $60.2
million.  The Company also issued seven-year warrants to purchase, at an
exercise price of $2.40 per share, 825,000 shares of the Company's Common Stock
with the Discount Notes.  The estimated fair value of such warrants was 
approximately $554,000 on the date of issuance. The Discount Notes were issued
at a substantial discount from their principal amount and accrete at a rate per
annum of 14-1/8%, compounded semi-annually, to an aggregate principal amount of
$104.0 million at May 1, 2002. Thereafter, the Discount Notes accrue interest at
the rate of 14-1/8% per annum, payable in cash semi-annually in arrears on May 1
and November 1 of each year, commencing November 1, 2002. The Discount Notes
mature on May 1, 2006. The Discount Notes are secured by a first priority lien
against the outstanding shares of capital stock of Gothic Production.

     The Company may, at its option, at any time on or after May 1, 2003, redeem
all or any portion of the Discount Notes at redemption prices decreasing from
107.063% if redeemed in the 12-month period beginning May 1, 2003 to 100.00% if
redeemed in the 12-month period beginning May 1, 2005 and thereafter plus, in
each case, accrued and unpaid interest thereon. Notwithstanding the foregoing,
at any time prior to May 1, 2003, the Company may, at its option, redeem all or
any portion of the Discount Notes at the Make-Whole Price (as defined in the
Discount  Note Indenture) plus accrued or unpaid interest to the date of
redemption.  In addition, in the event the Company consummates one or more
Equity Offerings (as defined in the Discount  Note Indenture) on or prior to May
1, 2001, the Company, at its option, may redeem up to 33-1/3% of the Accreted
Value (as defined in the Discount  Note Indenture) of the Discount Notes with
all or a portion of the aggregate net proceeds received by the Company from such
Equity Offering or Equity Offerings at a redemption price of 114.125% of the
Accreted Value of the Discount Notes so redeemed, plus accrued and unpaid
interest thereon to the redemption date; provided, however, that following such
redemption, at least 66-2/3% of the Accreted Value of the Discount Notes remains
outstanding.

     Following the occurrence of any Change of Control (as defined in the
Discount  Note Indenture), the Company will offer to repurchase all outstanding
Discount Notes at a purchase price equal to, prior to May 1, 2002,  101% of the
Accreted Value of the Discount Notes on the date of repurchase, plus accrued and
unpaid interest to the date of repurchase and thereafter, 101% of the aggregate
principal amount of the Discount Notes plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of repurchase.

     The Discount  Note Indenture under which the Discount Notes were issued
contains certain covenants limiting the Company with respect to or imposing
restrictions on the incurrence of additional indebtedness, the payment of
dividends, distributions and other restricted payments, the sale of assets,
creating, assuming or permitting to exist any liens (with certain exceptions) on
its assets, mergers and consolidations (subject to meeting certain conditions),
sale leaseback transactions, and transactions with affiliates, among other
covenants.

                                       25
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
------------------------------------------------------------------------------

     Events of default under the Discount  Note Indenture include the failure to
pay any payment of principal or premium when due, failure to pay for 30 days any
payment of interest when due, failure to make any optional redemption payment
when due, failure to perform any covenants relating to mergers or
consolidations, failure to perform any other covenant or agreement not remedied
within 30 days of notice from the Trustee under the Discount Note Indenture or
the holders of 25% in principal amount of the Discount Notes then outstanding,
defaults under other indebtedness of the Company causing the acceleration of the
due date of indebtedness having an outstanding principal amount of $10.0 million
or more, the failure of Gothic Production to be a wholly owned subsidiary of the
Company, and certain other bankruptcy and other court proceedings, among other
matters.

     12 1/4% SENIOR NOTES DUE 2004.  On January 23, 1998, the Company obtained
consents to the amendment of the Company's outstanding 12 1/4% Senior Notes.  Of
the consideration given for the consents, $15.0 million was paid by the issuance
of 15,000 shares of Series A Preferred Stock (see Note 4) and $5.8 million was
paid in cash.  These consent fees totaling $20.8 million together with
unamortized discount and debt issue costs of $5.3 million and a $1.0 million
early redemption premium related to the 12 1/4 % Senior Notes have all been
written off as an extraordinary loss during the quarter ended March 31, 1998, as
the terms of the consent constitute a substantial modification of the terms of
the 12 1/4% Senior Notes.

     In connection with obtaining the consents, the Company agreed to raise a
total of at least $45.0 million of equity by February 28, 1998 and at least
$100.0 million from the sale of senior subordinated notes by March 31, 1998.  In
the event the Company failed to comply with either of these agreements, until
such conditions were met, the interest rate on the 12 1/4% Senior Notes
increased by 1% until the additional equity was raised and also by 1% until the
senior subordinated notes were sold, provided, if the senior subordinated notes
were not sold by June 30, 1998, the interest rate on the 12 1/4% Senior Notes
increased by 2% until such senior subordinated notes were sold.  Such additional
equity was not sold by February 28, 1998.   Pursuant to such consents, the
holders of the 12 1/4% Senior Notes agreed that the Company had the right to
redeem such notes through March 31, 1998 at 100% of the principal amount thereof
and at 101% of the principal amount thereof through April 30, 1998 when such
redemption right expired.  On April 27, 1998, as part of the Company's
Recapitalization, the Senior Notes and all accrued interest were paid in full.

     SERIES B PREFERRED STOCK.  On April 27, 1998, as part of the
Recapitalization, the Company issued 50,000 shares of its Series B Preferred
Stock with an aggregate liquidation value of $50.0 million, and ten-year
warrants to purchase, at an exercise price of $0.01 per share, 2,439,246 shares
of the Company's Common Stock.   The estimated fair value of such warrants was
$4.9 million on the date of issuance.  The Series B Preferred Stock, with
respect to dividend rights and rights on liquidation, winding-up and
dissolution, ranks senior to all classes of Common Stock of the Company and
senior to all other classes or series of any class of preferred stock.  Holders
of the Series B Preferred Stock are entitled to receive dividends payable at a
rate per annum of 12% of the aggregate Liquidation Preference of the Series B
Preferred Stock payable in additional shares of Series B Preferred Stock;
provided that after April 1, 2000, at the Company's option, it may pay the
dividends in cash.  Dividends are cumulative and will accrue from the date of
issuance and are payable quarterly in arrears.

     At any time prior to April 30, 2000, the Series B Preferred Stock may be
redeemed at the option of the Company in whole or in part, at 105% of the
Liquidation Preference payable in cash out of the net proceeds from a public or
private offering of any equity security, plus accrued and unpaid dividends
(whether or not declared), which shall also be paid in cash.  At any time on or
after April 30, 2000, the Series B Preferred Stock may be redeemed at the option
of the Company in whole or in part, in cash at a redemption price equal to the
Liquidation Preference.

                                       26
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
------------------------------------------------------------------------------

     The Company is required to redeem the Series B Preferred Stock on June 30,
2008 at a redemption price equal to the Liquidation Preference payable in cash
or, at the option of the Company, in shares of Common Stock valued at the fair
market value at the date of such redemption.

     Except as required by Oklahoma law, the holders of Series B Preferred Stock
are not entitled to vote on any matters submitted to a vote of the stockholders
of the Company.

     The Series B Preferred Stock is convertible at the option of the holders on
or after April 30, 2000 into the number of fully paid and non-assessable shares
of Common Stock determined by dividing the Liquidation Preference by the higher
of (i) $2.04167 or (ii) the fair market value on the date the Series B Preferred
Stock is converted.  Notwithstanding the foregoing, no holder or group shall be
able to convert any shares of Series B Preferred Stock to the extent that the
conversion of such shares would cause such holder or group to own more than
19.9% of the outstanding Common Stock of the Company.

     SERIES A PREFERRED STOCK AND WARRANTS.   On January 23, 1998, the Company
issued an aggregate of 37,000 shares of Series A Preferred Stock, inclusive of
the shares issued as part of the consent fee described above, with each share
having a liquidation preference of $1,000.  The shares of Series A Preferred
Stock were redeemable at any time upon payment in cash of 101% of the
liquidation preference, inclusive of accrued but unpaid dividends, and the
shares were mandatorily redeemable on December 31, 2004.  The shares of Series A
Preferred Stock entitled the holders to receive cumulative dividends payable in
additional shares of Series A Preferred Stock at a rate per annum initially of
14% of the liquidation preference of the Series A Preferred Stock increasing on
April 1, 1998 and each 90-day period thereafter that the Series A Preferred
Stock remained outstanding by 1%, but not to exceed a maximum dividend per annum
of 20%, excluding any other adjustments to the dividend rate.   The issuance of
the shares provided a portion of the cash paid as consideration in the Amoco
Acquisition and a fee in connection with an amendment obtained from the holders
of certain terms of the Company's 12 1/4% Senior Notes.

     Concurrently with the sale of the Series A Preferred Stock, the Company
issued five-year Warrants to purchase an aggregate of 1,175,778 shares of Common
Stock exercisable at the lesser of $2.75 per share or the average of the daily
closing bid prices commencing five days and ending one day before the date of
exercise, subject to reduction to $0.01 per share under certain circumstances.
The estimated fair value of such Warrants was $941,000 on the date of issuance.

     In March 1998, the Company obtained consents from the holders of
approximately 95% of the Series A Preferred Stock and the related warrants to
extend through April 30, 1998 the date on which (i) the warrant exercise price
on existing warrants will reduce to $0.01 and (ii) such holders would receive
additional warrants.  On April 27, 1998, as part of the Company's
Recapitalization Plan, all 37,000 shares of the Series A Preferred Stock were
redeemed and all accrued dividends paid.

     On April 27, 1998, the Company completed a series of transactions which
recapitalized the Company (the "Recapitalization).  See Note 3 to notes to
financial statements for a description of the Recapitalization. As  a
consequence of the Recapitalization the Company now has outstanding the
following:

                                       27
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
------------------------------------------------------------------------------

FUTURE CAPITAL REQUIREMENTS AND RESOURCES

     The Company's capital requirements relate to the acquisition, exploration,
enhancement, development and operation of natural gas and oil properties.  In
general, because the natural gas and oil reserves the Company has acquired are
depleted by production over time, the success of its business strategy is
dependent upon a continuous acquisition, exploitation, enhancement, and
development program.  In order to achieve profitability and generate cash flow,
the Company will be dependent upon acquiring or developing additional natural
gas and oil properties or entering into joint natural gas and oil well
development arrangements.  The Company currently has $25.0 million in borrowing
capacity available under its Credit Facility.

YEAR 2000 COMPUTER ISSUES

     The Company has reviewed its computer systems and hardware to locate
potential operational problems associated with the year 2000.  Such review will
continue until all potential problems are located and resolved.  The Company
believes that all year 2000 problems in its computer systems have been or will
be resolved in a timely manner and have not caused and will not cause disruption
of its operations or have a material adverse effect on its financial condition
or results of operations.  However, it is possible that the Company's cash flows
could be disrupted by year 2000 problems experienced by outside operators of its
wells, buyers of its natural gas and oil, financial institutions or other
persons.  The Company is unable to quantify the effect, if any, of year 2000
computer problems that may be experienced by these third parties.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.

     With the exception of historical matters, the matters discussed in this
Report are "forward-looking statements" as defined under the Securities Exchange
Act of 1934, as amended, that involve risks and uncertainties.  Forward-looking
statements include, but are not limited to, the matters described below, as well
as  "Item 2.  Management's Discussion and Analysis or Plan of Operations -
General," "- Liquidity and Capital Resources."  Such forward-looking statements
relate to the Company's ability to attain and maintain profitability and cash
flow, the stability of and future prices for oil and gas, the ability of the
Company to acquire additional natural gas and oil reserves, the ability of the
Company to raise additional capital to meet its requirements and to obtain
additional financing, its ability to successfully implement its business
strategy, and its ability to maintain compliance with the covenants of its
various loan documents and other agreements pursuant to which securities have
been issued.  The inability of the Company to meet these objectives or the
consequences on the Company from adverse developments in general economic
conditions, adverse developments in the oil and gas industry, and other factors
could have a material adverse effect on the Company.  The Company cautions
readers that various risk factors described in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997 could cause the Company's
operating results to differ materially from those expressed in any forward-
looking statements made by the Company and could adversely affect the Company's
financial condition and its ability to pursue its business strategy.

                                       28
<PAGE>
 
PART II.  OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

     On April 27, 1998, as part of the Recapitalization, the Company issued to
Chesapeake Energy Corporation 50,000 shares of Series B Preferred Stock with an
aggregate liquidation value of $50.0 million, and ten-year warrants to purchase,
at an exercise price of $0.01 per share, 2,439,246 shares of the Company's
Common Stock.  The securities were issued in consideration for $39.5 million.

     On April 27, 1998, as part of the Recapitalization, the Company issued and
sold $60.2 million initial principal amount if its 14 1/8% Senior Secured
Discount Notes, due 2006, and warrants to purchase 825,000 shares of Common
Stock at an exercise price of $2.40 per share.  The securities were issued in
consideration for $60.2 million.  The securities were purchased by persons who
represented that they were "qualified institutional buyers", as defined under
Rule 144A under the Securities Act of 1933, as amended (the Securities Act).

     The securities were issued in reliance upon the exemption from the
registration requirements of the Securities Act afforded by Section 4 (2)
thereof and Regulation D thereunder.  Donaldson, Lufkin & Jenrette Securities
Corporation acted as advisor to the Company in the transactions and received a
fee in connection with its representation of the Company in the
Recapitalization.

                                       29
<PAGE>
 
PART II.  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibits:

               15 -     Letter Regarding Unaudited Interim Financial Information

               27 -     Financial Data Schedule

          (b)  Reports on Form 8-K

               During the quarter ended June 30, 1998, the Company filed Current
               Reports on Form 8-K dated April 27, 1998.

                                       30
<PAGE>
 
                                   SIGNATURES


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


                                 GOTHIC ENERGY CORPORATION



Date:  August 12, 1998    By:    /s/ Michael Paulk
                                 --------------------------------------
                                 MICHAEL PAULK,
                                 President, Chief Executive Officer


Date:  August 12, 1998    By:    /s/ Steven Ensz
                                 --------------------------------------
                                 STEVEN ENSZ,
                                 Vice President of Finance,
                                 Chief Financial Officer


Date:  August 12, 1998    By:    /s/ Andrew McGuire
                                 --------------------------------------
                                 ANDREW MCGUIRE,
                                 Controller


                                 GOTHIC PRODUCTION CORPORATION



Date:  August 12, 1998    By:    /s/ Michael Paulk
                                 --------------------------------------
                                 MICHAEL PAULK,
                                 President, Chief Executive Officer


Date:  August 12, 1998    By:    /s/ Steven Ensz
                                 --------------------------------------
                                 STEVEN ENSZ,
                                 Vice President of Finance,
                                 Chief Financial Officer


Date:  August 12, 1998    By:    /s/ Andrew McGuire
                                 --------------------------------------
                                 ANDREW MCGUIRE,
                                 Controller

                                       31