<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 SEPTEMBER 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  November 13, 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 November 13, 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 September 30, 1998.....................         3
 
        Consolidated Unaudited Statements of Operations
        Nine months ended September 30, 1997 and 1998................         4
 
        Consolidated Unaudited Statements of Operations
        Three Months ended September 30, 1997 and 1998...............         5
 
        Consolidated Unaudited Statements of Cash Flows
        Nine months ended September 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 Operation....        18
                                        

PART II - OTHER INFORMATION

        Item 6 - Exhibits and Reports on Form 8-K....................        31
 
        Signatures...................................................        32
                                        

                                       2
<PAGE>
 
                    GOTHIC ENERGY CORPORATION AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
                    (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
                                        
<TABLE>
<CAPTION>
                                                                       DECEMBER 31,             SEPTEMBER 30,
                             ASSETS                                        1997                     1998
                             ------                                  ---------------          ----------------
                                                                                                (Unaudited)
<S>                                                                  <C>                       <C>
CURRENT ASSETS:
  Cash and cash equivalents                                                 $ 16,722                 $  11,724
  Available-for-sale investments                                                 406                         -
  Natural gas and oil receivables                                              3,200                     5,963
  Other Receivable                                                                 -                     3,053
  Receivable from officers and employees                                          82                        70
  Other                                                                           78                        69
                                                                            --------                 ---------
  TOTAL CURRENT ASSETS                                                        20,488                    20,879
 
PROPERTY AND EQUIPMENT:
  Natural gas and oil properties on full cost method:
    Properties being amortized                                                94,168                   275,946
    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                     3,057
  Accumulated depreciation, depletion and amortization                        (9,456)                  (28,441)
                                                                            --------                 ---------
PROPERTY AND EQUIPMENT, NET                                                  116,527                   252,665
OTHER ASSETS, NET                                                              1,360                    13,482
NOTE RECEIVABLE FROM OFFICER AND DIRECTOR                                        167                         -
                                                                            --------                 ---------
TOTAL ASSETS                                                                $138,542                 $ 287,026
                                                                            ========                 =========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
 
CURRENT LIABILITIES:
  Accounts payable trade                                                    $  2,081                 $   2,247
  Revenues payable                                                             1,553                     4,930
  Accrued interest and dividends                                               4,018                    11,184
  Accrued liabilities                                                            182                       167
                                                                            --------                 ---------
TOTAL CURRENT LIABILITIES                                                      7,834                    18,528
 
LONG-TERM DEBT, NET                                                          117,704                   298,943
 
GAS IMBALANCE LIABILITY                                                          551                     5,642
 
STOCKHOLDERS' EQUITY:
  Series B Redeemable Preferred stock, par value $.05,
    authorized 500,000 shares; issued and outstanding 51,052
    shares                                                                         -                    34,892
  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)                 (113,969)
  Unrealized loss on available-for-sale investments                             (121)                        -
  Note receivable                                                               (169)                     (169)
                                                                            --------                 ---------
TOTAL STOCKHOLDERS' EQUITY                                                    12,453                   (36,087)
                                                                            --------                 ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                  $138,542                 $ 287,026
                                                                            ========                 =========
</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 NINE MONTHS ENDED
                                                                                 SEPTEMBER 30,
                                                               ----------------------------------------------
                                                                        1997                      1998
                                                               --------------------      --------------------
<S>                                                            <C>                       <C>
REVENUES:
  Natural gas and oil sales                                            $12,539                  $ 39,699
  Gas system revenues                                                    3,120                         -
  Well operations                                                          952                     1,949
                                                                       -------                  --------

    TOTAL REVENUES                                                     $16,611                  $ 41,648
                                                                    
COSTS AND EXPENSES:                                                 
  Lease operating expenses                                               4,768                     9,949
  Gas system expenses                                                    2,414                         -
  Depreciation, depletion and amortization                               3,804                    19,240
  General and administrative expense                                     1,655                     2,405
  Severance for former officer                                               -                       258
  Provision for impairment of natural gas and oil properties                 -                    34,000
                                                                       -------                  --------
Operating income (loss)                                                  3,970                   (24,204)
Interest expense and amortization of debt issuance costs                (5,241)                  (26,247)
Interest and other income                                                   93                       350
Loss on sale of investments                                                  -                      (305)
                                                                       -------                  --------

LOSS BEFORE EXTRAORDINARY ITEM                                         $(1,178)                 $(50,406)
                                                                    
LOSS ON EARLY EXTINGUISHMENT OF DEBT                                      (907)                  (31,459)
                                                                       -------                  --------
                                                                    
NET LOSS                                                                (2,085)                  (81,865)
                                                                    
PREFERRED DIVIDEND ($47.65 AND $95.46 PER PREFERRED SHARE)                 264                     4,008
                                                                    
PREFERRED DIVIDEND--AMORTIZATION OF PREFERRED DISCOUNT                       -                     4,633
                                                                       -------                  --------
                                                                    
                                                                    
NET LOSS AVAILABLE FOR COMMON SHARES                                   $(2,349)                 $(90,506)
                                                                       =======                  ========
                                                                    
LOSS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM,                    
  BASIC AND DILUTED                                                    $  (.11)                 $  (3.63)
                                                                       =======                  ========
                                                                    
NET LOSS PER COMMON SHARE, BASIC AND DILUTED                           $  (.18)                 $  (5.57)
                                                                       =======                  ========
                                                                    
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                              13,269                    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
                                                                                     SEPTEMBER  30,
                                                                    ----------------------------------------------
                                                                             1997                      1998
                                                                    --------------------      --------------------
<S>                                                                 <C>                       <C>
REVENUES:
 Natural gas and oil sales                                                  $ 4,514                  $ 11,778
 Gas system revenues                                                            941                         -
 Well operations                                                                321                       796
                                                                            -------                  --------
 
   TOTAL REVENUES                                                           $ 5,776                  $ 12,574
 
COSTS AND EXPENSES:
 Lease operating expenses                                                     1,546                     2,454
 Gas system expenses                                                            672                         -
 Depreciation, depletion, and amortization                                    1,131                     5,485
 General and administrative expense                                             614                       893
 Provision for impairment of natural gas and oil properties                       -                    34,000
                                                                            -------                  --------
 
Operating income (loss)                                                       1,813                   (30,258)
Interest expense and amortization of debt issuance costs                     (2,315)                   (9,153)
Interest and other income                                                        73                       171
                                                                            -------                  --------
 
LOSS BEFORE EXTRAORDINARY ITEM                                              $  (429)                 $(39,240)
 
LOSS ON EARLY EXTINGUISHMENT OF DEBT                                           (907)                        -
                                                                            -------                  --------
 
NET LOSS                                                                     (1,336)                  (39,240)
 
PREFERRED DIVIDEND ($12.27 AND $30.24 PER PREFERRED SHARE)                       68                     1,544
 
PREFERRED DIVIDEND - AMORTIZATION OF PREFERRED DISCOUNT                           -                       462
                                                                            -------                  --------
 
NET LOSS AVAILABLE FOR COMMON SHARES                                        $(1,404)                 $(41,246)
                                                                            =======                  ========
 
LOSS PER COMMON SHARE BEFORE
 EXTRAORDINARY ITEM, BASIC AND DILUTED                                      $  (.04)                 $  (2.54)
                                                                            =======                  ========
 
NET LOSS PER COMMON SHARE, BASIC AND DILUTED                                $  (.10)                 $  (2.54)
                                                                            =======                  ========
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                   14,151                    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 NINE MONTHS ENDED
                                                                                    SEPTEMBER 30,
                                                                    ----------------------------------------------
                                                                             1997                      1998
                                                                    --------------------      --------------------
<S>                                                                 <C>                       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                               $ (2,085)                $ (81,865)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED
    BY OPERATING ACTIVITIES:
    Depreciation, depletion and amortization                                  3,804                    19,240
    Amortization of discount and loan costs                                   1,547                     1,581
    Loss on early extinguishment of debt                                        907                    31,459
    Accretion of interest on discount notes                                       -                     3,787
    Provision for impairment of natural gas and oil properties                    -                    34,000
 
CHANGES IN ASSETS AND LIABILITIES:
    Increase in accounts receivable                                          (1,441)                   (2,365)
    (Increase) decrease  in other current assets                                (25)                        9
    Increase in accounts and revenues payable                                   259                     1,589
    Decrease in gas imbalance payable                                          (469)                        -
    Increase in accrued liabilities                                             449                     7,151
    Decrease in other assets                                                    357                         -
                                                                           --------                 ---------
 
NET CASH PROVIDED BY OPERATING ACTIVITIES                                  $  3,303                 $  14,586
 
NET CASH USED BY INVESTING ACTIVITIES:
    Increase in notes receivable                                               (336)                        -
    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                                457                    43,027
    Purchase of property and equipment                                      (58,872)                 (218,234)
    Property development costs                                               (3,636)                  (10,890)
                                                                           --------                 ---------
 
NET CASH USED BY INVESTING ACTIVITIES                                      $(62,387)                $(185,033)
 
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from short-term borrowings                                      14,500                    60,000
    Payment of short-term borrowings                                        (14,500)                  (60,000)
    Proceeds from long-term borrowings                                      136,597                   429,340
    Payments of long-term borrowings                                        (61,863)                 (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                             335                         -
    Payment of loan and offering fees                                        (2,084)                  (38,461)
    Payment of dividends                                                       (220)                        -
    Other                                                                       (70)                     (162)
                                                                           --------                 ---------
 
NET CASH PROVIDED BY FINANCING ACTIVITIES                                  $ 72,695                 $ 165,449
NET CHANGE IN CASH AND CASH EQUIVALENTS                                      13,611                    (4,998)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                  207                    16,722
                                                                           --------                 ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                   $ 13,818                 $  11,724
                                                                           ========                 =========
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID                                   $  3,694                 $   9,696
                                                                           ========                 =========
</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, a "holding
company", (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 September 30, 1998, and the results of its operations and cash
flows for the periods ended September 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 September 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 an effect on the Company's
financial statements, as there was no difference between net income (loss) and
comprehensive income (loss). FAS 131 does not effect the Company as the Company
operates in only one business segment in the United States.

     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.  NATURAL GAS AND OIL PROPERTY ACQUISITIONS, DISPOSITIONS AND WRITEDOWN

     AMOCO ACQUISITION - an 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. 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 approximately $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 provided 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.

     CEILING WRITE-DOWN OF NATURAL GAS AND OIL PROPERTIES - The Company accounts
for its natural gas and oil exploration and development activities using the
full cost method of accounting prescribed by the Securities and Exchange
Commission ("SEC").  Accordingly, all productive and non-productive costs
incurred in connection with the acquisition, exploration and development of
natural gas and oil reserves are capitalized and depleted using the units-of-
production method based on proved natural gas and oil reserves. In the event the
unamortized cost of natural gas and oil properties being amortized exceeds the
full cost ceiling as defined by the SEC, the excess is charged to expense in the
period during which such excess occurs. The full cost ceiling is based
principally on the estimated future discounted net cash flows from the Company's
natural gas and oil properties. As a result of a decrease in the prices of
natural gas and oil received, the Company recorded a $34.0 million provision for
impairment of natural gas and oil properties at September 30, 1998.

                                       8
<PAGE>
 
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 interests in natural gas and oil properties 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, (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.

     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

                                       9
<PAGE>
 
NOTE 3.  RECAPITALIZATION (CONTINUED)

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.

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 was initially  redetermined on October
1, 1998.  Upon completion of the October 1, 1998 redetermination, the borrowing
base remained at $25.0 million.  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 quarters ended June 30, 1998 and
September 30, 1998.  Gothic Production received waivers of compliance with the
covenant for both quarters.

                                       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
million or more, the failure of

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

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 September 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 would 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 September 30, 1998 and for the nine month and three month periods ended
September 30, 1998. (in thousands)

<TABLE>
<CAPTION>
                                                             As of  September 30, 1998
                           -------------------------------------------------------------------------------------------
                                    Gothic Energy                 Gothic Production         Gothic Energy Corporation   
                                     Corporation                   Corporation/(1)/                Consolidated         
                           ------------------------------  -----------------------------  ---------------------------- 
<S>                        <C>                             <C>                            <C>
Current assets                          $      -                      $ 20,879                       $ 20,879
Non-current assets                         2,121                       264,026                        266,147
Current liabilities                            -                        18,528                         18,528
Non-current liabilities                   63,943                       240,642                        304,585

<CAPTION>
                                                    For the nine months ended September 30, 1998
                           --------------------------------------------------------------------------------------------
                                    Gothic Energy                  Gothic Production          Gothic Energy Corporation   
                                     Corporation                   Corporation/(1)/                Consolidated          
                           -------------------------------  -----------------------------  ---------------------------- 
<S>                        <C>                              <C>                            <C>                          
Total revenues                         $ 21,033                       $ 20,615                       $ 41,648
Operating costs and                    
   expenses                              16,172                         15,680                         31,852
Provision for impairment               
   of natural gas and oil              
   properties                                 -                         34,000                         34,000
Interest expense and                   
   amortization of debt                
   issuance cost                         14,515                         11,732                         26,247
Loss before                            
   extraordinary item                   (10,111)                       (40,295)                       (50,406)
Net loss                                (41,545)                       (40,320)                       (81,865)
 
<CAPTION> 
                                                   For the three months ended September 30, 1998
                           --------------------------------------------------------------------------------------------
                                    Gothic Energy                  Gothic Production          Gothic Energy Corporation 
                                     Corporation                   Corporation/(1)/                Consolidated         
                           -------------------------------  -----------------------------  ---------------------------- 
<S>                        <C>                              <C>                            <C>                          
Total revenues                          $     _                       $ 12,574                       $ 12,574
Operating costs and                     
   expenses                                   -                          8,832                          8,832
Provision for impairment                
   of natural gas and oil               
   properties                                 -                         34,000                         34,000
Interest expense and                    
   amortization of debt                 
   issuance cost                          2,278                          6,875                          9,153
Net loss                                 (2,278)                       (36,962)                       (39,240)
</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 September 30, 1998 and the related
consolidated statements of operations for the three and nine month periods ended
September 30, 1998, and the consolidated statement of cash flows for the nine-
month period ended September 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
November 3, 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.  

     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 Company 
also sold for $10.5 million, a 50% participation right in substantially all of
the Company's undeveloped acreage. See Note 3 of the Notes to Unaudited
Consolidated Financial Statements herein.

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

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

<TABLE>
<CAPTION>
RESULTS OF OPERATIONS                                 Three Months Ended                    Nine months Ended
                                             ------------------------------------  ------------------------------------
                                                        September 30,                         September 30,
                                             ------------------------------------  ------------------------------------
                                                   1997               1998               1997               1998
                                             -----------------  -----------------  -----------------  -----------------
<S>                                          <C>                <C>                <C>                <C>
                                                             (in thousands, unless otherwise indicated)
Net Production:
   Oil (Mbbls)                                              43                 52                122                190
   Natural gas (Mmcf)                                    1,673              5,994              4,601             18,660
   Natural gas equivalent (Mmcfe)                        1,931              6,306              5,333             19,800
 
Oil and Natural Gas Sales:
   Oil                                                  $  859            $   668            $ 2,496            $ 2,692
   Natural gas/(1)/                                      3,655             11,110             10,043             37,007
                                                        ------            -------            -------            -------
   Total                                                $4,514            $11,778            $12,539            $39,699
                                                        ======            =======            =======            =======
Average Sales Price:
   Oil (Bbl)                                            $19.99            $ 12.74            $ 20.54            $ 14.18
   Natural gas (Mcf)/(1)/                                 2.09               1.85               2.10               1.98
   Natural gas equivalent (Mcfe)                          2.26               1.87               2.28               2.01
 
Expenses ($ per Mcfe):
   Lease operating /(2)(3)/                             $ 0.63            $  0.26            $  0.72            $  0.40
   General and administrative/(4)/                        0.32               0.14               0.31               0.12
   Depreciation, depletion and
    amortization /(5)/                                    0.59               0.87               0.71               0.97 
</TABLE> 
-------------------------------------------
(1)  The natural gas sales amounts for the three and nine month periods ended
     September 30, 1997 reflect gas balancing settlements of approximately
     $156,000 and $357,000 to settle under production interests held by the
     Company.
(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 nine months ended September 30, 1998 lease operating expense amount
     includes $1.1 million of non-recurring costs in January and February, 1998
     associated with the Amoco Acquisition transition.
(4)  The nine months ended September 30, 1998 excludes a non-recurring severance
     payment to a former officer in January 1998.
(5)  Represents depreciation, depletion and amortization of oil and natural gas
     properties only.

Nine Months Ended September 30, 1998 Compared with Nine Months Ended September
30, 1997

     Revenues were $41.6 million for the nine months ended September 30, 1998,
as compared to $16.6 million for the nine months ended September 30, 1997.  This
represents a 151% increase in total revenue for the period.  Natural gas and oil
sales for the nine months ended September 30, 1998 increased $27.2 million
(218%)  to $39.7 million, with $2.7 million from oil sales and $37.0 million
from natural gas sales, as compared to natural gas and oil sales of $12.5
million for the nine months ended September 30, 1997, with $2.5 million from oil
sales and $10.0 million from natural gas sales.  The increase in natural gas and
oil sales was primarily the result of a 306% increase in natural gas production
and a 56% increase in oil production in 1998 compared to 1997.  The increase in
volumes of natural gas and oil 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 190,000 barrels at an
average price of $14.18 per barrel as compared to 122,000 barrels at an average
price of $20.54 per barrel in 1997.  Natural gas sales in 1998 were based on the
sale of 18,660,000 Mcf at an average price of $1.98 per Mcf compared to
4,601,000 Mcf at an average price of $2.10 per Mcf in 1997. Also included in the
Company's total revenue for the nine months ended September 30, 1997 is $3.1
million related to the sale of natural gas and related products from the
Company's interest in the

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

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 nine months ended
September 30, 1998 of $9.9 million compared with lease operating expenses of
$4.8 million for the nine months ended September 30, 1997.  Lease operating
expenses include approximately $2.7 million and $823,000, 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 271%
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 25% in 1998 as compared to 38% in
1997. This improvement in lease operating expenses as a percentage of natural 
gas and oil sales is due to the Company's use of telemetry and other more 
efficient means of operating its properties that were realized as part of the 
Amoco Acquisition.

     Depreciation, depletion and amortization expense was $19.2 million for the
nine months ended September 30, 1998 as compared to $3.8 million for the nine
months ended September 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 $2.4 million for the nine months
ended September 30, 1998, as compared to $1.7 million for the nine months ended
September 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 nine month costs increased
approximately $750,000 during 1998, the nine month costs per Mcfe decreased from
$.31 in 1997 to $.12 in 1998.

     During the period ended September 30, 1998, the Company recorded a $34.0
million pre-tax provision for impairment of natural gas and oil properties.
Such provision resulted from a full cost-ceiling write-down which was required
due to a drop in natural gas and oil prices at September 30, 1998.  The write-
down was reflected in the balance sheet as a reduction of the cost of natural
gas and oil properties.

     Interest expense and amortization of debt issuance costs were $26.2 million
for the nine months ended September 30, 1998 as compared to $5.2 million for
1997.  The increase primarily relates to  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, $11.2 million related to the 11 1/8% Senior Secured Notes,
$3.7 million related to the 14 1/8% Senior Secured Discount Notes, $1.6 million
as amortization of loan costs and $106,000 with other parties.

     The Company earned $350,000 in interest and other income during the nine
months ended September 30, 1998 compared to $93,000 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 nine months ending September 30, 1998.  The loss was recognized
as a result of amendments to the Company's 12 1/4% Senior Notes which

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

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 $2.6 million in preferred dividends on its Series B
Preferred Stock during the nine months ended September 30, 1998, compared to
$264,000 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 five months in connection with
the Series B Preferred Stock.  The Company also recognized $4.6 million as
preferred dividend  amortization of preferred discount during the nine months
ended September 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 $700,000 relates to five 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 SEPTEMBER 30, 1998 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997.

     Revenues were $12.6 million for the three months ended September 30, 1998,
as compared to $5.8 million for the three months ended September 30, 1997.  This
represents a 117% increase in total revenue for the period.  Natural gas and oil
sales for the three months ended September 30, 1998 increased $7.3 million
(162%)  to $11.8 million, with $700,000 from oil sales and $11.1 million from
natural gas sales, as compared to natural gas and oil sales of $4.5 million for
the three months ended September 30, 1997, with $900,000 from oil sales and $3.6
million from natural gas sales.  The increase in natural gas and oil sales was
primarily the result of a 258% 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 $12.74 per barrel as compared to
43,000 barrels at an average price of $19.99 per barrel in 1997.  Natural gas
sales in 1998 were based on the sale of 5,994,000 Mcf at an average price of
$1.85 per Mcf compared to 1,673,000 Mcf at an average price of $2.09 per Mcf in
1997.   Also included in the Company's revenue total for the three months ended
September 30, 1997 is $941,000 related to the sale of natural gas and related
products from the Company's interest in the Sycamore System, which was sold
effective January 1, 1998.

     The Company incurred lease operating expenses for the three months ended
September 30, 1998 of $2.5 million compared with lease operating expenses of
$1.5 million for the three months ended September 30, 1997.  Lease operating
expenses include approximately $769,000 and $307,000, 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
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 $5.5 million for the
three months ended September 30, 1998 as compared to $1.1 million for the three
months ended September 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.

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

     General and administrative costs were $893,000 for the three months ended
September 30, 1998, as compared to $614,000 for the three months ended September
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.

     During the period ended September 30, 1998, the Company recorded a $34.0
million pre-tax provision for impairment of natural gas and oil properties.
Such provision resulted from a full cost ceiling write-down which was required
due to a drop in natural gas and oil prices at September 30, 1998.  The write-
down was reflected in the balance sheet as a reduction of the cost of oil and
gas properties.

     Interest expense and amortization of debt issuance costs were $9.2 million
for the three months ended September 30, 1998 as compared to $2.3 million for
1997.  The increase primarily relates to 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 the new Bank One Credit Facility. The Company incurred interest
costs of $6.6 million related to the 11 1/8% Senior Secured Notes, $2.2 million
related to the 14 1/8% Senior Secured Discount Notes, and $408,000 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.

     On September 30, 1998, the prices of natural gas and oil received by the
Company and upon which the Company's reserves were determined had decreased to
$1.95 per mcf and $13.55 per barrel, resulting in a full cost ceiling write-down
of $34.0 million for the period ended September 30, 1998, as discussed above.
Subsequent to September 30, 1998 the natural gas industry experienced a further
decline in natural gas prices.  At October 30, 1998 the natural gas price
received by the Company fell to approximately $1.65 per Mcf.  Had the October
30, 1998 prices been used in the evaluation, the decline in natural gas prices
would have resulted in an additional provision to reduce the oil and natural gas
properties by approximately $40.0 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 additional impairment, if any, will not be determinable until
the end of  the fourth quarter.

                                       22
<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 nine months ended September 30, 1997 and 1998:
<TABLE>
<CAPTION>
                                                                             NINE MONTHS ENDED SEPTEMBER 30, 
                                                                      --------------------------------------------- 
                                                                              1997                      1998
                                                                      -------------------        ------------------ 
                                                                                       (IN THOUSANDS)
                                                                      --------------------------------------------- 
<S>                                                                   <C>                             <C> 
Net cash provided by operating activities                                    $  3,303                  $  14,586
Net cash used in investing activities                                         (62,387)                  (185,033)
Net cash provided by financing activities                                      72,695                    165,449
</TABLE>

     Net cash provided by operations was $14.6 million for the nine months ended
September 30, 1998 as compared to net cash provided by operations of $3.3
million for the same period in 1997.  The operating cash flows for the nine
months ended September 30, 1998 relate primarily to the increased income from
operations (before non-cash charges) resulting from the Amoco Acquisition and
the 1997 Acquisitions, partially offset by related interest costs and changes in
working capital.

     The Company used $185.0 million of net cash in investing activities for the
nine months ended September 30, 1998 compared to net cash used of $62.4 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 $10.9 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.

     Net cash provided by financing activities for the nine months ended
September 30, 1998 was $165.4 million compared to $72.7 million provided in
1997.  The September 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
$38.5 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 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 was initially redetermined on October 1, 1998.  Upon
completion of the October 1, 1998 redetermination, the borrowing base remained
at $25.0 million. 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

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

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 quarters ended June 30, 1998 and
September 30, 1998.  Gothic Production has received waivers of compliance with
the covenant for both quarters.

     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

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

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.

     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 established 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

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

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
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 September 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

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

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.

     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

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

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.

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 STATEMENT

     The Year 2000 issue is the result of computer programs being written to use
two digits to define year dates. Computer programs running date-sensitive
software may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in systems failure or miscalculations causing
disruptions of operations.

     The Company has initiated a comprehensive assessment of its information
technology ("IT") and non-information technology ("non-IT") systems to ensure
that such systems will be upgraded to ensure compliance with Year 2000
standards. In general, the Company's IT systems consist of its office computer
network and financial management software and related computer programs. The
Company's non-IT systems consist of certain office equipment and other systems
associated with its natural gas and oil properties. The Company is also
evaluating the Year 2000 compliance of its customers and suppliers to ascertain
the potential impact on the Company.

                                       28
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)

     The Company began an in-house assessment of the year 2000 problem with
respect to its IT systems in mid 1997. Since that time the Company has
upgraded all of its financial management software to newer versions which are
Year 2000 compliant. In addition, the Company has replaced nearly all of its IT
hardware such that this hardware is now Year 2000 compliant. To date the cost to
the Company of the upgrade and of its IT software and hardware has been
approximately $60,000.

     Additionally, the Company is conducting an assessment of its non-IT systems
which consist primarily of embedded technology at the Company's Watonga,
Oklahoma field office and the production telemetry equipment used on the
Company's operated wellsites. During the later half of 1998 the Company intends
to complete this assessment of the readiness of its non-IT systems and obtain an
estimate of the costs to replace or otherwise render such systems Year 2000
compliant. The Company believes that its non-IT systems will be Year 2000
compliant by March 1999.

     The Company will be conducting an assessment of Year 2000 exposures related
to the Company's suppliers and customers. The Company will identify its key
customers and suppliers and intends to request information as to the Year 2000
compliance of such customers. Although no contingency plans have been developed
to date, the Company will begin to formulate such plans as it ascertains the
preparedness of its customers and suppliers.

     As noted, the Company anticipates that all of its internal systems and
equipment will be Year 2000 compliant by the end of the first quarter of 1999.
The Company believes that the total costs associated with modifying its existing
systems will not have a material adverse effect on the Company's results of
operations or financial condition.  Nonetheless, if all Year 2000 issues are not
adequately assessed or if the necessary remedial efforts are not implemented on
a timely basis, the Company may not be Year 2000 complaint which, in turn, could
have a material adverse effect on the Company's business, operating results or
financial condition. In addition, the Company's operations may be disrupted in
the event its suppliers or service providers are not Year 2000 compliant and
such failure could have a material adverse effect on the Company's business,
operating results or financial condition.

                                       29
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)

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.

                                       30
<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 September 30, 1998, the Company did not
               file any Current Reports on Form 8-K.

                                       31
<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:  November 13, 1998    By: /s/ Michael Paulk
                                --------------------------------------
                                MICHAEL PAULK,
                                President, Chief Executive Officer


Date:  November 13, 1998    By: /s/ Steven Ensz
                                --------------------------------------
                                STEVEN ENSZ,
                                Vice President of Finance, Chief Financial 
                                Officer


Date:  November 13, 1998    By: /s/ Andrew McGuire
                                --------------------------------------
                                ANDREW MCGUIRE,
                                Controller


                              GOTHIC PRODUCTION CORPORATION



Date:  November 13, 1998    By: /s/ Michael Paulk
                                --------------------------------------
                                MICHAEL PAULK,
                                President, Chief Executive Officer


Date:  November 13, 1998    By: /s/ Steven Ensz
                                --------------------------------------
                                STEVEN ENSZ,
                                Vice President of Finance, Chief Financial 
                                Officer


Date:  November 13, 1998    By: /s/ Andrew McGuire
                                --------------------------------------
                                ANDREW MCGUIRE,
                                Controller

                                       32