<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

         [X]      Annual  Report  under  Section  13 or 15(d) of the  Securities
                  Exchange  Act of 1934 For the fiscal year ended  December  31,
                  1997


         [ ]      Transition   Report  under  Section  13  or  15(d)  of  the
                  Securities Exchange Act of 1934 For the transition period from
                  __________ to ___________ .


                           Commission File No. 1-12508

                          MAGNUM HUNTER RESOURCES, INC.
                 (Name of small business issuer in its charter)
         Nevada                                                  87-0462881
State or other jurisdiction of                                (I.R.S. Employer
incorporation or organization                               Identification No.)


           600 East Las Colinas Blvd., Suite 1200, Irving, Texas 75039
               (Address of principal executive offices) (zip code)


Issuer's telephone number, including area code:  (972) 401-0752

Securities registered under Section 12(b) of the Exchange Act:

Title of each class                    Name of each exchange on which registered

Common Stock ($.002 par value)                        American Stock Exchange
------------------------------                        -----------------------

Securities registered under Section 12(g) of the Act:  None

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
2 months (or for such  shorter  period that the Issuer was required to file such
reports) and (2) has been subject to such filing requirements for the past 90 da
Yes X No

Check  if no  disclosure  of  delinquent  filers  in  response  to  Item  405 of
regulation S-B is contained in this form,  and no disclosure  will be contained,
to the best of the  Issuer's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB [ ]

The Issuer's revenues for its most recent fiscal year: $49,923,000

As of March  27,  1998,  the  aggregate  market  value of voting  stock  held by
non-affiliates,  computed by reference  to the closing  price as reported by the
American Stock Exchange, was $94,578,801.

The number of shares  outstanding of the Issuer's  common stock at December 31,
1997: 21,738,320


<PAGE>





                                      INDEX

                       Securities and Exchange Commission
                           Item Number and Description


                                     PART I

Item 1     Description of Business.............................................1
Item 2     Description of Properties..........................................11
Item 3     Legal Proceedings..................................................17
Item 4     Submission of Matters to a Vote of Security Shareholders...........17


                                     PART II

Item 5     Market for Common Equity and Related Stockholder Matters...........17
Item 6     Management's Discussion and Analysis of Financial Condition and
             Results of Operations............................................18
Item 7     Consolidated Financial Statements..................................25
Item 8     Change in and Disagreements with Accountants
             on Accounting and Financial Disclosure...........................26

                                    PART III

Item 9     Directors Executive Officers, Promoters and Control Persons;
             Compliance with Section 16(a) of the Exchange Act................26
Item 10   Executive Compensation..............................................30
Item 11   Security Ownership of Certain Beneficial Owners and Management......33
Item 12   Certain Relationships and Related Transactions......................33
Item 13   Exhibits and Reports on Form 8-K....................................34




















                                        i

<PAGE>




Item 1.           Description of Business

The Company
-----------

       Magnum Hunter Resources,  Inc., a Nevada corporation  ("Magnum Hunter" or
the "Company"), is an independent energy company engaged in the exploitation and
development,  acquisition,  exploration  and operation of oil and gas properties
with a geographic focus in Texas, Oklahoma and New Mexico. In December 1995, the
Company  consummated  the  acquisition  of  all of the  subsidiaries  of  Hunter
Resources,  Inc., a Pennsylvania  corporation (the "Magnum Hunter Combination"),
and the management of Hunter  Resources,  Inc. assumed  operating control of the
Company.  The new  management  implemented a business  strategy that  emphasized
acquisitions of long-lived  proved reserves with  significant  exploitation  and
development   opportunities  where  the  Company  generally  could  control  the
operations of the properties. As part of this strategy, in June 1996 the Company
acquired the Panoma  Properties (as defined  herein) from  Burlington  Resources
Inc.  ("Burlington")  for a net  purchase  price of $34.7  million  (the "Panoma
Acquisition").  Additionally,  in April 1997 the  Company  acquired  the Permian
Basin Properties (as defined herein) from Burlington for a net purchase price of
$133.8 million (the "Permian Basin Acquisition").  The Company presently intends
to  focus  its  efforts  on  its  substantial   inventory  of  exploitation  and
development  opportunities,  further  acquisitions  and,  to  a  lesser  extent,
selected  exploratory  drilling  prospects.  The Company has identified over 600
development  drilling locations  (including both production and injection wells)
on its  properties,  substantially  all of which are low-risk  in-fill  drilling
opportunities.

       At December 31, 1997,  the Company had an interest in 2,626 wells and had
estimated  proved  reserves of 333 Bcfe with an SEC PV-10 (as defined herein) of
$211.6  million.  Approximately  68% of these  reserves  were  proved  developed
producing  reserves and 90% were  attributable to the Panoma  Properties and the
Permian Basin  Properties.  At December 31, 1997, the Company's  proved reserves
had an estimated  reserve life index of approximately 16 years and were 62% gas.
The Company serves as operator for approximately 70% of its properties (based on
the  number  of  producing  wells  in  which  the  Company  owns  an  interest).
Additionally, the Company owns over 500 miles of gas gathering systems and a 50%
interest in a gas  processing  plant that is connected to the Company's  largest
gas gathering system, which was purchased with the Panoma Properties.

       Beginning  with the Magnum  Hunter  Combination  in  December  1995,  the
Company has made nine acquisitions for an aggregate net purchase price of $185.4
million.   This  strategy  has  added   approximately  305.6  Bcfe  of  reserves
(determined as of the respective times of their  acquisition) at an average cost
of $0.61 per Mcfe, as well as a 427 mile gas gathering system and a 50% interest
in the McLean Gas Plant (the  "McLean  Plant  Acquisition").  As a result of its
acquisitions, the Company has achieved substantial growth as described below:

     o  Proved reserves increased to 333 Bcfe at year end 1997 from 36.7 Bcfe at
        year end 1995;

     o  SEC PV-10 increased to $211.6 million at year end 1997from $37.2 million
        at year end 1995;

     o  Average daily production increased to 50.5 million cubic feet equivalent
        in  the fourth quarter of 1997 from 800 thousand cubic feet equivalent
        in fiscal 1995; and

    
Business Strategy
-----------------

       The  Company's  objective is to increase its reserves,  production,  cash
flow and earnings  utilizing a program of (i)  exploitation  and  development of
acquired properties,(ii)strategic acquisitions and (iii) a selective exploration
program.

                                      

<PAGE>

       The following are key elements of the Company's strategy:

       Exploitation  and Development of Existing  Properties.  The Company has a
substantial  inventory of exploitation  projects including development drilling,
workovers  and  recompletions.  The Company  seeks to maximize  the value of its
properties   through   development   activities   including   in-fill  drilling,
waterflooding and other enhanced recovery techniques.

       Management  of  Operating  Costs.  The  Company  emphasizes  strict  cost
controls in all  aspects of its  business  and seeks to operate  its  properties
wherever possible. By operating  approximately 70% of its properties (90% of its
SEC PV-10 value),  the Company is generally able to control direct operating and
drilling  costs as well as to manage the timing of development  and  exploration
activities.

       Property Acquisitions. Although the Company has an extensive inventory of
exploitation  and development  opportunities,  it continues to pursue  strategic
acquisitions which fit its objectives of having proved reserves with development
potential and operating control.

       Expansion of Gas  Gathering,  Processing  and Marketing  Operations.  The
Company has implemented  several  programs to expand and increase the efficiency
of  its  gas  gathering   systems.   The  Company  owns  over  85%  and  markets
approximately  10% of the gas that moves through its gas gathering  systems and,
therefore,  directly  benefits from any cost and productivity  improvements.  In
December  1997,  the Company  acquired a 30% interest in NGTS,  LLC ("NGTS"),  a
natural gas marketing  company  marketing  approximately  350 MMcf per day as of
December 31, 1997. NGTS now markets  substantially  all of the Company's natural
gas.  The  Company  is also  considering  opportunities  to  acquire  or develop
additional gas gathering and processing capability.

       Exploration.  The Company is  systematically  increasing its  exploration
efforts,  focusing on established geological trends where the Company can employ
its geological,  geophysical and engineering expertise.  The Company is actively
generating  and  evaluating  prospects  for the  application  of 3-D seismic and
advanced drilling technologies.

Recent Acquisitions
-------------------

       The most  significant  of the Company's  completed  acquisitions  are the
Permian  Basin  Acquisition,   the  Panoma  Acquisition  and  the  McLean  Plant
Acquisition.

       Permian Basin  Acquisition

     On April 30, 1997 the Company  acquired  from  Burlington,  effective as of
January 1, 1997, certain oil and gas properties  consisting of 25 field areas in
west Texas and 22 field  areas in  southeast  New  Mexico  (the  "Permian  Basin
Properties"),  for a net  purchase  price of $133.8  million  after  adjustments
aggregating $9.7 million.  The primary producing  formations  include the Yates,
Seven Rivers and Queen in Lea and Eddy  Counties,  New Mexico;  the Atoka in the
Brunson  Ranch Field in Loving  County,  Texas;  the  Clearfork in the Westbrook
Field in Mitchell County, Texas; the San Andres in the Levelland/Slaughter Field
in Cochran  County,  Texas;  and the Canyon Sand in Sutton  County,  Texas.  The
Permian  Basin  Properties  included  1,852  producing  oil  and  gas  wells  on
approximately  113,810  gross acres  (82,175 net  acres).  One of the  Company's
subsidiaries,  Gruy  Petroleum  Management Co.  ("Gruy"),  serves as operator on
approximately  60% of the wells on the Permian Basin  Properties.  Management of
the  Company   believes  the  Permian  Basin  Properties   provide   significant
opportunities  for  exploitation  and  development  of both oil and gas  through
workovers and recompletions, enhanced recovery projects and infill drilling.

     
                                        2

<PAGE>
     During 1997 daily net  production  from the Permian  Basin  Properties  was
22.13 MMcf per day of gas and over 2,153 Bbl per day of oil.  According to Ryder
Scott Co.  ("Ryder  Scott"),  independent  petroleum  engineers  engaged  by the
Company to evaluate the Permian Basin  Properties,  as of December 31, 1997, the
Permian Basin  Properties had proved reserves of 14.7 MMBbl of oil and 103.2 Bcf
of gas, or on a natural gas equivalent  basis,  191.7 Bcfe.  Ryder Scott further
estimated the SEC PV-10 for the Permian Basin Properties to be $123.1 million as
of December  31, 1997 based on prices of $16.08 per Bbl of oil and $2.34 per Mcf
of gas at December  31,  1997.  Approximately  65% of the proved  reserves  were
classified as proved developed  producing  reserves as of December 31, 1997. See
"Properties  - Oil and Gas  Reserves."  Based  on the  $133.8  million  adjusted
purchase  price and  proved  reserves  of 186.9 Bcfe as of April 30,  1997,  the
Company paid approximately $0.72 per Mcfe for the Permian Basin Properties.

       The major  fields in the  Permian  Basin  Properties  are the  Westbrook,
Levelland/Slaughter, Lea County Shallow Properties and the Brunson Ranch.

     Westbrook.  The Westbrook Field covers 45 square miles of the Permian Basin
in Mitchell County,  Texas and produces from the Clearfork  formation at a depth
of  approximately  3,200  feet.  The  following  table  sets  forth  information
regarding  three  properties  in  the  Westbrook  Field  in  the  Permian  Basin
Acquisition on April 30, 1997:
<TABLE>
<CAPTION>   
<S>                                <C>               <C>      <C>       <C>           <C>   
                                                                                       Gross Oil
                                                      Well    Working    Net Revenue   Production
       Property                     Operator         Count    Interest     Interest     (Bbl/d)
--------------------------------------------------------------------------------------------------

Southwest Westbrook Unit........     Company         135       89.9%        77.5%         450
Morrison "G" Lease (1)..........     Company           2       83.3%        72.9%          10
North Westbrook Unit... ..........   Third Party     294        2.0%         2.8%(2)    1,560

       (1)        Subsequent  to the  Permian  Basin  Acquisition,  the  Company
                  acquired the  remaining  16.7% of the working  interest in the
                  Morrison  "G" Lease,  increasing  its Net Revenue  Interest to
                  87.5%.

       (2) Includes an overriding Royalty Interest.
</TABLE>
       Most of the  leases  and  units  in the  field  had  waterflood  projects
initiated in the 1960's and those  projects are still active.  The Company plans
to initiate  waterflood  enhancement  operations on the Southwest Westbrook Unit
and the Morrison "G" Lease in 1998.

     Ryder Scott attributed  approximately 2%, or $4.3 million, of the SEC PV-10
at  December  31,  1997  to a  four  year  enhancement  program  on an  existing
waterflood project on the Westbrook Field in Mitchell County, Texas. The Company
has identified  approximately 250 drilling locations,  including  production and
injection wells, to further develop the fields at a cost of approximately  $38.1
million.  When  completed,  the properties will be developed on a ten acre, line
drive waterflood pattern, as opposed to the current 28 acre,  five-spot pattern.
The Company has budgeted approximately $11.0 million during 1998 for development
of the Westbrook  Field.  Given current oil prices,  the Company is  considering
delaying  some of these  expenditures  and is  considering  adjusting the budget
toward  funding  currently  owned gas projects where  development  opportunities
exist.

       Levelland/Slaughter.  The Levelland and Slaughter  Fields  consist of 155
wells  located  in  Cochran  County,  Texas  that  produce  from the San  Andres
formation at a depth of 5,000 feet. The interests  acquired in the Permian Basin
Acquisition  include  the  following  three  properties  in  the  Levelland  and
Slaughter Fields:
<TABLE>
<CAPTION>
<S>                            <C>             <C>       <C>            <C>            <C>    
                                                                                        Gross Oil
                                                Well      Working        Net Revenue    Production
       Property                Operator         Count     Interest         Interest       (Bbl/d)
---------------------------------------------------------------------------------------------------

TLB Unit....................     Company         20        100.0%           87.3%           85
Veal Lease..................     Company         52        100.0%           87.1%          225
NW Slaughter Unit...........     Company         83         74.8%           62.8%          330
</TABLE>
                                        3

<PAGE>



     Discovered  in  the  1930's,   all  three  properties  have  been  actively
waterflooded  since  the  1970's.  While the  projects  are  mature,  additional
drilling and waterflood  enhancement are likely. No proved undeveloped  reserves
were  assigned by Ryder  Scott to either the TLB Unit or the Veal Lease.  Proved
undeveloped  reserves were  assigned by Ryder Scott to the NW Slaughter  Unit in
contemplation  of a carbon dioxide  injection  project which is anticipated  for
that  property.  The  operator of an  adjacent  property  has been  successfully
injecting carbon dioxide for several years to enhance production.

       Lea County Shallow Properties.  The Lea County Shallow Properties consist
of  approximately  300 wells in Lea County,  New Mexico which are in the Rhodes,
Jalmat,  Monument,  Langlie Mattix, Eumont and Eunice Fields. The fields produce
from the Yates,  Seven Rivers,  Queen and other  formations at depths  generally
shallower than 3,000 feet.  Production is generally high Btu gas, which produces
into low  pressure  gathering  systems.  At  year-end  approximately  13  proved
undeveloped  locations were identified and the Company anticipates that numerous
additional   recompletion,   stimulation,   workover  or  development   drilling
opportunities will result from detailed geological and engineering studies which
are planned.

       Brunson Ranch.  The Brunson Ranch Field consists of four wells located in
Loving  County,  Texas in the deep  Delaware  Basin  geological  province of the
Permian  Basin.  Three  of  these  wells  are  currently  producing  a total  of
approximately  2.4 MMcf of gas per day from the  Atoka  formation  at a depth of
approximately  16,000 feet. The Company  recompleted an additional  well in June
1997 that is producing 2.3 MMcf of gas per day. Undeveloped  potential exists on
the properties  through redrilling the Atoka formation and completing such wells
using technology designed for high bottom hole pressure conditions.

       Burlington has agreed to indemnify the Company for breaches by Burlington
of the purchase  agreement as well as any claims  attributable to or arising out
of acts or omissions of Burlington (including, but not limited to, environmental
claims)  occurring before January 1, 1997. There are certain  limitations on the
amount  of, and time  period for  bringing,  a claim for  indemnity  made by the
Company.  Burlington  is a defendant  in two actions  claiming  that  Burlington
underpaid  royalty  owners on  properties  in New Mexico  and  Texas,  including
properties  that are a part of the Permian Basin  Properties.  The plaintiffs in
the New Mexico action are seeking class certification while the Texas action has
been certified as a class action.  Burlington's indemnity would hold the Company
harmless from any of these claims  arising prior to January 1, 1997. The Company
has also agreed,  subject to certain  limitations,  to indemnify  Burlington for
matters arising subsequent to January 1, 1997 as well as for certain liabilities
and obligations assumed by the Company as part of the purchase transaction.

       Panoma Acquisition

       On June 28, 1996, the Company purchased from Burlington  interests in 520
gas wells in the Texas Panhandle and western Oklahoma (470 of which are operated
by the Company) and the  associated  427 mile gas gathering  system (the "Panoma
Properties").  At year-end the Company had drilled an additional 40 wells, and a
continuous  drilling  program is progressing  into 1998, with an additional well
being added every 7 days. The net purchase price,  after certain  purchase price
adjustments,  was $34.7  million,  funded  by  borrowings  under  the  Company's
previous credit  facility.  Gruy is the operator of the gas gathering system and
the wells that were previously operated by Burlington. According to Ryder Scott,
the proved  reserves  attributable  to the Panoma  Properties as of December 31,
1997 aggregated 110 Bcfe with an SEC PV-10 of $66.4 million.

       The Panoma Properties currently consist of approximately 560 gas wells in
the West Panhandle,  East Panhandle,  and South Erick Fields along a corridor 65
miles long and 20 miles wide stretching  from Beckham  County,  Oklahoma to Gray
County,  Texas. All wells are less than 2,300 feet deep and produce gas from the
Granite Wash and/or Brown Dolomite formations.

                                        4

<PAGE>



       McLean Plant Acquisition

       On January 1, 1997, the Company  complemented  its Panoma  Acquisition by
purchasing  for $2.5 million a 50%  ownership  interest in the McLean Gas Plant,
which is connected to the Panoma gas gathering  system,  and a related  products
pipeline. The Company receives 100% of the net profits from the McLean Gas Plant
until it recoups  the $2.5  million  purchase  price,  after  which time it will
receive 50% of the net profits.  During 1997, the Company recouped approximately
$1 million or 41% of its initial  investment.  See  "Gathering and Processing of
Gas."

Development and Exploration Activities
--------------------------------------

       Overview

       The Company  presently  intends to focus its  efforts on its  substantial
inventory of exploitation and development activities,  further acquisitions and,
to a lesser extent, selected exploratory drilling prospects.

       The Company  seeks to minimize its overhead and capital  expenditures  by
subcontracting  the drilling,  redrilling  and workover of wells to  independent
drilling  contractors and by outsourcing  other services.  The Company typically
compensates its drilling  subcontractors on a turnkey (fixed price),  footage or
day  rate  basis  depending  on  the  Company's  assessment  of  risk  and  cost
considerations on each project.

       Development Drilling

       The Company's  development  strategy  focuses on maximizing the value and
productivity  of its oil and gas asset base  through  development  drilling  and
enhanced recovery projects. The Company has budgeted approximately $30.0 million
for exploitation and development activities for 1998. The Company has identified
over 600 development drilling locations (including both production and injection
wells) on its properties.  In exploiting its producing  properties,  the Company
relies upon its in-house technical staff of petroleum engineering and geological
professionals  and utilizes the services of outside  consultants  on a selective
basis.

       Permian Basin Properties. In evaluating the Permian Basin Properties, the
Company has identified approximately 400 drilling locations including production
and injection wells.  Engineering and geological  studies are being initiated to
more  precisely  identify  specific  development  locations.   In  addition,  in
evaluating the Permian Basin  Properties,  Ryder Scott attributed  approximately
2%, or $4.3  million,  of their SEC PV-10 at  December  31,  1997 to a four-year
enhancement  program,  commencing  in 1998,  on an  existing  waterflood  in the
Westbrook Field in Mitchell County,  Texas. The proposed  waterflood  project is
estimated  to cost an  aggregate  of $38.1  million.  The Company  has  budgeted
approximately  $11.0 million for  development  of the  Westbrook  Field in 1998.
Given  current oil prices,  the Company is  considering  delaying  some of these
expenditures  and instead  directing some of these funds to currently  owned gas
projects.

       Panoma Properties.  The Company believes that developmental  drilling can
continue to enhance the value of the Panoma  Properties,  which produce from the
Brown  Dolomite and Granite Wash  formations in the Texas  Panhandle and western
Oklahoma.  The easternmost  fields are developed on 160 acre spacing because the
original spacing of 640 acres proved  inadequate to drain reserves  efficiently.
In-fill  development is underway in the westernmost  field with 40 wells of a 70
well program having been completed  during 1997.  Upon completion of the 70 well
program,  the  westernmost  field will be developed  with 320 acre spacing.  The
Company has budgeted  approximately  $4.0 million for  development of the Panoma
Properties through 1998.

                                        5

<PAGE>



       Waterfloods.  The  Company  believes it can enhance the value of selected
west Texas fields  through  in-fill  drilling and  enhanced  recovery  projects,
including  several  waterflood  projects.   While  waterfloods   typically  take
considerable time to respond to fluid injection,  the west Texas properties have
in-fill drilling  potential that management  believes could result in a somewhat
faster   increase  in  production  and  cash  flow.  The  Company  has  budgeted
approximately  $7.3  million  in 1998 for five west Texas  waterflood  projects;
however,  the timing of these  expenditures  may be delayed due to significantly
lower oil prices experienced during the first quarter of 1998.

       Exploratory Drilling

       The Company attempts to lessen the risks inherent in exploratory drilling
by: (i) concentrating in specific areas in the United States where the Company's
technical  staff has  considerable  experience and which are in known  producing
trends where the potential for significant  reserves exists;  (ii)  diversifying
through investment in multiple prospects;  (iii) utilizing 3-D seismic and other
advanced technologies; and (iv) promoting out interests to industry partners.

       The Company  spent  approximately  $3.0 million of its $20.0 million 1997
capital  budget  on  exploratory  drilling.  The  Company  has  a  $6.0  million
exploration  budget for 1998,  including  geological and  geophysical  expenses.
Three exploratory wells were drilled in 1997. One of these is located on a 7,500
acre lease block in Roger Mills County, Oklahoma and was completed as a gas well
flowing  approximately 500 Mcfe per day. A second  exploratory well located on a
3,000 acre  block in Fayette  County,  Texas has  encountered  oil shows but was
junked and abandoned due to  mechanical  problems.  The Company owns 25% and 20%
working  interests,  respectively,  in  these  two  prospects  where  additional
drilling is being evaluated.  The third  exploratory well resulted in a dry hole
in Ellis County,  Oklahoma.  An exploratory  well on the Mossy Grove prospect in
Walker County,  Texas commenced in late 1997 but encountered  drilling  problems
above the objective and is being redrilled as a dual lateral (turnazontal) well.
The Company  owns a 25%  working  interest  in the  proposed  test well which is
located on a 30,000 acre lease  block.  The primary  objective  is the Glen Rose
formation at approximately  11,800 feet. In Victoria  County,  Texas the Company
has purchased 1,000 acres overlaying a shallow Frio structure.  Magnum Hunter is
the  operator  and  owns a 75%  working  interest  in  this  prospect  where  an
exploratory  well  is  scheduled  for  the  second  quarter  of  1998.   Seismic
acquisition  has  commenced on the Bobcat Trend in Hockley Co.,  Texas where the
Company owns a twenty-five  percent (25%) working  interest after payout.  A 3-D
seismic  program has been  designed to evaluate 16  geological  and  geophysical
leads in an area of active exploration for the Strawn and Canyon formations. The
project  covers  approximately  30,000 acres and over 15,000 acres are currently
under option. The Company is actively  generating and evaluating other prospects
for the application of future 3-D seismic and advanced drilling technologies.

Gathering and Processing of Gas
-------------------------------

       Hunter Gas  Gathering,  Inc., a wholly owned  subsidiary  of the Company,
owns three gas gathering systems located in Oklahoma, Texas and Louisiana,  none
of which are subject to regulation by the Federal Energy  Regulatory  Commission
("FERC"),  and a 50%  ownership  interest  in the  McLean Gas Plant in the Texas
Panhandle.  Two of the gas gathering systems, Panoma and North Appleby,  account
for more than 90% of the  throughput  from the  Company's  three  systems.  Gruy
operates all three gas gathering systems.

       Generally, the gathering systems transport the gas from wells to a common
point where it is dehydrated  prior to redelivery  to downstream  pipelines.  In
managing  its gas  gathering  systems,  the  Company  has  emphasized  operating
efficiency  and  overhead   management  and  introduced  a  program  which  ties
throughput costs to volume transported rather than to compression capacity.  The
Company  believes that its focus on  volume-based  pricing reduces the potential
financial impact of a decline in actual throughput.

                                        6

<PAGE>

       The Panoma  system,  the  largest of the  Company's  three gas  gathering
systems,  consists of approximately  435 miles of pipeline.  The main trunklines
run  east to west for  approximately  66 miles  with  the east end  starting  in
Beckham  County,  Oklahoma and the west end starting in Gray County,  Texas.  At
year  end  1997,  gas  throughput  for  the  Panoma  gas  gathering  system  was
approximately  17 MMcf  per day.  The  Panoma  gas  gathering  system  currently
delivers gas to El Paso Natural Gas Company for  transport to markets in western
Oklahoma  and the  West  Coast,  although  the  Company  is  actively  exploring
additional markets for such gas. The Company,  which operates  approximately 500
of the  approximately 600 wells connected to the Panoma system, is also actively
seeking to add new wells to such  system  through  acquisition,  development  or
arrangements with third party producers.

       The Company's North Appleby gas gathering system is located  primarily in
Nacogdoches  County in east Texas.  Approximately  39 wells are connected to the
system,  which  delivers  approximately  2.6 MMcf per day for third  parties  to
Natural Gas Pipeline Co. for transportation to other markets.

       Effective  January 1, 1997, the Company  purchased for $2.5 million a 50%
ownership  interest  in the  McLean  Gas  Plant,  the  gas  processing  facility
connected to the  Company's  Panoma gas  gathering  system.  The  purchase  also
included a 23-mile  products  pipeline between the McLean Gas Plant and the Koch
Pipeline at Lefors,  Texas and all gas and product purchase and sales agreements
related to the plant.  The McLean Gas Plant is a modern cryogenic gas processing
plant with a throughput  capacity of 23.0 MMcf per day.  Current  throughput  is
approximately 17 MMcf per day. The Company  acquired its 50% ownership  interest
in the plant from Carrera Gas Company,  L.L.C.  ("Carrera") of Tulsa,  Oklahoma,
which owns the remaining 50% of the plant and operates the facility. Under terms
of the Company's operating agreement with Carrera,  the Company receives 100% of
the net  profits  from the McLean Gas Plant  until it recoups  the $2.5  million
purchase  price,  at which point net profits will be divided equally between the
Company  and  Carrera.  As  of  December  31,  1997  the  Company  had  recouped
approximately 41% of its $2.5 million investment.

Marketing of Production
-----------------------

       The Company markets all of its gas production as well as gas it purchases
from third parties to gas marketing firms or end users either on the spot market
on a  month-to-month  basis at  prevailing  spot market  prices or at negotiated
prices under long-term contracts.  Marketing gas for its own account exposes the
Company to the attendant commodities risk which the Company attempts to mitigate
through various financial hedges. In 1996 the Company sold  approximately 91% of
its gas to Crosstex,  a gas marketing  firm in Dallas,  Texas.  Crosstex did not
purchase  more than 10% of the  Company's  total oil and gas  production  during
1997. The Company typically  obtains letters of credit  guaranteeing the payment
of the purchase price for its gas.

       The Company  normally  sells its own oil under  month-to-month  contracts
with a variety of purchasers.  Oil is usually sold for the Company's own account
through Enmark Services,  a marketing agent in Dallas,  Texas. While the Company
has historically  been able to sell oil above posted prices,  it is also exposed
to the  commodities  risk  inherent in  short-term  contracts  which the Company
attempts to mitigate through various financial  hedges.  For a discussion of the
Company's  hedging  activities,  see  "Management's  Discussion  and Analysis of
Financial  Condition and Results of Operations - Liquidity and Capital Resources
-  Hedging  Activity"  and  Note  14 to  the  Company's  Consolidated  Financial
Statements.

     In December  1997,  Hunter Gas  Gathering,  Inc.  acquired a thirty percent
(30%)  membership  interest in NGTS,  a newly formed  subsidiary  of Natural Gas
Transmission  Services,  Inc.  ("NGTS,  Inc.")  NGTS  assumed all of NGTS Inc.'s
operations as of December 1, 1997. The Company acquired its interest in NGTS for
$4.35 million through a combination of cash ($2.35 million) and promissory notes
($2.0  million),  due  December 1, 1998,  that have equity "put"  features  once
Magnum Hunter's common stock achieves a trading range of $7.50 per share. Magnum
Hunter may, at its option,  retire the promissory notes early with stock or cash
at anytime.

                                        7

<PAGE>

       NGTS is a four year old natural gas  marketing  and trading  company with
operations  concentrated  in the western  two-thirds  of the country.  In fiscal
1997,  NGTS reported total revenues of  approximately  $195.6  million.  NGTS is
presently marketing approximately 350 million cubic feet of natural gas per day.
As of December 1, 1997, the Company and its gas gathering subsidiary, Hunter Gas
Gathering,  Inc.,  dedicated  substantially all of its natural gas production to
NGTS for marketing.

       The market for oil and  natural gas  produced  by the Company  depends on
factors  beyond its control,  including  the extent of domestic  production  and
imports of oil and  natural  gas,  the  proximity  and  capacity  of natural gas
pipelines  and other  transportation  facilities,  weather,  demand  for oil and
natural gas, the  marketing  of  competitive  fuels and the effects of state and
federal  regulation.  The oil and natural gas industry  also competes with other
industries  in  supplying  the  energy  and  fuel  requirements  of  industrial,
commercial and individual consumers.

Petroleum Management and Consulting Services; Other Activities
--------------------------------------------------------------

       Gruy.  The Company  acquired  Gruy in the Magnum  Hunter  Combination  in
December 1995.  Gruy,  which conducts  operations for both the Company and third
parties, has over a 40-year history of managing properties for banks,  financial
institutions,  bankruptcy trustees,  estates,  individual investors,  trusts and
independent oil and gas companies. Gruy provides drilling,  completion and other
well-site  services;   advice  regarding   environmental  and  other  regulatory
compliance;  receipt and disbursement  functions and other managerial  services;
petroleum  engineering  services;  and  consultation as an expert witness.  Gruy
manages,  operates and provides  consulting  services on oil and gas properties,
gathering systems and processing plants located in Texas, Oklahoma, Mississippi,
Louisiana,  New  Mexico  and  Kansas.  Gruy  is an  important  component  of the
Company's acquisition program. As the operator of wells for third parties and as
a  provider  of  consulting  services  for the  energy  industry,  Gruy is often
uniquely able to identify attractive acquisition opportunities.

       Hunter  Butcher.  The  Company  provides  consulting  services  to  Latin
American energy companies through Hunter Butcher International,  L.L.C. ("Hunter
Butcher").  Hunter  Butcher has  primarily  focused on assisting  energy-related
Mexican  companies  in  obtaining  financing  for their  purchases in the United
States of  products  for import  into  Mexico.  This is  accomplished  through a
commercial bank credit facility  established to facilitate short and medium term
credit for Hunter  Butcher to  purchase  these  products  and resell them to its
clients at a slight  premium.  The credit risk to Hunter Butcher on such resales
is lessened by partial guarantees of approximately 85% to 90% of such borrowings
by the Export  Import  Bank of the United  States (the "ExIm  Bank"),  by credit
insurance  and  through  deposits  by Hunter  Butcher's  clients  to secure  the
unguaranteed  portion of the indebtedness and certain  interest.  Hunter Butcher
could,  however,  incur a loss under such  arrangement in repaying  indebtedness
under the credit  facility since the  applicable  ExIm Bank guaranty and deposit
would not be adequate to pay interest  under the credit  facility at the default
rate or cover other possible  losses.  In addition,  the Company itself may from
time to time guarantee the  indebtedness  incurred under the credit  facility by
Hunter Butcher for its clients,  but the Company's  credit  facility  limits the
Company to guaranteeing  not more than $3.0 million of such  indebtedness at any
time.  The Company is  currently  in the process of winding down the business of
Hunter Butcher and this division should no longer be active after 1998.

Competition
-----------

     The oil and gas industry is highly competitive.  Competitors of the Company
include  major  oil  companies,  other  independent  oil and gas  concerns,  and
individual  producers  and  operators,  many of which have  substantiallygreater
financial  resources and larger staffs and facilities than those of the Company.
In addition, the Company

                                        8

<PAGE>



frequently  encounters  competition  in  the  acquisition  of oil  and  gas
properties  and gas gathering  systems,  and in its  management  and  consulting
business.  The principal  means of such  competition are the amount and terms of
the consideration  offered. The principal means of such competition with respect
to the sale of oil and gas production are product  availability  and price.  The
price at which the  Company's  products may be sold will continue to be affected
by a number of factors,  including the price of alternate fuels such as oil, gas
and coal and competition among various gas producers and marketers.

Regulation
----------

       General Federal and State Regulation

       The Company's oil and gas exploration,  production and related operations
are subject to extensive rules and regulations  promulgated by federal and state
agencies.  Failure  to comply  with such  rules and  regulations  can  result in
substantial  penalties.  The  regulatory  burden  on the oil  and  gas  industry
increases the Company's  cost of doing  business and affects its  profitability.
Because such rules and regulations are frequently amended or reinterpreted,  the
Company is unable to predict  the future cost or impact of  complying  with such
laws.

       The State of Texas and many other  states  require  permits for  drilling
operations,  drilling bonds and reports  concerning  operations and impose other
requirements  relating to the  exploration  and  production of oil and gas. Such
states  also have  statutes  or  regulations  addressing  conservation  matters,
including  provisions for the  unitization or pooling of oil and gas properties,
the  establishment of maximum rates of production from wells, and the regulation
of  spacing,  plugging  and  abandonment  of such wells.  Many  states  restrict
production  to the  market  demand for oil and gas.  Some  states  have  enacted
statutes prescribing ceiling prices for gas sold within their states.

       FERC   regulates   interstate  gas   transportation   rates  and  service
conditions,  which affect the marketing of gas produced by the Company,  as well
as the revenues received by the Company for sales of such production.  Since the
mid-1980's,  FERC has issued a series of orders,  culminating in Order Nos. 636,
636-A and 636-B ("Order 636"), that have significantly altered the marketing and
transportation  of gas.  Order  636  mandates  a  fundamental  restructuring  of
interstate pipeline sales and transportation  service,  including the unbundling
by  interstate  pipelines  of  the  sale,  transportation,   storage  and  other
components of the city-gate sales services such pipelines previously  performed.
One of FERC's purposes in issuing the orders is to increase  competition  within
all  phases  of the gas  industry.  Order  636 and  subsequent  FERC  orders  on
rehearing  have been  appealed and are pending  judicial  review.  Because these
orders may be modified as a result of the  appeals,  it is  difficult to predict
the ultimate impact of the orders on the Company and its gas marketing  efforts.
Generally,  Order 636 has  eliminated or  substantially  reduced the  interstate
pipelines'  traditional  role  as  wholesalers  of gas,  and  has  substantially
increased competition and volatility in gas markets.

       The price  the  Company  receives  from the sale of oil and  natural  gas
liquids is affected by the cost of  transporting  products to market.  Effective
January 1, 1995, FERC  implemented  regulations  establishing an indexing system
for transportation rates for oil pipelines,  which, generally,  would index such
rates to inflation,  subject to certain conditions and limitations.  The Company
is not able to predict with certainty the effects,  if any, of these regulations
on its operations. However, the regulations may increase transportation costs or
reduce  wellhead prices for oil and natural gas liquids.  Finally,  from time to
time  regulatory  agencies  have  imposed  price  controls  and  limitations  on
production  by  restricting  the rate of flow of oil and gas wells below natural
production capacity in order to conserve supplies of oil and gas.

                                        9

<PAGE>

       Environmental Regulation

       The Company's  exploration,  development,  and production of oil and gas,
including its operation of saltwater  injection and disposal wells,  are subject
to various federal,  state and local  environmental  laws and regulations.  Such
laws and regulations can increase the costs of planning,  designing,  installing
and operating oil and gas wells. The Company's  domestic  activities are subject
to a variety of environmental  laws and  regulations,  including but not limited
to, the Oil  Pollution  Act of 1990  ("OPA"),  the Clean Water Act ("CWA"),  the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
the Resource Conservation and Recovery Act ("RCRA"),  the Clean Air Act ("CAA"),
and  the  Safe  Drinking  Water  Act  ("SDWA"),  as well  as  state  regulations
promulgated  under  comparable  state  statutes.  The Company also is subject to
regulations  governing the handling,  transportation,  storage,  and disposal of
naturally  occurring  radioactive  materials  that are  found in its oil and gas
operations.   Civil  and  criminal  fines  and  penalties  may  be  imposed  for
non-compliance  with these  environmental  laws and  regulations.  Additionally,
these  laws  and  regulations  require  the  acquisition  of  permits  or  other
governmental  authorizations  before undertaking  certain  activities,  limit or
prohibit  other  activities  because of protected  areas or species,  and impose
substantial liabilities for cleanup of pollution.

       Under the OPA, a release of oil into water or other areas  designated  by
the statute could result in the Company being held  responsible for the costs of
remediating such a release,  certain OPA specified damages, and natural resource
damages.  The extent of that liability  could be extensive,  as set forth in the
statute,  depending  on the nature of the  release.  A release of oil in harmful
quantities or other  materials  into water or other  specified  areas could also
result in the  Company  being  held  responsible  under the CWA for the costs of
remediation, and civil and criminal fines and penalties.

       CERCLA and comparable state statutes, also known as "Superfund" laws, can
impose joint and several and retroactive  liability,  without regard to fault or
the  legality of the  original  conduct,  on certain  classes of persons for the
release of a "hazardous  substance" into the environment.  In practice,  cleanup
costs are usually  allocated  among  various  responsible  parties.  Potentially
liable parties include site owners or operators,  past owners or operators under
certain conditions,  and entities that arrange for the disposal or treatment of,
or  transport  hazardous  substances  found at the  site.  Although  CERCLA,  as
amended,  currently exempts petroleum,  including but not limited to, crude oil,
gas and natural gas liquids  from the  definition  of hazardous  substance,  the
Company's operations may involve the use or handling of other materials that may
be classified as hazardous substances under CERCLA. Furthermore, there can be no
assurance that the exemption will be preserved in future  amendments of the act,
if any.

       RCRA and comparable state and local requirements impose standards for the
management,  including  treatment,  storage,  and disposal of both hazardous and
nonhazardous  solid wastes.  The Company  generates  hazardous and  nonhazardous
solid  waste in  connection  with its  routine  operations.  From  time to time,
proposals  have been made that  would  reclassify  certain  oil and gas  wastes,
including wastes generated during pipeline, drilling, and production operations,
as "hazardous  wastes" under RCRA which would make such solid wastes  subject to
much more stringent handling,  transportation,  storage,  disposal, and clean-up
requirements.  This development could have a significant impact on the Company's
operating  costs.  While state laws vary on this  issue,  state  initiatives  to
further regulate oil and gas wastes could have a similar impact.

     Because  oil  and  gas  exploration  and  production,  and  possibly  other
activities,  have been conducted at some of the Company's properties by previous
owners and  operators,  materials  from these  operations  remain on some of the
properties and in some instances require remediation.  In addition,  the Company
has agreed to indemnify  sellers of producing  properties  from whom the Company
has acquired  reserves  against  certain  liabilities for  environmental  claims
associated with such  properties.  While the Company does not believe that costs
to be incurred  by the Company for  compliance  and  remediating  previously  or
currently  owned  or  operated  properties  will be  material,  there  can be no
guarantee that such costs will not result in material expenditures.
 

                                       10

<PAGE>

       Additionally,  in the  course  of  the  Company's  routine  oil  and  gas
operations,  surface spills and leaks,  including  casing leaks, of oil or other
materials   occur,   and  the  Company  incurs  costs  for  waste  handling  and
environmental compliance.  Moreover, the Company is able to control directly the
operations   of  only   those   wells  for  which  it  acts  as  the   operator.
Notwithstanding  the  Company's  lack of control over wells owned by the Company
but operated by others,  the failure of the  operator to comply with  applicable
environmental regulations may, in certain circumstances,  be attributable to the
Company. The Company currently expects to spend approximately  $400,000 over the
next five years in connection  with  remediation and  environmental  compliance,
including $100,000 in 1998 and $75,000 in 1999.

       It is not  anticipated  that the  Company  will be  required  in the near
future to expend  amounts  that are  material in  relation to its total  capital
expenditures  program  by  reason of  environmental  laws and  regulations,  but
inasmuch as such laws and  regulations  are frequently  changed,  the Company is
unable to predict the  ultimate  cost of  compliance.  There can be no assurance
that more stringent laws and regulations  protecting the environment will not be
adopted or that the  Company  will not  otherwise  incur  material  expenses  in
connection with environmental laws and regulations in the future.

Employees
---------

       At December 31, 1997, the Company had 67 full-time  employees of which 10
were management, 28 were administrative and 29 were field employees. None of the
Company's employees are represented by a union.
Management considers its relations with employees to be good.

Facilities

       The Company occupies  approximately 11,590 square feet of office space at
600 East Las Colinas Boulevard,  Suite 1200,  Irving,  Texas, under a lease that
expires in November 2001. The Company owns a field office and production yard in
Shamrock,  Texas. The Company also has field  production  offices in Midland and
Abilene, Texas and Hobbs, New Mexico.

Item 2.           Description of Properties

Oil and Gas Reserves
--------------------

       General

       All information set forth in this Form 10-KSB regarding  estimated proved
reserves, related estimated future net cash flows and SEC PV-10 of the Company's
oil and gas interests is taken from reports  prepared (i) by Ryder Scott Company
of Houston,  Texas and Pollard,  Gore & Harrison ("PGH") of Austin,  Texas, both
independent  petroleum  engineers  with  respect to the  Company's  interests at
December  31, 1997 (using oil and gas prices at December  31,  1997) and (ii) by
the  engineers  named in the  footnotes  to the tables below with respect to the
Company's  interests at December 31, 1996.  The  estimates of these  independent
petroleum  engineers  were based upon their review of  production  histories and
other  geological,  economic,  ownership  and  engineering  data provided by the
Company.

       SEC PV-10 is the present value of proved reserves which is an estimate of
the  discounted  future net cash flows from each of the Company's  properties at
December 31, 1997,  or as otherwise  indicated.  Net cash flow is defined as net
revenues less, after deducting  production and ad valorem taxes,  future capital
costs and operating

                                       11

<PAGE>



expenses, but before deducting federal income taxes. As required by rules of the
Securities  and  Exchange  Commission,  the  future  net cash  flows  have  been
discounted  at an annual rate of 10% to determine  their  "present  value".  The
present  value is shown  to  indicate  the  effect  of time on the  value of the
revenue stream and should not be construed as being the fair market value of the
properties.  In accordance with Commission rules, estimates have been made using
constant oil and gas prices and  operating  costs,  at December 31, 1997,  or as
otherwise indicated.

       In accordance  with  Commission  guidelines,  the estimates of future net
cash flows from proved  reserves  and their SEC PV-10 are made using oil and gas
sales prices in effect as of the dates of such  estimates  and are held constant
throughout  the  life of the  properties.  The  Company's  estimates  of  proved
reserves, future net cash flows and SEC PV-10 were estimated using the following
weighted average prices, before deduction of production taxes:


                                              Prices used in Reserve Reports
                                                      at December 31,
                                           -------------------------------------

                                                  1997               1996
                                           -------------------------------------

Gas (per Mcf)............................  $       2.34         $        4.00
Oil (per Bbl)............................  $      16.08         $       24.31

       All reserves are evaluated at contract temperature and pressure which can
affect the measurement of gas reserves.  Operating costs,  development costs and
certain production-related and ad valorem taxes were deducted in arriving at the
estimated  future net cash flows.  No provision was made for income  taxes.  The
estimates   following  this  section  set  forth   reserves   considered  to  be
economically  recoverable under normal operating methods and existing conditions
at the prices and operating costs  prevailing at the dates indicated  above. The
estimates  of the  SEC  PV-10  from  future  net  cash  flows  differ  from  the
standardized  measure of discounted future net cash flows set forth in the notes
to the  Consolidated  Financial  Statements of the Company,  which is calculated
after  provision for future income taxes.  There can be no assurance  that these
estimates  are  accurate  predictions  of future net cash flows from oil and gas
reserves or their present value.

       Proved  reserves  are  estimates  of oil and gas to be  recovered  in the
future. Reservoir engineering is a subjective process of estimating the sizes of
underground  accumulations  of oil and gas that  cannot be  measured in an exact
way.  The  accuracy  of any  reserve  estimates  is a function of the quality of
available data and of engineering  and geological  interpretation  and judgment.
Reserve  reports of other  engineers  might  differ from the  reports  contained
herein.  Results of drilling,  testing, and production subsequent to the date of
the estimate may justify  revision of such estimate.  Future prices received for
the sale of oil and gas will likely be  different  from those used in  preparing
these reports.  The amounts and timing of future operating and development costs
may also  differ  from those  used.  Accordingly,  reserve  estimates  are often
different from the quantities of oil and gas that are ultimately recovered.

       Except  for  the  effect  of  changes  in oil and gas  prices,  no  major
discovery  or other  favorable  or adverse  event is  believed  to have caused a
significant  change in these  estimates of the Company's  proved  reserves since
December  31, 1997.  No  estimates  of proved  reserves of oil and gas have been
filed by the  Company  with,  or  included  in any report to, any United  States
authority or agency (other than the Commission) since January 1, 1997.

                                       12

<PAGE>



       Company Reserves

       The following  tables set forth the estimated  proved reserves of oil and
gas of the Company and the SEC PV-10  thereof on an actual basis at December 31,
1996 and 1997.

                Estimated Proved Oil and Natural Gas Reserves (1)

                                                         At December 31,
                                                --------------------------------

                                                    1997              1996
                                                --------------------------------
Net gas reserves (Mcf):
     Proved developed producing.................  154,749,340        71,166,555
     Proved developed non-producing.............      215,056           108,586
     Proved undeveloped.........................   52,811,374        19,290,856
                                                --------------------------------

       Total proved gas reserves................  207,775,770        90,565,997
                                                ================================

Net oil reserves (Bbl):
    (including condensate and NGL)
     Proved developed producing.................  12,021,950          1,849,846
     Proved developed non-producing.............      14,284            112,338
     Proved undeveloped.........................   8,910,181          3,376,071
                                                --------------------------------

       Total proved oil reserves................  20,946,415          5,338,255
                                                ================================

Total proved reserves (Mcfe).................... 333,454,260        122,595,527
                                                ================================


                   Estimated SEC PV-10 of Proved Reserves (1)

                                                       At December 31,
                                                --------------------------------

                                                   1997                1996
                                                --------------------------------

Estimated SEC PV-10 (2) :
     Proved developed producing ............... $  173,189,655   $  115,858,134
     Proved developed non-producing ...........        342,473          664,308
     Proved undeveloped........................     38,054,232       48,244,017
                                                --------------------------------

       Total proved reserves................... $  211,586,360   $  164,766,459
                                                ================================

       (1)        Based upon (i) reserve  reports at December 31, 1996  prepared
                  by Gaffney,  Cline &  Associates  ("Gaffney  Cline") and Glenn
                  Harrison Petroleum Consultants, Inc.; and (ii) reserve reports
                  at December 31, 1997 prepared by Ryder Scott and PGH.

       (2)        SEC PV-10 differs from the standardized  measure of discounted
                  future   net  cash  flows  set  forth  in  the  notes  to  the
                  Consolidated  Financial  Statements  of the Company,  which is
                  calculated after provision for future income taxes.

      
                                       13

<PAGE>

 Significant Properties

       On December  31, 1997,  90% of the  Company's  proved  reserves on a Bcfe
basis were located in the Permian Basin Properties and the Panoma Properties. On
such date the Company's  properties  included  working  interests in 2,626 gross
(1,482 net) productive oil and gas wells.

       The following  table sets forth summary  information  with respect to the
Company's estimated proved reserves of oil and gas at December 31, 1997.


<TABLE>
<CAPTION> 
<S>                                 <C>        <C>        <C>         <C>         <C>             <C>

                                               SEC PV-10 (1)
                                      -------------------------------

                                                                                                    Natural Gas
                                            Amount         % of           Oil          Gas          Equivalent
                                        (in thousands)    Total          (Bbl)        (Mcf)           (Mcfe)
                                      --------------------------------------------------------------------------

Permian Basin Properties (2)(3)......    123,054,987       58.16      14,746,386   103,238,221     191,716,537
Panoma Properties (2)  ..............     66,463,866       31.41       3,144,520    90,985,490     109,852,610
Other (2) (3)........................     22,067,507       10.43       3,055,509    13,552,059      31,885,113
                                      --------------------------------------------------------------------------

       Total......................... $  211,586,360      100.0%      20,946,415   207,775,770     333,454,260
                                      ==========================================================================

       (1)    SEC PV-10  differs  from the  standardized  measure of  discounted
              future net cash  flows set forth in the notes to the  Consolidated
              Financial  Statements of the Company,  which is  calculated  after
              provision for future income taxes.

       (2)    Based on a reserve report at December 31, 1997 prepared by Ryder Scott.

       (3)    Based on reserve reports at December 31, 1997 prepared by PGH.
</TABLE>

Oil and Gas Production, Prices and Costs
----------------------------------------

       The following table shows the approximate net production  attributable to
the  Company's  oil and gas  interests,  the average sales price and the average
production expense  attributable to the Company's oil and gas production for the
periods  indicated.  Production  and sales  information  relating to  properties
acquired  or  disposed  of is  reflected  in this  table only since or up to the
closing  date of  their  respective  acquisition  or sale  and  may  affect  the
comparability of the data between the periods presented.


                                                        Year Ended December 31,
                                                         1997             1996
                                                      --------------------------

Oil and gas production:
  Oil (Mbbl)........................................     737               191
  Gas (MMcf)........................................   9,614             2,675
  Natural Gas Equivalents (MMcfe)...................  14,037             3,821
Average sales price (1):
  Oil (per Bbl)..................................... $ 17.70           $ 20.46
  Gas (per Mcf).....................................    2.35              2.37
  Natural Gas Equivalents (per Mcfe)................    2.54              2.68
Oil and gas production expense per (Mcfe) (2)....... $   .99           $  1.15

       (1)   Before deduction of production taxes and net of hedging results for
             the two years ended December 31, 1997.

       (2)   Includes  lease  operating  expenses and  production and ad valorem
             taxes,  if  applicable.  For the years ended  December 31, 1997 and
             1996,  includes  internal transfer price expenses for gas gathering
             and  overhead   costs  of  $0.17 per  Mcfe,  and  $0.23 per  Mcfe,
             respectively.

                                       14

<PAGE>



Drilling Activity
-----------------

       The  following  table sets forth the  results of the  Company's  drilling
activities during the two fiscal years ended December 31, 1997.
<TABLE>
<CAPTION>
<S>           <C>                  <C>         <C>                <C>              <C>         <C>               <C>
      

                                               Gross Wells(1)                                    Net Wells(2)
    Year         Type of Well       Total       Producing(3)       Dry(4)           Total      Producing(3)       Dry(4)
    ----         ------------       -----       ------------       ------           -----      ------------       ------
    1997       Exploratory
                 Texas                1               0               1                 .2             0            .2
                 Oklahoma             1               1               0                 .25            .25          0
                 Other                1               0               1                1               0            1
               Development
                 Texas                71             71               0               67.1           67.1           0
                 Oklahoma             5               2               3                1.24            .5           .73
                 Other                1               1               0                 .5             .5           0
    1996       Exploratory  
                 Texas                8               4               4                5.23           2.63         2.60
                 Oklahoma             0               0               0                  0              0           0
                 Other                0               0               0                  0              0           0
               Development
                 Texas                2               2               0                 .35            .35          0
                 Oklahoma             1               1               0                 .31            .31          0
                 Other                0               0               0                  0              0           0
  
       (1)   The number of gross  wells is the total  number of wells in which a
             working interest is owned. Fluid injection wells for waterflood and
             other enhanced recovery projects are not included as gross wells.

       (2)   The number of net wells is the sum of fractional working interests 
             owned  in  gross   wells  expressed as whole numbers and fractions
             thereof.

       (3)   A producing well is an exploratory or development  well found to be
             capable of producing either oil or gas in sufficient  quantities to
             justify completion as an oil or gas well.

       (4)   A dry  well  is an  exploratory or development  well  that is not a
             producing well.
</TABLE>


                                       15

<PAGE>

Oil and Gas Wells
-----------------

       The following table sets forth the number of oil and natural gas wells in
which the Company had a working  interest at  December  31,  1997.  All of these
wells are located in the United States.
<TABLE>
<CAPTION>
<S>                           <C>           <C>      <C>         <C>      <C>    <C>

                                                          Productive Wells
                                                      As of December 31, 1997
                                                     ------------------------
                                            Gross(1)                               Net(2)
Location                         Oil          Gas        Total     Oil      Gas    Total
--------                         ---          ---        -----     ---      ---    -----

Texas......................     1,444         741        2,185     675      516    1,191
Oklahoma...................         3         119          122       1      103      104
Mississippi................         4           0            4       3        0        3
New Mexico.................        60         239          299      37      144      181
California.................        14           0           14       1        0        1
Kansas.....................         2           0            2       2        0        2

                           ---------------------------------------------------------------
         Total.............     1,527       1,099        2,626     719      763    1,482
                            ===============================================================
                            
       (1)   The number of gross  wells is the total  number of wells in which a
             working interest is owned.  Well counts include wells with multiple
             completions, but do not include injector wells.

       (2)   The number of net wells is the sum of fractional working interests
             owned in gross wells expressed as whole numbers and fractions
             thereof.
</TABLE>

Oil and Gas Acreage
-------------------

       The following  table  summarizes the Company's  developed and undeveloped
leasehold acreage at December 31, 1997.
<TABLE>
<CAPTION>
<S>                              <C>              <C>          <C>               <C>    


                                          Developed                   Undeveloped
                                   -----------------------------------------------------
                                   Gross(1)        Net(2)       Gross(1)         Net(2)
                                   -----------------------------------------------------
Texas........................       242,549       199,920        40,805         14,001
Oklahoma.....................        45,610        42,982         3,352            838
Mississippi..................           528           452             0              0
New Mexico...................        40,637        35,323             0              0
California...................           509            38             0              0
Kansas.......................            80            69             0              0
                                    -----------------------------------------------------
      Total..................       329,913       278,784        44,157         14,839
                                    =====================================================

      (1)  The number of gross acres is the total number of acres in which a 
           working interest is owned.

      (2)  The number of net acres is the sum of fractional working interests 
           owned in gross acres expressed as whole numbers and fractions thereof.
</TABLE>

       Substantially  all of  the  Company's  interests  are  leasehold  working
interests  or  overriding  royalty  interests  (as  opposed  to  mineral  or fee
interests)  under  standard  onshore oil and gas leases.  As is customary in the
industry,  the  Company  generally  acquires  oil and gas  acreage  without  any
warranty of title except as to claims made by, through or under the  transferor.
Although the Company has title  examined by a landman or title attorney prior to
acquisition  of  developed   acreage  in  those  cases  in  which  the  economic
significance of the acreage justifies the

                                       16

<PAGE>



cost,  there can be no assurance  that losses will not result from title defects
or from defects in the  assignment of leasehold  rights.  In certain  instances,
title  opinions may not be obtained if, in the Company's  judgment,  it would be
uneconomical or impractical to do so.

Item 3.           Legal Proceedings.

       No legal  proceedings are pending other than ordinary routine  litigation
incidental to the Company's  business,  the outcome of which management believes
will not have a material adverse effect on the Company.

Item 4.           Submission of Matters to a Vote of Security Holders.

       The Company had no matters  requiring a vote of security  holders  during
the fourth quarter of 1997.

                                     PART II

Item 5.           Market for Common Equity and Related Stockholder Matters.

       The Common Stock has been listed on the  American  Stock  Exchange  since
March 8, 1996.  The Common Stock has been listed  under the ticker  symbol "MHR"
since March 18, 1997,  prior to which time it was listed under the ticker symbol
"MPM." Prior to March 8, 1996, the Common Stock was listed on the American Stock
Exchange  Emerging  Company  Marketplace.  At March 31,  1998,  there were 3,606
stockholders of record.


                                                                Average Daily
                                                                Trading Volume
                                        High          Low         (Shares)
                                       -----         -----      ---------------
1996
   First Quarter.......................$3.63         $2.75         19,737
   Second Quarter......................$4.75         $3.06         47,360
   Third Quarter.......................$4.75         $3.56         23,781
   Fourth Quarter......................$5.06         $4.25         45,658
1997
   First Quarter.......................$6.63         $4.19         96,554
   Second Quarter......................$6.31         $5.00         41,845
   Third Quarter.......................$6.44         $5.00         55,194
   Fourth Quarter......................$7.94         $4.88        159,423

       On March 27, 1998,  the last reported sale price of the Company's  Common
Stock on the American Stock Exchange was $5.1875 per share.

       The  Company has not  previously  paid any cash  dividends  on its Common
Stock  and does not  anticipate  paying  dividends  on its  Common  Stock in the
foreseeable  future.  It is the present  intention of  management to utilize all
available funds for the development of the Company's  business  activities.  The
Company may not pay any  dividends on Common Stock unless and until all dividend
rights on  outstanding  Preferred  Stock  have  been  satisfied.  The  Company's
existing  credit  facility  restricts  the  payment  of  cash  dividends  on the
Company's securities.

                                       17

<PAGE>



Item 6.           Management Discussion and Analysis of Financial Condition and
                  Results of Operations

       The following  discussion and analysis should be read in conjunction with
the Company's  consolidated  financial  statements and the notes associated with
them contained elsewhere in this report. This discussion should not be construed
to imply that the results  discussed herein will  necessarily  continue into the
future or that any conclusion  reached herein will  necessarily be indicative of
actual operating results in the future. Such discussion represents only the best
present assessment by management of the Company.

     During 1996,  management  implemented a business  strategy that  emphasized
acquisition of long-lived,  proved reserves with  significant  exploitation  and
development  opportunities  that  management  considered  to have a  lower  risk
profile  than the  Company's  historic  projects.  Prior to  1996,  under  prior
management,  the Company was primarily  focused on developing and selling higher
risk,  non-operated  exploratory and  development  projects and did not focus on
acquisitions.  In order to improve the  economics of  acquisitions,  the Company
emphasizes  strict  cost  control in all  aspects of its  business  and seeks to
operate its properties  wherever possible.  The Company also participates,  to a
lesser extent, in selected exploration projects on a controlled risk basis.

     As a part of the Company's new strategy,  in June 1996 the Company acquired
the Panoma Properties for a net purchase price of $34.7 million from Burlington,
which  included,  interests in 520 gas wells in the Texas  Panhandle and western
Oklahoma and an associated 427 mile gas gathering  system.  The Company  assumed
operations of  approximately  90% of the wells and of the  gathering  system and
began  planning  for  increased  density  development  drilling  on  the  Panoma
Properties.

       In January 1997 the Company  purchased for $2.5 million a 50% interest in
a gas processing plant, the McLean Gas Plant, which currently  processes 100% of
the gas produced from the Panoma  Properties.  The Company  receives 100% of the
net profits of the plant until it recoups its  investment,  after which time the
Company will receive 50% of the net profits. As of December 31, 1997 the Company
had  recouped  approximately  41% of its  $2.5  million  investment.  Management
believes  that the  acquisition  of the McLean Gas Plant  allows the  Company to
capture a significant  portion of the profits  generated from processing the gas
produced  at the  Panoma  Properties  that  would  otherwise  go to third  party
processors.

       In April 1997 the Company  purchased  the Permian Basin  Properties  from
Burlington  for a net purchase  price of $133.8  million  after  purchase  price
adjustments of $9.7 million.  These properties  consist of  approximately  1,852
producing oil and gas wells and  associated  acreage in west Texas and southeast
New Mexico. This acquisition substantially increased the Company's cash flow and
inventory of exploitation, development and exploration opportunities.

     On  April  29,  1997  the  Company  received  and  accepted  two  new  loan
commitments  from Bankers Trust  Company,  as Agent,  and other banks for senior
credit facilities for the Company and several of its  subsidiaries.  The two new
senior credit  facilities  were structured as the $130.0 million Credit Facility
with a term of five  years  and a $60.0  million  one year  senior  subordinated
bridge  facility (the "Term Loan  Facility")  convertible  into a five year term
loan. The new credit facilities were conditioned,  among other things,  upon the
closing of the Permian  Basin  Acquisition,  which took place on April 30, 1997.
The Credit Facility  provides the Company the flexibility of choosing a range of
either  "LIBOR" or "Prime" based  interest rate  options.  This Credit  Facility
replaced the Company's  previously  existing  $100.0  million  revolving  credit
facility.

     On May 29, 1997, the Company placed,  through a Rule 144A private placement
offering,  $140 million in Senior  Notes due 2007.  The Notes have a 10% coupon,
with interest  payable on June 1 and December 1, commencing on December 1, 1997.
There is no restriction  on the ability of any  consolidated  or  unconsolidated
subsidiary to transfer funds to the Company in the form of cash dividends, loans
or advances. Net proceeds from

                                       18

<PAGE>



the sale of the  Senior  Notes  were  used to  completely  repay  the  Company's
outstanding bridge loan facility in the principal amount of $60 million with the
remaining  proceeds  used  to  repay  a  substantial  portion  of the  Company's
outstanding  revolving  credit  facility.  At that time, the maximum  commitment
under the  revolving  credit  facility  was  reduced  from $130  million  to $75
million,  with a borrowing base of $60 million.  The credit facility was amended
as of September 30, 1997, to increase the maximum commitment from $75 million to
$125  million,  increase the  borrowing  base by $5 million to $65 million,  and
modify the interest expense coverage ratio test.

       On  December  18,  1997,  the  Company  acquired a thirty  percent  (30%)
membership  interest in NGTS,  LLC., a newly formed  wholly owned  subsidiary of
Natural Gas  Transmission  Services,  Inc., a natural gas  marketing and trading
company. NGTS, LLC assumed all of the parent company's operations as of December
1, 1997.  The  Company,  as of  December  1, 1997,  dedicated  its  natural  gas
production to NGTS, LLC for marketing.  The Company's $4.35 million  acquisition
was completed for a combination  of cash ($2.35  million) and  promissory  notes
($2.0 million) that have equity "put" features.  The Company may, at its option,
retire the promissory note due December 1, 1998, with stock or cash.

     The Company uses the full cost method of accounting  for its  investment in
oil and gas properties.  Under the full cost method of accounting,  all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
into a "full cost pool" as incurred, and properties in the pool are depleted and
charged to operations using the unit-of-production  method based on the ratio of
current production to total proved oil and gas reserves. To the extent that such
capitalized costs (net of accumulated depreciation,  depletion and amortization)
less deferred taxes exceed the SEC PV-10 of estimated  future net cash flow from
Proved  Reserves of oil and gas, and the lower of cost or fair value of unproved
properties  after  income  tax  effects,   such  excess  costs  are  charged  to
operations.  Once  incurred,  a  write-down  of oil  and gas  properties  is not
reversible at a later date even if oil or gas prices increase. While the Company
has never been  required  to  write-down  its asset base,  significant  downward
revisions of quantity  estimates or declines in oil and gas prices from those in
effect on  December  31,  1997,  which are not  offset by other  factors,  could
possibly result in a write-down for impairment of oil and gas properties.

Results of Operations For the Years Ended 1997 and 1996

     As discussed  above,  the Company  acquired the Panoma  Properties  in June
1996, the McLean Gas Plant in January 1997, and the Permian Basin  Properties in
April 1997. As such,  the results of  operations  for the fiscal year ended 1997
included  twelve months of operations  for the Panoma  Properties and the McLean
Gas  Plant  and  eight  months  for the  Permian  Basin  Properties,  while  the
corresponding  period in 1996  contained six months of operations for the Panoma
Properties and no results  related to the McLean Gas Plant and the Permian Basin
Properties.  Unless otherwise stated,  the increases in the 1997 period over the
1996 period were a direct result of these acquisitions.

     Oil and gas sales were $35.7 million in 1997, a 250% increase over sales of
$10.2  million in 1996.  In 1997,  the Company  sold  737,289 Bbl of oil, a 286%
increase,  and 9,614 MMcf of gas, a 259% increase over the prior year. The price
received  for oil was  $17.70  per Bbl and for gas was  $2.35  per Mcf in  1997,
representing a 13% decrease  in oil price  from  $20.46 per Bbl in 1996 and a 1%
decrease in gas price from $2.37 per Mcf in 1996. Oil and gas  production  costs
increased  217% to $13.9  million in 1997 from $4.4  million in 1996.  The gross
operating  margin from oil and gas  production was $21.8 million in 1997, a 271%
increase over the gross  operating  margin of $5.9 million in 1996,  principally
due to the volume increase of oil and gas sold. On an equivalent unit basis, the
gross margin was $1.55 per Mcfe in 1997 versus $1.53 in 1996, a 1% increase.

       Gas gathering,  marketing,  and processing revenues were $10.3 million in
the 1997 period,  a 79% increase  over  revenues of $5.8 million in 1996.  Costs
from these activities were $7.9 million in 1997, a 68% increase over

                                       19

<PAGE>



costs of $4.7 million in 1996.  Gross operating  margin was $2.4 million in 1997
versus $1.1 million in 1996, a 125% increase.  Total gathering system throughput
increased  60% to 20.5 MMcf per day in 1997  compared  with 12.8 MMcf per day in
1996. Due to the McLean Gas Plant acquisition,  gas plant processing  throughput
was 14.9 MMcf per day in 1997 versus  none  reported  in 1996.  Gross  operating
margin from gathering  operations was $0.22 per Mcf of throughput in 1997 versus
$0.23 per Mcf in 1996. The gross operating  margin from gas processing was $0.20
per Mcf of throughput versus none reported in 1996.

       Revenues  from oil  field  services  and  international  sales  were $4.0
million in 1997, an 885% increase over revenues of $396,000 in 1996, principally
due to an increase in sales of Hunter  Butcher  International,  L.L.C.  ("Hunter
Butcher") in the amount of $3.4  million.  Operating  costs were $3.7 million in
1997, a $3.5 million increase over 1996, also principally due to Hunter Butcher.
The gross  operating  margin from these  activities  was $223,000 in 1997 versus
$129,000  in the 1996  period.  The margin from Hunter  Butcher  operations  was
$60,000 in 1997 versus $32,000 in the 1996 period.  Oil field services  produced
an operating margin of $163,000 in 1997 versus a loss of $97,000 in 1996.

     Depreciation and depletion  expense increased 319% to $12.4 million in 1997
from $3.0 million in 1996 due to the acquisitions.  Depletion expense on oil and
gas production in 1997 was $11.6 million, or $0.82 per Mcfe, in 1997 versus $2.6
million, or $0.70 per Mcfe in 1996. General and administrative expense increased
92% to $2.4 million in 1997 from $1.2 million in 1996, due to increased staffing
and other costs as a result of the acquisitions and increased activity levels of
the Company.

       Operating  profit  increased to $9.6 million in 1997 from $2.9 million in
1996, a 236% increase.  Equity in earnings of affiliate,  net of income tax, was
$6,000 in 1997  versus  none  reported  in 1996 due to the NGTS  acquisition  in
December,  1997.  Other income increased 122% to $762,000 due to gain on sale of
marketable securities.  Interest expense increased to $13.8 million in 1997 from
$2.4 million in 1996, an increase of 476%, due to increased  levels of borrowing
under the Company's revolving credit lines, the Notes, and bridge financing used
to fund the acquisitions  previously mentioned.  The Company incurred a net loss
before  income tax and  minority  interest of $3.4  million in 1997,  versus net
income  of  $821,000  in  1996,  principally  due  to  interest  expense  on the
acquisitions  exceeding  operating  income  and  due to the  higher  charge  for
depreciation  and  depletion.  The Company  provided  for a deferred  income tax
benefit of $1.3 million on this loss in 1997 versus  deferred income tax expense
of $312,000 in 1996. After recording a $19,000 minority  interest loss in Hunter
Butcher,  the Company reported a net loss in 1997 before  extraordinary items of
$2.1 million,  or $0.21 per common share,  versus a $509,000 net profit, or $.01
per common share, in 1996.

       The Company  realized an  extraordinary  loss of $1.4 million  ($0.09 per
common share) as required under Accounting  Principles  Board ("APB")  Statement
No. 26 and  Statement  of  Financial  Standards  ("SFAS")  No. 4, from the early
extinguishment of bank debt. The early  extinguishment was a result of the Notes
financing and new amended  revolving  credit  agreements  with banks arranged to
repay the Company's previous credit facility in conjunction with the purchase of
the Permian Basin  Properties from  Burlington.  The net loss in 1997, after the
extraordinary charge,  applicable to common shareholders was $4.4 million ($0.30
per common  share) in 1997  compared to net income of $103,000  ($.01 per common
share) in 1996. The Company accrued $875,000 in dividends on its preferred stock
in 1997 versus $406,000 in 1996.

Liquidity and Capital Resources

     The Company has three principal operating sources of cash: (i) sales of oil
and gas, (ii) revenues from gas gathering,  processing, and marketing, and (iii)
revenues from petroleum management and consulting  services.  The Company's cash
flow is highly dependent upon oil and gas prices.  Decreases in the market price
of oil and gas could result in  reductions  of both cash flow and the  Borrowing
Base under the Company's Credit Facility,  which would result in decreased funds
available, including funds for capital expenditures.


                                       20

<PAGE>

       In December 1996 the Company issued $10.0 million of TCW Preferred  Stock
to facilitate its development drilling program.

     On April 30, 1997 the Company  closed the  acquisition of the Permian Basin
Properties for a net purchase price of approximately $133.8 million. At the same
time, the Company's  previously  existing  $100.0  million  credit  facility was
replaced by two new credit  facilities;  a $130.0 million Credit  Facility and a
$60.0  million  Term Loan  Facility  for a combined  aggregate  amount of $190.0
million. The initial advances under these new facilities totaled $179.5 million,
including funds to complete the Permian Basin Acquisition,  to pay principal and
accrued interest  remaining on the Company's  previous credit  facility,  and to
provide cash for working capital purposes.

       On May 29, 1997 the Company sold,  through a Rule 144A private  placement
offering,  $140.0 million aggregate principal amount of Notes. Net proceeds from
the sale of the Notes  were used to  completely  repay the  Company's  Term Loan
Facility in the  principal  amount of $60.0  million and to repay a  substantial
portion of the indebtedness  outstanding  under the Credit  Facility.  The Notes
bear interest at 10% per annum,  with interest  payable on June 1 and December 1
commencing on December 1, 1997. After paydown,  the maximum commitment under the
Credit  Facility  was  reduced  from  $130.0  million to $75.0  million,  with a
Borrowing  Base of $60.0  million.  The Credit  Facility  was amended  effective
September  30, 1997 to increase  the maximum  commitment  from $75.0  million to
$125.0 million, increase the Borrowing Base by $5.0 million to $65.0 million and
modify  the  Consolidated   EBITDA  to  Interest   Expense  ratio.   With  these
adjustments, total long-term debt under the Credit Facility at December 31, 1997
was $21.5 million,  leaving $43.5 million  available to draw at such time, prior
to the next borrowing base  redetermination  based upon financial results of the
Company.  At December  31,  1997,  the Company had $3.0 million in cash and cash
equivalents  and $2.6 million in net working  capital,  in addition to the funds
available under the Credit Facility.

       The  Company  called for  redemption  on November  14, 1997 its  publicly
traded Warrants,  each of which was exercisable for three shares of Common Stock
at an exercise price of $5.50 per share and redeemable at $0.02 per Warrant.  As
a result,  Warrants were  exercised for an aggregate of 846,256 shares of Common
Stock and the  remaining  Warrants  covering  7,920  shares of Common Stock were
redeemed.  The Company received cash proceeds of approximately $4.7 million.  In
addition,  during June and October,  1997,  100,000 warrants and 50,000 warrants
were  exercised  at  $4.125  per  share  and an  average  of  $4.25  per  share,
respectively, resulting in net proceeds to the Company of $625,000.

       On November 21, 1997, the Company sold  6,500,000  newly issued shares of
its common stock in a public offering,  receiving cash proceeds of approximately
$36.2 million after fees and expenses.

       For 1997,  the Company had a net  increase in cash of $1.3  million.  The
Company's operating  activities  provided net cash of $5.7 million,  principally
from  operating  income  before  depreciation,  depletion,  and deferred  taxes,
reduced by a net increase in accounts  receivable  over  accounts  payable.  The
Company used $168.6 million in investing  activities,  principally for additions
to property  and  equipment of $160.1  million.  Financing  activities  provided
$164.3  million  of cash,  principally  from  the  aggregate  proceeds  from the
issuance of long-term debt of $352.5 million,  less principal payments of $229.9
million on this debt, as well as proceeds from issuance of common stock of $41.7
million and proceeds from short-term notes payable of $2.7 million.  The Company
also paid $678,000 in dividends on preferred stock.

       For  1996,  the  Company  had a net  increase  in cash of  $143,000.  The
Company's operating  activities  provided net cash of $3.0 million,  principally
from operating income before depreciation, depletion and deferred taxes, reduced
by a net increase in accounts receivable over accounts payable. The Company used
$41.7 million in

                                       21

<PAGE>

investing  activities,   principally  for  additions  to  property  and
equipment of $41.5  million,  as well as increases in deposits and other assets.
Financing  activities  provided  $38.9  million  of cash,  principally  from the
aggregate  proceeds  from the  issuance of long-term  debt of $56.5  million and
production  payments of $750,000,  less the  combined  payments on such debt and
production  payments  totaling  $27.5  million,  as well as  proceeds  from  the
issuance of preferred  stock of $9.8 million.  The Company also paid $295,000 to
redeem a portion of the outstanding Series C Preferred Stock and $438,000 to pay
dividends on preferred stock.

Capital Requirements

     For fiscal  1998 the  Company has  budgeted  approximately  $36 million for
development  and  exploration  activities,  including  $30 million  budgeted for
development projects on the Permian Basin and Panoma Properties and $6.0 million
budgeted for  exploration  projects.  In addition,  with respect to the recently
closed Permian Basin  Acquisition,  the Company  anticipates  that it will spend
approximately  $38.1  million  over a four year period  which began in 1997 on a
development  program to enhance an existing  waterflood project in the Westbrook
Field located in Mitchell County, Texas. While the Company has not yet developed
a budget  for fiscal  1999,  Ryder  Scott has  capital  expenditures  planned of
approximately  $18  million  on  development  activities.  The  Company  is  not
contractually   obligated  to  proceed   with  any  of  its   budgeted   capital
expenditures.  The amount and  allocation of future  capital  expenditures  will
depend on a number of factors that are not entirely within the Company's control
or ability to forecast,  including  drilling  results and changes in oil and gas
prices.  Due to the recent decline in oil prices,  the Company may redirect some
of its budgeted funds from oil projects to gas or it may defer certain  projects
until  a  later  date.  As  a  result,  actual  capital  expenditures  may  vary
significantly from current expectations.

       In  connection  with the  acquisition  of 30% of the  outstanding  common
member's  equity of NGTS, the Company is obligated to pay a note of $2.0 million
to current and former  shareholders  of NGTS.  This loan is due December 1, 1998
and may be  repaid,  at the  option of the  Company,  with cash or shares of its
common stock.

       Based upon the Company's  anticipated  level of  operations,  the Company
believes that cash flow from operations together with the availability under the
Credit  Facility  (approximately  $43.5 million as of December 31, 1997) will be
adequate  to meet its  anticipated  requirements  for working  capital,  capital
expenditures and scheduled interest payments for the foreseeable future.

       In the normal course of business,  the Company reviews  opportunities for
the possible acquisition of oil and gas reserves and activities related thereto.
When  potential  acquisition   opportunities  are  deemed  consistent  with  the
Company's growth  strategy,  bids or offers in amounts and with terms acceptable
to the Company may be submitted. It is uncertain whether any such bids or offers
which may be submitted by the Company would be acceptable to the sellers. In the
event of a future  significant  acquisition,  the Company may require additional
financing in connection therewith.

Inflation and Changes in Prices

     During the past several years,  the Company had experienced  some inflation
in oil and gas prices  with  moderate  increases  in  property  acquisition  and
development costs.  During 1997, the Company received  significantly lower (13%)
oil prices and slightly lower (1%) gas prices for the natural resources produced
from its properties. The results of operations and cash flow of the Company have
been, and will continue to be, affected to a certain extent by the volatility in
oil and gas prices.  Should the Company experience a significant increase in oil
and gas prices that is sustained over a prolonged  period,  it would expect that
there would also be a corresponding increase in oil and gas finding costs, lease
acquisition costs, and operating expenses.  Periodically the Company enters into
futures,  options,  and swap contracts to reduce the effects of  fluctuations in
crude oil and gas prices. It is policy of the Company not to enter into any such
arrangements which exceed 75% of the 

                                       22

<PAGE>

Company's oil and gas production  during the next 12 months.  Subsequent to
year end 1997, oil prices continued to decline. If this decline were to continue
in 1998,  the Company  might be forced to recognize a loss from thewrite down of
its full cost pool.

     The Company  markets  oil and gas for its own  account,  which  exposes the
Company to the attendant  commodities  risk.  Substantially all of the Company's
gas  production is currently  sold to NGTS,  LLC or end users either on the spot
market on a  month-to-month  basis at  prevailing  spot  market  prices or under
long-term  contracts based on current spot market prices.  The Company  normally
sells its oil under month-to-month contracts with a variety of purchasers.

Hedging Activity

     Periodically,  the Company enters into futures, options, and swap contracts
to  reduce  the  effects  of  fluctuations  in crude oil and gas  prices.  As of
December 31, 1997 the Company had 33% of its oil  production  and 43% of its gas
production  hedged  although  lesser  or  greater  amounts  may be hedged in the
future.  At December 31, 1997,  the Company had open  contracts for an oil price
collar  covering  30,000  Bbls of oil per month  (with  cap and floor  prices of
$23.25 and $18.50,  respectively)  through  December 1998. At December 31, 1997,
the Company had gas price swaps on 100,000  MMBtu of gas per month at $1.905 per
MMBtu through  January  1998,  100,000 MMBtu of gas per month at $1.77 per MMBtu
through  January 1998 and 300,000  MMBtu of gas per month at an average price of
$2.55 per MMBtu through  March 1998.  The average Btu content of gas produced by
the Company exceeds 1,100 Btu per Mcf of gas.  Therefore,  each of the above gas
prices  should be  increased  by 10% to  reflect  the  actual  gas price per Mcf
received by the  Company.  All of these  swaps are  against the El Paso  Permian
Basin Index. These contracts expire monthly. The Company has also written a call
option on 100,000  MMbtu of gas per month at an average price of $2.90 per MMBtu
through March,  1998. The gains or losses on the Company's hedging  transactions
are  determined  as the  difference  between the contract  price and a reference
price,  generally  closing  prices  on the New  York  Mercantile  Exchange.  The
resulting  transaction gains and losses are determined  monthly and are included
in the period the hedged production or inventory is sold. Net losses relating to
these  derivatives  for the years  ended  December  31,  1997 and 1996 were $1.5
million and $272,000, respectively.

Year 2000 Compliance

     The  inability  of  computers,   software  and  other  equipment  utilizing
microprocessors  to recognize and properly process data fields  containing a two
digit year is commonly  referred to as the Year 2000  Compliance  issue.  As the
year 2000 approaches,  such systems may be unable to accurately  process certain
date-based information.

     The Company has  identified no significant  applications  that will require
modifications to ensure Year 2000 Compliance.

     In addition, the Company plans to communicate with others with whom it does
significant  business to determine their Year 2000 Compliance  readiness and the
extent to which the Company is  vulnerable  to any third party Year 2000 issues.
However,  there can be no guarantee that the systems of other companies on which
the  Company's  systems  rely will be  timely  converted,  or that a failure  to
convert  by another  company,  or a  conversion  that is  incompatible  with the
Company's systems, would not have a material adverse effect on the Company.

     The total cost to the Company of these Year 2000 Compliance  activities has
not been and is not  anticipated  to be  material to its  financial  position or
results of operations in any given year. However, there can be no guarantee that
these  estimates  will be achieved  and actual  results  could differ from those
plans.

                                       23

<PAGE>

Recently Issued Accounting Pronouncements

       In June 1997,  the FASB  issued SFAS No.  130,  "Reporting  Comprehensive
Income" and SFAS No. 131,  "Disclosures  About  Segments  of an  Enterprise  and
Related  Information."  SFAS No. 130  establishes  standards  for  reported  and
display  of  comprehensive  income in the  financial  statements.  Comprehensive
income is the total of net  income  and all other  non-owner  changes in equity.
SFAS  No.  131  requires  that  companies  disclose  segment  data  based on how
management makes decisions  allocating resources to segments and measuring their
performance.  SFAS Nos. 130 and 131 are  effective  for 1998.  Adoption of these
standards  is  not  expected  to  have  an  effect  on the  Company's  financial
statements, financial position or results of operations.




                                       24

<PAGE>



Item  7.Consolidated Financial Statements and Unaudited Supplemental Information


                   Index to Consolidated Financial Statements
                                                                         Page

     Independent Auditors' Report.........................................F-1

     Financial Statements:
             Consolidated Balance Sheet at December 31, 1997 and 1996.....F-2

             Consolidated Statements of Operations for the Years Ended
                      December 31, 1997 and 1996..........................F-3

             Consolidated Statements of Stockholders' Equity for the
                      Years Ended December 31, 1997 and 1996..............F-4

             Consolidated Statements of Cash Flows for the Years
                      Ended December 31, 1997 and 1996....................F-5

     Notes to Consolidated Financial Statements...........................F-6

     Supplemental Information (Unaudited).................................F-21

                                       25

<PAGE>


                          INDEPENDENT AUDITORS' REPORT




Board of Directors and Stockholders
Magnum Hunter Resources, Inc.

     We have  audited the  accompanying  consolidated  balance  sheets of Magnum
Hunter  Resources,  Inc. and Subsidiaries as of December 31, 1997, and 1996, and
the related  consolidated  statements of operations,  stockholders'  equity, and
cash  flows for each of the two years in the period  ended  December  31,  1997.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the financial  position of Magnum Hunter  Resources,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations  and their cash  flows for each of the two years in the period  ended
December 31, 1997, in conformity with generally accepted accounting principles.



Deloitte & Touche LLP


Dallas, Texas
March 13, 1998 (except for the last paragraphs of Notes 5 and 16 as to which
the date is March 27, 1998)

















                                      F-1

                                                        

<PAGE>
                 Magnum Hunter Resources, Inc. and Subsidiaries
                           Consolidated Balance Sheets
                            (in thousands of dollars)
<TABLE><CAPTION>
<S>                                                                           <C>               <C>    
                                                                               December 31,       December 31,
                                                                                   1997               1996
                                                                           ------------------------------------
                                  ASSETS
Current Assets
     Cash and cash equivalents............................................ $      3,030        $   1,687
     Securities available for sale........................................          -                233
     Accounts receivable
          Trade, net of allowance of $166 and $132........................       12,850            4,372
          Due from affiliates.............................................           58              241
     Notes receivable from affiliate......................................          355              264
     Current portion of long-term note receivable, net allowance of $200
             and $0.......................................................          357              198
     Prepaid and other....................................................        1,299               52
                                                                           ---------------------------------
           Total Current Assets...........................................       17,949            7,047
                                                                           ---------------------------------
Property, Plant, and Equipment
     Oil and gas properties, full cost method
           Unproved.......................................................          517              459
           Proved.........................................................      227,028           70,575
     Pipelines............................................................        9,166            7,102
     Other property.......................................................          776              381
                                                                           ---------------------------------
     Total Property, Plant and Equipment..................................      237,487           78,517
           Accumulated depreciation, depletion, and impairment............      (16,589)          (4,869)
                                                                           ---------------------------------
     Net Property, Plant and Equipment....................................      220,898           73,648
                                                                           ---------------------------------
Other Assets
     Deposits and other assets............................................       5,863                645
     Investment in unconsolidated affiliate...............................       4,372                  -
     Other long-term investments..........................................         361                  -
     Long-term notes receivable, net of imputed interest..................       1,626              1,732
                                                                           ---------------------------------
                               Total Assets                                $   251,069         $   83,072
                                                                           =================================
                   LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
     Trade payables and accrued liabilities............................... $    9,235          $    3,940
     Dividends payable....................................................        219                  22
     Suspended revenue payable............................................      1,162                 784
     Current maturities of long-term debt.................................         24                  22
     Notes payable........................................................      4,699                   -
                                                                           ---------------------------------
           Total Current Liabilities......................................     15,339               4,768
                                                                           ---------------------------------
Long-Term Liabilities
     Long-term debt, less current maturities..............................    161,519              38,744
     Production payment liability.........................................        743                 937
     Deferred income taxes................................................      1,289               3,469
     Minority interest....................................................         39                   -
Commitments and Contingencies (Note 11)
Stockholders' Equity
Preferred stock - $.001 par value; 10,000,000 shares authorized 216,000
       designated as Series A; 80,000 issued and outstanding,
       liquidation amount $0..........................................              -                   -
       1,000,000 designated as 1996 Series A Convertible; 1,000,000
       issued and outstanding, liquidation amount $10,000,000.............          1                   1
Common Stock-$.002 par value; 50,000,000 shares authorized,
       21,738,320 and 14,252,822 shares issued, respectively..............         43                  29
Additional paid-in capital................................................     80,731              40,216
Accumulated deficit.......................................................     (8,634)             (5,142)
Unrealized gain on investments............................................          -                  51
                                                                            ---------------------------------
                                                                               72,141              35,155
Treasury stock (538,633 and 544,495 shares of common stock, respectively).         (1)                 (1)
                                                                            ---------------------------------
Total Stockholders' Equity................................................     72,140              35,154
                                                                           ----------------------------------
Total Liabilities and Stockholders' Equity................................ $  251,069          $   83,072
                                                                           ==================================
        The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                       F-2

<PAGE>

                 Magnum Hunter Resources, Inc. and Subsidiaries
                      Consolidated Statements of Operations
                  (in thousands, except for per share amounts)
<TABLE>
<CAPTION>
<S>                                                                        <C>                  <C>   

                                                                                    For the Years Ended
                                                                                        December 31,
                                                                           ----------------------------------
                                                                                  1997             1996
                                                                           ----------------------------------
Operating Revenues:
   Oil and gas sales......................................................  $     35,658        $   10,248
   Gas gathering, marketing and processing................................        10,297             5,768
   Oil field services and international sales.............................         3,968               396
                                                                           ----------------------------------
         Total Operating Revenue..........................................        49,923            16,412
                                                                           ----------------------------------
Operating Costs and Expenses:
   Oil and gas production.................................................        13,901             4,390
   Gas gathering, marketing and processing................................         7,909             4,708
   Oil field services and international sales.............................         3,745               267
   Depreciation and depletion.............................................        12,363             2,951
   General and administrative.............................................         2,358             1,225
                                                                           ----------------------------------
         Total Operating Costs and Expenses...............................        40,276            13,541
                                                                           ----------------------------------
Operating Profit..........................................................         9,647             2,871

   Equity in earnings of affiliate, net of income tax.....................             6                -
   Other income...........................................................           762               344
   Interest expense.......................................................       (13,788)           (2,394)
                                                                           ---------------------------------
Net Income (Loss) before income tax and minority interest.................        (3,373)              821

   Benefit (Provision) for deferred income tax............................         1,284              (312)
                                                                           ----------------------------------
Net Income (Loss) before minority interest................................        (2,089)              509

   Minority interest in subsidiary earnings...............................           (19)               -
                                                                           ----------------------------------
Net Income (Loss) Before Extraordinary Loss...............................        (2,108)             509

Extraordinary Loss From Early Extinguishment of Debt, net of tax
      benefit of $848.....................................................        (1,384)                -
                                                                           ----------------------------------
Net Income (Loss).........................................................        (3,492)             509

   Dividends Applicable to Preferred Stock................................          (875)            (406)
                                                                           ----------------------------------
Income (Loss) Applicable to Common Shares.................................  $     (4,367)        $    103
                                                                           ----------------------------------
Income (Loss) per Common Share - Basic
   Income (Loss) Before Extraordinary Loss................................  $      (0.21)        $   0.01
   Extraordinary Loss.....................................................         (0.09)               -
                                                                           ----------------------------------
   Income (Loss) After Extraordinary Loss.................................  $      (0.30)        $   0.01
                                                                           ----------------------------------
Income (Loss) per Common Share  - Diluted
   Income (Loss) Before Extraordinary Loss................................  $      (0.21)        $   0.01
   Extraordinary Loss.....................................................         (0.09)                -
                                                                           ----------------------------------
   Income (Loss) After Extraordinary Loss.................................  $      (0.30)        $   0.01
                                                                           ----------------------------------
Common Shares Used in Per Share Calculation
   Basic..................................................................    14,535,805       12,485,893
                                                                           ----------------------------------
   Diluted................................................................    14,535,805       12,561,760
                                                                           ----------------------------------


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

</TABLE>
                                      F-3

<PAGE>



                 Magnum Hunter Resources, Inc. and Subsidiaries
                 Consolidated Statements of Stockholders' Equity
                For the Periods Ended December 31, 1997 and 1996
                             (dollars in thousands)


<TABLE>
<CAPTION>
<S>                                                <C>           <C>            <C>       <C>         <C>       <C>
                                                                                                                      
                                                         Preferred Stock         Common    Stock      Treasury  Stock 
                                                        Shares      Amount       Shares    Amount      Shares   Amount
                                                    -------------------------------------------------------------------

Balance at December 31, 1995.......................   767,050    $    1       11,598,183   $ 23          -       $   - 

  Conversion of preferred stock to common stock...   (658,934)       (1)       1,821,638      4   
  Redemption of 28,116 shares of Series C
     preferred stock...............................   (28,116) 
  Issuance of 1996 Series A convertible preferred
     stock, net of offering costs.................. 1,000,000         1              
  Shares issued as collateral, returned and held as
     treasury stock................................                              610,170      1      (610,170)      (1)
  Exercise of employees' common stock options......                                                    12,258                       
  Issuance of common stock to acquire oil and gas
     properties....................................                              188,410      1        51,300
  Sale of investment shares........................                                           
  Dividends declared on preferred stock............                               34,421                2,117                       
  Net income from operations.......................                                                                                 
  Unrealized gain on investments...................                                                                                 
                                                    -------------------------------------------------------------------


Balance at December 31, 1996......................  1,080,000    $    1       14,252,822   $ 29      (544,495)   $ (1)

  Common stock contributed to 401(k) plan..........                                                    13,556       - 
  Exercise of employees' common stock options......                               89,242      -  
  Issuance of common stock for services............                                                     1,000       -
  Issuance of warrants for services................                                                                                 
  Issuance and costs from exercise of warrants.....                              896,256      2       100,000       -
  Issuance of common stock to acquire oil and gas
     properties....................................                                                    16,306       -
  Issuance of common stock, net of offering costs..                            6,500,000     12                                     
  Return of common stock held as collateral to
     treasury......................................                                                  (125,000)      -
  Costs associated with issuance of preferred stock                             
  Dividends declared on 96 Series A preferred stock                                                                                 
  Net loss.........................................                                                          
  Unrealized gain on investments...................                                                          
                                                    ------------------------------------------------------------------

Balance at December 31, 1997....................... 1,080,000    $   1        21,738,320   $ 43     (538,633)    $ (1)
                                                    ==================================================================


         The accompanying notes are an integral part of these consolidated financial statements
</TABLE>    
<PAGE>

                 Magnum Hunter Resources, Inc. and Subsidiaries
                 Consolidated Statements of Stockholders' Equity
                For the Periods Ended December 31, 1997 and 1996
                             (dollars in thousands)
<TABLE>
<CAPTION>
<S>                                                <C>              <C>               <C>
                                                                                       Unrealized
                                                      Additional                       Gain (Loss)
                                                      Paid-In        Accumulated          On
                                                      Capital          Deficit         Investments
                                                    -----------------------------------------------------------------


Balance at December 31, 1995....................... $   29,660       $  (5,245)        $     57

  Conversion of preferred stock to common stock...          (3)
  Redemption of 28,116 shares of Series C
     preferred stock...............................       (294)
  Issuance of 1996 Series A convertible preferred
     stock, net of offering costs..................      9,785
  Shares issued as collateral, returned and held as
     treasury stock................................         (1)
  Exercise of employees' common stock options......          9
  Issuance of common stock to acquire oil and gas
      properties...................................        938
  Sale of investment shares........................                                         (57)
  Dividends declared on preferred stock............        122           (406)
  Net income from operations.......................                                                                 509
  Unrealized gain on investments...................                                          51
                                                    -----------------------------------------------------------------


Balance at December 31, 1996......................  $   40,216       $ (5,142)         $     51

  Common stock contributed to 401(k) plan..........         59
  Exercise of employees' common stock options......        269
  Issuance of common stock for services............          4
  Issuance of warrants for services................         34
  Issuance and costs from exercise of warrants.....      5,277
  Issuance of common stock to acquire oil and gas
      properties...................................         90
  Issuance of common stock, net of offering costs..     36,161
  Return of common stock held as collateral to
      treasury..................................... 
  Costs associated with issuance of preferred stock       (505)
  Dividends declared on 96 Series A preferred stock       (875)
  Net loss.........................................                    (3,492)
  Unrealized gain on investments...................                                         (51)
                                                    ------------------------------------------------------------------

Balance at December 31, 1997.......................  $   80,371      $ (8,634)          $    -
                                                    ==================================================================
 

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

</TABLE>


                                       F-4

<PAGE>



                 Magnum Hunter Resources, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                                 (in thousands)
<TABLE>
<CAPTION>
<S>                                                                           <C>                <C>    


                                                                                      For the Years Ended
                                                                                           December 31,
                                                                              ------------------------------
                                                                                    1997             1996
                                                                              ------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
   Net Income (loss)........................................................... $    (3,492)  $         509
   Adjustments to reconcile net income (loss) to cash provided by
   (used for) operating activities:
      Extraordinary loss.......................................................        1,384              -
      Depreciation and depletion...............................................       12,363          2,951
      Amortization of financing fees...........................................          508              -
      Increase in reserve for doubtful accounts................................          322              -
      Deferred income taxes....................................................       (1,284)           312
      Equity in unconsolidated affiliate.......................................           (6)             -
      Minority interest........................................................           19              -
      (Gain) Loss on sale of assets............................................         (386)          (143)
      Other....................................................................           93             32
      Changes in certain assets and liabilities
        Accounts and notes receivable..........................................       (8,295)        (3,250)
        Other current assets...................................................       (1,247)           (30)
        Accounts payable and accrued liabilities...............................        5,673          2,647
                                                                               ------------------------------
Net Cash Provided By Operating Activities......................................        5,652          3,028
                                                                               ------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sale of assets................................................          593            318
   Additions to property and equipment.........................................     (160,059)       (41,471)
   Increase in deposits and other assets.......................................       (6,159)          (527)
   Loan made for promissory note receivable....................................         (237)           (58)
   Other long-term investments.................................................         (361)             -
   Investment in unconsolidated affiliate......................................       (2,362)             -
                                                                               ------------------------------
   Net Cash Used In Investing Activities.......................................     (168,585)       (41,738)
                                                                               ------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from the issuance of long-term debt and production
       payment.................................................................      352,500         57,262
   Fees paid related to bridge financing.......................................       (1,800)             -
   Proceeds from short-term notes payable......................................        2,699              -
   Payments of principal on long-term and production payment...................     (229,917)       (27,459)
   Payments of other liabilities...............................................            -           (290)
   Payment of fees on issuance of preferred stock..............................         (505)             -
   Proceeds from issuance of common and preferred stock,
      net of offering costs....................................................       41,721          9,796
   Redemption of preferred stock...............................................            -           (295)
   Payments received on notes receivable.......................................          256            277
   Dividends paid..............................................................         (678)          (438)
                                                                               ------------------------------
   Net Cash Provided By Financing Activities...................................      164,276         38,853
                                                                               ------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................................        1,343            143
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...............................        1,687          1,544
                                                                               ------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................................... $      3,030  $       1,687
                                                                               ------------------------------


           The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       F-5

<PAGE>



                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

       Magnum Hunter Resources, Inc. (the "Company"), formerly Magnum Petroleum,
Inc.,  is  incorporated  under the laws of the state of Nevada.  The  Company is
engaged in the acquisition, operation and development of oil and gas properties,
the gathering, processing transmission, and marketing of natural gas and natural
gas liquids,  providing  management and advisory  consulting services on oil and
gas  properties  for third parties,  and providing  consulting  and U.S.  export
services to facilitate Latin American trade in energy  products.  In conjunction
with the above activities,  the Company owns and operates oil and gas properties
in six states,  predominantly in the Southwest  region of the United States.  In
addition,  the Company  owns and operates  three  gathering  systems  located in
Texas,  Louisiana and Oklahoma and owns an interest in a natural gas  processing
plant located in Texas.

Consolidation

     The accompanying  consolidated financial statements include the accounts of
the  Company  and  its  existing  wholly-owned   subsidiaries,   Gruy  Petroleum
Management  Company,  Hunter Gas Gathering,  Inc.,  Inesco  Corporation,  Magnum
Hunter Production, Inc., Midland Hunter Petroleum Limited Liability Company, and
SPL  Gas  Marketing,   Inc.  and  its  51%  owned  subsidiary,   Hunter  Butcher
International Limited Liability Company. The Company accounts for its investment
in NGTS under the equity  method.  All  significant  intercompany  accounts  and
transactions  have been eliminated in consolidation.  Certain  reclassifications
have been made to the  consolidated  financial  statements  of the prior year to
conform with the current presentation.

       The Company is a holding company with no significant assets or operations
other than its investments in its subsidiaries. The wholly-owned subsidiaries of
the Company are direct  Guarantors of the Company's Section 144 A Notes and have
fully and unconditionally guaranteed the Notes on a joint and several basis. The
Guarantors  comprise all of the direct and indirect  subsidiaries of the Company
(other than  inconsequential  subsidiaries),  and the Company has not  presented
separate  financial  statements and other disclosures  concerning each Guarantor
because  management  has  determined  that such  information  is not material to
investors.   There  is  no  restriction  on  the  ability  of   consolidated  or
unconsolidated subsidiaries to transfer funds to the Company in the form of cash
dividends, loans, or advances.

Cash and Cash Equivalents

       The Company considers all highly liquid debt instruments purchased with a
maturity of three  months or less to be cash  equivalents.  The Company has cash
deposits in excess of federally insured limits.

Investments

       The Company  follows  accounting  procedures  according  to  Statement of
Financial  Accounting  Standards No. 115,  Accounting for Certain Investments in
Debt and Equity Securities.  Under this standard,  the equity securities held by
the Company that have readily determinable fair values are classified as current
assets  available-for-sale and are measured at fair value.  Unrealized gains and
losses  for  these   investments  are  reported  as  a  separate   component  of
stockholders' equity.

       
                                      F-6

<PAGE>

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

     At December 31, 1996,  the Company's  available for sale  securities had an
amortized cost basis of $150,000,  gross  unrealized gains reported in equity of
$51,150 and a fair market value of $232,500.  During 1996,  securities were sold
for gross proceeds of $187,312 and the Company realized a gain of $142,872.

       At December 31, 1997,  the Company had no  securities  available for sale
and no gross unrealized gains reported in equity.  During 1997,  securities were
sold for gross proceeds of $483,500 and the Company realized a gain of $330,000.

Suspended Revenues

       Suspended revenue interests  represent oil and gas sales payable to third
parties largely on properties  operated by the Company.  The Company distributes
such  amounts  to third  parties  upon  receipt  of  signed  division  orders or
resolution of other legal matters.

Oil and Gas Producing Operations

       The Company  follows the full-cost  method of accounting  for oil and gas
properties,  as prescribed by the  Securities and Exchange  Commission  ("SEC").
Accordingly, all costs associated with acquisition,  exploration and development
of oil  and  gas  reserves,  including  directly  related  overhead  costs,  are
capitalized.

       All capitalized costs of oil and gas properties,  including the estimated
future costs to develop proved reserves, are amortized on the unit-of-production
method using  estimates of proved  reserves.  Cost directly  associated with the
acquisition  and  evaluation  of  unproved  properties  are  excluded  from  the
amortization  base until the related  properties  are  evaluated.  Such unproved
properties  are  assessed  periodically  and any  provision  for  impairment  is
transferred to the full-cost  amortization base. Sales of oil and gas properties
are  credited to the  full-cost  pool  unless the sale would have a  significant
effect on the amortization rate. Abandonments of properties are accounted for as
adjustments to capitalized costs with no loss recognized. The Company's unproved
properties  excluded  from the  amortization  base were $517,000 and $459,000 at
December 31, 1997 and 1996, respectively.

       The  net  capitalized  costs  are  subject  to a  "ceiling  test,"  which
generally  limits such costs to the aggregate of the estimated  present value of
future net revenues  from proved  reserves  discounted  at ten percent  based on
current economic and operating conditions.

Derivative Instruments

     The  Company  frequently  enters  into  swaps,  futures,  options and other
derivative  contracts to hedge the impact of market  fluctuations in gas and oil
prices on  anticipated  future gas and oil  production.  The Company  defers the
impact of  changes  in the market  value of the  contracts  that serve as hedges
until the related transaction is completed.

Pipelines and Processing Plant

       Pipelines  and  processing  plant are  carried at cost.  Depreciation  is
provided  using the  straight-line  method over an  estimated  useful life of 15
years.  Gain or loss on  retirement  or sale or other  disposition  of assets is
included in results of operations in the period of disposition.






                                      F-7 

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Other Property

       Other  property  and  equipment  are  carried  at cost.  Depreciation  is
provided using the straight-line method over estimated useful lives ranging from
five to ten years.  Gain or loss on retirement or sale or other  disposition  of
assets is included in results of operations in the period of disposition.

Other Oil and Gas Related Services

       Other oil and gas related  services  consist  largely of fees earned from
the Company's  operation of oil and gas properties for third parties.  Such fees
are recognized in the month the service is provided.

Income Taxes

       The Company files a consolidated federal income tax return.  Income taxes
are  provided  for the tax effects of  transactions  reported  in the  financial
statements  and consist of taxes  currently due, if any, plus net deferred taxes
related primarily to differences between the basis of assets and liabilities for
financial  and  income  tax  reporting.  Deferred  tax  assets  and  liabilities
represent the future tax return  consequences of those  differences,  which will
either be taxable or deductible when the assets and liabilities are recovered or
settled.  Deferred tax assets include  recognition of operating  losses that are
available to offset future  taxable income and tax credits that are available to
offset  future  income  taxes.  Valuation  allowances  are  recognized  to limit
recognition  of deferred tax assets where  appropriate.  Such  allowances may be
reversed when  circumstances  provide evidence that the deferred tax assets will
more likely than not be realized.

Income or Loss Per Common Share

       During  1997,  the Company  adopted  Statement  of  Financial  Accounting
Standards   ("SFAS")  No.  128,   "Earnings  per  Share,"  which  requires  dual
presentation of basic and diluted earnings per shares ("EPS") on the face of the
consolidated  income statement and requires a  reconciliation  of the numerators
and denominators of the basic and diluted EPS calculations. Accordingly, all EPS
information  for all periods  presented  have been restated to present basic and
diluted EPS under the provisions of SFAS No. 128.

Use of Estimates and Certain Significant Estimates

       The preparation of the Company's financial  statements in conformity with
generally accepted accounting  principles  requires the Company's  management to
make  estimates  and  assumptions  that  affect the  amounts  reported  in these
financial  statements and accompanying  notes.  Actual results could differ from
those estimates. Significant assumptions are required in the valuation of proved
oil and gas  reserves,  which as described  above may affect the amount at which
oil and gas properties are recorded.  It is at least  reasonably  possible those
estimates  could be  revised  in the  near  term and  those  revisions  could be
material.

     In June  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income" and SFAS No. 131,  "Disclosures  About  Segments  of an  Enterprise  and
Related  Information."  SFAS No. 130  establishes  standards  for  reported  and
display  of  comprehensive  income in the  financial  statements.  Comprehensive
income is the total of net  income  and all other  non-owner  changes in equity.
SFAS  No.  131  requires  that  companies  disclose  segment  data  based on how
management makes decisions  allocating resources to segments and measuring their
performance.  SFAS Nos. 130 and 131 are  effective  for 1998.  Adoption of these
standards  is  not  expected  to  have  an  effect  on the  Company's  financial
statements, financial position or results of operations. 

                                      F-8

<PAGE>

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 2 -- ACQUISITIONS

       On June 28, 1996, the Company  purchased 469 gas wells and  approximately
427  miles  of a gas  gathering  pipeline  system  for a net  purchase  price of
$34,652,395. The properties are located in the Panhandle of Texas and

Western Oklahoma and are referred to as the "Panoma Properties." As the purchase
was not completed until the end of the second quarter of 1996, the  consolidated
financial  statements  for 1996  include  the  operating  results  of the Panoma
Properties for only the last six months of the year.

       On  November 4, 1996,  the  Company  entered  into an  agreement  to sell
certain oil and gas properties for $1,850,000,  including $150,000 of restricted
securities  of an  American  Stock  Exchange  listed  company  and a  $1,700,000
promissory  note  payable  out of 100% of the  net  oil  and gas  income  of the
properties.  The  agreement  calls for the  Company's  subsidiary to continue to
operate the properties for a monthly management fee.

       In January, 1997, the Company purchased a fifty percent (50%) interest in
the McLean Gas Plant,  the gas  processing  facility  connected to the Company's
Panoma gas gathering  system for $2.5  million.  Under the terms of the purchase
agreement,  the Company  will receive 100% of the net profits of the plant until
it  receives  the $2.5  million  purchase  price at which  point its net profits
interest will revert to fifty percent (50%), the Company's ownership position.

       On April 30, 1997,  the Company  acquired from a subsidiary of Burlington
Resources,  Inc., effective as of January 1, 1997, the Permian Basin Properties,
consisting  of 25 field areas in west Texas and 22 field areas in southeast  New
Mexico,  for a net purchase  price of $133.8  million after  adjustments of $9.7
million for  production  cash flow from  January 1, 1997 to the closing date and
other minor adjustments.

       The  following  summary,  prepared  on a pro forma  basis,  presents  the
results of operations  for the years ended December 31, 1997 and 1996, as if the
acquisitions occurred as of the beginning of the respective years. The pro forma
information  includes  the  effects of  adjustments  for  increased  general and
administrative  expense,  interest expense,  depreciation,  depletion and income
taxes:
<TABLE>
<CAPTION>
<S>                                                           <C>                 <C>   
                                                                      1997              1996
                                                                 ---------------------------------
                                                                            (Unaudited)
                                                                 ---------------------------------

Revenue........................................................$   62,550,000      $  63,648,000
Net Income (Loss) Applicable to Common Stock before
  extraordinary items..........................................    (2,100,000)         1,158,000
Net Income (Loss) Per Common Share before extraordinary items
  Basic........................................................$         (.14)     $         .09
  Diluted......................................................$         (.14)     $         .09
Average shares outstanding - Basic.............................    14,535,805         12,485,893
Average shares outstanding - Diluted...........................    14,535,805         12,561,760
</TABLE>
       On  December  18,  1997,  the  Company  acquired a thirty  percent  (30%)
membership  interest in NGTS,  LLC., a newly formed  wholly owned  subsidiary of
Natural Gas  Transmission  Services,  Inc., a natural gas  marketing and trading
company. NGTS, LLC assumed all of the parent company's operations as of December
1, 1997.  The  Company,  as of  December  1, 1997,  dedicated  its  natural  gas
production to NGTS, LLC for marketing.  The 


                                      F-9

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Company's $4.35 million acquisition was completed for a combination of cash
($2.35  million)  and  promissory  notes ($2.0  million)  that have equity "put"
features.  The  Company  may,  at its  option,  retire the  promissory  note due
December 1, 1998 with stock or cash.

     As of December  31,  1997,  the Company had  acquired  74,500  Units of TEL
Offshore  Trust for  investment  purposes.  Subsequent to that date, the Company
announced a cash tender offer for  $9,599,000  to acquire at least forty percent
(40%) of the outstanding  Units of TEL at $5.50 per Unit,  which was successful.
At December  31, 1997,  the  investment  in TEL was included in other  long-term
investments.

NOTE 3 -- NOTES RECEIVABLE

       On July 28,  1995,  the  Company  received a  non-interest  bearing  note
receivable  in the amount of $223,500 in exchange for its interest in an oil and
gas  property.  Interest at 10 percent was  imputed on the note  resulting  in a
discount of $28,366.  The note  provides  for payments of $7,000 per month which
were received timely in 1997. As of December 31, 1997, the unpaid balance, net
of discount, was $27,705.

       On November 4, 1996, the Company received an interest bearing note due on
November  1, 1999,  in  exchange  for its  interest  in oil and gas  properties.
Interest is at the rate of 12% per annum. The note is  collateralized by the oil
and gas  properties  sold.  As of  December  31,  1997,  the unpaid  balance was
$1,598,238.

       On September  30, 1997,  the Company sold its  investment  in  securities
available for sale to an unrelated entity for $483,500.  Prior to the sale, this
entity owed the  Company  $92,610.  The total  amount owed was secured by a note
payable to the Company with interest at 10% per annum and principal installments
of $50,000  per month  commencing  November  5, 1997,  with  final  payment  due
November 5, 1998.  The note is  collateralized  by shares of an  American  Stock
Exchange  listed company and by shares of the Company held by the entity.  After
making the  payment  due  November  5, 1997,  the entity was unable to  continue
making  further  payments.  Based on the current  market value of the collateral
securities,  the Company made a $200,000  allowance for the  realization  of the
note. The net carrying value of the note, at December 31, 1997 was $330,016.

NOTE 4 -- RELATED PARTY TRANSACTIONS

       In conjunction with the acquisition of Hunter, the Company assumed a note
receivable  with a balance of $178,527  and  $353,071  at December  31, 1996 and
1997,  respectively,  from an owner in an affiliated  limited liability company.
The note  provides  for  interest  at ten percent and has a due date of March 1,
1998.  It is management's intent to extend the due date to December 31,1998.

       During 1996, as part of the Company's overall  compensation  package, the
Company's  officers  and  directors  were  granted the right to  participate  in
certain development and exploration projects of the Company on a promoted basis.
As of December 31, 1996, eleven (11) of the Company's  officers and directors as
a group spent an aggregate  of $137,340  participating  in 6 wells.  The Company
discontinued this program as of January 1, 1997.


                                      F-10
<PAGE>

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 5 -- DEBT

       Notes Payable and Long-term  debt at December 31, 1997 and 1996 consisted
of the following:
<TABLE>
<CAPTION>
<S>                                                                             <C>              <C>    



                                                                                   1997              1996
                                                                                -----------------------------

Notes Payable:
Note payable to bank, due March 3, 1998,
  including interest at 8.25%..............................................    $  2,699,000      $    -

Note payable,  secured by stock in NGTS,  LLC., due December 1, 1998, or earlier
  under  special  conditions,  payable in cash or common stock of the Company at
  its option, interest payable
  at 9% in cash quarterly beginning March 31, 1998.........................       2,000,000           -
                                                                                -----------------------------
         Total Notes Payable...............................................    $  4,699,000      $    -
                                                                                =============================
 
Long-Term Debt: 
                                                                   
Banks
Revolving promissory note, collateralized by pipeline and oil and gas
  properties, due April 30, 2002, (1)......................................    $ 21,500,000     $       -

Revolving   promissory  note, collateralized by pipeline and oil and gas
  properties, due June 30, 2001, interest at LIBOR + 2.25% (total of
  7.625% at December 31, 1996).............................................          -           38,700,000

Note payable to bank collateralized by vehicle payable in monthly installments
  of $1,031 including interest at 8.5% through
  February 1999............................................................          13,000          24,000

Other
Senior notes, unsecured, due June 1, 2007, interest at 10% payable
  semi-annually on June 1 and December 1...................................     140,000,000             -

Notes payable, non-interest bearing and uncollateralized, payable in monthly
  installments of $1,000 through July 1, 2000, assumed in
  Hunter acquisition.......................................................          30,000          42,000
                                                                                -----------------------------
         Total Long-Term Debt..............................................    $161,543,000     $38,766,000
                             Less Current Portion..........................          24,000          22,000
                                                                                -----------------------------

                 Long-Term Debt............................................    $161,519,000     $38,744,000
                                                                               ============================== 
</TABLE>

                                      F-11
<PAGE>

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

       Maturities of long-term  debt based on contractual  requirements  for the
years ending December 31, are as follows:

1998.............................................  $      24,000
1999.............................................         14,000
2000.............................................          5,000
2001.............................................             -
2002.............................................     21,500,000
2003 to 2006.....................................             -
2007.............................................    140,000,000
                                                   ---------------
                                                   $ 161,543,000
                                                   ===============   


       (1)       The revolving promissory note to the banks is a borrowing under
                 a  $125,000,000  line  of  credit  on  which  there  existed  a
                 borrowing  base of  $65,000,000 at December 31, 1997. The level
                 of the  borrowing  base is  dependent  on the  valuation of the
                 assets pledged,  primarily oil and gas reserve values. The line
                 of credit  includes  covenants,  the most  restrictive of which
                 require  maintenance  of a  current  ratio,  interest  coverage
                 ratio,  and  tangible  net  worth,  as  specified  in the  loan
                 agreement.  The bank group must approve all  dividends  paid on
                 common stock.  The credit  agreement  provides for both "LIBOR"
                 and "Base Rate" (Prime) interest rate options.  At December 31,
                 1997, the amounts borrowed at these rates were:


LIBOR + 1% (total of 6.77%)........................  $  17,000,000
Base Rate (Prime) at 8.5%..........................      4,500,000
                                                   -----------------
       Total.......................................  $  21,500,000  
 
     At December 31, 1997,  the Company was not in compliance  with the interest
coverage  ratio  covenant of the  revolving  promissory  note.  The lenders have
agreed to waive  compliance  with the interest  coverage  ratio  requirement  at
December 31, 1997, and amend the interest  coverage ratio  requirement as stated
in the Amended and  Restated  Credit  Agreement  for each of the quarters in the
year ended December 31, 1998.
               
NOTE 6 -- PRODUCTION PAYMENT LIABILITY

       The Company has an obligation under a production payment conveyance.  The
conveyance  provides  for a  royalty  payment  equal to 50% of the  monthly  net
revenue proceeds received by the Company in certain oil and gas properties.  The
balance  owed  under  the  conveyance  bears  interest  at 15% per  annum and is
non-recourse to the Company. The balance owed under this conveyance was $147,000
and $210,000 at December 31, 1997 and 1996, respectively.

       In November,  1996, the Company entered into a second production  payment
conveyance with the same party. The Company received a production payment amount
of $750,000 and agreed to make royalty  payments of up to 50% of the monthly net
revenue proceeds received from certain oil and gas properties.  The balance owed
under the  conveyance  was  $596,000 and $726,000 at December 31, 1997 and 1996,
respectively.  The  production  payment bears  interest at the rate of 13.5% per
annum and is non-recourse to the Company.

NOTE 7 -- INCOME TAXES

       The Company  accounts for income taxes in  accordance  with  Statement of
Financial  Accounting  Standards No. 109,  Accounting  for Income  Taxes,  which
requires the recognition of a liability or asset, net of a valuation  allowance,
for the deferred tax consequences of all temporary  differences  between the tax
bases and the  reported 

                                      F-12

<PAGE>

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)


amounts of assets and liabilities,  and for the future benefit of operating
loss  carryforwards.  The  following is a  reconciliation  of income tax expense
reported in the statement of operations:
                                                     
                                                       1997              1996
                                                    ----------------------------
Income tax expense (benefit) at statutory rates    $(1,153,000)      $  279,000
State tax expense (benefit)                           (133,000)          24,000
Other                                                 (288,000)           9,000
Change in valuation allowance                          290,000             -
                                                   -----------------------------
      Tax expense (benefit)                        $(1,284,000)      $  312,000
                                                   =============================


       The tax effects of significant  temporary  differences and  carryforwards
are as follows:

<TABLE>
<CAPTION>
<S>                                                                        <C>               <C>    

                                                                                         December 31,
                                                                           ----------------------------------

                                                                                  1997               1996
                                                                           ----------------------------------

Property and equipment, including intangible drilling costs............... $  (5,245,000)      $  (6,381,000)
Annualized gain on investment.............................................          -                (32,000)
                                                                           ----------------------------------
Total deferred tax liability..............................................    (5,245,000)         (6,413,000)
                                                                           ----------------------------------
Allowance for doubtful accounts...........................................       191,000              49,000
Depletion carryforwards...................................................       196,000             361,000
Operating loss and other carryforwards....................................     3,859,000           2,534,000
                                                                           ----------------------------------
         Total deferred tax assets........................................     4,246,000           2,944,000
                                                                           ----------------------------------
Valuation allowance.......................................................      (290,000)               -
                                                                           ----------------------------------
         Net Deferred Tax Liability....................................... $  (1,289,000)      $  (3,469,000)
                                                                           ==================================
</TABLE>

     The Company and its  subsidiaries  have net  operating  loss  carryforwards
(NOL) of approximately $9,954,000 that expire, if unused, in years through 2012,
and of which approximately $608,000 expire in 1999.  Approximately $1,992,000 of
the NOL carries a limitation  of  approximately  $718,000 per year. In addition,
the Company has depletion  carryforwards of approximately  $517,000. A valuation
allowance reduces deferred taxes based on the criteria set forth in SFAS 109.

NOTE 8 -- STOCKHOLDERS' EQUITY

       Shares  of  preferred  stock  may be  issued  in such  series,  with such
designations,  preferences, stated values, rights, qualifications or limitations
as determined  solely by the Board of  Directors.  Of the  10,000,000  shares of
$.001 par value  preferred  stock the Company is  authorized  to issue,  216,000
shares have been  designated as Series A Preferred  Stock,  925,000  shares have
been designated as Series B Preferred Stock, 625,000 shares have been designated
as Series C Preferred  Stock and 1,000,000  shares have been  designated as 1996
Series A Convertible Preferred Stock. Thus, 7,234,000 preferred shares have been
authorized  for  issuance  but have not been issued nor have the rights of these
preferred shares been  designated.  No dividends can be paid on the common stock
until the dividend requirements of the preferred shares have been satisfied.

     Holders of the Series A Preferred  Stock are entitled to receive  dividends
only to the extent that funds are available from the West Dilley Prospect.  Such
dividends are limited to $7.50 per share, in the aggregate. Dividend payments to
Series A preferred  shareholders will be based on fifty percent (50%) of the net
operating  revenue  received by the working  interest  owners of the West Dilley
Prospect.  Due to no  production  from the well  located 

                                      F-13

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

on this prospect,  the Company shut this well in and therefore is no longer
producing the property.  The Series A dividends  are not  cumulative  except for
unpaid  amounts due from this  calculation.  No dividends  have been paid on the
Series A preferred stock and there is no aggregate  annual dividend  requirement
for the Series A preferred stock.

       The Series B  Preferred  Stock was issued as a unit,  comprised  of 1,000
shares of Series B Preferred Stock and two production certificates. The Series B
preferred  stockholders  are entitled to receive  cumulative  dividends of $0.35
annually per share, payable quarterly.  The holders of the units are entitled to
receive $10,000 per unit in dividends and in production payments. The production
payments were derived from 50% of the  Company's net revenue from  production of
oil and gas.  Beginning  June 15,  1994,  the Company  offered to exchange  (the
"Exchange  Offer")  1,250  shares of common  stock for each Series B  production
certificate. All of the shares were converted to common stock during 1996.

     Separate and apart from the Exchange Offer,  two of the Company's  previous
officers and directors (the  "Officers")  set aside 125,000 shares (the "Stock")
of  their  own  common  stock  of  the  Company  for a  single  individual  (the
"Individual")   who  owned   approximately   55%  of  the  Series  B  production
certificates  that were  exchanged.  The Stock was being held by an  independent
party to this transaction  until fair market value of the Exchange Shares,  when
the  Exchange  Shares  become  eligible  for  sale  pursuant  to Rule 144 of the
Securities Act of 1933, was determined. The Company issued 125,000 shares of its
common stock to the Officers in exchange for their  assignment to the Company of
all of the Officers'  rights,  title and interest in the Stock.  The Company has
recorded the new shares  issued at par value.  The value of the exchange  shares
was  determined in 1996, and the Company issued 5,000 shares of its common stock
to the  Individual.  Subsequent to year-end,  the 125,000 shares being held were
returned to the Company and are being held as treasury stock.

     The Series C preferred stock was convertible at the option of the holder at
any time into three shares of common stock and, after  November 12, 1994,  would
automatically  convert  into common  stock any time the closing bid price of the
common stock equals or exceeds  $5.00 per share for twenty  consecutive  trading
days.  The Series C preferred  stock was  redeemable  by the  Company  beginning
November 12, 1995,  at $10.50 per share plus  accrued and unpaid  dividends.  If
declared  by the Board of  Directors,  dividends  accrued at the annual  rate of
$1.10 per share,  were  cumulative from the date of first issuance and were paid
quarterly in arrears.  The Board of Directors declared dividends on the Series C
preferred  stock of $339,827 for the year ended December 31, 1996. The aggregate
annual dividend  requirements for the 625,000 shares of Series C preferred stock
outstanding at December 31, 1996 was none. As of December 31, 1996, all Series C
preferred stock had been redeemed or converted to common stock.

     On  December  6, 1996,  the  Company  entered  into an  agreement  to issue
1,000,000  shares of new Series A  preferred  stock,  known as the 1996 Series A
Convertible  Preferred Stock, in a private  placement.  The shares have a stated
and  liquidation  value  of $10 per  share  and pay a  fixed  annual  cumulative
dividend  of eight and three  quarters  percent  (8.75%)  payable  quarterly  in
arrears  beginning  December 31, 1996. The shares are convertible into shares of
common  stock at a conversion  price of $5.875 per share.  Beginning in December
1998,  the  Company  has an  option  to  exchange  the  stock  into  convertible
subordinated  debentures  of  equivalent  value.  The  purpose  of  the  private
placement was to fund the capital cost  necessary to drill  certain  development
projects  and to fund  the  capital  costs  of  several  West  Texas  waterflood
projects. Proceeds from the offering were initially used to reduce the Company's
existing  bank  indebtedness.   Certain  capital  expenditure  requirements  for
developmental drilling and waterflood projects were required under the agreement
whereby this stock was issued. The Company has met all of these requirements. On
December 23, 1996,  the 1996 Series A  Convertible  Preferred Stock was



                                     F-14

<PAGE>

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)


issued,  resulting in net proceeds to the Company after  offering  costs of
$9,282,000.  Dividends of $22,000 and $875,000  were  declared in 1996 and 1997,
respectively.

       The  preferred  shareholders  are not  entitled  to vote  except on those
matters in which the consent of the holders of preferred  stock is  specifically
required by Nevada law. If the Company were to liquidate prior to payment of the
full dividend  requirements  on the preferred  stock,  the preferred stock would
receive a liquidation  preference  from the liquidation  proceeds.  The Series A
preferred  shareholders  would  receive  an  amount  equal to the  lesser of the
proceeds  from the  liquidation  of the West Dilley  Prospect  or the  remaining
unpaid dividend.  The 1996 Series A Convertible Preferred Stock would receive an
amount of $10 per share. On liquidation,  holders of all series of the preferred
stock would be entitled to receive the par value, $.001 per share, in preference
to the common stock shareholders.

     The Series C preferred  stock was originally  issued as a unit comprised of
one share of Series C preferred  stock and warrants to purchase three (3) shares
of common stock. A total of 1,687,500  warrants were issued and were exercisable
at $5.50 per share through  November 12, 1998,  of which 833,324 were  exercised
prior to 1996. The warrants were  redeemable by the Company at $0.02 per warrant
upon 30 day notice at any time after November 12, 1995 or earlier if the closing
bid price of the common  stock  equaled or exceeded  $6.75 for five  consecutive
trading  days.  The Company  called the warrants for  redemption on November 14,
1997,  after which  846,256  warrants  were  exercised  for net  proceeds to the
Company of $4,654,000. The remaining 7,920 warrants were redeemed.

       In January,  1996,  60,000  warrants were issued at an exercise  price of
$3.375 per share and expiring in January 1999.  At December 31, 1997,  45,000 of
these warrants had been earned.  In connection  with the receipt of a production
payment,  in October 1996 the Company  issued  25,000  warrants with an exercise
price of $5.18 expiring October 1999,  25,000 warrants with an exercise price of
$5.65 expiring  October 2000 and 25,000 warrants with an exercise price of $6.13
expiring October 2001. No warrants were exercised in 1996. At December 31, 1996,
the Company had 1,176,676 total warrants  issued,  including the publicly traded
warrants.  Additionally,  in 1996,  610,170 shares of the Company's common stock
that had been held as collateral were returned and held in the treasury,  12,258
shares of common stock were issued upon  exercise of employees'  stock  options,
239,710 shares of common stock,  valued at $939,000,  were issued to acquire oil
and gas  properties,  and 36,538 shares of common stock were issued as dividends
on the Company's Series C Preferred Stock.

        In January,  1997,  21,000 warrants  were issued at a exercise  price of
$4.50 per share expiring  January 1, 2000, in connection with services  rendered
by a non-employee.  During June and October,  1997,  100,000 warrants and 50,000
warrants  were  exercised at $4.125 per share and an average of $4.25 per share,
respectively, resulting in net proceeds to the Company of $625,000. In December,
1997,  37,500  warrants  at an  exercise  price of $3.00 per share  expired.  At
December 31,  1997,  the Company had 166,000  total  warrants  issued,  of which
141,000 had been earned.

       On November 21, 1997, the Company sold  6,500,000  newly issued shares of
its common stock in a public offering,  receiving cash proceeds of approximately
$36.2 million after fees and expenses.  Additionally,  in 1997, 13,556 shares of
the Company's common stock were contributed to the 401(k) plan, 89,242 shares of
common stock were issued upon exercise of employees' stock options, 1,000 shares
of common  stock,  valued at $4,000 were issued in exchange  for  services,  and
16,306 shares of common stock, valued at $90,000, were issued to acquire oil and
gas properties.

                                     F-15

<PAGE>

                MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

       Earnings Per Share

       During 1997, the Company adopted SFAS No. 128, "Earnings per Share." As a
result of the adoption of SFAS No. 128, all earnings per share  ("EPS")  amounts
have been  restated  to the basic and  diluted  presentations  required  by this
pronouncement.  The following table  reconciles the numerators and  denominators
used in the computations of both basic and diluted EPS:
<TABLE>
<CAPTION>
<S>                               <C>             <C>               <C>          <C>            <C>                <C>


                                               For the Year Ended                    For the Year Ended
                                                December 31, 1997                     December 31, 1996
                                  -----------------------------------------------------------------------------------------
                                                                      Per                                          Per
                                       Loss           Shares         Share          Income          Shares        Share
                                    (Numerator)     (Denominator)    Amount      (Numerator)     (Denominator)    Amount
                                  -----------------------------------------------------------------------------------------

Income (Loss) before extraordinary
  item..........................   $ (2,108,000)                                $   509,000
  Less: Preferred Stock dividends      (875,000)                                   (406,000)
                                  ------------------------------------------------------------------------------------------
Basic EPS
Income (Loss) available to
  common stockholders...........     (2,983,000)       14,535,805        (.21)      103,000       12,485,893         .01
Effect of dilutive securities
Warrants........................          -                -                            -             14,943
Options.........................          -                -                            -             60,924
Convertible preferred stock.....          -                -                            -              -
Diluted EPS
Income (Loss) available to
  common stockholders and
                                  --------------------------------------------------------------------------------------------
   assumed  conversions.........  $   (2,983,000)      14,535,805     $   (.21) $   103,000       12,561,760   $    .01
                                  ============================================================================================
</TABLE>
     The warrants, options, and convertible preferred stock were not included in
the computation of diluted earnings per share in 1997 since the Company incurred
a loss  before  extraordinary  items  for the  year  and  any  effect  would  be
anti-dilutive.  At  December  31,  1997,  the Company  had  outstanding  141,000
warrants  at a weighted  average  exercise  price of $4.75 per share,  2,538,000
options at a weighted  average  exercise price of $5.00 per share, and 1,000,000
shares of  preferred  stock  convertible  to common  stock at $5.875  per share.
Additionally,  effective  December  1997,  the Company issued a note payable for
$2,000,000  due  December 1, 1998,  payable,  at its  option,  in either cash or
common stock.

NOTE 9 -- SUPPLEMENTAL CASH FLOW INFORMATION

       During 1997,  the Company  purchased  oil and gas  properties  by issuing
16,306 shares valued at $90,000. The Company contributed 13,556 shares valued at
$59,000 to the Company's  401(k) plan. The Company issued 1,000 shares valued at
$4,000 in exchange for services rendered. Interest paid in 1997 was $12,001,557.

       During 1996,  the Company  purchased  oil and gas  properties  by issuing
239,710 shares of its common stock,  valued at $938,444.  The Company  converted
658,934 shares of Series B and Series C preferred stock into 1,821,638 shares of
common  stock.  The  Company  issued  36,538  shares of common  stock  valued at
$121,700 in lieu of cash  dividends on  preferred  stock.  The Company  received
equity  securities with a fair value of $150,000 as partial payment for the sale
of property interests. Interest paid in 1996 was $2,344,308.

NOTE 10 -- ENVIRONMENTAL ISSUES

       Being engaged in the oil and gas exploration  and  development  business,
the  Company  may  become  subject  to  certain  liabilities  as they  relate to
environmental  clean  up  of  well  sites  or  other  environmental  restoration

                                      F-16
                                
<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

procedures as they relate to the drilling of oil and gas wells and the operation
thereof.  In the Company's  acquisition  of existing or previously  drilled well
bores, the Company may not be aware of what environmental  safeguards were taken
at the time such  wells  were  drilled  or during  the time that such wells were
operated.  Should it be determined  that a liability  exists with respect to any
environmental  clean up or  restoration,  the liability to cure such a violation
would most likely fall upon the Company.  In certain  acquisitions,  the Company
has received  contractual  warranties  that no such violations  exist,  while in
other  acquisitions the Company has waived its rights to pursue a claim for such
violations  from the selling party.  No claim has been made nor has a claim been
asserted,  nor is the Company aware of the  existence of any material  liability
which the  Company  may  have,  as it  relates  to any  environmental  clean up,
restoration or the violation of any rules or regulations relating thereto.

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

       The Company has certain lease  agreements for the use of office space and
office  equipment.  The office space lease extends through November 2001 with an
option to renew the lease for a three year term.  The various  office  equipment
leases extend until 1999. The leases have been  classified as operating  leases.
The following is a schedule by years of future minimum lease  payments  required
under the operating lease agreements:


Year Ended December 31:
1998.......................................................     $    263,886
1999.......................................................          266,770
2000.......................................................          271,157
2001.......................................................          246,959
Thereafter.................................................           13,155
                                                                ----------------
 Total Minimum Payments Required                                $  1,061,927
                                                                ================

       Rental expense was $218,951 and $129,169 for 1997 and 1996, respectively.

     In December,  1997,  the Company  amended its Revolving Loan Agreement with
certain  banks  to  permit  guarantees  of  NGTS,  LLC's  debt,  not  to  exceed
$4,000,000,  and trade payables or letters of credit for the purchase of natural
gas not to exceed an  aggregate  of  $15,000,000  on behalf of NGTS,  LLC. As of
December 31, 1997, there was no NGTS, LLC. debt outstanding.

NOTE 12 -- FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

       Financial  instruments  that  subject the Company to credit risk  consist
principally of accounts and notes receivable. The receivables are primarily from
companies in the oil and gas business or from  individual oil and gas investors.
These parties are primarily  located in the  Southwestern  regions of the United
States.  No single  receivable is considered to be  sufficiently  material as to
constitute a concentration.  The Company does not ordinarily require collateral,
but in the case of receivables for joint  operations,  the Company often has the
ability to offset amounts due against the participant's share of production from
the related  property.  The Company believes the allowance for doubtful accounts
at December 31, 1997 is adequate.

       Management  estimates the market values of notes  receivable  and payable
based on expected  cash flows.  At December  31,  1997,  the Company  provided a
$200,000 reserve for the carrying value of a note receivable. After establishing
this  reserve,  management  believes  those market values  approximate  carrying
values at December 31, 1997 and 1996.  The market  values of equity  investments
are based upon quoted prices (see Note 1).


                                     F-17

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

NOTE 13 -- COMMODITY DERIVATIVES AND HEDGING ACTIVITIES

     Periodically,  the Company enters into futures, options, and swap contracts
to mitigate the effects of significant fluctuations in crude oil and gas prices.
At December 31, 1997,  the Company had open  contracts  for oil price collars on
30,000 barrels of oil per month (with cap and floor prices of $23.25 and $18.50,
respectively) through December, 1998. At December 31, 1997, the Company had open
contracts  for gas prices swaps of 500,000  MMbtu of gas at an average  price of
$2.45 during  January,  1998,  300,000 MMbtu of gas at an average price of $2.54
during  February,  1998,  and 300,000  MMbtu of gas at an average price of $2.25
during  March,  1998.  Additionally,  the Company had  written  call  options on
100,000 MMbtu per month for the months of January through March,  1998 at prices
averaging $2.90 per MMbtu. Net losses related to derivative transactions for the
years  ended   December  31,  1997  and  1996  were   $1,537,000  and  $272,000,
respectively.   At  December  31,1997,   the  unrealized  gain  from  derivative
transactions was $336,000.

NOTE 14 -- STOCK COMPENSATION PLAN

       The  Company  adopted  in  1996  two  stock  compensation  plans  for its
employees  and  directors,  (i)  the  Magnum  Hunter  Resources  Employee  Stock
Ownership Plan, (the "ESOP"),  and (ii) the Magnum Hunter  Resources,  Inc. 1996
Incentive  Stock  Option Plan (the  "Option  Plan").  In  addition,  the Company
authorized,  after  the  effect of the ESOP  transaction  described  below,  the
issuance of its common stock to  participants  in the Magnum  Hunter  Resources,
Inc.  401(k) plan in an amount that  matched  employee  contributions  up to one
hundred percent (100%). The cost of this matching  contribution was $157,000 and
$59,000 in 1997 and 1996, respectively.

ESOP

       The  Company  established  an ESOP and a  related  trust  as a  long-term
benefit for its employees.  Under terms of the ESOP,  eligible  participants may
elect to make elective  deferred  contributions of not less than 1% or more than
15% of their annual compensation, limited in combination with the 401(k) plan to
the maximum  allowable  per year by the  Internal  Revenue  Code.  The Plan also
allows for the Company to make  discretionary  contributions  to the ESOP. It is
also the Company's  intent to invest all  contributions in Common Stock. In this
regard,  on October 11, 1996, the ESOP purchased  22,556 shares of the Company's
Common Stock for $3.75 per share from a third party. To fund this purchase,  the
ESOP borrowed  $84,585 from a bank. At December 31, 1997, the Company elected to
pay the  loan and  accrued  interest  and  contribute  the  stock as part of the
$157,000  matching of employee  contribution  to the 401(k) plan. 

1996 Incentive Stock Option Plan

       The  Company  established  this  plan  effective  April 1,  1996,  and is
governed by Section 422 of the Internal  Revenue Code,  and Section 16(b) of the
Securities  Exchange Act of 1934. The Option Plan covers 1,200,000 shares of the
Company's Common Stock. Eligibility is limited to employees and directors of the
Company and its  subsidiaries.  The actual  selection of grantees is made by the
Board of Directors. The term of the Option Plan is 10 years, and the term of the
options is at the discretion of the Board,  with a term of 5 years.  All options
are fully vested and exercisable when granted. The exercise price is fair market
value at the date of grant,  except for  individuals  who own 10% or more of the
Company's stock.

       In addition, during 1996, the Board granted the remaining 935,442 options
to employees and directors at an exercise price of $4.50 per share.

     During  1997,  the  Board  granted   1,440,000  options  to  employees  and
directors, 1,240,000 of which were fully vested and 200,000 of which vest over 5
years.

                                     F-18

<PAGE>
                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

       The  following  is a summary of stock  option  activity  under the Option
Plan:
<TABLE>
<CAPTION>
<S>     <C>                            <C>                <C>              <C>            <C>    
                                                     1997                            1996
                                       ----------------------------------------------------------------------
                                                           Weighted                           Weighted
                                                            Average                            Average
                                              Shares     Exercise Price      Shares         Exercise Price
                                       ----------------------------------------------------------------------
Outstanding - Beginning of Year.......    1,187,742      $   3.72           264,558         $    0.82
Granted...............................    1,440,000          5.93           935,442              4.50
Exercised.............................      (89,242)         3.01           (12,258)              .73
Canceled..............................         -              -                 -                 -
                                       ----------------------------------------------------------------------
Outstanding - End of Year.............    2,538,500      $   5.00         1,187,742         $    3.72
                                       ====================================================================== 
Exercisable - End of Year.............    2,338,500                         970,684
                                       ======================================================================

       The following is a summary of plan stock options  outstanding at December 31, 1997:
</TABLE>
<TABLE>
<CAPTION>
<S>                                    <C>              <C>                   <C>   
                                                           Weighted
                                                            Average
                                           Number of       Remaining
                                            Options      Contractual Life          Number of
Exercise Price                            Outstanding       (Years)            Exercisable Options
                                      -----------------------------------------------------------------------
   $   .73.....................              191,522          3.0                    191,522
      1.65.....................               25,536          3.0                     25,536
      4.50.....................              881,442          3.7                    881,442
      4.375....................               25,000          4.0                     25,000
      5.375....................               10,000          4.3                     10,000
      5.25.....................               35,000          4.4                     35,000
      5.875....................            1,170,000          5.0                   1,170,000
      6.0......................              100,000          5.0                       -
      7.125....................              100,000          5.0                       -
                                      -----------------------------------------------------------------------
                                           2,538,500                                 2,338,500
                                      =======================================================================
</TABLE>
     The Company  adopted  the  disclosures  only  portion of SFAS No. 123 as it
continued to follow the  provisions of APB No. 25, which is the intrinsic  value
method of accounting for stock-based compensation.

     On a pro forma  basis,  the  effect  of stock  based  compensation  had the
Company adopted Statement No. 123 is as follows:
<TABLE>
<CAPTION>
<S>                                                      <C>                    <C>    
                                                                 1997                  1996
                                                         -------------------------------------- 
Net Income (Loss) Applicable to Common Stock:
  As reported............................................ $     (4,367,000)     $      103,000
  Pro Forma..............................................       (6,573,000)         (1,540,000)
Basic Earnings (Loss) per Share:
  As reported, after extraordinary loss.................. $           (.30)     $          .01
  Pro Forma..............................................             (.45)               (.12)
Diluted Earnings (Loss) per Share:
  As reported, after extraordinary loss..................             (.30)                .01
  Pro Forma..............................................             (.45)               (.12)
</TABLE>

                                      F-19
<PAGE>

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)


       The weighted  average grant date fair value of options  granted was $2.87
during  1997.  Fair value of options and warrants  was  calculated  by using the
Black-Scholes  options  pricing  model  using  the  following  weighted  average
assumptions for 1997 activity:  risk free interest rate of 5.67%,  expected life
of 5.0 years, expected volatility of 57.0% and no dividend yield.

NOTE 15 -- EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
                     CHANGE-IN-CONTROL ARRANGEMENTS

       Mr. Gary C. Evans and Mr. Matthew C. Lutz have employment agreements with
Magnum Hunter Resources,  Inc. Mr. Evans' agreement terminates December 31, 1998
and continues  thereafter on a year to year basis and provides for a base salary
of $250,000 per annum.  Mr. Lutz's agreement  terminates  September 30, 1998 and
continues  thereafter  on a year to year basis and provides for a base salary of
$150,000 per annum.  Both agreements  provide that the same benefits supplied to
other  Company  employees  shall be available to the  employee.  The  employment
agreements also contain,  among other things,  covenants by the employee that in
the event of  termination,  he will not associate  with a business that competes
with the Company for a period of one year after  cessation  of  employment.  The
Company  also  has  key  man  life  insurance  on Mr.  Evans  in the  amount  of
$5,000,000.

NOTE 16 -- SUBSEQUENT EVENTS

     On January 9, 1998, the Company adopted a Shareholder Rights Plan, pursuant
to which Rights would be distributed as a dividend to its common stockholders at
a rate of one Right for each share of common stock held of record on January 20,
1998.  Under the Rights Plan, the Rights will  initially  represent the right to
purchase  one  one-hundreth  of a share of 1998  Series  A Junior  Participating
Preferred  Stock for $35.00 per one  one-hundreth  of a share.  The Rights  will
become  exercisable  only if a person or a group  acquires or commences a tender
offer  for  15% or  more  of the  Company's  common  stock.  Until  they  become
exercisable,  the Rights attached to and trade with the Company's  common stock.
The Rights  will  expire  January  20,  2008.  The Rights may be redeemed by the
continuing  members of the Company's  Board of Directors at $.01 per Right prior
to the tenth day  after a person  or group  has  accumulated  15% or more of the
Company's  common  stock.  The  Rights  will  not be  taxable  to the  Company's
shareholders.  In the event that a person or group  acquires  15% or more of the
Company's common stock, the Rights would then be modified to represent the right
to receive for the exercise  price,  Magnum  Hunter  common stock having a value
worth twice the exercise  price.  In the event that the Company is involved in a
merger or other  business  combination  at any time  after a person or group has
acquired  15% or more of  Magnum  Hunter's  common  stock,  the  Rights  will be
modified so as to entitle a holder to buy a number of shares of common  stock of
the acquiring  entity having a market value of twice the exercise  price of each
Right.

       On January 28, 1998, the Company  announced,  and later  amended,  a cash
purchase  offer for Units of TEL  Offshore  Trust.  Previous  to the offer,  the
Company owned  161,500  Units  representing  3.4% of the Units  outstanding.  As
amended, the offer was to purchase between forty percent (40%) and sixty percent
(60%) of the Trust's outstanding Units at $5.50 per Unit. On March 27, 1998, the
Company  announced that 1,745,353  Units,  or 40.1% of the total number of Units
outstanding, had been tendered.



                                     F-20

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
          SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
                                   (Unaudited)

       Proved oil and gas  reserves  consist of those  estimated  quantities  of
crude oil, gas, and natural gas liquids that  geological  and  engineering  data
demonstrate  with  reasonable  certainty to be  recoverable in future years from
known  reservoirs  under  existing  economic and  operating  conditions.  Proved
developed oil and gas reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.

       Estimates of petroleum  reserves have been made by independent  engineers
and Company  employees.  These estimates  include  reserves in which the Company
holds an economic interest under production-sharing and other types of operating
agreements.  These estimates do not include probable or possible  reserves.  The
estimated net interests in proved reserves are based upon subjective engineering
judgments and may be affected by the  limitations  inherent in such  estimation.
The  process  of  estimating  reserves  is  subject  to  continual  revision  as
additional  information  becomes  available  as a result of  drilling,  testing,
reservoir  studies and production  history.  There can be no assurance that such
estimates will not be materially revised in subsequent periods.

       Estimated  quantities  of proved oil and gas reserves of the Company were
as follows:


                                                                     Gas
                                                    Oil           (Thousand
                                                  (Barrels)       Cubic Feet)
                                                --------------------------------
December 31, 1996
  Proved reserves..............................   5,338,255        90,565,997
  Proved developed reserves....................   1,962,184        71,275,141
December 31, 1997
  Proved reserves..............................  20,946,415       207,775,770
  Proved developed reserves....................  12,036,234       154,964,396

     The changes in proved  reserves  for the years ended  December 31, 1997 and
1996 were as follows:

                                                                     Gas
                                                    Oil           (Thousand
                                                  (Barrels)       Cubic Feet)
                                                 -------------------------------
Reserves at December 31, 1995..................   3,767,739       14,071,916
Purchase of minerals-in-place..................   2,678,579       81,943,557
Sale of minerals-in-place......................    (214,381)      (1,318,164)
Extensions and discoveries.....................        -             151,606
Production.....................................    (191,203)      (2,674,793)
Revisions of estimates.........................    (702,479)      (1,608,125)
                                                 -------------------------------

Reserves at December 31, 1996...................  5,338,255       90,565,997
Purchase of minerals-in-place................... 15,282,168      108,620,963
Sale of minerals-in-place.......................    (24,882)         (22,517)
Extensions and discoveries......................      1,777           18,000
Production......................................   (737,289)      (9,613,623)
Revisions of estimates..........................  1,086,386       18,206,952
                                                --------------------------------
Reserves at December 31, 1997................... 20,946,415      207,775,770
                                                ================================


                                     F-21

<PAGE>



                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
   SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES --(Continued)
                                   (Unaudited)

       The  aggregate  amounts  of  capitalized  costs  relating  to oil and gas
producing  activities and the related  accumulated  depreciation,  depletion and
impairment as of December 31, 1997 and 1996 were as follows:


                                                        1997          1996
                                                    ----------------------------
Unproved oil and gas properties...................  $    516,560   $    459,254
Proved properties.................................   227,027,869     70,574,890
                                                    ----------------------------
Gross Capitalized Costs...........................   227,544,429     71,034,144
Accumulated depreciation, depletion and impairment.  (16,091,001)    (4,513,541)
                                                   -----------------------------
          Net Capitalized Costs...................  $211,453,428   $ 66,520,603
                                                   =============================

       Costs incurred in oil and gas producing activities,  both capitalized and
expensed, during the years ended December 31, 1997 and 1996 as follows:


                                                        1997          1996
                                                    ----------------------------
Property acquisition costs
Proved properties................................. $ 137,430,583   $ 31,982,821
  Unproved properties.............................        57,306          -
  Exploration costs...............................       737,936      1,114,733
Development costs.................................    18,284,460        837,273
                                                    ----------------------------
          Total Costs Incurred.................... $ 156,510,285   $ 33,934,827
                                                   =============================

       Results of operations from oil and gas producing activities for the years
ended December 31, 1997 and 1996 were as follows:


                                                       1997          1996
                                                    ----------------------------
Oil and gas production revenue.................... $ 35,658,032    $ 10,247,688
Disposal services revenue.........................        5,130          20,487
Production costs..................................  (13,901,537)     (4,389,465)
Depreciation and depletion........................  (11,577,460)     (2,598,939)
                                                    ----------------------------
  Results of Operations for Producing Activities   $ 10,184,165    $  3,279,771
                                                    ============================

       The  standardized  measure of discounted  estimated future net cash flows
related to proved oil and gas  reserves  at  December  31, 1997 and 1996 were as
follows:

                                                        1997         1996
                                                    ----------------------------
Future cash inflows.............................. $ 811,512,060   $ 492,157,062
Future development and production costs..........  (336,730,398)   (138,614,804)
                                                    ----------------------------
Future net cash flows, before income tax.........   474,781,662     353,542,258
Future income taxes..............................   (93,828,793)   (102,341,098)
                                                    ----------------------------
Future Net Cash Flows............................   380,952,869     251,201,160
10% annual discount..............................  (211,181,318)   (134,116,299)
                                                    ----------------------------
  Standardized Measure of Discounted Future Net
       Cash Flows................................ $ 169,771,551   $ 117,084,861
                                                   =============================



                                     F-22

<PAGE>



                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
   SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES - (Continued)
                                   (Unaudited)

       The primary changes in the standardized  measure of discounted  estimated
future net cash flows for the years  ended  December  31,  1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
<S>                                                                    <C>                   <C>    
 

                                                                             1997                1996
                                                                         ------------------------------------

Purchases of minerals-in-place.......................................    $   136,739,277     $  129,544,769
Sales of minerals-in-place...........................................           (191,741)        (2,195,780)
Extensions, discoveries and improved recovery, less related costs                 38,555            302,785
Sales of oil and gas produced, net of production costs...............        (21,756,495)        (5,858,223)
Development costs incurred during the period.........................         16,289,428             -
Revision of prior estimates:
  Net change in prices and costs.....................................       (141,112,592)        14,993,539
  Change in quantity estimates.......................................         46,255,955        (10,107,737)
Accretion of discount................................................         11,708,486          2,981,968
Net change in income taxes...........................................          4,715,817        (42,396,139)
                                                                         ------------------------------------
                 Net Change..........................................    $    52,686,690     $   87,265,182
                                                                         ====================================
</TABLE>

       Estimated future cash inflows are computed by applying year-end prices of
oil  and  gas to  year-end  quantities  of  proved  reserves.  Estimated  future
development and production  costs are determined by estimating the  expenditures
to be incurred in  developing  and  producing the proved oil and gas reserves at
the end of the year,  based on  year-end  costs  and  assuming  continuation  of
existing economic conditions.  Estimated future income tax expense is calculated
by applying  year-end  statutory tax rates to estimated  future pre-tax net cash
flows  related  to  proved  oil and gas  reserves,  less  the tax  basis  of the
properties involved.

       The  assumption  used to  compute  the  standardized  measure  are  those
prescribed  by the  Financial  Accounting  Standards  Board and as such,  do not
necessarily reflect the Company's  expectations of actual revenues to be derived
from those reserves nor their present  worth.  The  limitations  inherent in the
reserve quantity  estimation  process are equally applicable to the standardized
measure  computations  since  these  estimates  are the basis for the  valuation
process.

                                     F-23

<PAGE>



Item 8.  Changes In and Disagreements With Accountants on Accounting
         and Financial Disclosure.

       The accounting firm of Hein + Associates, L.L.P. ("Hein") represented the
Company as its independent accountants during fiscal year 1995 and was dismissed
by the  Company's  Board of Directors on January 20, 1997.  During the Company's
fiscal year ended December 31, 1995, and subsequent  interim period,  there were
no  disagreements  between  the  Company  and Hein on any  matter of  accounting
principals or practices,  financial statement  disclosure,  or auditing scope or
procedure,  which  disagreements,  if not resolved to the  satisfaction of Hein,
would have caused it to make reference to the subject matter of the disagreement
in connection  with its reports.  Hein's reports on the financial  statements of
the Company  for the fiscal year ended  December  31,  1995,  did not contain an
adverse opinion or disclaimer of opinion,  and were not qualified or modified as
to  uncertainty,  audit scope or accounting  principles.  The Company's Board of
Directors  appointed  Deloitte  &  Touche  LLP  as  the  Company's   independent
accountants on January 20, 1997.


                                    PART III

 Item 9.         Directors, Executive Officers, Promoters and Control  Persons; 
                 Compliance with  Section 16(a) of the Exchange Act

       The  following  table sets forth the  directors,  executive  officers and
other  significant  employees  of the Company,  their ages,  and all offices and
positions  with the Company.  Each  director is elected for a period of one year
and thereafter serves until his successor is duly elected by the stockholders of
the Company and qualifies.
<TABLE>
<CAPTION>
<S>                               <C>        <C>   


 Name                             Age       Title
Gary C. Evans...................  40        Director, President, Chief Executive Officer
Matthew C. Lutz.................  63        Chairman of the Board and Executive Vice President of
                                            Exploration and Business Development
Chris Tong......................  41        Senior Vice President and Chief Financial Officer
David S. Krueger................  48        Vice President and Chief Accounting Officer
Morgan F. Johnston..............  37        Vice President, General Counsel and Secretary
Richard R. Frazier..............  51        President and Chief Operating Officer of Magnum Hunter
                                            Production, Inc. and Gruy
Michael McInerney . . . . . . .   56        Vice President, Corporate Development & Investor Relations
R. Douglas Cronk . . . . . . . . .50        Vice President of Magnum Hunter Production, Inc. and Gruy
Craig Knight....................  41        Vice President of Operations of Hunter Gas Gathering, Inc.
Gerald W. Bolfing...............  69        Director
Oscar C. Lindemann..............  75        Director
John H. Trescot, Jr.............  72        Director
James E. Upfield................  77        Director
</TABLE>

       Gary C. Evans has served as  President,  Chief  Executive  Officer  and a
director of the Company since  December,  1995 and Chairman and Chief  Executive
Officer of all of the Hunter  Subsidiaries since their formation or acquisition.
He served as Chief Financial  Officer from January 1997 to August 1997. He acted
as Chairman, President and Chief Executive Officer of Hunter from September 1992
until October 1996. Previously,  he was President and Chief Operating Officer of
Hunter from December 1990 to September  1992.  From 1985 to 1990,  Mr. Evans was
Chairman,  President and Chief Executive Officer of Sunbelt Energy, Inc. and its
subsidiaries,  which were merged with Hunter.  From 1981 to 1985,  Mr. Evans was
associated  with the Mercantile  Bank of Canada where he held various  positions
including Vice President and Manager of the Energy Division of the  Southwestern
United States.  From 1978 to 1981, he served in various capacities with National
Bank of Commerce  (now  BancTexas,  N.A.)  including  Credit  Manager and Credit
Officer.  Mr.  Evans  serves on the Board of  Directors  of Karts  International
Incorporated, a Nasdaq-listed company.

                                       26
<PAGE>

     Matthew C. Lutz has  served as  Chairman  since  March,  1997 after  having
served as Vice Chairman of the Company since  December,  1995. Mr. Lutz has also
served as Executive Vice President of Exploration and Business Development since
December,  1995. Mr. Lutz held similar positions with Hunter from September 1993
until October 1996.  From 1984 through 1992,  Mr. Lutz was Senior Vice President
of Exploration and on the Board of Directors of Enserch  Exploration,  Inc. with
responsibility  for  such  company's  worldwide  oil  and  gas  exploration  and
development  program.  Prior to joining  Enserch,  Mr.  Lutz spent 28 years with
Getty Oil  Company.  He advanced  through  several  technical,  supervisory  and
managerial   positions  which  gave  him  various   responsibilities   including
exploration,   production,  lease  acquisition,   administration  and  financial
planning.

    Chris Tong has served as Senior Vice President and Chief Financial  Officer
since August, 1997. Previously, Mr. Tong was Senior Vice President of Finance of
Tejas Acadian  Holding Company and its  subsidiaries  including Tejas Gas Corp.,
Acadian  Gas  Corporation  and  Transok,  Inc.,  all of which  are  wholly-owned
subsidiaries of Tejas Gas  Corporation.  In January 1998,  Tejas Gas Corporation
was acquired by Shell Oil. Mr. Tong held these  positions since August 1996, and
served in other treasury positions with Tejas beginning August 1989. He was also
responsible for managing Tejas' property and liability  insurance.  From 1980 to
1989,  Mr.  Tong  served in various  energy  lending  capacities  with  Canadian
Imperial Bank of Commerce,  Post Oak Bank, and Bankers Trust Company in Houston,
Texas.  Prior to his  banking  career,  Mr.  Tong also  served  over a year with
Superior Oil Company as a Reservoir Engineering  Assistant.  Mr. Tong is a summa
cum laude graduate of the University of  Southwestern  Louisiana with a Bachelor
of Arts degree in Economics and a minor in Mathematics.

     David S. Krueger has served as Vice President and Chief Accounting  Officer
of the Company since January 1997. Mr.  Krueger acted as Vice  President-Finance
of Cimarron Gas Holding Co., a gas processing and natural gas liquids  marketing
company in Tulsa,  Oklahoma,  from April 1992 until  January  1997. He served as
Vice  President/  Controller  of American  Central Gas  Companies,  Inc.,  a gas
gathering, processing and marketing company from May 1988 until April 1992. From
1974 to 1986, Mr. Krueger served in various managerial  capacities for Southland
Energy  Corporation.  From 1971 to 1973, Mr. Krueger was a staff accountant with
Arthur Andersen LLP. Mr. Krueger, a certified public accountant,  graduated from
the  University of Arkansas with a B.S./B.A.  degree in Business  Administration
and earned his M.B.A. from the University of Tulsa.

     Morgan F. Johnston has served as Vice  President and General  Counsel since
April,  1997 and has served as the Company's  Secretary  since May 1, 1996.  Mr.
Johnston  was in private  practice  as a sole  practitioner  from May 1, 1996 to
April 1, 1997,  specializing in corporate and securities law. From February 1994
to May 1996,  Mr.  Johnston  served  as  general  counsel  for  Millennia,  Inc.
(formerly known as SOI Industries,  Inc.) and Digital Communications  Technology
Corporation,  two American Stock Exchange  listed  companies.  He also served as
general counsel to Halter Capital  Corporation,  a private  consulting firm from
August  1991 to May  1996.  For the two  years  prior to  August  1, 1991 he was
securities  counsel for Motel 6 L.P., a New York Stock Exchange  listed company.
Mr.  Johnston  graduated cum laude from Texas Tech Law School in May 1986 and is
licensed to practice law in the State of Texas.

     Richard R. Frazier has served as President and Chief  Operating  Officer of
Magnum Hunter  Production,  Inc. and Gruy since January 1994. From 1977 to 1993,
Mr. Frazier was employed by Edisto Resources  Corporation in Dallas,  serving as
Executive Vice President  Exploration and Production from 1983 to 1993, where he
had overall responsibility for its property acquisition,  exploration, drilling,
production,  gas marketing and  engineering  functions.  From 1972 to 1976,  Mr.
Frazier served as District Production Superintendent and Petroleum Engineer with
HNG Oil Company (now Enron Oil & Gas Company) in Midland,  Texas.  Mr. Frazier's
initial  employment,  from 1968 to 1971, was with Amerada Hess  Corporation as a
petroleum  engineer  involved in numerous  projects in Oklahoma  and Texas.  Mr.
Frazier  graduated  in 1970 from the  University  of Tulsa  with a  Bachelor  of
Science  Degree  in  Petroleum  Engineering.  He  is a  registered  Professional
Engineer in Texas and a member of the Society of  Petroleum  Engineers  and many
other professional organizations.

                                       27

<PAGE>

     Michael  McInerney has served as Vice  President,  Corporate  Development &
Investor  Relations  of the Company  since  October  1997.  Prior to joining the
Company,  Mr. McInerney owned Energy Advisors,  Inc., an energy consulting firm,
from June 1993 until  October 1997.  Mr.  McInerney was employed from 1981 until
June 1993 by Triton Energy Corporation, an independent energy company, where his
responsibilities   included  investor  relations,   acquisitions  and  corporate
planning.  Before joining Triton Energy  Corporation,  Mr. McInerney served nine
years in various financial  management positions with American Natural Resources
Company,  a  gas  transmission  and  distribution  corporation.   Mr.  McInerney
graduated from the University of Michigan with a B.B.A.

       R.  Douglas  Cronk, has served as Vice  President of  Operations  for
Magnum  Hunter  Production,  Inc.  and Gruy  since May 1996,  at which  time the
Company  acquired  from Mr. Cronk  Rampart  Petroleum,  Inc.,  based in Abilene,
Texas. Rampart had been an active operating and exploration company in the north
central and west Texas region since 1983. Prior to the formation of Rampart, Mr.
Cronk  was  an  independent  oil  and  gas  consultant  in  Houston,  Texas  for
approximately  two years.  From 1974 to 1981,  Mr. Cronk held various  positions
with subsidiaries of Deutsch Corporation of Tulsa, Oklahoma, including Southland
Drilling  and  Production  where  he  became  Vice  President  of  Drilling  and
Production.  Mr. Cronk is a Chemical  Engineer  graduate from the  University of
Tulsa.

     Craig  Knight has served as Vice  President  of  Operations  for Hunter Gas
Gathering,  Inc. since March,  1998. Prior to joining the Company Mr. Knight was
employed by MidCon Corp.  and its affiliates  since 1979 in various  capacities.
From 1995 to his departure  from MidCon he served as the Sr.  Business  Manager,
Gathering and Processing for MidCon Gas Products Corp. where he managed MidCon's
gathering and  processing  activities in the Panhandle and Permian Basin regions
of Texas. From 1992 -1994, he served as an account manager of the Electric Power
Sector  Start-up Group for MidCon Gas Services Corp and as Manager - West Region
for MidCon  Marketing Corp. Mr. Knight graduated from Texas Tech University with
a B.S. in Engineering Technology with Construction  Specialty.  He also received
his M.B.A. in Executive Programs from University of Houston in 1989.

       Gerald W.  Bolfing  has been a director of the  Company  since  December,
1995.  Mr.  Bolfing was  appointed a director of Hunter in August 1993. He is an
investor  in the oil and gas  business  and a past  officer  of one of  Hunter's
former  subsidiaries.  From 1962 to 1980,  Mr.  Bolfing was a partner in Bolfing
Food Stores in Waco,  Texas.  During this time, he also joined American  Service
Company  in  Atlanta,  Georgia  from 1964 to 1965,  and was  active  with  Cable
Advertising  Systems,  Inc. of  Kerrville,  Texas from 1978 to 1981. He joined a
Hunter  subsidiary  in the well  servicing  business  in 1981 where he  remained
active until its  divestiture  in 1992. Mr. Bolfing is on the board of directors
of Capital Marketing Corporation of Hurst, Texas.

       Oscar  C.  Lindemann  has  served  as a  director  of the  Company  since
December,  1995. Mr. Lindemann was previously a director of Hunter,  having been
appointed in November  1995. Mr.  Lindemann has over 40 years  experience in the
financial  industry.  Mr. Lindemann began his banking career with the Texas Bank
and Trust in  Dallas,  Texas in 1951.  He  served  the bank  until  1977 in many
capacities,  including Chief Executive Officer and Chairman of the Board.  Since
leaving Texas Bank and Trust,  he has served as Vice Chairman of both the United
National Bank and the National Bank of Commerce,  also in Dallas.  Mr. Lindemann
has also  served as a  consultant  to the  banking  industry.  He  retired  from
commercial  banking in 1987.  Mr.  Lindemann is a former  President of the Texas
Bankers  Association,  and a former state representative to the American Bankers
Association.  He was a Founding  Director and Board Member of VISA, and a member
of the Reserve City Bankers Association.  He has served as an instructor at both
the Southwestern Graduate School of Banking at Southern Methodist University and
the School of Banking of the South at Louisiana State University.


                                       28

<PAGE>


       John H. Trescot,  Jr. has served as a director of the Company since June,
1997.  For the  last  five  years,  Mr.  Trescot  has  been a  principal  of AWA
Management  Corporation,  a professional  consulting  firm  specializing in oil,
timber,  pulp and paper,  and  financial  management.  Early in his career,  Mr.
Trescot held various  positions in woodlands,  and pulp and paper,  advancing to
the  position of Senior Vice  President,  Southern  Operations  at Hudson Pulp &
Paper Corp. (now part of Georgia  Pacific Corp.).  Later Mr. Trescot became Vice
President  of The  Charter  Company,  a  corporation  with  operations  in  oil,
communications  and insurance.  In 1979, Mr. Trescot became the Chief  Executive
Officer of "Jari"  Florestal e  Agropecuaria,  Ltda.,a  pulp,  timber,  rice and
kaolin  operation in the Amazon Basin of Brazil owned by D.K.  Ludwig.  In 1981,
Mr. Trescot became the Chief Executive Officer of TOT Drilling Corp., a contract
drilling company with operations in west Texas and New Mexico.

     James E.  Upfield has served as a director of the Company  since  December,
1995. Mr. Upfield was appointed a director of Hunter in August 1992. Mr. Upfield
is Chairman of Temtex Industries,  Inc. based in Dallas, Texas, a public company
that produces consumer hard goods and building  materials.  In 1969, Mr. Upfield
served on a select  Presidential  Committee  serving  postal  operations  of the
United States of America.  He later accepted the  responsibility  for the Dallas
region,  which encompassed  Texas and Louisiana.  From 1959 to 1967, Mr. Upfield
was President of Baifield Industries,  Inc. ("Baifield") and its predecessor,  a
company he founded in 1949 which  merged  with  Baifield in 1963.  Baifield  was
engaged in prime  government  contracts for military  systems and sub-systems in
the production of high-strength, light-weight metal products.

                                       29

<PAGE>

Item 10.          Executive Compensation.

       The  following  table  contains  information  with  respect  to all  cash
compensation  paid or accrued by the Company  during the past three fiscal years
to the officers of the Company.  No other officer  individually  received annual
cash compensation exceeding $100,000 during the past three years.
<TABLE>
<CAPTION>
<S>                       <C>       <C>          <C>            <C>             <C>             <C>          <C>          <C> 

                                                                                        Long Term Compensation
                                                                                 ---------------------------------------------------
                                    Annual Compensation                             Awards                   Payout
                            -------------------------------------------------------------------------------------------------------
 (a)                        (b)      (c)           (d)                 (e)            (f)           (g)         (h)            (i)
Name,                                                                Other                       Number
Principal                                                           Annual        Restricted     Options       LTP         All Other
Position                   Year     Salary        Bonus          Compensation       Stock         SARs       Payouts    Compensation
------------------------------------------------------------------------------------------------------------------------------------
Gary C. Evans              1997     $200,025      $250,000             -               -            -           -               -
President and CEO          1996     $150,000      $100,000             -               -            -           -               -

Matthew C. Lutz            1997     $106,000      $100,000             -               -            -           -               -
Executive V.P. and         1996     $ 65,600      $ 10,000             -               -            -           -               -
Chairman

Richard R. Frazier         1997     $124,200      $ 50,000             -               -            -           -               -
President of
Magnum Hunter
Production, Inc.

David S. Krueger           1997     $ 93,366      $ 10,000             -               -            -           -               -
Vice President and
Chief Accounting
Officer

R. Douglas Cronk           1997     $ 92,033      $10,000              -               -            -           -               -
V.P. of Magnum
Hunter Production, Inc.

L.T. Rochford              1995     $  96,000     $   -0-           $15,693            -            -           -               -
CEO
</TABLE>
 
                      Option/SAR Grants in Last Fiscal Year
                               (Individual Grants)
<TABLE>
<CAPTION>
<S>                   <C>                            <C>                           <C>                <C>    


                         Number of Securities             Percent of total           Exercise of
                       Underlying Options/SARs        options/SARs granted to        base price
        Name                 granted (#)              employees in fiscal year         ($/Sh)         Expiration date
        (a)                      (b)                            (c)                      (d)                (e)
----------------------------------------------------------------------------------------------------------------------
Gary C. Evans                   50,000                                                  $4.50            12/05/2001
                               500,000                         36.0%                    $5.875           12/12/2002
Richard R. Frazier              50,000                                                  $4.50            12/05/2001
                               100,000                          9.8%                    $5.875           12/12/2002

Matthew C. Lutz                350,000                         23.0%                    $5.875           12/12/2002
David S. Krueger                25,000                          1.6%                    $5.875           12/12/2002
R. Douglas Cronk                25,000                          1.6%                    $5.875           12/12/2002
</TABLE>

                                       30
<PAGE>
       Compensation of Directors

     The Company has six individuals  who serve as directors,  four of which are
independent.  Two of these directors receive  compensation with respect to their
services and in their  capacities  as  executive  officers of the Company and no
additional  compensation  has  historically  been paid for their services to the
Company as directors.  The other four directors of the Company are not employees
of the Company and receive no compensation for their services as directors other
than as stated below.  For the first six months of 1997,  independent  directors
received $500 per meeting as compensation for their services.  Beginning July 1,
1997, independent directors receive $1,000 per meeting. In addition, once a year
each independent  director will be granted an option to acquire 10,000 shares of
the Company's common stock at an exercise price equal to the market price of the
Company's common stock on the date of grant. Other than the compensation  stated
herein, the Company has not entered into any arrangement,  including  consulting
contracts, in consideration of the director's service on the board.

       Employment Contracts and Termination of Employment and Change-in-Control
       Arrangements

       Mr. Gary C. Evans and Mr. Matthew C. Lutz have employment agreements with
Magnum Hunter Resources,  Inc. Mr. Evans' agreement terminates December 31, 1998
and continues  thereafter on a year to year basis and provides for a base salary
of $250,000 per annum.  Mr. Lutz's agreement  terminates  September 30, 1998 and
continues  thereafter  on a year to year basis and provides for a base salary of
$150,000 per annum.  Both agreements  provide that the same benefits supplied to
other  Company  employees  shall be available to the  employee.  The  employment
agreements also contain,  among other things,  covenants by the employee that in
the event of  termination,  he will not associate  with a business that competes
with the Company for a period of one year after  cessation  of  employment.  The
Company  also  has  key  man  life  insurance  on Mr.  Evans  in the  amount  of
$5,000,000.

       The Company has not entered into any contracts or  arrangements  with any
officer  which  would  provide  such  individual  with  a form  of  compensation
resulting  from  such   individual's   resignation,   retirement  or  any  other
termination of such officer's employment with the Company or its subsidiary,  or
from  a  change-in-control   of  the  Company  or  a  change  in  the  officer's
responsibilities following a change-in-control.

     Section 16 (a) Beneficial Ownership Reporting Compliance

     For the fiscal year 1996, Gary C. Evans filed one late report on Form 3 and
three late reports on Form 4 relating to five  transactions that occurred during
June,  October,  and December of 1996. For the fiscal year 1996, Matthew C. Lutz
filed one late  report on Form 3 and three late  reports  on Form 4 relating  to
four transactions that occurred during June, October,  and December of 1996. For
the fiscal year 1996, Richard R. Frazier filed one late report on Form 3 and two
late  reports on Form 4 relating  to three  transactions  that  occurred  during
October, and December of 1996. For the fiscal year 1996, Gerald W. Bolfing filed
one  late  report  on Form 3 and two  late  reports  on Form 4  relating  to two
transactions that occurred during October,  and December of 1996. For the fiscal
year  1996,  James E.  Upfield  filed one late  report on Form 3 and three  late
reports on Form 4 relating to three  transactions  that  occurred  during  June,
October,  and  December of 1996.  For the fiscal year 1996,  Oscar C.  Lindemann
filed one late  report on Form 3 and two late  reports on Form 4 relating to two
transactions that occurred during June and December of 1996. For the fiscal year
1997,  Chris Tong filed one late report on Form 3 and three late reports on Form
4 relating to five transactions that occurred during  September,  November,  and
December of 1997. For the fiscal year 1997, John H. Trescot,  Jr. filed one late
report on Form 3 and three late reports on Form 4 relating to five  transactions
that occurred  during June,  August,  and December of 1997.  For the fiscal year
1997,  Gary C.  Evans  filed  three late  reports  on Form 4  relating  to three
transactions that occurred during August, November and December of 1997. For the
fiscal year 1997,  Matthew C. Lutz filed two late  reports on Form 4 relating to
two  transactions  that  occurred  during  August and December of 1997.  For the
fiscal year 1997, 

                                       31
<PAGE>


Richard R.  Frazier  filed  three late  reports on Form 4 relating to three
transactions  that occurred  during May,  August,  and December of 1997. For the
fiscal year 1997, Gerald W. Bolfing filed two late reports on Form 4 relating to
two  transactions  that  occurred  during  August and December of 1997.  For the
fiscal year 1997,  James E. Upfield  filed one late report on Form 4 relating to
one transaction that occurred during December of 1997. For the fiscal year 1997,
Oscar C. Lindemann filed two late reports on Form 4 relating to two transactions
that occurred during August and December of 1997. In making this disclosure, the
Company  has  relied  solely on written  representations  of its  directors  and
executive officers and copies of the reports filed by them with the SEC.

                                       32

<PAGE>



Item 11.         Security Ownership of Certain Beneficial Owners and Management.

       The following table sets forth certain  information as of March 15, 1998,
regarding  the share  ownership  of the Company by (i) each person  known to the
Company to be the beneficial owner of more than 5% of the outstanding  shares of
Common Stock of the  Company,  (ii) each  director,  (iii) the  Company's  Chief
Executive Officer and the two other most highly  compensated  executive officers
of the Company, and (iv) all directors and executive officers of the Company, as
a group.  None of the directors or executive  officers named below owned,  as of
March 24, 1997, any shares of the Company's Series A Preferred Stock or its 1996
Series A Convertible  Preferred  Stock. The business address of each officer and
director  listed  below is:  c/o Magnum  Hunter  Resources,  Inc.,  600 East Las
Colinas Blvd., Suite 1200, Irving, Texas 75039.
<TABLE>
<CAPTION>
<S>                                                                 <C>                         <C>   


                                                                                     Common Stock
                                                                                  Beneficially Owned
                                             
                                                                       Number of                 Percent
                       Name                                              Shares                of Class (3)
Directors and Executive Officers
     Gary C. Evans ............................................       2,178,226  (1)              10.0%
     Matthew C. Lutz...........................................         672,411                    3.0%
     Gerald W. Bolfing.........................................         359,558                    1.6%
     Oscar C. Lindemann........................................          37,160                     *
     John H. Trescot, Jr.......................................          60,154                     *
     James E. Upfield..........................................          64,704                     *
     Richard R. Frazier........................................         248,623                    1.1%
     Chris Tong................................................          53,300                     *
     All directors and executive officers as a group (8 persons)      3,507,033                   15.0%
Beneficial owners of 5 percent or more (excluding persons named
above)
     TCW Group, Inc.
     865 South Figueroa Street
     Los Angeles, CA  90017....................................       1,702,127  (2)               7.8%

     Janus Capital Corporation
     100 Fillmore St. , Suite 300
     Denver, CO.  80206........................................       1,474,900                    6.8%

</TABLE>


       (1)    Includes  17,024  shares  held  in the  name of  Jacquelyn  Evelyn
              Enterprises,  Inc., a corporation  whose sole  shareholder  is Mr.
              Evans' wife. Mr. Evans  disclaims any ownership in such securities
              other than those in which he has an economic interest.

       (2)    Consists of shares attributable to shares of Common Stock issuable
              upon conversion of 1,000,000 shares of the Company's 1996 Series A
              Convertible Preferred Stock.

       (3)    Percentage is calculated on the number of shares  outstanding plus
              those shares deemed  outstanding under Rule 13d- 3(d)(1) under the
              Exchange Act.

Item 12.          Certain Relationships and Related Transactions.

       During 1996, as part of the Company's overall  compensation  package, the
Company's  officers  and  directors  were  granted the right to  participate  in
certain exploration  projects of the Company on a promoted basis. As of December
31, 1996,  eleven (11) of the Company's  officers and directors as a group spent
an aggregate of $137,340 participating in 6 wells. The Company discontinued this
program as of January 1, 1997.


                                       33

<PAGE>
Item 13.          Exhibits and Reports on Form 8-K.
                                     Exhibit
Number        Description of Exhibit

3.1 & 4.1     Articles of Incorporation(Incorporated by reference to
              Registration Statement on Form S-18, File No. 33-30298-D)
3.2 & 4.2     Articles of Amendment to Articles of Incorporation(Incorporated by
              reference to Form 10-K for the year ended December 31, 1990)
3.3 & 4.3     Articles of Amendment to Articles of Incorporation (Incorporated 
              by reference to Registration Statement on Form SB-2, File No.
              33-66190)
3.4 & 4.4     Articles of Amendment to Articles of Incorporation (Incorporated
              by reference to Registration Statement on Form S-3, File No.
              333-30453)
3.5 & 4.5     By-Laws,  as  Amended  (Incorporated  by  reference  to
              Registration Statement on Form SB-2, File No.33-66190)
3.6 & 4.6     Certificate of Designation of 1996 Series A Preferred Stock 
              (Incorporated by reference to Form 8-K dated December 26, 1996,
              filed January 3, 1997)
3.7 & 4.7     Amendment to Certificate of Designations for 1996 Series A 
              Convertible Preferred Stock (Incorporated by reference to 
              Registration Statement on Form S-3, File No. 333-30453)
4.8           Indenture dated May 29, 1997 between Magnum Hunter Resources, the
              subsidiary guarantors named therein and First Union National Bank
              of North Carolina, as Trustee (Incorporated by reference to 
              Registration Statement on Form S-4, File No. 333-2290)
4.9           Form of 10% Senior Note due 2007 (Incorporated by reference to
              Registration Statement on Form S-4, File No. 333-2290)
10.1          Amended and Restated Credit Agreement, dated April 30, 1997, 
              between Magnum Hunter Resources, Inc. and  Bankers Trust Company,
              et al. (Incorporated by reference to Registration Statement on
              Form S-4, File No. 333-2290)
10.2          First Amendment to Amended and Restated Credit Agreement, dated
              April 30, 1997, between Magnum Hunter Resources, Inc. and Bankers
              Trust Company, et al. (Incorporated by reference to Registration 
              Statement on Form S-4,File No. 333-2290)
10.3*         Second Amendment to Amended and Restated Credit Agreement, dated
              April 30, 1997, between Magnum Hunter Resources, Inc. and Bankers
              Trust Company, et al.
10.4*         Third Amendment to Amended and Restated Credit Agreement, dated 
              April 30, 1997, between Magnum Hunter Resources, Inc. and Bankers
              Trust Company, et al.
10.5          Employment Agreement for Gary C. Evans (Incorporated by reference
              to Registration Statement on Form S-4, File No. 333-2290)
10.6          Employment Agreement for Matthew C. Lutz (Incorporated by 
              reference to Registration Statement on Form S-4,File No. 333-2290)
10.7          Stock Purchase Agreement among Magnum Hunter Resources, Inc. and
              Trust Company of the West and TCW Asset Management Company, in the
              capacities described herein, TCW Debt and Royalty Fund IVB and TCW
              Debt and Royalty Fund IVC, dated as of December 6, 1996
              (Incorporated by reference to Form 8-K dated December 26, 1996,
              filed January 3, 1997)
10.8          Registration Rights Agreement, dated May 29, 1997, between Magnum
              Hunter Resources, Inc. and Bankers Trust Company, et al. 
              (Incorporated by reference to Registration Statement on Form S-4,
              File No. 333-2290)
10.9          Purchase and Sale Agreement,  dated May 17, 1996 between  Meridian
              Oil, Inc. and ConMag Energy Corporation (Incorporated by reference
              to Form 8-K, dated June 28, 1996, filed July 12, 1996)
10.10         Purchase  and  Sale  Agreement,  dated  February  27,  1997  among
              Burlington Resources Oil and Gas Company, Glacier Park Company and
              Magnum Hunter Production,  Inc. (Incorporated by reference to Form
              8-K, dated April 30, 1997, filed May 12, 1997)
10.11         Purchase and Sale Agreement between Magnum Hunter Resources,  Inc.
              , NGTS, et al., dated December 17, 1997 (Incorporated by reference
              to Form 8-K, dated December 17, 1997, filed December 29, 1997)
21            Subsidiaries of the Registrant (Incorporated by reference to 
              Registration Statement on Form S-4, File No. 333-2290)
27            Financial Data Schedule
* Filed herewith.
(B) Form 8-K's
A Form 8-K,  dated  December  17, 1997 was filed by the Company on December  29,
1997 under Item 2  concerning  the  Company's  acquisition  of a thirty  percent
membership  interest in NGTS, L.L.C., a gas marketing company located in Dallas,
Texas.  The  Company  amended  the Form 8-K on  February  13, 1998 to report the
historical and pro forma financial information for the NGTS acquisition.

                                       34
<PAGE>

                                   SIGNATURES

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

MAGNUM HUNTER RESOURCES, INC.


By:    /s/ Gary C. Evans                                         March 27, 1998
---------------------------------------------
         Gary C.  Evans, President & CEO

In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  Company  and in the  capacities  and on the
dates indicated.
<TABLE>
<CAPTION>
<S>                                             <C>                                     <C>    


Signature                                        Title                                      Date

/s/ Gary C.  Evans                               Director, President
--------------------------                       Chief Executive Officer                    March 27, 1998
Gary C. Evans                                    


/s/ Matthew C.  Lutz                             Chairman of the Board and                  March 27, 1998
--------------------------                       Executive Vice President of 
Matthew C. Lutz                                  Exploration and Business                            
                                                 Development                            
                                                

/s/ Chris Tong                                   Senior Vice President and                  March 27, 1998
---------------------------                      Chief Financial Officer
Chris Tong                                       

/s/ David S. Krueger                             Vice President and                         March 27, 1998
---------------------------                      Chief Accounting Officer
David S. Krueger                                 


/s/ Morgan F. Johnston                           Vice President, General Counsel            March 27, 1998
-------------------------                        and Secretary
Morgan F. Johnston                              

/s/ Gerald W.  Bolfing                           Director                                   March 27, 1998
--------------------------
Gerald W. Bolfing

/s/ Oscar C.  Lindemann                          Director                                   March 27, 1998
-----------------------
Oscar C. Lindemann

/s/ John H. Trescot, Jr.                         Director                                   March 27, 1998
---------------------------
John H. Trescot, Jr.

/s/ James E. Upfield                             Director                                   March 27, 1998
---------------------------
James E. Upfield

</TABLE>