UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington. D.C. 20549

                                   FORM 10-KSB

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended October 31, 1997

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the transition period from______to_______

                         Commission file number 1-12835


                         GENERAL AMERICAN ROYALTY, INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                             75-2468002
 (State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                              Identification No.)

    One Energy Square, Suite 717, 4925 Greenville Avenue, Dallas, Texas 75206
               (Address of principal executive offices) (Zip Code)


       (Registrants' telephone number, including area code) (214) 361-8535


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


          Securities registered under Section 12(g of the Exchange Act:

                          Common Stock, Par Value $.001
      --------------------------------------------------------------------
                                (Title of Class)


     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___


<PAGE>


     Indicate by check mark if there is no disclosure  of  delinquent  filers in
response to Item 405 of  Regulation  S-B is not  contained in this form,  and no
proxy of information  statements  incorporated  by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. ____


     Registrant's  revenues  for the fiscal year ended  October 31,  1997,  were
$197,916.

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant,  computed by using the  closing  price of  registrant's  common
stock, at February 10, 1998, was $ 1,535,000.


     As of February 10, 1998,  there were 1,031,500  shares of the  Registrant's
Common Stock, par value $.001 per share, outstanding.


                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

     Traditional Small Business Disclosure Format:

Yes       No   X















<PAGE>




                          T A B L E  O F  C O N T E N T S
                          -------------------------------

PART I                                                                      Page
------                                                                      ----
Item     1.    Description of Business

Item     2.    Description of Properties

Item     3.    Legal Proceedings

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


PART II
-------
Item     5.    Market of Common Equity and Related Stockholder Matters

Item     6.    Management's Discussion and Analysis of Plan of Operations

Item     7.    Financial Statements

Item     8.    Changes in and Disagreements with Accountants on Accounting
                        and Financial Disclosure


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

Item    10.    Executive Compensation

Item    11.    Security Ownership of Certain Beneficial Owners and Management

Item    12.    Certain Relationships and Related Transactions

Item    13.    Exhibits and Reports on Form 8-K

Signature Page




<PAGE>


                                     PART I
                                     ------

ITEM 1. DESCRIPTION OF BUSINESS


BUSINESS DEVELOPMENT
--------------------

     General American  Royalty,  Inc. (the "Company") is a Delaware  corporation
incorporated  on  December  28,  1992 as  Hermes  Capital  Management,  Inc.  It
conducted no business activities under that name. On October 23, 1995 it changed
its name to General American Royalty,  Inc. and became active in the acquisition
of certain oil and gas royalty,  overriding and fee mineral interests located in
Texas and New Mexico.  Interests  have been  purchased in exchange for shares of
Common Stock of the Company,  issuance of promissory notes and for cash.  During
1996 the Company  completed  a private  placement  of common  stock and a public
offering of units that  consisted of shares of common  stock and stock  purchase
warrants. Net proceeds from these offerings were approximately  $485,000,  which
were used to complete acquisitions of royalty and mineral interests and to repay
debt.


BUSINESS OF ISSUER
------------------

     General American  Royalty,  Inc. (the "Company") was organized to engage in
the  following  business  activities:  to acquire  producing oil and natural gas
royalty, overriding royalty, and mineral interests; to acquire non-producing oil
and natural gas royalty,  overriding royalty, and mineral interests; to purchase
units in publicly  traded  royalty  trusts;  and to manage joint  ventures  with
institutional investors to accomplish the above purposes.

     The Company's  management  believes that the opportunity  exists to acquire
substantial  amounts of mineral and royalty interests located in producing wells
and fields that  generate an  immediate  stream of income.  Interest acquired in
non-producing areas with nearby exploration activity could dramatically increase
in value,  allowing  the  Company  to sell a  portion  of such  interests  for a
substantial profit, in effect,  paying for the interests retained.  Acquisitions
of minerals and royalty interests in areas offsetting production  (developmental
drilling)  or in  trend  areas  have a high  probability  of being  selected  as
drilling  prospects and have enhanced value through leasing (lease bonuses) and,
ultimately through the production of oil and gas..

     The Company does not know of a public royalty  company in the United States
that is active in the  acquisition of solely royalty and mineral  interests with
no drilling or  exploration  activities.  While there are other public  entities
that are  classified  as  royalty  companies,  none is active  in the  continual
acquisition of royalty interests and fee mineral in oil and gas properties.  The
large publicly held companies that once engaged in the business of  accumulating

<PAGE>

royalty and mineral  interests in oil and gas  properties  have ceased to exist.
Although successful, those companies have either been acquired or reorganized as
self-liquidating   trusts  whose  ownership   units  were   distributed  to  the
shareholders and offer no opportunity for growth.


PRINCIPAL PRODUCTS AND MARKETS
------------------------------

     The Company's owns fee mineral, royalty and overriding royalty interests in
producing oil and gas wells,  that generate  revenues from the sale of crude oil
and natural gas.  These  products are sold to numerous  purchasers  and pipeline
companies  generally  located  and  servicing  the  areas  where  the  Company's
producing interests are located. The Company does not act as operator for any of
the  properties in which it owns an interest and as such relies on the operating
expertise of the numerous companies that operate those properties.  As a royalty
or overriding royalty interest owner the Company has no contractual control over
the  operations or marketing and sales of the crude oil and natural gas produced
by the properties.  The operating  companies or working interest owners contract
all natural gas sales with third party gas  marketers  and  pipeline  companies.
Payment for gas sold is received  either from the  contracted  purchasers or the
well  operator.  Crude oil  sales are also  handled  by the well  operators  and
payments for oil sold is received  from the well  operator or from the crude oil
purchaser.


COMPETITIVE BUSINESS CONDITIONS
-------------------------------

     Oil and gas prices can be extremely volatile and are subject to substantial
seasonal, political and other fluctuations. As a result, the prices at which oil
and gas  produced  for the Company may be sold is  uncertain  and it is possible
that under some market  conditions  the  production and sale of oil and gas from
some  or all  of the  Company's  properties  may  not  be  economical.  In  most
instances,  the operator will market the production  from the Company's  royalty
interests,  and the Company will have no control  over the  marketing or sale of
production.  The  availability  of a ready market for oil and gas and the prices
obtained for such oil and gas depend upon numerous factors beyond the control of
the Company, including competition from other oil and gas producers and national
and  international  economic  and  political  developments.   In  addition,  the
marketability  of natural  gas  production  depends  upon the  availability  and
capacity of gas gathering systems and pipelines.

     The oil and gas  business  is highly  competitive  and has few  barriers to
entry.  The  Company  will be  competing  with other oil and gas  companies  and
investment  partnerships in the search for, and obtaining of,  desirable  proved
producing royalty and mineral interests.  Many of the Company's  competitors are
larger  than the Company and have  substantially  greater  access to capital and
technical resources than does the Company and may, therefore, have a significant
competitive advantage. Many of the Company's competitors are capable of making a
larger investment in a given area than is the Company,  although large and small
companies  alike are subject to the economics of cost  effectiveness.  It can be
expected that prices for oil and gas will continue to fluctuate, depending upon

<PAGE>

a number of conditions over which the Company has no control,  including actions
taken by the Organization of Petroleum Exporting Countries ("OPEC"),  turmoil in
the Middle East,  and the price of  alternative  fuels.  The prices at which the
Company's oil and gas production will be sold will have a substantial  effect on
its earnings (if any) and its results of operations.


OWNERSHIP AND TITLE TO INTERESTS
--------------------------------

     The Company  generally  examines  title  before  acquiring  a mineral  fee,
royalty or overriding  royalty interests and all such mineral interests acquired
by the  Company are  evidenced  by written  conveyances,  which are filed in the
records of the county or parish in which such  mineral  interests  are  located.
Management  believes that the Company has satisfactory  title to all mineral and
royalty interests it has acquired.


SOURCES AND AVAILABILITY OF RAW MATERIALS
-----------------------------------------

     The existence of commercial quantities of oil and gas reserves is essential
to the realization of value from the Company's royalty and mineral interests and
these  reserves may be considered a raw material to its business.  The cash flow
from producing  activities  and lease bonus income from granting  mineral leases
constitutes the Company's primary internal source of liquidity. The viability of
the Company may depend on the  reinvestment of cash resources in the purchase of
additional raw materials in the form of producing mineral and royalty interests.
Purchases of royalty and mineral interests are available from many sources,  and
the Company does not rely on any particular  companies or individuals  for these
acquisitions.


MAJOR CUSTOMERS
---------------

     The Company  generally  sells its share of oil and  production  to pipeline
companies and refineries through arrangements and contracts administrated by the
operator of the property.  Since  royalty and mineral  interests do not bear any
costs related to exploration and production (except for severance and ad valorem
taxes),  owners of such  interests  have no authority to select  purchasers  for
their share of oil and gas produced.  For the fiscal year ended October 31, 1997
the following customers accounted for more than 10% of the Company's revenues:

                                                              Percentage
               Customer                                      of Revenues
               --------                                      -----------

         Marathon Oil Company                                      48%

         Lomak Petroleum, Inc.                                     23%


<PAGE>


GOVERNMENTAL REGULATION AND
---------------------------
ENVIRONMENTAL MATTERS
---------------------

     The  cost  of  compliance  with  governmental   provisions  regulating  the
discharge  of  materials  into the  environment  is a cost  that is borne by the
working  interest  owners of oil and gas wells.  The  Company,  by limiting  its
activities  to the  acquisition  of  non-working  interest  royalty  and mineral
interests,  will  bear  none of  these  costs.  There is some  risk of  eventual
liability under  environmental  regulations,  which risk can occur where royalty
interests  that  convert  to  a  possessory  interest  are  involved.  In  those
instances,  activities can result in liability  under  federal,  state and local
environmental  regulations for activities  involving,  among other things, water
pollution  and  hazardous  waste  transportation,  storage  and  disposal.  Such
liability  can attach not only to the operator of record of a well,  but also to
other  parties that may be deemed to be current or prior  operators or owners of
possessory interest in a property.


EMPLOYEES
---------

     The Company has three full-time employees and no part-time employees.


FORWARD-LOOKING STATEMENTS
--------------------------

     Forward-looking  statements for 1997 and later periods are made  throughout
this document.  Such statements  represent  estimates of management based on the
Company's   knowledge  of  historic  trends,   reserve   information  and  other
information  currently  available to management.  The Company  cautions that the
forward-looking  statements  provided  herein  are  subject to all the risks and
uncertainties  incident to the  acquisition of producing  royalty and overriding
royalty interests and fee mineral  ownership.  These risks include,  but are not
limited  to, oil and  natural  gas prices,  reserve  quantity  risks,  the risks
confronting  the  operators  of the wells in which the  Company  has royalty and
overriding  royalty interests in and the uncertainties of leasing prospects from
fee ownership of minerals.  For all the above  reasons,  actual results may vary
materially  from the  forward-looking  statements and there is no assurance that
the assumptions used will occur.



ITEM 2. DESCRIPTION OF PROPERTIES


     The Company owns small mineral, royalty and overriding royalty interests in
approximately  670 wells  located  in two  counties  in New  Mexico  and  eleven
counties in Texas.  These  interests were acquired in four  transactions  during
fiscal year 1996.

<PAGE>




     Basin  Fruitland Coal Field - San Juan County,  New Mexico.  This is a 2.5%
overriding  royalty  interest  in 9 wells and a 1.25%  overriding  interest in 3
wells.  The interests cover the rights to the Fruitland Coal formation only. The
wells  are  operated  by  Marathon  Oil  Company  and have  produced  a total of
approximately  10.7 billion cubic feet through  October 1997, and at October 31,
1997 had an estimated 14.3 billion cubic feet of gross  recoverable gas reserves
remaining.  Monthly  production from the 12 wells is  approximately  155 million
cubic feet of gas.

     Alta  Mesa  Gas  Field -  Brooks  County,  Texas.  This is a 0.333  percent
overriding royalty interest in 16 producing wells and a 0.005 percent overriding
royalty  interest in 5 producing  wells located in the South Texas Alta Mesa gas
field.  Production depths range from 1,100-foot depth gas sands to the Vicksburg
sands at depths in excess of 7,000 feet. Gross remaining reserves at October 31,
1997 were estimated to be 14.2 billion cubic feet of gas and 206,341  barrels of
condensate.  Remaining life of the wells is estimated to be in excess of fifteen
years.

     North Wilton Strawn Waterflood Unit - Young County,  Texas. This is a 3.125
percent overriding royalty interest in the 3-well North Wilton Strawn Waterflood
Unit in Young County,  Texas.  At October 31, 1997,  estimated  gross  remaining
reserves  of  63,000  barrels  of oil  are  estimated  to be  recovered  over an
estimated life in excess of fifteen years.

     Dumraese  Estate  Purchase - Lea  County,  New  Mexico  and Bexar,  Brooks,
Colorado,  DeWitt, Duval, Jim Wells, Lavaca, Starr and Stephens Counties, Texas.
Effective  August 1, 1996 the Company  purchased small fee mineral,  royalty and
overriding  royalty interests in over 635 producing oil and gas wells located in
numerous oil and gas fields in New Mexico and Texas.  The properties  range from
large unitized  waterfloods to single low rate  producing  wells.  Net remaining
reserves,  to the Company's interests,  at October 31, 1997 were estimated to be
 .07 billion  cubic feet of gas and 8,511 barrels of oil.  Remaining  life of the
wells is estimated to be in excess of fifteen years.


ACREAGE
-------

     It is the Company's general practice to have title examined by a landman or
an attorney before acquiring  royalty,  overriding royalty or mineral interests.
All such royalty and mineral interests  acquired by the Company are evidenced by
written  conveyances,  which are duly  filed in the  applicable  records  of the
county or parish in which such mineral  interests  are located.  Generally,  the
Company will not make on site inspections of the properties in which it acquires
an interest.  Information regarding gross and net acreage owned is not presented
herein because the Company owns a large number of small  percentage  royalty and
mineral interests that would impose an undue burden to report.

<PAGE>


PROVED RESERVES
---------------

     Information  regarding  estimates  of  the  proved  oil  and  gas  reserves
attributable  to the Company are based on reports  prepared  internally with the
assistance of two  independent  petroleum  engineering  consultants  who have no
affiliation or economic  interest in the Company.  Utilizing  current  available
data,  these  estimates  of proved  reserves  were  made  using  geological  and
engineering methods generally accepted in the petroleum industry. Estimates were
prepared in accordance with Statement of Financial  Accounting  Standards No. 69
and the guidelines  established by the Securities and Exchange  Commission  Rule
4-10(a)  of  Regulation  S-X,  using  prices  and  costs  as of  the  day of the
estimates.  The prices and costs were not escalated.  The interests owned by the
Company are all royalty and overriding royalty  interests,  and therefore do not
bear their share of operating  costs and current data on operating  costs is not
available.

     Proved reserves are those quantities of Crude oil, natural gas, and natural
gas liquids which  geological and engineering  data  demonstrate with reasonable
certainty  to be  recoverable  in the future from known oil and gas  reservoirs,
under existing  economic and operating  conditions.  Proved developed  producing
reserves  are  those  reserves  which  can  be  expected  to be  recovered  from
completion intervals open to production in existing wells.  Estimated quantities
of proved developed  reserves of oil and gas, to the Company's  interest,  as of
October 31, 1997 and 1996 were as follows:

                                             1997              1996
                                             ----              ----

                  Oil (barrels)              11,487            13,209

                  Gas (Mcf)                 400,357           462,001

     Any  additional  information  concerning  the  Company's  estimated  proved
developed oil and gas reserves are included in Item 8. - Financial Statement and
Supplementary Data.

     Petroleum  engineering is not an exact science and involves estimates based
upon numerous  factors,  many of which are  inherently  variable and  uncertain.
Consequently,  reserve  estimates  are  imprecise  and are  subject to change as
additional information becomes available.  Estimates of oil and gas reserves, of
necessity,  are  projections  based upon  engineering  data.  As a result of the
uncertainties  inherent  in the  interpretation  of such  data  there  can be no
assurance that the Company's  estimated oil and gas reserves would ultimately be
developed.  Estimates of the reserves and future net revenues involve projecting
future results by estimating future events. Actual production,  revenues, taxes,
and  expenses  may not occur as  estimated.  Additionally,  as the Company  owns
royalty  interests  rather  than  working  interests,  and is not  party  to the
operating  agreements  of  the  various  properties,  there  may  be  additional
considerations  concerning the evaluated properties of which the Company and the
independent  reserve  engineer  may not be  aware.  These  considerations  could
materially affect the reserve estimates.

<PAGE>


     No reserve  reports  with  respect to the  Company's  proved net oil or gas
reserves were filed with any federal  authority or agency during the fiscal year
ended October 31, 1997.


ESTIMATED FUTURE NET CASH FLOWS
-------------------------------

     The following table sets forth an estimate of future net cash flows,  using
current prices and costs, but before  consideration of federal income taxes. The
future net revenues  have been  discounted at an annual rate of 10% to determine
"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.  Estimates  have been made in  accordance  with
current  Securities  and Exchange  Commission  guidelines  concerning the use of
constant oil and gas prices and costs in reserve evaluations.

                Estimated Future Net Cash Flows and Present Value
                          of Proved Producing Reserves
                             As of October 31, 1997

             Year Ending       1998                     $   161,280
             October 31,       1999                         137,731
                               2000                         118,541
                               2001                         102,430
                               2002                          88,795
                               Thereafter                   578,521
                                                        -----------

                               Total                    $ 1,187,298

             Estimated Future Net Cash Flows before
             income taxes, discounted at 10% per
             annum                                      $   708,475


PRODUCTION, AVERAGE SALES PRICES
--------------------------------

     The following table sets forth certain information regarding volumes of the
Company's  production  of crude oil and  natural gas and the  Company's  average
sales price per barrel of crude oil ("Bbl") and average sales price per thousand
cubic feet of natural gas  ("Mcf") for the two years ended  October 31, 1997 and
1996.  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 effect comparability.

<PAGE>




                                                   1997               1996
                                                   ----               ----
                Production:
                   Oil  (Bbl)                       1,722               380
                   Gas  (Mcf)                      61,411            24,941

                Average Sales Prices:
                   Oil  (per Bbl)                  $19.83            $20.21
                   Gas  (per Mcf)                  $ 2.46            $ 2.01

         Note: Production numbers do not include plant products.



ITEM 3. LEGAL PROCEEDINGS

     There were no legal proceedings involving General American Royalty, Inc. as
of the date of this report.



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


     No matters were  submitted  to a vote of General  American  Royalty  Inc's.
security  holders during the fourth quarter of the fiscal year ended October 31,
1997.



PART II
-------

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's  common stock is listed on the NASDAQ  Bulletin Board (symbol
TROY).  The first  trading  in the stock  occurred  on  February  4,  1997.  The
following table sets forth the high and low trade prices of the Company's common
stock,  as reported by NASDAQ System  Statistics  furnished by NASD,  during the
periods indicated:

             Quarter Ended                          HIGH           LOW
             -------------                          ----           ---
             April 30, 1997                         6-1/4          4-3/4
             July 31, 1997                          4-1/2          3-1/2
             October 31, 1997                       5-3/4          4-1/4

<PAGE>

        
     As of  October  31,  1997,  the  approximate  number of  holders of General
American Royalty, Inc. were:

                  Title of Class                     Number of Holders
                  --------------                     -----------------

                  Common (Voting)                    100

     During the last two years no cash  dividends  have been declared on General
American Royalty, Inc. common stock.



ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     Sales of crude oil and natural  gas from  royalty  and  overriding  royalty
interests  have been the  Company's  principal  internal  source  of  liquidity.
Monthly sales have not reached a sufficient  level to cover  administrative  and
overhead expenses. Growth in the Company's sales is expected to be the result of
acquiring additional  producing crude oil and natural gas royalty interests.  As
of October  31,  1997 the  Company had  acquired,  for  approximately  $567,000,
royalty and mineral  interests that have generated net revenues of approximately
$206,000.

     The Company has completed  offerings of its equity  securities and incurred
bank debt during the previous year as its primary  sources of external  capital.
Proceeds  from  these  financings  were used to  acquire  royalty  interests  in
producing crude oil and natural gas wells and for working  capital.  The Company
intends to direct its efforts and resources toward  developing  opportunities to
acquire crude oil and natural gas reserves.

     Specifically,  the Company  anticipates  that proceeds from the sale of its
equity  securities in public and private  offerings  will serve as the principal
source of capital for  acquisition of royalty  interests and retirement of debt.
After closing the unit equity  offering in 1997, the Company was prohibited from
obtaining additional equity capital until January 1998 to comply with securities
regulations  on  integration  of offerings.  This has  restricted  the Company's
ability to acquire royalty assets and to refinance  short-term debt  obligations
as they become due with permanent  equity capital.  During the fiscal year ended
October 1997, the Company did not acquire any mineral and royalty interests.

     In June 1997 the Company borrowed  $300,000 from an entity  controlled by a
shareholder  and used the proceeds to repay a $200,000 bank loan and for working
capital.  This  obligation  is due on  February  28,  1998 and is expected to be
repaid with proceeds from the sale of producing  royalty  interests owned by the

<PAGE>

Company, a private placement of equity securities or by refinancing with another
lender.  If the Company is unable to satisfy or extend this obligation,  it will
have a severe  adverse  impact on the Company.  In the future,  short-term  debt
secured by producing  royalty interests will be utilized as an interim source of
financing for royalty  acquisition  activities.  When  necessary the Company may
sell  certain  of its  mineral  and  royalty  interests  to  satisfy  such  debt
obligations.

     The Company's revenues are substantially  affected by prevailing prices for
natural  gas,  crude oil and  condensate.  These prices are affected by numerous
factors over which the Company has no control.  Historically  the energy markets
have been very volatile and prices have been subject to material fluctuations. A
material  or lengthy  decline in crude oil and gas prices  could have an adverse
effect on the Company's financial position and results of operations,  affecting
the economic productivity of an indeterminable number of producing properties in
which the Company  has  royalty or  overriding  royalty  interests.  Natural gas
accounts for approximately 90% of the Company's oil and gas sales.

RESULTS OF OPERATIONS
---------------------


Fiscal Year Ended October 31, 1997 Compared
to the Fiscal Year Ended  October 31, 1996

Revenues

     Revenues  for the  twelve  months  ended  October  31,  1997 were  $198,000
compared  with  $61,000 in 1996.  The Company  acquired  royalty and  overriding
royalty interests, in three separate acquisitions,  during the fiscal year ended
October 31, 1996. The first  acquisition  representing  approximately 30% of its
total production  became  effective for production  beginning April 1, 1996, the
second  representing  approximately 50% of its total production became effective
for production  beginning July 1, 1996 and the third representing  approximately
20% of its total production became effective for production  beginning August 1,
1996. The significantly  higher revenues for 1997 are due to the increased crude
oil and natural gas sales that  resulted from a full twelve months of production
from the Company's  royalty and overriding  royalty  interests and significantly
higher prices for natural gas.

Costs and Expenses

     General and Administrative  Expenses.  General and administrative  expenses
     -------------------------------------
("G&A")  increased  from $72,000 for the twelve months ended October 31, 1996 to
$887,536  for the  comparable  period in 1997.  The increase in G&A expenses for
1997 primarily  resulted from a non-cash  charge of $536,500 equal to the market
value  of  the  Company's  100,000  shares  of  common  stock  issued  to  Russo
Securities,  Inc. which agreed to perform  investment  banking  services.  Also,
increases  were  attributable  to the  expansion  of the  Company's  operational
activities and the costs incurred in connection  with becoming a publicly traded
entity.

<PAGE>


     Depletion,  Depreciation  and  Amortization.  Depletion,  depreciation  and
     --------------------------------------------
amortization ("DD&A"),  increased to $79,000 for the twelve months ended October
31, 1997 compared to $21,000 for the comparable  period in 1996. The increase is
primarily due to additional costs attributable to acquired producing royalty and
overriding royalty interests as described in the "Revenues" section above.

     Interest  expense.  The Company  first  incurred  interest-bearing  debt of
     -----------------
$140,000 on July 24,  1996.  The  interest  expense for the twelve  months ended
October 31, 1997 was incurred on notes payable that totaled  $300,000 at October
31, 1997.



ITEM 7. FINANCIAL STATEMENTS

        Independent Auditors Report                                F-1

        Report of Independent Accountants                          F-2

        Balance Sheet as of October 31, 1997                       F-3

        Statements of Operations for the Years Ended
        October 31, 1997 and 1996                                  F-4

        Statements of Stockholders' Equity for the Years
        Ended October 31, 1997 and 1996                            F-5

        Statements of Cash Flows for the Years Ended
        October 31, 1997 and 1996                                  F-6

        Notes To Financial Statements                              F-7











<PAGE>


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

     On October 30, 1997 the Company  engaged Hein + Associates  LLP ("Hein") as
its independent  principal accountant and auditor,  replacing Coopers & Lybrand,
LLP ("C&L").  C&L had been engaged as principal  accountants and issued an audit
report on the Company's  financial  statements  for the last fiscal year.  C&L's
audit reports were not qualified in any manner and contained no adverse  opinion
of  disclaimer  of opinion.  The Company had no  disagreements  over  accounting
matters or  received  any  notification  from C&L that the scope of its audit or
reliability of the Company's financial  information had adversely changed during
the current  fiscal year.  C&L's letter  confirming  these facts was included as
part of the Company's filing on Form 8-K dated October 30, 1997.



                                    PART III
                                    --------

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

     Set forth below are the identities of the directors, executive officers and
significant  employees  of the  Company  and a brief  account of their  business
experience.  The Company's bylaws provide for nine directors who are elected for
one-year  terms.  Executive  officers are appointed by the board of directors to
serve in their  respective  capacities  for one year  until the  directors  duly
appoint their successors.

DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------

<TABLE>
<S>                                                                             <C>    
                                                                            Served as
                                                                  Term       Director         
      Name                Age          Position and Offices      Expires      Since
      ----                ---          --------------------      -------      -----

James F. Smith             61      Director, Chief Executive      1998        1996
                                   Officer, President

James E. Mitschke          56      Director, Executive Vice       1998        1996
                                   President

Bill L. Bledsoe            62      Director                       1998        1996

Malcolm E. Wilson, Jr.     71      Director                       1998        1996

J. Donald Hill             65      Advisory Director              1998        1998

Rory S. Phillips           45      Advisory Director              1998        1998

</TABLE>


<PAGE>


EXECUTIVE OFFICERS
-------------------
                                                                     Held Office
      Name             Age        Position and Offices                 Since
      ----             ---     -------------------------               -----
James F. Smith          61     Director, Chief Executive               1996
                               Officer, President

James E. Mitschke       56     Director, Executive Vice                1996
                               President

Sam E. Nicholson        50     Vice President, Secretary               1996
                               and Treasurer


BUSINESS EXPERIENCE
-------------------

     James F. Smith.  Mr. Smith  received a Bachelor of Business  Administration
degree in 1958 from  Southern  Methodist  University  and  attended the Graduate
School of Business Administration during 1959-1960 at the University of Texas at
Austin.

     After leaving  college he embarked on a career in the oil and gas business,
although he was also active in the  ownership  of several  banks and savings and
loan  associations  from 1960  through  1968.  Mr. Smith has been engaged in the
domestic oil and gas industry for over 30 years, his companies have drilled over
400 wells during this period. He has completed four initial public offerings for
companies  of  which  he  was  founder  and an  executive  officer,  which  were
PetroDynamics,  Inc. in 1968,  Toltec Oil & Gas, Inc. in 1979 and Toltec Royalty
Corporation in 1980. Controlling interest in Toltec Royalty Corporation was sold
to an American Stock Exchange company in 1982. Toltec Oil & Gas, Inc. was merged
with a public  company in 1983,  which  later  became  Coda  Energy,  Inc.  Both
PetroDynamics  and Toltec Royalty were active in the  acquisition of oil and gas
royalty interests.

     James E. Mitschke.  Mr.  Mitschke is a petroleum  landman with more than 24
     ------------------
years  experience in the oil and gas industry.  He has been employed during this
period as a landman for several  companies,  all based in Dallas,  Texas,  which
include  Hunt Energy  Corporation,  Wessely  Energy  Corporation  and  Murchison
Exploration  Company.  His positions with these  companies have ranged from area
land manager to vice president-land.  He is a member of the American Association
of  Professional  Landmen  and served as the  chairman of its  industry  affairs
committee,  1980-81  and as a  director,  1981-82.  He has been a member  of the
Dallas  Association  of  Petroleum  Landmen  for a number  of years  and was its
president  in 1979 and  served  on its  board of  directors  from  1978-80.  Mr.
Mitschke  has a  Bachelor  of  Arts  degree  from  Southwestern  Oklahoma  State
University in Weatherford, Oklahoma.

<PAGE>


     Sam  E.  Nicholson.   Mr.  Nicholson  received  his  Bachelor  of  Business
     -------------------
Administration in accounting from the University of Texas at Arlington, in 1978.
In 1984 he became a  Certified  Public  Accountant  in the  State of Texas.  Mr.
Nicholson has over 15 years  experience in the oil and gas industry serving as a
controller or financial  officer for both public and privately owned  companies.
From 1992 to 1993 he was self-employed as a practicing  accountant primarily for
the oil and gas  industry.  From 1993 to 1995 he served  as the  controller  for
Superior Energy Co., Inc. in Dallas,  Texas. In 1995 he joined the Company as an
officer and principal financial officer.

     Mr.  Nicholson  is a member of the American  Institute of Certified  Public
Accountants and the Texas Society of Certified Public Accountants.

     Malcolm E. Wilson,  Jr. Mr. Wilson is a  professional  petroleum  geologist
     ------------------
with considerable  experience as a chief executive officer of an independent oil
company.  From 1948 to 1975 he was employed as a geologist with General American
Oil Company of Texas where,  prior to his  resignation  in January  1975, he was
Vice President of Geology. During 1975 and 1976 he was a Petroleum Consultant to
Baruch-Foster  Corporation,  May  Petroleum  Company,  and  Republic  Production
Company of Texas.  From 1977 until  February 1991 he was the President and Chief
Executive  officer of Baruch-Foster  Corporation and its  subsidiaries  which in
February of 1991 merged with another oil company.  Since that time,  Mr.  Wilson
has managed his personal investments,  which are primarily mineral,  royalty and
overriding royalty interests. He has also served as a Petroleum Consultant.  Mr.
Wilson has  considerable  experience  as a geologist  having  either  personally
geologically  mapped  prospects or supervised  the  geological  and  geophysical
mapping in many of the major oil and gas fields in Louisiana,  Texas,  Oklahoma,
New Mexico, Mississippi,  Alabama,  the Rocky Mountains,  the Gulf of Mexico and
some  foreign  countries,  for the  companies  and  clients  with  which  he was
associated.

     Bill L. Bledsoe. Mr. Bledsoe received a Bachelor of Science degree from the
     ----------------
University of North Texas (Denton) in 1957.

     Mr.  Bledsoe  has 35 years  of  experience  in the  general  management  of
domestic and  international  oil and gas exploration  and production.  From 1960
through 1965 he served in the land department of Texaco, Inc. in New Orleans and
Shreveport,  Louisiana. From 1965 to 1979 he served the various organizations of
H. L. Hunt in a number of management capacities worldwide,  being Assistant Land
Manager  of  Placid  Company,   Vice  President/Land   Manager  of  Hunt  Energy
Corporation,  General Manager of Hunt  International  Petroleum  Corporation and
President of Pursue Energy  Corporation,  among others. From 1979 to the present
he has owned and served as President of Bledsoe Energy  Corporation  and Bledsoe
Petro Corporation in Dallas, Texas, both of which are exploration and production
companies, operating approximately 300 wells in Texas, Oklahoma and New Mexico.


<PAGE>


     J. Donald Hill.  Mr. Hill is the Chairman  and Chief  Executive  Officer of
     ---------------
Excel Technology,  Inc. a company that is based in Long Island,  New York. Excel
Technology, Inc. trades on NASDAQ under the symbol XLTC.

     Mr. Hill has extensive experience in investment banking, having served as a
General Partner of Loeb, Rhoads & Company from 1966 to 1977 and Vice Chairman of
First  Affiliated  Securities,  Inc. from 1978 to 1988. From 1988 to 1990 he was
director of Corporate  Finance at Weeden & Company,  an investment  banking firm
and member of the New York Stock  Exchange.  During 1991 he was Chief  Executive
Officer of Medstone International, Inc., a company engaged in shock wave therapy
devices.  He served as President and Chief Financial  Officer of a subsidiary of
Excel  Technology,  Inc.,  Excel/Quantronix,  from November 1992 until  becoming
Chief Executive Officer of Excel Technology, Inc., in 1995.

     Rory S.  Phillips.  Mr.  Phillips  is a  managing  director  of  Mandeville
     ------------------
Partners.  Prior to joining Mandeville,  Mr. Phillips had a financial consulting
practice,  which  concentrated  on  U.S.  and  international  telecommunications
transactions.  He  concurrently  served  as  Chief  Financial  Officer  of Cable
Holdings,  Inc., a privately owned cable television company. From April, 1980 to
November, 1994, Mr. Phillips was Chief Financial Officer of Cellular Information
Systems, Inc., a public traded cellular telephone company.

     Mr. Phillips also has 15 years experience in senior banking positions, both
in the U.S. and in London.  Mr. Phillips holds a B.A. degree from the University
of California at Davis and a M.A. degree in  international  finance and business
from the Fletcher School of Law and Diplomacy, Boston.


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------

     The  following  persons  during the last  fiscal  year  failed to file on a
timely basis, as disclosed in the following  table,  reports required by Section
16(a) of the Exchange Act:

                                              Number of           Number of
     Name                                Late Reports        Transactions

     James F. Smith                              2                  2
     James E. Mitschke                           1                  1
     Malcolm E. Wilson, Jr.                      1                  1
     J. Donald Hill                              1                  1
     Bill L. Bledsoe                             1                  1
     Sam E. Nicholson                            1                  1
     Lawrence E. Steinberg                       1                  1
     Sammie S. Smith                             1                  1

     The Company knows of no existing failures to file a required form.

<PAGE>



ITEM 10. EXECUTIVE COMPENSATION.


     Set forth below is the  aggregate  annual  remuneration  during fiscal year
1997  of the  officers  and  directors  who  received  remuneration,  and of the
officers and directors as a group.


Name of Individual        Capacities in Which                Remuneration
                                                             ------------
Identity of Group         Remuneration was Received      October 31  October 31,
-----------------         -------------------------        1997        1996


James F. Smith            President and Chief Executive
                          Officer and Director             $30,000     $14,950

Sam E. Nicholson            Vice President, Secretary
                                       and Treasurer        33,350       7,500
Officers and
directors as a group
(8 persons)                                                $76,350     $22,450



ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.


     As of  February  10, 1998 set forth below are the numbers of shares and the
percentage of  outstanding  shares of Common Stock of the Company held of record
by each of the 3 highest  paid  persons who are  officers  and  directors of the
Company,  by all officers and directors as a group,  and by each shareholder who
owns more than 10 percent of any class of the  Company's  securities,  including
those shares subject to outstanding options or warrants:

Title of               Name and Address                      Amount    Percent
 Class                  of Owner                               Owned  of Class
--------------------------------------------------------------------------------

Common Stock           James F. Smith(1)(2)                   34,000      3.3%
                       4925 Greenville Ave. Ste 717
                       Dallas, TX  75206

Common Stock           James E. Mitschke                      40,000      3.9%
                       4925 Greenville Ave. Ste 717
                       Dallas, TX  75206


<PAGE>


Common Stock           Sam E. Nicholson                       10,000      1.0%
                       4925 Greenville Ave. Ste 717
                       Dallas, TX  75206

Common Stock           Sammie S. Smith(2)                    105,000     10.2%
                       4925 Greenville Ave. Ste 717
                       Dallas, TX  75206

Common Stock           Officers and Directors                159,000     15.4%
                       as a group (8 persons)

Common Stock           Russo Securities, Inc.(3)
                       128 Sand Lane
                       Staten Island, NY 10305


---------------
(1) Mr. Smith holds 10,000 shares of record and 21,000 are held by two trusts of
which Mr. Smith is the trustee.  One trust  benefits  Mr.  Smith's  children and
holds 15,000 shares,  and the other trust  benefits the Company's  employees and
holds 9,000 shares.

(2) Mr. and Mrs.  Smith are husband and wife.  They each disavow any  beneficial
interest in the shares held of record or beneficially by the other.

(3) In September  1997 the Company  sold  100,000  shares of its Common stock to
Russo Securities,  Inc. ("Russo") which is further explained in Notes to 4 and 5
of  Notes  to  Financial  Statements.  The  Shares  were  issued  using  an  S-8
Registration,  filed with the SEC.  In  December  1997 the  Company  requested a
confirmation  from Russo as to the number of shares  directly owned by Russo. On
December  22, 1997 Russo  reported to the company  that Russo and its  customers
held in excess of 100,000 shares of General American Royalty, Inc. common stock.
As of this date the Company is unable to  determine  the exact  number of shares
directly owned by Russo.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.


     Eagle  Equity Oil & Gas L.P.,  an entity  under the  control of Lawrence E.
Steinberg,  on July 24, 1996 loaned $140,000 to the Company. The loan was due on
September  23,  1996,  provided  for  interest  at 12  percent  a year,  and was
collateralized  by the properties in the Basin  Fruitland  Coal Field,  San Juan
County,  New Mexico  purchased by the Company from the proceeds of the loan. The
loan was paid down to $40,000 by August 31,  1996 from the  proceeds of the sale
of securities by the Company.

     On August  13,  1996  Eagle  Equity  Oil & Gas L.P.  loaned  an  additional
$130,000  to the  Company.  The loan was due  October  14,  1996,  provided  for
interest  at 12  percent  a  year,  and  was  collateralized  by the oil and gas
properties in the Basin Fruit land Coal Field, the Alta Mesa Gas Field in Brooks
County, Texas and the North Wilton Strawn Waterflood Unit in Young County, Texas
and a life insurance policy on the president of the Company.

     The loans were paid off in January  1997 from the  proceeds  of a bank loan
made to the  Company.  In July 1997 the bank loan of $200,000  was repaid from a
$300,000  loan from Eagle  Equity Oil & Gas L.P. due February 28, 1998 and bears
interest at 14%.

     Mr.  Lawrence  E.  Steinberg,  who  controls  Eagle  Equity Oil & Gas L.P.,
contemporaneously  with the  transactions  described  above,  purchased  100,000
shares of Common  Stock of the Company  for $100 from James F. Smith,  president
and a director of the  Company.  He holds 30,000 of these shares in his name and
35,000 in each of two trusts for his children.



<PAGE>



ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits.

     Item 3(i) and (ii). The articles of incorporation and by-laws,  as filed in
item 2 of Part III of the Company's  Form 10-SB dated March 26, 1997, are hereby
incorporated by reference.

     Item 10. The  agreement  between  the Company  and Russo  Securities  dated
September 12, 1997,  as filed in exhibit 4(a) of item 8 of the Company's  report
on Form 8-K dated September 16,1997, is hereby incorporated by reference.

     Item 27. Financial data schedule.

(b) Reports on Form 8-K. None filed.















<PAGE>


                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                                             GENERAL AMERICAN ROYALTY, INC.
                                             ------------------------------
                                                      (Registrant)

                                             /s/ James F. Smith
                                             ----------------------------
                                             James F. Smith, Director, President
                                             and Chief Executive Officer

                                             Date   February 12, 1998
                                                    -----------------


     In  accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.

<TABLE>
<S>                                                                             <C>     


/s/  James E. Mitschke                      /s/   Bill L. Bledsoe
--------------------------------            -----------------------------
James E. Mitschke, Director,                Bill L. Bledsoe, Director
Executive Vice President

Date   February 12, 1998                    Date   February 12, 1998
     ---------------------                       -------------------

/s/  Malcolm E. Wilson                      /s/ Sam E. Nicholson 
--------------------------------            -----------------------------------
Malcolm E. Wilson, Jr., Director            Sam E. Nicholson, Vice President, Secretary
                                            Treasurer and Chief Financial Officer

Date   February 12, 1998                    Date   February 12, 1998
     ---------------------                       -------------------


</TABLE>

 
<PAGE>
                                           


                          INDEPENDENT AUDITOR'S REPORT



Board of Directors
General American Royalty, Inc.
Dallas, Texas

We have audited the accompanying balance sheet of General American Royalty, Inc.
as of October 31, 1997, and the related statements of operations,  stockholders'
equity and cash flows for the year then ended.  These  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of General American Royalty, Inc.
as of October 31, 1997, and the results of its operations and cash flows for the
year then ended, in conformity with generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial  statements,  the Company has negative  working capital of $281,934 at
October 31, 1997 and has  suffered  significant  losses from  operations,  which
raise  substantial  doubt  about its  ability to  continue  as a going  concern.
Management's  plans in regard to these matters are also described in Note 1. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.




HEIN + ASSOCIATES LLP

Dallas, Texas
December 10, 1997








                                       F-1

<PAGE>


                        Report of Independent Accountants



We have audited the  statements  of  operations,  stockholders'  equity and cash
flows of General  American  Royalty,  Inc. for the year ended  October 31, 1996.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audit.

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

In our opinion,  the financial  statement  referred to above presents fairly, in
all  material  respects,  the  results of  operations  and cash flows of General
American  Royalty,  Inc. for the year ended October 31, 1996, in conformity with
generally accepted accounting principals.

Coopers & Lybrand L.L.P.

Dallas, Texas
November 30, 1996


                                      F-2

<PAGE>

<TABLE>
<CAPTION>

                         GENERAL AMERICAN ROYALTY, INC.

                                  BALANCE SHEET

                                OCTOBER 31, 1997

                                     ASSETS
                                     ------
<S>                                                                                    <C>    


CURRENT ASSETS:
   Cash                                                                                 $    14,967
   Accounts receivable, oil and gas                                                          26,224
   Accounts receivable, other                                                                 1,750
   Prepaid expenses                                                                           4,819
                                                                                        -----------
                  Total current assets                                                       47,760
                                                                                        -----------   

ROYALTY INTERESTS IN OIL AND GAS PROPERTIES, less accumulated                               466,966
   depletion of $100,230

PREPAID CONSULTING FEES                                                                      50,717

OTHER ASSETS, net of accumulated depreciation and amortization of $4,496                      7,491
                                                                                        -----------

                           Total assets                                                 $   572,934
                                                                                        ===========

                                            LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable and accrued expenses                                                $    24,886
   Accounts payable - shareholder                                                             4,808
   Note payable to shareholder                                                              300,000
                                                                                        -----------
                  Total current liabilities                                                 329,694

COMMITMENTS (Note 6)

STOCKHOLDERS' EQUITY:
   Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued or
     outstanding                                                                               --
   Common stock, $.001 par value, 20,000,000 shares authorized, 1,031,500 shares
     issued and outstanding                                                                   1,032
   Additional paid-in capital                                                             1,245,647
   Accumulated deficit                                                                   (1,003,439)
                                                                                        -----------
                  Total stockholders' equity                                                243,240

                           Total liabilities and stockholders' equity                   $   572,934
                                                                                        ===========

</TABLE>




              See accompanying notes to these financial statements.

                                       F-3
                                                         

<PAGE>


                         GENERAL AMERICAN ROYALTY, INC.

                            STATEMENTS OF OPERATIONS


                                             FOR THE YEARS ENDED OCTOBER 31,
                                                  1997            1996
                                               -----------    -----------
REVENUES: 
   Oil and gas royalty income                  $   194,583    $    60,751
   Other income                                      3,333           --
                                               -----------    -----------
                  Total revenues                   197,916         60,751
                                               -----------    -----------

COST AND EXPENSES:
   Production taxes and transportation costs        38,281         10,716
   General and administrative expense              887,536         71,814
   Amortization of deferred financing costs         35,313         83,846
   Depletion and amortization expense               79,346         21,481
   Interest expense                                 28,769          5,004
                                               -----------    -----------
                  Total costs and expenses       1,069,245        192,861
                                               -----------    -----------

NET LOSS                                       $  (871,329)   $  (132,110)
                                               ===========    ===========

BASIC AND DILUTED NET LOSS PER COMMON SHARE    $     (0.94)   $     (0.17)
                                               ===========    ===========

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
   OUTSTANDING                                     929,197        766,356
                                               ===========    ===========











              See accompanying notes to these financial statements.

                                       F-4
                                                         

<PAGE>

<TABLE>
<CAPTION>

                         GENERAL AMERICAN ROYALTY, INC.

                        STATEMENT OF STOCKHOLDERS' EQUITY
                  FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996

<S>                                                                             <C>         <C>    

                                                                 ADDITIONAL                   TOTAL
                                         COMMON STOCK             PAID-IN     ACCUMULATED   STOCKHOLDERS'
                                         ------------
                                      SHARES       AMOUNT         CAPITAL       DEFICIT        EQUITY
                                      ------       ------        ----------   -----------   -------------
BALANCES, November 1, 1995                --     $      --     $      --     $      --      $      --
   Sale of common stock                763,000           763        42,455          --           43,218
   Common stock issued for
      oil and gas interests             57,000            57        56,943          --           57,000
   Offering of common stock
      and other warrants, net of
      offering costs                    90,000            90       498,821          --          498,911
   Net loss                               --            --            --        (132,110)      (132,110)
                                   -----------   -----------   -----------   -----------    -----------

BALANCES, October 31, 1996             910,000           910       598,219      (132,110)       467,019
Exercise of common stock
   warrants, net of related
   costs                                11,500            12        56,838          --           56,850
Exercise of common stock
   options by consultants              110,000           110       590,590          --          590,700
Net loss                                  --            --            --        (871,329)      (871,329)
                                   -----------   -----------   -----------   -----------    -----------

BALANCES, October 31, 1997           1,031,500   $     1,032   $ 1,245,647   $(1,003,439)   $   243,240
                                   ===========   ===========   ===========   ===========    ===========



</TABLE>






              See accompanying notes to these financial statements.

                                       F-5
                                                           

<PAGE>

<TABLE>
<CAPTION>

                         GENERAL AMERICAN ROYALTY, INC.

                            STATEMENTS OF CASH FLOWS

<S>                                                                             <C>       

                                                                  FOR THE YEARS ENDED OCTOBER 31,
                                                                       1997         1996
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                          $(871,329)   $(132,110)
   Adjustments to reconcile net loss to net cash used in operating
     activities:
       Depletion and amortization                                       79,346       21,481
       Amortization of deferred financing costs                         35,313       83,846
       Non-cash payment of stock for services                          539,983          508
       Change in accounts receivable                                     6,419      (34,393)
       Change in prepaid expenses                                       (1,985)      (2,834)
       Change in accounts payable                                       16,672       13,022
       Change in other assets                                             (206)      (4,029)
                                                                     ---------    ---------
                  Net cash used in operating activities               (195,787)     (54,509)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of furniture and equipment                                  (1,991)        --
   Purchase of royalty interests                                          --       (510,196)
                                                                     ---------    ---------
                  Net cash used in investing activities                 (1,991)    (510,196)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Issuance of common stock                                             56,850      432,621
   Proceeds from borrowings                                            130,000      170,000
   Payments for deferred financing costs                               (12,021)        --
                                                                     ---------    ---------
                  Net cash provided by financing activities            174,829      602,621
                                                                     ---------    ---------

NET CHANGE IN CASH                                                     (22,949)      37,916
CASH, beginning of year                                                 37,916         --
                                                                     ---------    ---------
CASH, end of year                                                    $  14,967    $  37,916
                                                                     =========    =========

NON-CASH INVESTING AND FINANCING ACTIVITIES:
   Contribution of securities by shareholder                         $    --      $ 109,000
                                                                                  =========
   Purchase of royalty interests with stock                          $    --      $  57,000
                                                                                  =========
   Purchase of prepaid consulting fees with common stock options     $  50,717    $    --
                                                                     =========    =========

SUPPLEMENTAL INFORMATION -
   Cash paid for interest                                            $  28,155    $   4,126
                                                                     =========    =========


</TABLE>






              See accompanying notes to these financial statements.

                                       F-6
                                                           

<PAGE>


                          
                         GENERAL AMERICAN ROYALTY, INC.

                          NOTES TO FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------

     General American Royalty, Inc. ("the Company") was incorporated on December
     28, 1992 in the state of Delaware as Hermes  Capital  Management,  Inc. and
     was  inactive  until it  changed  its name on October  23,  1995 to General
     American Royalty,  Inc. The Company is engaged in the business of acquiring
     and managing producing oil and gas royalty,  overriding royalty and mineral
     interests in Texas and New Mexico.

     Cash and Cash Equivalents
     -------------------------

     The Company considers all highly liquid debt instruments  purchased with an
     original maturity of three months or less to be cash equivalents.

     Royalty Interests in Oil and Gas Properties
     -------------------------------------------

     Costs of  acquiring  interests in producing  royalty  interests,  including
     evaluation  costs,  are capitalized  and depleted on a straight-line  basis
     over the estimated lives of the related reserves. The Company estimated the
     lives of  reserves  to be ten years in fiscal  year  1996 and  revised  the
     estimate  to seven years in fiscal  year 1997.  This  change in  accounting
     estimate  resulted in an increase in the net loss and basic and diluted net
     loss per share for the year ended  October  31,1997  of  $22,128  and $.02,
     respectively.   The  Company  owns  a  large  number  of  interests   whose
     acquisition  costs are not individually  significant.  The Company annually
     reviews  significant  properties for  impairment by comparing  undiscounted
     estimated  future net cash flows to the  carrying  amount of the asset.  If
     impairment  is indicated,  the asset is written down to its estimated  fair
     value.  Depreciation and depletion  expense for producing royalty interests
     was $78,848  and  $21,381  for the years  ended  October 31, 1997 and 1996,
     respectively.

     Other Property
     --------------

     Property and  equipment is primarily  office  equipment,  and is carried at
     cost.   Depreciation  is  provided  using  the  straight-line  method  over
     estimated  useful lives of three years.  Gain or loss on retirement or sale
     or other  disposition  of assets  is  included  in income in the  period of
     disposition. Depreciation expense for other property and equipment was $398
     for the year ended October 31, 1997.

     Loss Per Share
     --------------

     Loss per  share is  calculated  in  accordance  with  Financial  Accounting
     Standards Board Statement No. 128,  "Earnings Per Share".  Earnings or loss
     per share is based on the weighted average number of shares of common stock
     outstanding  during the  period.  As of October 31, 1997 the Company had no
     outstanding options, warrants or other potentially dilutive securities.

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

     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 bases 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.

                                 
                                       F-7

<PAGE>


                                             
                         GENERAL AMERICAN ROYALTY, INC.

                          NOTES TO FINANCIAL STATEMENTS

     Impact of Recently-Issued Accounting Standards
     ----------------------------------------------

     Statement of Financial Accounting  Standards 130, "Reporting  Comprehensive
     Income"  establishes  standards for reporting and display of  comprehensive
     income, its components and accumulated  balances.  Comprehensive  income is
     defined to  include  all  changes in equity  except  those  resulting  from
     investments by owners and distributions to owners. Among other disclosures,
     Statement  130 requires  that all items that are required to be  recognized
     under current accounting standards as components of comprehensive income be
     reported  in  a  financial  statement  that  is  presented  with  the  same
     prominence as other  financial  statements.  Statement 130 is effective for
     financial  statements  for periods  beginning  after  December 15, 1997 and
     requires comparative information for earlier years to be restated.  Because
     of the recent  issuance  of this  standard,  management  has been unable to
     fully  evaluate the impact,  if any, the standard may have on the Company's
     future financial statement disclosures. Results of operations and financial
     position, however, will be unaffected by implementation of this standard.

     Continuation as a Going Concern
     -------------------------------

     The accompanying  financial statements have been prepared assuming that the
     Company will continue as a going concern.  The Company has negative working
     capital of $281,934 at October 31, 1997 and has suffered significant losses
     from  operations,  which  raise  substantial  doubt  about its  ability  to
     continue as a going concern.  It is  management's  opinion that  sufficient
     capital  can be raised  from  various  sources to provide  for the  ongoing
     operation and development of the Company and allow it to acquire additional
     producing royalty interests.

     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
     estimation  of future net cash flows,  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.

2.   NOTES PAYABLE
     -------------

     As of October  31,  1997,  the  Company  has a $300,000  note  payable to a
     shareholder  that bears  interest at 14% and is due on February  28,  1998.
     Interest  on  this  note is  payable  monthly  with  the  principal  due at
     maturity.  The note is  collateralized  by various  royalty and  overriding
     royalty  interests  of the  Company  and is  personally  guaranteed  by the
     Company's president.

     In  connection  with the note above and another  note entered into and paid
     during  fiscal 1997,  the Company  recorded  $12,021 of deferred  financing
     costs.  For the year ended  October  31,  1997,  $10,159 of this amount was
     charged to operations.

     In connection with a note payable entered into by the Company during fiscal
     1996, the Company's president transferred 110,000 shares of his benefically
     owned common  stock to the lender at closing in July 1996.  The Company has
     recorded  $109,000  as  contributed  capital  for the  value of the  shares
     transferred and recognized the entire amount as deferred  financing  costs.
     For the years  ended  October  31,  1997 and  1996,  $25,154  and  $83,846,
     respectively, of this amount has been charged to operations.

                               
                                       F-8

<PAGE>


                                             
                         GENERAL AMERICAN ROYALTY, INC.

                          NOTES TO FINANCIAL STATEMENTS

3.   RELATED PARTY TRANSACTIONS
     --------------------------

     As of October 31, 1997 the Company has a non-interest  bearing  payable for
     operating advances due to the Company's president for approximately $4,800.

4.   EQUITY TRANSACTIONS
     -------------------

     The Company  closed its initial  offering of common  stock and  warrants on
     October 31,  1996.  The  offering  consisted of the sale of 90,000 units at
     $5.00 per unit.  Each unit  consisted  of one share of common stock and one
     stock purchase warrant entitling the holder to one share of common stock of
     the Company at a purchase  price of $5.00.  The  Company  could call in the
     warrants on fifteen  days notice,  if not  exercised by the holder prior to
     the  expiration of a fifteen-day  notice  period,  if the Company's  common
     stock trade at or above $6.00  reported  closing bid or trade price for ten
     consecutive  trading  days.  Costs  incurred in  connection  with the stock
     offering  totaling  $60,089  were  recorded  as a reduction  of  additional
     paid-in  capital.  During fiscal 1997,  warrants were  exercised for 11,500
     shares. The remaining warrants expired on July 31, 1997.

     During fiscal 1997, the Company issued options to three different entities,
     in exchange for services. Russo Securities,  Inc., a member of the New York
     Stock  Exchange,  received  options to  purchase  100,000  shares of common
     stock. Another broker dealer, which is a member of the National Association
     of  Securities  Dealers,  was granted  options to purchase  5,000 shares of
     common  stock.  In addition,  a financial  public  relations  firm received
     options  to  purchase  5,000  shares of common  stock.  All three  entities
     exercised  their  options in September  1997.  The options are described in
     Note 5.  The fair  market  value of the  options  at the date of grant  was
     $590,700.  Of this amount,  $50,717 was recorded as prepaid consulting fees
     and  $539,983 was  recorded as general and  administrative  expense for the
     year  ended  October  31,  1997.  The  prepaid  consulting  fees are  being
     amortized over three years, on two of the contracts.

     During fiscal 1996,  the Company  purchased two royalty  interests for cash
     and 57,000 shares of common stock valued at $1.00 per share.

5.   STOCK BASED COMPENSATION
     ------------------------

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

     In September  1997, the Company  adopted an incentive stock option plan for
     certain key  officers and  directors  under which  2,500,000  shares of the
     Company's  common stock may be issued.  The option price will be determined
     by the  Board of  Directors  at the date of grant and the term will be five
     years from the date of grant to  expiration.  There were no options  issued
     pursuant to this plan during fiscal 1997.

     Stock Options
     -------------

     The Company granted  non-qualified  stock options to three  corporations to
     purchase the  Company's  common stock at $0.01 per share.  The options were
     exercisable from September 12, 1997 to September 11, 2000. The options were
     exercised on September 18, 1997.

     The  following is a summary of activity for the stock  options  granted for
     the year ended  October  31, 1997  (there  were no options  granted  during
     1996):




                               
                                       F-9

<PAGE>


                                            
                         GENERAL AMERICAN ROYALTY, INC.

                          NOTES TO FINANCIAL STATEMENTS


                                                         OCTOBER 31, 1997
                                                       --------------------
                                                                   Weighted
                                                                   Average
                                                        Number     Exercise
                                                        of Shares  Price
                                                        ---------  --------

                  Outstanding, beginning of year             --        --

                      Canceled or expired                    --        --
                      Granted                            110,000   $   0.01
                      Exercised                         (110,000)     (0.01)
                                                        --------   --------

                 Outstanding, end of year                    --        --
                                                        ========   ========

     Presented below is a comparison of the weighted average exercise prices and
     market prices of the Company's common stock on the measurement date for the
     stock options  granted during fiscal year 1997. The exercise price was less
     than the market price on each of the options. There were no options granted
     during 1996.


                                      1997
                                      ----
                    Number           Exercise         Market
                    of Shares         Price            Price
                    ---------       ---------       ---------

                     110,000           0.01           $ 5.37
                    =========       =========       =========

6.   COMMITMENTS
     -----------

     The Company has entered into several  non-cancellable  operating leases for
     office  space and  equipment.  The  office  space  lease  requires  monthly
     payments of  approximately  $2,900 until October 1999. The equipment leases
     require monthly payments totaling $400 until various dates, the last ending
     December  2000.  Rental  expense was $34,970 and $1,928 for the years ended
     October 31, 1997 and 1996, respectively.

     Contractual payments under  non-cancellable  operating leases as of October
     31, 1997 are as follows:


            Year Ending October 31,

                     1998                                  $  39,532
                     1999                                     39,565
                     2000                                        101
                                                           ---------
                                                          $   79,198

7.   CONCENTRATION OF CREDIT RISK

     Financial  instruments  that  subject the  Company to credit  risk  consist
     principally of oil and gas receivables.  The receivables are primarily from
     large  companies in the oil and gas  business.  These parties are primarily
     located in the Southwestern region of the United States.

             
                                      F-10
                                                     

<PAGE>


                         GENERAL AMERICAN ROYALTY, INC.

                          NOTES TO FINANCIAL STATEMENTS

     The Company has the following concentrations in volume of oil and gas sales
revenue:


                      Customer                               1997
                      --------                              -----
                         A                                    48%
                         B                                    23%

     Additionally,  the two  customers  above  accounted  for a total  of 69% of
     accrued oil and gas sales as of October 31, 1997.

8.   INCOME TAXES
     ------------

     In fiscal  1997,  the  Company  incurred a loss for both tax and  financial
     statement purposes and accordingly, recorded no Federal or state income tax
     expense.

     A reconciliation  of income tax benefit  computed at the federal  statutory
     rate and the  Company's  income  tax  provision  of $0 for the  year  ended
     October 31, 1996 is as follows:


     Pretax loss at statutory rate                          $(16,410)

     State taxes                                              (1,158)
     Meals and entertainment                                   1,024
     Key man life insurance                                      131
                                                            --------
     Deferred tax asset valuation allowance                 $ 16,413
                                                            ========

     The  Company's  deferred  income tax  balance at October  31, 1997 and 1996
     consisted of the following:


                                                             OCTOBER 31,
                                                       ----------------------
                                                         1997         1996
                                                       ---------    --------- 
     Deferred tax assets:
        Net operating loss carryforward                 $ 310,872   $  16,413
        Valuation allowance                              (310,872)    (16,413)
                                                        ---------   ---------
     Net deferred income tax asset                       $   --     $    --
                                                        =========   =========

     The  change in the  valuation  allowance  of  $294,459  for the year  ended
     October  31, 1997 is  primarily  due to the  increase in the net  operating
     loss.

     The  Company  has  a  net  operating  loss  carryforward  of  approximately
     $914,000, which will expire, if unused, in 2011 to 2012.

9.   SUBSEQUENT EVENT
     ----------------

     In November 1997, the Company granted  1,606,000 common stock options under
     the  incentive  stock option plan to the members of the Board of Directors.
     The options are exercisable at $5.25 per share and expire in November 2002.
     The market price at the date of grant was $5.00 per share.


              

                                      F-11

<PAGE>


                         GENERAL AMERICAN ROYALTY, INC.

                          NOTES TO FINANCIAL STATEMENTS

10.  SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

     The following table sets forth certain  information with respect to the oil
     and gas producing activities of the Company:


     Net capitalized costs related to oil and gas producing activities:
         Proved properties                                        $   567,196
         Less accumulated depletion, depreciation and amortization   (100,230)
                                                                  -------------
                  Net oil and gas property costs                  $    466,966
                                                                  =============

     The Company incurred no exploration or development  costs during the fiscal
     years ended October 31, 1997 and 1996. The Company incurred proved property
     acquisition  costs of $0 and  $567,196  in  fiscal  years  1997  and  1996,
     respectively.

     The  following  table,  based on  information  prepared  by an  independent
     petroleum  engineer,  summarizes  changes in the estimates of the Company's
     net  interest  in total  proved  reserves of crude oil and  condensate  and
     natural gas, all of which are domestic reserves:

                                                      Oil                Gas
                                                    (Barrels)           (MCF)

       Balance, October 31, 1996                      13,209           462,601
       Production                                     (1,722)          (62,244)
                                                  ----------        ---------- 
       Balance, October 31, 1997                      11,487           400,357
                                                  ==========        ========== 

     The foregoing  reserves are all  classified as proved  developed at October
     31, 1997. Proved oil and gas reserves are the estimated quantities of crude
     oil,  condensate  and natural gas which  geological  and  engineering  data
     demonstrate  with  reasonable  certainty to be  recoverable in future years
     from known  reservoirs  under existing  economic and operating  conditions.
     Proved  developed oil and gas reserves are reserves that can be expected to
     be recovered  through existing wells with existing  equipment and operating
     methods.  The above  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.  Additionally,  as the Company owns royalty  interests
     rather than working interests, and is not party to the operating agreements
     of  the  various  properties,   there  may  be  additional   considerations
     concerning   the  evaluated   properties  of  which  the  Company  and  the
     independent reserve engineer may not be aware. These  considerations  could
     materially affect the reserve estimates.

11.  STANDARDIZED MEASURE OF DISCOUNTED IN FUTURE NET CASH FLOWS (UNAUDITED)
     ----------------------------------------------------------------------

     The standardized measure of discounted future net cash flows at October 31,
     1997,  relating  to proved oil and gas  reserves  is set forth  below.  The
     assumptions 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-12

<PAGE>


                                            
                         GENERAL AMERICAN ROYALTY, INC.

                          NOTES TO FINANCIAL STATEMENTS

     Future cash inflows                                        $ 1,298,000
     Future ad valorem and severance taxes                         (111,000)
                                                                -----------

     Future net cash flows, before income tax                     1,187,000
     Future income taxes                                               --

     Future net cash flows                                        1,187,000
     10% annual discount                                           (478,000)

     Standardized measure of discounted future net cash flows   $   709,000
                                                                ===========

     Future net cash flows were computed  using year-end  prices and costs,  and
     year-end  statutory tax rates  (adjusted for  permanent  differences)  that
     relate to existing  proved oil and gas reserves at year end. The  following
     are  the  principal  sources  of  change  in the  standardized  measure  of
     discounted net cash flows:


     Sale of oil and gas produced, net of production costs      $ (156,000)
     Net changes in prices and production costs                    (81,000)
     Revisions and other                                            27,000
     Accretion of discount                                          68,000
     Net change in income taxes                                    169,000
                                                                ----------
        Net change                                                  27,000
     Balance, beginning of year                                    682,000
                                                                ----------
     Balance, end of year                                       $  709,000
                                                                ==========


                                
                                      F-13