<PAGE>
   
     As filed with the Securities and Exchange Commission on October 23, 1997
    
                            Registration No. 333-31149


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

           

                               
   
                                    FORM S-4/A-2
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
    
                          MAGNUM HUNTER RESOURCES, INC.
           (Exact name of registrants as specified in their charters)

                                     Nevada
                                      1311
                                  87-0462881
                         (State or other jurisdiction of
                         incorporation or organization)
                          (Primary Standard Industrial
                           Classification Code Number)
                                (I.R.S. Employer
                               Identification No.)

       File No.333-31149-1                           File No.333-31149-2
 MAGNUM HUNTER PRODUCTION, INC.                  HUNTER GAS GATHERING, INC.
(Exact name of registrants                      (Exact name of registrants
as specified in their charters)               as specified in their charters)
         Texas                                           Texas
(State or other jurisdiction                  (State or other jurisdiction
of incorporation or organization)            of incorporation or organization)
         75-2589131                                     75-1222501
(I.R.S. Employer Identification No.)        (I.R.S. Employer Identification No.)

   
      File No.333-31149-3                         File No.333-31149-4
GRUY PETROLEUM MANAGEMENT, CO.                  CONMAG ENERGY CORPORATION
(Exact name of registrants                      (Exact name of registrants
as specified in their charters)                as specified in their charters) 
           Texas                                           Texas
(State or other jurisdiction                    (State or other jurisdiction
of incorporation or organization)             of incorporation or organization)
        75-1074365                                      75-2715164
(I.R.S. Employer Identification No.)        (I.R.S. Employer Identification No.)
    
                             File No.333-31149-5
                            RAMPART PETROLEUM, INC.
                           (Exact name of registrants
                        as specified in their charters)
                                     Texas
                         (State or other jurisdiction
                        of incorporated or organization)
                                   75-1896997
                      (I.R.S. Employer Identification No.)



                     600 East Las Colinas Blvd., Suite 1200,
                               Irving, Texas 75039
                                 (972) 401-0752
      (Address, including zip code, and telephone number, including area code,
                  of Registrant's principal executive offices)

                            Morgan F. Johnston, Esq.
                     600 East Las Colinas Blvd., Suite 1200
                               Irving, Texas 75039
                                 (972) 401-0752
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                                   Copies to:
                             David E. Morrison, Esq.
                             Thompson & Knight, P.C.
                         1700 Pacific Avenue, Suite 3300
                               Dallas, Texas 75201
                                 (214) 969-1700
<PAGE>

         Approximate  date of  commencement  of proposed sale to the public:  As
soon as practicable after the effective date of this Registration Statement.

         If the  securities  being  registered on this form are being offered in
connection  with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]

The  Co-Registrants  hereby  amend this  Registration  Statement on such date or
dates as may be necessary to delay its effective  date until the  Co-Registrants
shall file a further amendment which specifically  states that this Registration
Statement shall  thereafter  become effective in accordance with Section 8(a) of
the  Securities  Act of 1933 or until the  Registration  Statement  shall become
effective on such date as the Commission,  acting pursuant to said Section 8(a),
may determine.



                                       

<PAGE>

                       
                   

PROSPECTUS

                          Magnum Hunter Resources, Inc.

                              Offer to Exchange its
                      10% Senior Notes due 2007, That Have
                Been Registered under the Securities Act of 1933,
                 As Amended, for Any and All of its Outstanding
                            10% Senior Notes due 2007


  The Exchange Offer and Withdrawal Rights Will Expire at 5:00 p.m., New York
  City Time, on December 2, 1997, Unless Extended (the "Expiration Date")


     Magnum Hunter Resources, Inc., a Nevada corporation (the "Company"), hereby
offers,  upon  the  terms  and  subject  to the  conditions  set  forth  in this
Prospectus (as the same may be amended or  supplemented  from time to time, this
"Prospectus")  and in the  accompanying  Letter of Transmittal  (which  together
constitute  the  "Exchange  Offer"),  to exchange up to  $140,000,000  aggregate
principal  amount of its 10% Senior Notes due 2007 (the  "Exchange  Notes") that
have  been  registered  under  the  Securities  Act of  1933,  as  amended  (the
"Securities Act"),  pursuant to a Registration  Statement (as defined herein) of
which this Prospectus  constitutes a part, for a like aggregate principal amount
of its  outstanding  10% Senior  Notes due 2007 (the  "Outstanding  Notes"  and,
together with the Exchange Notes and the Private Exchange Notes (as defined), if
any,  the  "Notes"),  of  which  $140,000,000   aggregate  principal  amount  is
outstanding.

     The terms of the Exchange  Notes are identical in all material  respects to
the terms of the Outstanding Notes, except that (i) the Exchange Notes have been
registered under the Securities Act and therefore will not be subject to certain
restrictions on transfer  applicable to the Outstanding Notes and generally will
not be entitled to  registration  rights,  and (ii) the Exchange Notes generally
will not provide for any increase in the interest  rate thereon  related to such
registration rights. See "Description of the Exchange Notes" and "Description of
the Outstanding  Notes." The  Outstanding  Notes were sold by the Company on May
29, 1997 to BT  Securities  Corporation,  First  Union  Capital  Markets  Corp.,
Paribas  Corporation and PaineWebber  Incorporated  (collectively,  the "Initial
Purchasers")  pursuant  to  an  offering  exempt  from  registration  under  the
Securities Act (the "Offering").

     The  Exchange  Notes are being  offered  for  exchange  in order to satisfy
certain  obligations of the Company and the  Subsidiary  Guarantors (as defined)
under the Registration  Rights  Agreement dated May 29, 1997 (the  "Registration
Agreement")  among  the  Company,  the  Subsidiary  Guarantors  and the  Initial
Purchasers.  Upon request of certain holders of Outstanding  Notes,  the Company
shall exchange for certain  Outstanding Notes other notes (the "Private Exchange
Notes") identical to the Exchange Notes in all material respects, except for the
placement of a legend on such Private  Exchange Notes.  See  "Description of the
Exchange Notes-Registration  Agreement." The Exchange Notes will be issued under
the same  Indenture  (as  defined) as the  Outstanding  Notes,  and the Exchange
Notes,  the Private  Exchange  Notes,  if any,  and the  Outstanding  Notes will
constitute a single series of debt securities under the Indenture.  In the event
that the  Exchange  Offer is  consummated,  any  Outstanding  Notes that  remain
outstanding after  consummation of the Exchange Offer, the Exchange Notes issued
in the Exchange Offer and the Private Exchange Notes, if any, will vote together
as a single class for purposes of determining  whether  holders of the requisite
percentage in outstanding  principal  amount of Notes have taken certain actions
or exercised certain rights under the Indenture.

         Interest on the Notes will accrue from their date of original  issuance
(the "Issue  Date") and will be payable  semi-annually  in arrears on June 1 and
December 1 of each year,  commencing on December 1, 1997, at the rate of 10% per
annum.  The Notes will be redeemable,  in whole or in part, at the option of the
Company on or after June 1, 2002,  at the  redemption  prices set forth  herein,
plus accrued interest to the date of redemption.  In addition, at any time on or
prior to June 1, 2000,  the Company may, at its option,  redeem up to 35% of the
aggregate  principal  amount of the Notes  originally  issued  with the net cash
proceeds of one or more Equity  Offerings  (as defined),  at a redemption  price
equal to 110% of the aggregate principal amount of the Notes to be redeemed plus
accrued interest to the date of redemption; provided, however, that after giving
effect to any such redemption, at least 65% of the aggregate principal amount of
the Notes originally  issued remains  outstanding.  Upon a Change of Control (as
defined), each holder of the Notes will have the right to require the Company to
repurchase such holder's Notes at a price equal to 101% of the principal  amount
thereof,  plus accrued  interest to the date of  repurchase.  In  addition,  the
Company  will be  obligated  to offer  to  repurchase  the  Notes at 100% of the
principal  amount thereof plus accrued interest to the date of repurchase in the
event of certain  Asset Sales (as  defined).  See  "Description  of the Exchange
Notes" and "Description of the Outstanding Notes."



                                      
<PAGE>

     The Outstanding  Notes are and the Exchange Notes will be general unsecured
obligations  of  the  Company,   ranking  pari  passu  with  any  unsubordinated
indebtedness  of the Company and senior in right of payment to all  subordinated
obligations  of the Company.  The  Outstanding  Notes are and the Exchange Notes
will be  unconditionally  guaranteed  (the  "Guarantees")  on a senior  basis by
certain  of  the  Company's  subsidiaries  (the  "Subsidiary  Guarantors").  The
Guarantees are general  unsecured  obligations of the Subsidiary  Guarantors and
rank  pari  passu  with  any  unsubordinated   indebtedness  of  the  Subsidiary
Guarantors and senior in right of payment to all subordinated obligations of the
Subsidiary Guarantors.  The Outstanding Notes are and the Exchange Notes will be
effectively  subordinated  to all  secured  indebtedness  of the Company and the
Subsidiary  Guarantors  to the extent of the value of the assets  securing  such
indebtedness.  As of  September  30,  1997,  the Company had  approximately  $48
million of secured indebtedness outstanding (excluding unused commitments of $12
million under the New Credit Facility (as defined)),  all of which is guaranteed
by the Subsidiary Guarantors.

     Each  broker-dealer  that  receives  Exchange  Notes  for its  own  account
pursuant  to the  Exchange  Offer  must  acknowledge  that  it  will  deliver  a
prospectus in connection with any resale of such Exchange  Notes.  The Letter of
Transmittal  states that by so acknowledging  and by delivering a prospectus,  a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus may be used by a broker-dealer in
connection  with resales of Exchange Notes received in exchange for  Outstanding
Notes where such  Outstanding  Notes were  acquired by such  broker-dealer  as a
result of market-making activities or other trading activities.  The Company has
agreed that it will make this Prospectus available to any broker-dealer for such
period of time as is necessary to comply with  applicable law in connection with
any such resale,  provided  that such time period  generally not exceed 180 days
after the Registration Statement is declared effective.

         See "Risk  Factors"  beginning on page 20 for a discussion  of certain
factors that should be considered in connection with the Exchange Offer.

  THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
       EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
           SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY
              OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
                       THE CONTRARY IS A CRIMINAL OFFENSE.
   
            The date of this Prospectus is October 24, 1997.
    
     Information  contained  herein is subject to  completion  or  amendment.  A
registration  statement  relating  to these  securities  has been filed with the
Securities and Exchange Commission (the "Commission").  These securities may not
be sold nor may  offers to buy be  accepted  prior to the time the  registration
statement  becomes  effective.  This prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy nor shall there be any sale of these
securities  in any State in which  such  offer,  solicitation  or sale  would be
unlawful prior to  registration  or  qualification  under the securities laws of
such State.

                                       -2-


<PAGE>


   
     THIS PROSPECTUS  INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
HEREIN OR DELIVERED  HEREWITH.  THESE  DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
MORGAN F.  JOHNSTON,  SECRETARY,  MAGNUM HUNTER  RESOURCES,  INC.,  600 EAST LAS
COLINAS BLVD., IRVING, TEXAS 75039 TELEPHONE (972) 401-0752.  IN ORDER TO ENSURE
TIMELY  DELIVERY OF THE  DOCUMENTS,  ANY REQUEST  SHOULD BE MADE BY NOVEMBER 17,
1997.
    
     The Company is making the  Exchange  Offer in reliance on a position of the
staff of the Division of  Corporation  Finance of the Commission as set forth in
certain  interpretive  letters addressed to third parties in other transactions.
However, the Company has not sought its own interpretive letter and there can be
no  assurance  that the staff of the  Division  of  Corporation  Finance  of the
Commission would make a similar determination with respect to the Exchange Offer
as it has in  such  interpretive  letters  to  third  parties.  Based  on  these
interpretations by the staff of the Division of Corporation Finance, and subject
to the three  immediately  following  sentences,  the Company  believes that the
Exchange  Notes  issued   pursuant  to  this  Exchange  Offer  in  exchange  for
Outstanding Notes may be offered for resale, resold and otherwise transferred by
a holder thereof (other than a holder who is a  broker-dealer)  without  further
compliance with the  registration  and prospectus  delivery  requirements of the
Securities  Act,  provided  that (i) such  Exchange  Notes are  acquired  in the
ordinary  course  of  such  holder's  business  and  (ii)  such  holder  is  not
participating,  and has no  arrangement  or  understanding  with any  person  to
participate,  in a distribution  (within the meaning of the  Securities  Act) of
such Exchange  Notes.  However,  any holder of the  Outstanding  Notes who is an
"affiliate"  of the Company  within the meaning of Rule 405 under the Securities
Act or any  broker-dealer  who purchased  Outstanding  Notes from the Company to
resell pursuant to Rule 144A under the Securities Act ("Rule 144A") or any other
available  exemption  under the Securities  Act, (a) will not be able to rely on
the  interpretations of the staff of the Division of Corporation  Finance of the
Commission set forth in the above mentioned  interpretive  letters, (b) will not
be permitted or entitled to tender such Outstanding  Notes in the Exchange Offer
and (c) must comply with the registration and prospectus  delivery  requirements
of the  Securities  Act in  connection  with any sale or other  transfer of such
Outstanding  Notes unless such sale or transfer is made pursuant to an exemption
from such requirements. In addition, any holder who tenders Outstanding Notes in
the Exchange Offer with the intention or for the purpose of  participating  in a
distribution  of the Exchange Notes cannot rely on such  interpretations  of the
staff of the Division of Corporation Finance of the Commission referred to above
and must comply with the  registration and prospectus  delivery  requirements of
the  Securities  Act  in  connection  with a  secondary  resale  transaction.  A
broker-dealer  who is not an "affiliate"  of the Company may  participate in the
Exchange Offer with respect to Outstanding Notes acquired for its own account as
a result of market-making activities or other trading activities,  provided that
(i)  in  connection   with  any  resales  of  Exchange  Notes  received  by  the
broker-dealer in exchange for such Outstanding Notes, the broker-dealer delivers
a  prospectus  meeting the  requirements  of the  Securities  Act,  and (ii) the
broker-dealer  has not entered into any  arrangement or  understanding  with any
person to participate  in a  distribution  (within the meaning of the Securities
Act) of such Exchange Notes. In the event that applicable interpretations by the
staff of the  Division  of  Corporation  Finance  of the  Commission  change  or
otherwise do not permit  resales of the Exchange Notes without  compliance  with
the  registration  and prospectus  delivery  requirements of the Securities Act,
holders of  Exchange  Notes who  transfer  Exchange  Notes in  violation  of the
prospectus  delivery  provisions of the  Securities  Act or without an exemption
from registration thereunder may incur liability thereunder.

                                      -3-

<PAGE>

     Each holder of  Outstanding  Notes who wishes to exchange such  Outstanding
Notes for  Exchange  Notes in the  Exchange  Offer will be required to represent
that (i) it is not an "affiliate" of the Company,  (ii) any Exchange Notes to be
received by it are being  acquired in the ordinary  course of its business,  and
(iii) at the time of consummation of the Exchange Offer such holder will have no
arrangement  or  understanding  with any person to participate in a distribution
(within the meaning of the  Securities  Act) of such Exchange Notes in violation
of the Securities Act. Each  broker-dealer  that receives Exchange Notes for its
own account in exchange for  Outstanding  Notes  pursuant to the Exchange Offer
must acknowledge that it acquired the Outstanding Notes for its own account as a
result of market-making activities or other trading activities (a "Participating
Broker-Dealer"),  and must agree that it will deliver a  prospectus  meeting the
requirements  of the  Securities  Act in  connection  with  any  resale  of such
Exchange Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus,  a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Based on the position
taken by the staff of the Division of  Corporation  Finance of the Commission in
the   interpretive   letters  referred  to  above,  the  Company  believes  that
Participating  Broker-Dealers may fulfill the prospectus  delivery  requirements
with respect to the Exchange  Notes  received upon exchange of such  Outstanding
Notes (other than Outstanding  Notes that represent an unsold allotment from the
original  sale  of  the  Outstanding   Notes)  with  a  prospectus  meeting  the
requirements  of the Securities  Act that may be the prospectus  prepared for an
exchange offer so long as it contains a description of the plan of  distribution
with respect to the resale of such Exchange Notes. Accordingly,  this Prospectus
may be used by a Participating Broker-Dealer during the period referred to below
in  connection   with  resales  of  Exchange  Notes  received  in  exchange  for
Outstanding   Notes  where  such   Outstanding   Notes  were  acquired  by  such
Participating  Broker-Dealer for its own account as a result of market-making or
other  trading  activities.  Subject  to  certain  provisions  set  forth in the
Registration Agreement,  the Company has agreed that this Prospectus may be used
by a Participating  Broker-Dealer  for such  period of time as is  necessary  to
comply with  applicable law in connection  with resales of such Exchange  Notes,
provided  that  such  time  period  generally  not  exceed  180 days  after  the
Registration  Statement is declared effective.  Any Participating  Broker-Dealer
who is an "affiliate" of the Company may not rely on such  interpretive  letters
and must comply with the  registration and prospectus  delivery  requirements of
the  Securities  Act in  connection  with any resale  transaction.  See "Plan of
Distribution" and "The Exchange Offer - Resales of Exchange Notes."

     Each  Participating  Broker-Dealer  will be deemed to have  agreed,  by its
acquisition  of the  Outstanding  Notes  or  Exchange  Notes  to be sold by such
Participating  Broker-Dealer,  that,  upon receipt of notice from the Company of
the  occurrence  of any event or the discovery of any fact which makes untrue in
any material respect or which causes this Prospectus to omit to state a material
fact  necessary in order to make the  statements  contained or  incorporated  by
reference herein, in light of the circumstances  under which they were made, not
misleading  or of the  occurrence  of  certain  other  events  specified  in the
Registration Agreement,  such Participating  Broker-Dealer will suspend the sale
of Exchange Notes pursuant to this  Prospectus  until the Company has amended or
supplemented  this  Prospectus to correct such  misstatement or omission and has
furnished  copies  of the  amended  or  supplemented  Prospectus  to  each  such
Participating  Broker-Dealer or until the Company has given notice that the sale
of Exchange Notes may be resumed,  as the case may be. If the Company gives such
notice to suspend the sale of the  Exchange  Notes,  it shall extend the 180 day
period referred to above during which Participating  Broker-Dealers are entitled
to use this  Prospectus in connection  with the resale of Exchange  Notes by the
number of days  during the period from and  including  the date of the giving of
such notice to and including the date when  Participating  Broker-Dealers  shall
have  received  copies of the amended or  supplemented  Prospectus  necessary to
permit resales of the Exchange  Notes, or to and including the date on which the
Company has given notice that the sale of Exchange Notes may be resumed,  as the
case may be.


                                      -4-

<PAGE>
         Prior to the Exchange  Offer,  there has been only a limited  secondary
market and no public market for the Outstanding  Notes.  The Exchange Notes will
be a new issue of securities  for which there is currently no market.  While the
Company does intend to apply for listing of the  Exchange  Notes on the American
Stock Exchange,  there can be no assurance as to the development or liquidity of
any market for the Exchange Notes. Although the Initial Purchasers have informed
the Company  that they each  currently  intend to make a market in the  Exchange
Notes,  they  are not  obligated  to do so,  and any such  market-making  may be
discontinued at any time without notice. Accordingly,  there can be no assurance
as to the development or liquidity of any market for the Exchange Notes.

     Any  Outstanding  Notes not tendered or accepted in the Exchange Offer will
remain  outstanding  and will be  entitled  to all the same  rights  and will be
subject to the same limitations  applicable  thereto under the Indenture (except
for those rights that terminate upon the  consummation  of the Exchange  Offer).
Following  consummation of the Exchange Offer, the holders of Outstanding  Notes
will continue to be subject to the existing  restrictions  upon transfer thereof
and the Company  will have no further  obligation  to such  holders  (other than
under certain limited  circumstances  primarily  relating to holders who are not
eligible to participate in the Exchange Offer) to provide the registration under
the Securities Act of the Outstanding  Notes held by them. If Outstanding  Notes
are  tendered  and  accepted  in the  Exchange  Offer,  the  trading  market for
untendered Outstanding Notes is likely to diminish; accordingly,  holders who do
not tender their  Outstanding  Notes may encounter  difficulties in selling such
notes  following  the Exchange  Offer.  See "Risk  Factors -  Consequences  of a
Failure to Exchange Outstanding Notes."

         THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION.  HOLDERS OF OUTSTANDING NOTES ARE URGED TO READ THIS PROSPECTUS AND
THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER
THEIR OUTSTANDING NOTES PURSUANT TO THE EXCHANGE OFFER.
   
     Outstanding  Notes may be tendered  for  exchange on or prior to 5:00 p.m.,
New York City time, on December 2, 1997,  unless the Exchange  Offer is extended
by the Company (the  "Expiration  Date").  Tenders of  Outstanding  Notes may be
withdrawn  at any  time  thereafter  on or  prior to the  Expiration  Date.  The
Exchange  Offer  is  not  conditioned  upon  any  minimum  principal  amount  of
Outstanding Notes being tendered for exchange. Outstanding Notes may be tendered
in whole or in part in a  principal  amount of  $1,000  and  integral  multiples
thereof.
    

                                       -5-


<PAGE>


         Each  Exchange  Note will bear  interest  from the most  recent date to
which  interest  has been  paid or duly  provided  for on the  Outstanding  Note
surrendered  in exchange for such Exchange Note or, if no such interest has been
paid or duly provided for on such Outstanding  Note, from May 29, 1997.  Holders
of the Outstanding  Notes whose Outstanding Notes are accepted for exchange will
not receive accrued interest on such  Outstanding  Notes for any period from and
after the last  interest  payment  date to which  interest has been paid or duly
provided for on such  Outstanding  Notes prior to the original issue date of the
Exchange  Notes or, if no such interest has been paid or duly provided for, will
not receive any accrued interest on such  Outstanding  Notes, and will be deemed
to have  waived the right to receive  any  interest  on such  Outstanding  Notes
accrued from and after such  interest  payment date or, if no such  interest has
been paid or duly provided for, from and after May 29, 1997. 

         The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. See "Use of Proceeds." No dealer-manager is being
used in  connection  with  this  Exchange  Offer.  See  "Plan of  Distribution."
Solicitation  of tenders of Outstanding  Notes may be made in person or by mail,
telephone  or telecopy,  by  directors,  officers  and regular  employees of the
Company.   Such  persons  will  receive  no  additional   compensation  for  any
solicitation  activities.  The Company may employ  third-party agents to solicit
tenders of Outstanding Notes, for which services such agents would be paid their
usual and  customary  fee.  The  Company  has agreed to pay the  expenses of the
Exchange Offer.

         NO PERSON HAS BEEN  AUTHORIZED TO GIVE ANY  INFORMATION  OR TO MAKE ANY
REPRESENTATION  NOT  CONTAINED IN THIS  PROSPECTUS  AND, IF GIVEN OR MADE,  SUCH
INFORMATION OR REPRESENTATION  MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY.  THIS  PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THE  SECURITIES  TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
JURISDICTION  WHERE SUCH OFFER WOULD BE  UNLAWFUL.  NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,  UNDER ANY  CIRCUMSTANCES,  CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY
OR ITS SUBSIDIARIES SINCE THE DATE HEREOF.
   
     This Prospectus,  together with the Letter of Transmittal, is being sent to
all  registered  holders of the  Outstanding  Notes as of  October 27, 1997.
    


                                       -6-

<PAGE>


                               PROSPECTUS SUMMARY

         The following summary is qualified in its entirety by the more detailed
information,  financial  statements,  and  other  data  appearing  elsewhere  or
incorporated  by  reference  in this  Prospectus.  Unless the context  otherwise
requires,  all  references  herein to "Magnum  Hunter" or the "Company"  include
Magnum Hunter Resources, Inc., formerly known as Magnum Petroleum, Inc., and its
consolidated subsidiaries.  Except as otherwise indicated herein, each reference
herein to on a "pro  forma  basis"  shall mean that the  results  for the stated
period or other information has been adjusted to reflect the consummation of the
Transactions (as defined herein).  Certain capitalized terms relating to the oil
and natural gas business are defined in the  "Glossary."  The Company  maintains
its corporate  headquarters at 600 East Las Colinas Blvd.,  Suite 1200,  Irving,
Texas 75039 and its telephone number is (972) 401-0752.

                                   The Company

         Magnum  Hunter  is  an  independent   energy  company  engaged  in  the
exploitation and development,  acquisition, exploration and operation of oil and
natural  gas  properties  with a focus on Texas,  Oklahoma  and New  Mexico.  In
December 1995, Magnum  Petroleum,  Inc. and Hunter  Resources,  Inc.  ("Hunter")
combined their oil and natural gas reserves and other assets (the "Magnum Hunter
Combination"), whereby the management of Hunter assumed operating control of the
Company.  The  new  management   implemented  a  business  strategy  emphasizing
acquisitions of long-lived  Proved Reserves with  significant  exploitation  and
development  opportunities where the Company generally can control operations of
the properties. As part of this strategy, in June 1996 the Company acquired from
a subsidiary of Burlington  Resources,  Inc.  ("Burlington")  property interests
located in the Texas  Panhandle and western  Oklahoma (the "Panoma  Properties")
for $34.7  million.  Additionally,  in April  1997,  the Company  acquired  from
Burlington  property  interests  located in west Texas and  southeast New Mexico
(the "Permian Basin  Properties")  for a net purchase  price of $133.0  million.
While the Company is considering  further  acquisitions and, to a lesser extent,
plans to pursue selected exploratory drilling opportunities, the Company intends
to  focus  its  efforts  on  the  substantial   inventory  of  exploitation  and
development opportunities arising from the acquisitions.

         The Company is a holding  company that  operates  through three primary
subsidiaries:  (i) Gruy Petroleum  Management Co.  ("Gruy"),  which conducts the
Company's  operations;  (ii)  Magnum  Hunter  Production,  Inc.,  which owns the
Company's  oil and natural gas assets;  and (iii)  Hunter Gas  Gathering,  Inc.,
which owns the Company's gas gathering and processing facilities.

         On a pro forma basis at December 31, 1996,  the Company had an interest
in 2,581 wells and had estimated Proved Reserves of 314.2 Bcfe with an SEC PV-10
of $408.0 million. As adjusted to use market prices in effect on March 31, 1997,
the Proved Reserves were 300.5 Bcfe with an SEC PV-10 of $224.8 million on a pro
forma basis at December  31,  1996.  Approximately  68% of these  reserves  were
classified as Proved Developed  Producing  Reserves and 86% were attributable to
the Panoma Properties and the Permian Basin Properties.  On a pro forma basis at
December 31, 1996, the Company's  Proved Reserves had an estimated  Reserve Life
of 14.6 years and were 61%  natural  gas.  The Company  serves as  operator  for
approximately  71% of its  properties.  Additionally,  the Company owns over 500
miles of gas gathering systems and a 50% interest in a gas processing plant that
is connected to the gas gathering system  purchased with the Panoma  Properties.
In 1996,  on a pro forma basis,  the Company had  revenues of $63.6  million and
EBITDA (as defined) of $38.3 million.

         Beginning  with the Magnum Hunter  Combination  in December  1995,  the
Company has made nine acquisitions for an aggregate net purchase price of $185.4
million.   This  strategy  has  added   approximately  305.6  Bcfe  of  reserves
(determined as of the respective times of their  acquisition) at an average cost
of $0.61 per Mcfe, as well as a 427 mile gas gathering system and a 50% interest
in a gas  processing  plant.  As a result of its  acquisitions,  the Company has
achieved substantial growth as described below (comparing 1996 pro forma data to
1995 historical data):

         o        Proved  reserves  increased  to  314.2  Bcfe at year  end 1996
                  (300.5 Bcfe as adjusted for March 31, 1997 market prices) from
                  36.7 Bcfe at year end 1995;

         o        Annual production increased to 20.4 Bcfe in 1996 from 0.3 Bcfe
                  in 1995;


                                       -7-

<PAGE>



         o        SEC PV-10 increased to $408.0 million at year end 1996 ($224.8
                  million as adjusted  for March 31, 1997  market  prices)  from
                  $37.2 million at year end 1995; and

         o        EBITDA increased to $38.3 million in 1996 from $(0.5) million
                  in 1995.

                          The Permian Basin Acquisition

         On April 30, 1997,  the Company  acquired the Permian Basin  Properties
from   Burlington   effective  as  of  January  1,  1997  (the  "Permian   Basin
Acquisition").  The Permian Basin  Properties  consist of 47 field areas in west
Texas and southeast New Mexico.  The net purchase price was $133.0 million after
adjustments  of $10.5 million for  production  cash flow from January 1, 1997 to
the closing date and other minor adjustments.

         The Permian Basin  Properties  include 1,852  producing oil and natural
gas wells on  approximately  113,810 gross acres  (82,175 net acres),  which the
Company  believes have  significant  additional  exploitation,  development  and
exploration opportunities.  Approximately 66% of the wells acquired are operated
by  the  Company.   Among  other  opportunities,   the  Company  has  identified
approximately 250 drilling locations,  including production and injection wells,
to further  develop an existing  waterflood in the  Westbrook  Field in Mitchell
County,   Texas.   The  proposed   waterflood   project  is  estimated  to  cost
approximately  $38.1 million over a four-year  period.  While the reserve report
for  the  Permian  Basin  Properties  assumes   approximately  $6.6  million  of
development  expenditures  during 1997 to enhance this waterflood  project,  the
Company is evaluating the timing of these development  expenditures  relative to
the Company's other capital expenditure requirements.  The Company has initially
budgeted approximately $5.0 million for development  expenditures on the Permian
Basin Properties for 1997.

         According to Ryder Scott Co.,  independent  petroleum engineers engaged
by the Company to evaluate the Permian Basin  Properties  ("Ryder  Scott"),  the
Proved Reserves  attributable to the Permian Basin Properties as of December 31,
1996 aggregated  191.6 Bcfe with an SEC PV-10 of $243.3 million,  including 60.4
Bcfe of Proved Undeveloped Reserves. At December 31, 1996, on a pro forma basis,
the Permian Basin  Acquisition  increased the Company's Proved Reserves to 314.2
Bcfe with an SEC PV-10 of $408.0 million as compared to Proved Reserves of 122.6
Bcfe with an SEC PV-10 of $164.8 on a historical  basis at December 31, 1996. As
adjusted to use market prices in effect on March 31, 1997,  the Proved  Reserves
attributable to the Permian Basin  Properties as of December 31, 1996 aggregated
181.6 Bcfe with an SEC PV-10 of $139.6  million,  including  60.3 Bcfe of Proved
Undeveloped Reserves.

         The Company  financed the  acquisition of the Permian Basin  Properties
with a new $130.0  million  credit  facility (the "New Credit  Facility")  and a
senior subordinated credit facility of $60.0 million (the "Term Loan Facility").
Borrowings  of $119.5  million  under the New Credit  Facility and $60.0 million
under the Term Loan Facility were used to pay the $123.0 million  balance of the
$133.0 million net purchase price for the Permian Basin Properties, to repay the
$53.7  million  in  outstanding  indebtedness  as of April  30,  1997  under the
Company's   previous  $100.0  million  credit  facility  (the  "Previous  Credit
Facility") and to pay the costs  associated  with the Permian Basin  Acquisition
and the related financings.  Upon the closing of the Offering,  the Company used
the  net  proceeds  from  the   Outstanding   Notes  to  repay  the  outstanding
indebtedness  under the Term Loan Facility and to reduce  indebtedness under the
New Credit Facility by approximately $75.5 million.

                             The Panoma Acquisition

         In  June  1996,  the  Company  purchased  the  Panoma  Properties  from
Burlington for $34.7 million (the "Panoma  Acquisition")  using borrowings under
the Previous Credit Facility. Assets acquired in the Panoma Acquisition included
interests in 520 natural gas wells in the Texas  Panhandle and western  Oklahoma
and an associated  427 mile gas gathering  system.  The Company now operates the
gas gathering system and approximately 90% of the acquired natural gas wells.

         According  to  Gaffney,  Cline  &  Associates,   independent  petroleum
engineers  engaged by the Company to evaluate the Panoma  Properties  ("Gaffney,
Cline"), the Proved Reserves attributable to the Panoma Properties as of


                                      -8-

<PAGE>



December 31, 1996 aggregated  77.3 Bcfe with an SEC PV-10 of $111.0 million.  As
adjusted to use market prices in effect on March 31, 1997,  the Proved  Reserves
attributable  to the Panoma  Properties as of December 31, 1996  aggregated 74.2
Bcfe with an SEC PV-10 of $53.3 million.

     The Company plans to drill over 80 in-fill  wells on the Panoma  Properties
based on the greater well density of nearby  analogous  fields.  The Company has
budgeted  approximately  $5.0  million  to drill 40 of these  natural  gas wells
during  1997.  During  the first  nine  months of 1997,  the  Company  completed
approximately  half of these wells.  The Company has  increased  the natural gas
flow through the gas gathering  system by installing  new  compressor  units and
reconfiguring the compression system.

                            McLean Plant Acquisition

     In January  1997,  the Company  acquired for $2.5  million a 50%  ownership
interest in the McLean gas  processing  plant (the  "McLean Gas  Plant"),  which
currently  processes 100% of the natural gas produced from the Panoma Properties
(the "McLean Plant  Acquisition").  The Company receives 100% of the net profits
from the McLean Gas Plant  until it recoups  the $2.5  million  purchase  price,
after which time it will  receive 50% of the net  profits.  Management  believes
that the McLean Plant Acquisition allows the Company to capture a portion of the
processing  profits on natural gas produced at the Panoma  Properties that would
otherwise go to third party processors.

                  Other Development and Exploration Activities

     Apart  from the  Permian  Basin and  Panoma  Properties,  the  Company  has
identified a number of  development  opportunities  on its other  properties for
which it has budgeted  approximately  $7.0 million to be spent during 1997.  The
Company  believes it can enhance the value of selected west Texas fields through
in-fill  drilling  and  enhanced  recovery  projects,   and  it  also  plans  to
participate  in the drilling of up to 16 new lateral  extensions  from  existing
well bores in the Austin Chalk formation in Fayette County in central Texas. The
Company also plans to participate in drilling  approximately  seven  exploratory
wells during 1997,  for which it has budgeted  approximately  $3.0 million.  The
Company has  participated in a successful  exploratory gas discovery in Oklahoma
and is presently testing another exploratory well drilled earlier this year. The
Company plans to drill additional  exploratory  wells in 1997 on properties near
the Texas Gulf Coast and in southwest Texas.

                                Company Strengths

     o Quality of Reserves.  The Company has a high quality  reserve  base.  The
majority of the reserves are in the Permian Basin and Hugoton Embayment, both of
which are well-known,  mature oil and natural gas producing regions.  The fields
in which the  properties  are  located  generally  have  significant  production
history and performance  data. In addition,  approximately  68% of the Company's
Proved Reserves were classified as Proved Developed  Producing Reserves on a pro
forma basis at December 31, 1996. These  attributes  reduce the risks associated
with determining  remaining  reserves and forecasting future production from the
properties. The properties are also long-lived with an estimated Reserve Life on
a pro forma basis at December 31, 1996 of 14.6 years.

     o Substantial  Inventory of  Exploitation  and  Development  Projects.  The
Company  has  identified  over  400  development   drilling   locations  on  its
properties.  The  Company  believes  that the  majority of these  locations  are
low-risk in-fill drilling  opportunities  which should add incremental  reserves
and  increase  production  rates.  In addition to  drilling  opportunities,  the
Company has identified several enhanced recovery projects which will include the
use of waterflood and tertiary recovery methods.

     o Significant Operating Control.  Through its Gruy subsidiary,  the Company
operates approximately 71% of the properties in which it owns an interest.  This
level of operating control benefits the Company in numerous ways by enabling the
Company to (i)  control  the timing  and  nature of capital  expenditures,  (ii)
identify and implement cost control programs, (iii) respond quickly to operating
problems and (iv) receive  overhead  reimbursements  from other working interest
owners.



                                      -9-

<PAGE>



     o Experienced Management.  The Company's three senior managers have over 82
combined years of direct oil and natural gas experience in the areas of drilling
and  completions,  production  operations,  acquisitions  and  divestitures  and
reservoir  engineering.  Most members of the Company's  technical staff,  having
spent  their  entire  careers  specializing  in  these  regions,  have  in-depth
knowledge of the Company's core operating regions.

     o Balanced  Reserve  Mix. On a pro forma basis at December  31,  1996,  the
Company's  reserve  mix was  approximately  39% oil and 61%  natural  gas.  This
balanced  portfolio  reduces the Company's  exposure to a single product's price
volatility.

                                Business Strategy

         The  Company's   objective  is  to  aggressively   grow  its  reserves,
production,  cash  flow  and  earnings  utilizing  a  balanced  program  of  (i)
exploitation  and  development  of acquired  properties,  including  development
drilling,  workovers and cost reduction programs,  (ii) strategic  acquisitions,
and (iii) a selective exploration program.  Since the Magnum Hunter Combination,
the Company has acquired long-lived properties with significant exploitation and
development  potential  where  the  Company  can  control  operations  on a high
percentage of the  properties.  The Company is now focusing its efforts on fully
developing the large inventory of properties  arising from its acquisitions and,
to a lesser extent,  is identifying and  participating  in selected  exploratory
prospects. The Company is also evaluating several smaller strategic acquisitions
which fit the Company's  objectives of having  long-lived  Proved  Reserves with
exploitation and development potential and operating control.

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

     o Exploitation  and Development of Existing  Properties.  The Company has a
substantial  inventory of exploitation  projects including development drilling,
workovers and  recompletions  and cost  reduction  programs.  As of December 31,
1996,  on a pro forma  basis,  32% (100.0  Bcfe) of the  Company's  total Proved
Reserves were classified as Proved  Undeveloped  Reserves.  The Company seeks to
maximize the value of the properties through  development  activities  including
in-fill  drilling,   waterflooding  and  other  enhanced  recovery   techniques.
Management  believes that the proximity of these Proved Undeveloped  Reserves to
existing production makes development of these projects less risky and more cost
effective than other drilling opportunities available to the Company.

     o Operating Cost Management. The Company emphasizes strict cost controls in
all  aspects of its  business,  and seeks to  operate  its  properties  wherever
possible.  By  operating  approximately  71% of its  properties,  the Company is
generally  able to control  direct  operating  and drilling  costs as well as to
manage  the timing of  development  and  exploration  activities.  For  example,
following the Panoma  Acquisition,  the Company  increased  operating margins by
restoring  shut-in wells to production,  reducing the number of field employees,
implementing  compression  and other  improvements  on the Panoma gas  gathering
system and  purchasing  a 50%  interest  in the  McLean  Gas  Plant.  Management
believes it can also reduce  operating costs on the Permian Basin  Properties by
reducing the number of field employees,  using contract pumpers and implementing
other  efficiencies.  Moreover,  as a result of its  acquisition  of the Permian
Basin  Properties,  the Company expects only a moderate  increase in its general
and  administrative  expenses  in  relation  to the large  number of  properties
acquired.  Therefore, the Company anticipates that such expenses will decline on
a per Mcfe basis.

     o Strategic  Acquisitions.  Although the Company has an extensive inventory
of  exploitation  and  development  opportunities,  it is  continuing  to pursue
smaller strategic acquisitions in its existing areas of operations which fit its
objectives of having long-lived  Proved Reserves with development  potential and
operating control.



                                      -10-

<PAGE>



     o Expansion of Gas  Gathering  and  Marketing  Operations.  The Company has
implemented  several  programs to expand and increase the  efficiency of its gas
gathering systems. The Company owns over 75% and markets 100% of the natural gas
that moves through its gas gathering systems and,  therefore,  directly benefits
from any cost and productivity improvements. Since the Company believes that its
gas gathering systems have significant  underutilized throughput capacity, it is
actively pursuing several  opportunities to add new Company and third party well
connections.   The  Company  is  also   considering   opportunities  to  acquire
complementary  gas  gathering  systems  and to form  joint  ventures  with other
operators.  In addition,  the Company  believes  that its  acquisition  of a 50%
interest in the McLean Gas Plant  allows the Company to capture a portion of the
processing  profits on natural gas produced at the Panoma  Properties that would
otherwise go to third party processors.

                           Recent Financing Activities

         TCW Preferred  Stock.  In December 1996, the Company sold $10.0 million
of its 1996 Series A Convertible  Preferred Stock (the "TCW Preferred Stock") in
a private placement to funds managed by Trust Company of the West (collectively,
"TCW").  The purpose of the  private  placement  was to fund the  capital  costs
necessary  to develop  certain  developmental  drilling and  secondary  recovery
projects.  The proceeds were initially used to reduce the Company's  outstanding
indebtedness under the Previous Credit Facility.

         New Credit  Facility and Term Loan  Facility.  On April 30,  1997,  the
Company entered into the New Credit Facility (which replaced the Previous Credit
Facility) and the Term Loan Facility.  On such date, the Company borrowed $119.5
million  and $60.0  million  under  the New  Credit  Facility  and the Term Loan
Facility,  respectively,  to fund the balance due on the  purchase  price of the
Permian  Basin  Acquisition,  to repay the  outstanding  indebtedness  under the
Previous Credit Facility and to pay the costs  associated with the Permian Basin
Acquisition and the related financings.

     Offering  of Senior  Notes.  On May 29,  1997,  the  Company  completed  an
offering of $140,000,000  aggregate  principal  amount of its Outstanding  Notes
(the  "Offering").  Interest  on the Notes  accrues  from their date of original
issuance  and is payable  semi-annually  in arrears on June 1 and  December 1 of
each year,  commencing  on  December 1, 1997,  at the rate of 10% per annum.  In
general, the Notes will be redeemable, in whole or in part, at the option of the
Company on or after June 1, 2002,  at the  redemption  prices set forth  herein,
plus accrued interest to the date of redemption.  The Outstanding  Notes are and
the Exchange Notes will be general unsecured obligations of the Company, ranking
pari passu with any  unsubordinated  indebtedness  of the  Company and senior in
right  of  payment  to all  subordinated  obligations  of the  Company.  The net
proceeds from the Offering were  approximately  $135.5  million after  deducting
fees and expenses of $4.5 million payable by the Company.  The Company  utilized
the net proceeds to repay the $60.0 million of  outstanding  indebtedness  under
the Term Loan Facility and to reduce  indebtedness under the New Credit Facility
by  approximately  $75.5  million.  As of September  30,  1997,  the Company had
approximately $48 million of secured indebtedness  outstanding (excluding unused
commitments of $12 million under the New Credit Facility).

                                The Transactions

         The  Offering and the  application  of the net  proceeds  thereof,  the
Permian Basin  Acquisition  (including the incurrence of indebtedness  under the
New  Credit  Facility  and the  Term  Loan  Facility  and  the  use of  proceeds
therefrom), the Panoma Acquisition,  the McLean Plant Acquisition,  the issuance
of the TCW  Preferred  Stock and the  conversion  or redemption of the Company's
Series B and Series C  Preferred  Stock into  Common  Stock,  each as more fully
described in the  "Unaudited Pro Forma  Combined  Financial  Data" and the notes
thereto, are collectively referred to herein as the "Transactions."



                                      -11-

<PAGE>

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


          Summary Description of the Exchange Offer and Exchange Notes


Exchange Offer................................    Up to $140,000,000 aggregate principal  amount of  Exchange
                                                  Notes are being offered  in  exchange  for  like  aggregate 
                                                  principal  amount  of Outstanding Notes. Outstanding  Notes
                                                  may  be  tendered  for  exchange  in  whole or in part in a 
                                                  principal  amount of $1,000  and integral multiples thereof.
                                                  The  Company  is  making  the  Exchange  Offer  in order to
                                                  satisfy  its obligations  under  the Registration Agreement 
                                                  relating  to the Outstanding  Notes. The Company will issue 
                                                  the Exchange Notes to  tendering holders of the Outstanding
                                                  Notes promptly following the Expiration Date.

Registration Agreement........................... The  Outstanding  Notes were sold by the Company on May 29,
                                                  1997  to BT  Securities  Corporation,  First  Union Capital
                                                  Markets   Corp.,   Paribas   Corporation   and  PaineWebber
                                                  Incorporated, which   placed    the  Outstanding  Notes  in 
                                                  the United  States  with  Qualified  Institutional   Buyers
                                                  ("QIBs") in reliance on Rule 144A under  the Securities Act
                                                  and  institutional   accredited  investors.  In  connection
                                                  therewith,  the   Company,    the    Subsidiary  Guarantors
                                                  and the Initial Purchasers executed and   delivered for the
                                                  benefit  of  the  holders  of  the  Outstanding  Notes  the
                                                  Registration Agreement providing for, among other   things,
                                                  the Exchange Offer.
   
Expiration Date.................................. 5:00  p.m.,  New  York  City  time, on  December  2,   1997
                                                  unless the Exchange Offer is  extended by the Company.  See
                                                  "The Exchange Offer - Terms of the Exchange."
    
Procedures for Tendering Outstanding
   Notes......................................... Each  holder  of  Outstanding  Notes  wishing to accept the
                                                  Exchange Offer must either (i) complete,  sign and date the
                                                  Letter of Transmittal, or a facsimile thereof,in accordance
                                                  with the instructions  contained  herein and  therein,  and
                                                  mail or  otherwise  deliver  such  Letter  of  Transmittal, 
                                                  or such  facsimile, together  with either the  certificates
                                                  for such  Outstanding  Notes or, if   such    procedure  is
                                                  available, a Book-Entry Confirmation  of  such  Outstanding
                                                  Notes into the Exchange Agent's  account  at the Book-Entry
                                                  Transfer  Facility,  or  (ii) deliver  such  a   Book-Entry
                                                  Confirmation together with an Agent's Message (whereby  the
                                                  holder  acknowledges  its  receipt  of  and  agrees  to  be
                                                  bound by the Letter of Transmittal), and any other required
                                                  documentation to  the  Exchange Agent  at  the  address set
                                                  forth  herein. By  executing  the Letter of  Transmittal or
                                                  delivering  an  Agent's Message each  holder of Outstanding
                                                  Notes will  represent to  the  Company  that,  among  other
                                                  things, (i)  the Exchange  Notes  acquired pursuant  to the
                                                  Exchange  Offer by  the holder and any beneficial owners of
                                                  such  Outstanding  Notes are being acquired in the ordinary
                                                  course of business of the  person receiving  such  Exchange
                                                  Notes, (ii) at the time of the consummation of the Exchange
                                                  Offer such holder will have no arrangement or understanding
                                                  with any person to participate in the  distribution of such
                                                  Exchange Notes in violation of the Securities Act and (iii)
                                                  neither  the  holder  nor  such  beneficial  owner  is  an
                                                  "affiliate," as defined in Rule 405  under  the  Securities
                                                  Act, of the Company.



                                      -12-

<PAGE>

                                                  A Participating  Broker-Dealer  that receives Exchange Notes
                                                  for its own account in  exchange for Outstanding  Notes  may
                                                  participate in  the  Exchange  Offer  but may  be  deemed an
                                                  "underwriter" under the Securities Act and,  therefore, must
                                                  acknowledge that  it will  deliver a  prospectus meeting the
                                                  requirements of the  Securities Act in connection  with  any
                                                  resale of such Exchange  Notes. The  Company has undertaken,
                                                  for a period of 180 days  after its  Registration  Statement
                                                  of which this Prospectus  is  a part is declared  effective,
                                                  to maintain  the effectiveness of the Registration Statement
                                                  for use in satisfaction  of  such   persons' obligations  to
                                                  deliver a  prospectus.  The  Letter  of  Transmittal  states
                                                  that by so acknowledging  and by  delivering a prospectus, a
                                                  Participating Broker-Dealer will not be deemed to admit that
                                                  it is an "underwriter" within the meaning  of the Securities
                                                  Act. See  "The Exchange Offer-Resales of Exchange Notes" and
                                                  "Plan of Distribution."

Special Procedures for Beneficial
   Owners........................................ Any beneficial owner whose Outstanding Notes are  registered
                                                  in the name of a broker,  dealer,   commercial  bank,  trust
                                                  company or   other nominee and who    wishes to  tender such
                                                  Outstanding Notes in the Exchange Offer should contact  such
                                                  registered  holder  promptly  and  instruct  such registered
                                                  holder to tender on such beneficial owner's behalf.  If such 
                                                  beneficial owner wishes to tender  on  its  own behalf, such
                                                  owner must, prior to completing and executing the Letter  of
                                                  Transmittal and delivering  its  Outstanding  Notes,  either
                                                  make appropriate arrangements to  register ownership  of the
                                                  Outstanding Notes in such owner's  name or obtain a properly
                                                  completed bond power from the registered holder.The transfer
                                                  of registered ownership may take  considerable time and  may 
                                                  not be able to be completed prior to the Expiration Date.

Guaranteed Delivery
   Procedures.................................... Holders   of   Outstanding  Notes  who  wish to tender their
                                                  Outstanding   Notes  and whose  Outstanding  Notes  are  not
                                                  immediately available or who cannot complete the  procedures
                                                  for book-entry transfer of such Outstanding Notes or deliver
                                                  their Outstanding Notes, the Letter  of  Transmittal  or any
                                                  other required documents to the Exchange  Agent prior to the
                                                  Expiration   Date   must  tender  their  Outstanding   Notes 
                                                  according to the guaranteed delivery  procedures  set  forth  
                                                  in "The Exchange Offer- Procedures for Tendering Outstanding
                                                  Notes - Guaranteed Delivery."

Withdrawal Rights................................ Tenders may be withdrawn at any time prior to the Expiration
                                                  Date.  See "The Exchange Offer -Withdrawal Rights."
Certain Federal Income Tax
     Considerations.............................. The exchange of the Outstanding Notes for  Exchange Notes by  
                                                  tendering holders should not be  a taxable exchange for U.S.
                                                  federal  income tax  purposes, and such  holders  should not
                                                  recognize any taxable  gain or  loss for U.S. federal income 
                                                  tax purposes  as  a  result of  such exchange.    Holders of 
                                                  Exchange  Notes  will  continue to  be  required  to include 
                                                  interest received on such Exchange Notes in gross  income in 
                                                  accordance with their method of accounting for U.S.  federal
                                                  income tax purposes.  Holders should review  the information
                                                  set forth under "Certain Federal Income  Tax Considerations"
                                                  for   a   discussion   of  certain  U.S.  federal income tax 
                                                  considerations  relating  to  the  Exchange  Notes  prior to 
                                                  tendering the Outstanding Notes in the Exchange Offer.

Exchange Agent................................... First Union National Bank of  North  Carolina is  serving as
                                                  Exchange Agent in  connection  with the Exchange Offer.  See
                                                  "The Exchange Offer - Exchange Agent."



                                      -13-

<PAGE>





The Exchange Notes............................... $140,000,000 in   aggregate  principal  amount of 10% Senior
                                                  Notes due 2007. The form and terms of the Exchange Notes are
                                                  identical in all  material  respects  to  the terms  of  the
                                                  respective Outstanding Notes for which they may be exchanged
                                                  pursuant to the Exchange Offer, except for certain  transfer
                                                  restrictions   and  registration  rights  relating  to   the
                                                  Outstanding Notes and except for certain interest provisions
                                                  relating  to  such  registration rights. See "Description of
                                                  the Exchange Notes."

Maturity......................................... June 1, 2007.

Interest on the Exchange Notes................... The Exchange Notes will bear interest at the rate of 10% per
                                                  annum, payable semiannnually  on  June 1  and  December 1 of
                                                  each year, commencing December 1, 1997.   Each Exchange Note
                                                  will  bear  interest  from  the  most  recent  date to which
                                                  interest  has  been  paid  or  duly  provided  for  on   the
                                                  Outstanding  Note  surrendered in exchange for such Exchange
                                                  Note or, if no such interest has been paid  or duly provided
                                                  for on such Outstanding Note, from May 29, 1997. Interest on
                                                  the  Outstanding  Notes  accepted for exchange will cease to
                                                  accrue upon issuance of the Exchange Notes.

Ranking.......................................... The Exchange  Notes will be general unsecured obligations of
                                                  the Company and will rank pari passu with any unsubordinated
                                                  indebtedness of the Company and will rank senior in right of
                                                  payment to all subordinated obligations of the Company.  The
                                                  Exchange Notes  will  be  effectively  subordinated  to  all
                                                  secured indebtedness of  the Company to  the  extent of  the 
                                                  value  of  the  assets  securing  such  indebtedness. As  of
                                                  September  30,  1997,  the  Company  had  approximately  $48
                                                  million  of secured   indebtedness    outstanding (excluding
                                                  unused commitments  of  $12 million  under  the  New  Credit
                                                  Facility), all of  which  is  guaranteed  by  the Subsidiary
                                                  Guarantors.

Guarantees....................................... The  Exchange  Notes  will be  unconditionally guaranteed on 
                                                  a senior  basis by the Subsidiary Guarantors. The Guarantees 
                                                  will  be  general  unsecured  obligations  of the Subsidiary  
                                                  Guarantors  and will rank pari passu with any unsubordinated 
                                                  indebtedness  of  the  Subsidiary  Guarantors  and will rank 
                                                  senior in right of payment to all  subordinated  obligations 
                                                  of  the  Subsidiary   Guarantors.  The  Guarantees  will  be 
                                                  effectively subordinated to all secured  indebtedness of the 
                                                  Subsidiary  Guarantors  to the  extent  of  the value of the
                                                  assets securing such indebtedness.

Optional Redemption.............................. The Exchange Notes will be  redeemable,  in whole or in part, 
                                                  at the option of the  Company on or  after  June 1,  2002  at 
                                                  the redemption prices set forth herein, plus accrued interest
                                                  to  the  date of  redemption. In addition, at any time on  or  
                                                  prior to June 1, 2000, the Company may, at its option, redeem 
                                                  up  to  35% of  the  aggregate  principal amount of the Notes  
                                                  originally issued with  the  net cash  proceeds  of  one  or 
                                                  more Equity Offerings, at a redemption price equal to 110% of
                                                  the aggregate principal amount  of  the  Notes to be redeemed
                                                  plus accrued interest to  the  date of  redemption;  provided,  
                                                  however, that, after giving effect to any such redemption, at
                                                  least  65% of  the aggregate principal  amount  of the  Notes
                                                  originally issued remains outstanding.

Change of Control................................ Upon a Change of Control, each holder will have  the  right to
                                                  require the Company to repurchase such holder's Exchange Notes
                                                  at a price equal to 101% of the principal amount thereof  plus
                                                  accrued interest to the date of repurchase.



                                      -14-

<PAGE>





Certain Covenants................................ The  Indenture  governing   the Exchange Notes (the "Indenture")
                                                  contains certain covenants that limit the ability of the Company
                                                  and  its  Restricted  Subsidiaries (as defined) to,  among other
                                                  things,  incur  additional  indebtedness,  pay dividends or make
                                                  certain  other  restricted  payments, consummate  certain  asset
                                                  sales,  enter  into certain transactions  with affiliates, incur
                                                  liens, impose  restrictions  on  the  ability  of  a  Restricted
                                                  Subsidiary to  pay  dividends or  make certain payments  to  the
                                                  Company and its Restricted  Subsidiaries,  merge or  consolidate
                                                  with any other person or sell, assign, transfer,lease, convey or
                                                  otherwise  dispose of all or substantially  all of the assets of
                                                  the  Company. In  addition,  under certain   circumstances,  the
                                                  Company will be required to offer to purchase the Exchange Notes,
                                                  in whole or in part,  at  a purchase  price equal to 100% of the
                                                  principal amount thereof plus  accrued interest to  the  date of
                                                  repurchase, with the proceeds of certain Asset Sales (as defined).

Listing.......................................... The Company has applied for listing of the Exchange Notes on the
                                                  American  Stock Exchange. See "Risk  Factors -  Lack  of  Public
                                                  Market."

Sinking Fund..................................... None.

         For additional information regarding the Exchange Notes, see "Description of the Exchange Notes."

</TABLE>

                                 Use of Proceeds

         The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby.

                                  Risk Factors

         See "Risk  Factors" for a discussion of certain  factors that should be
considered in evaluating an investment in the Exchange Notes.




                                      -15-

<PAGE>


                 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

     The following table sets forth summary  historical  consolidated  financial
data of the Company as of and for the three years ended  December 31, 1996,  for
the six months ended June 30, 1996 and 1997 and as of June 30, 1997,  which have
been derived from the Company's consolidated financial statements, and unaudited
summary  pro forma data as of and for the six months  ended June 30,  1997.  The
historical  financial data of the Company for the six months ended June 30, 1996
and 1997 and as of June 30, 1997 have been derived from the Company's  unaudited
interim consolidated financial statements. The pro forma data give effect to the
consummation of the Transactions.  The pro forma income statement data and other
data for the six months ended June 30, 1997 reflect such  adjustments  as if the
Transactions  had occurred on January 1, 1997.  The pro forma  financial data do
not purport to represent  what the  Company's  financial  position or results of
operations would actually have been had the Transactions in fact occurred on the
assumed dates and are not necessarily  indicative of future operating results or
financial  position.  The information  contained in this table should be read in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and  Results  of  Operations,"   "Selected  Consolidated  Financial  Data,"  the
Consolidated  Financial  Statements and the notes thereto and the "Unaudited Pro
Forma Combined  Financial Data" and the notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
<S>                                          <C>           <C>           <C>         <C>        <C>           <C>
                                                                                                 Six Months                    
                                                    Year Ended December 31,                     Ended June 30,         
                                             ------------------------------------ -----------------------------------------   
                                                                                                               Pro-forma
                                                   1994        1995         1996        1996        1997         1997
                                             ------------ ----------- -----------  ---------- ------------    -------------
                                                                     (dollars in thousands)
Income Statement Data:
Operating revenues:
   Oil and natural gas......................   $     729   $     617  $    10,248  $    2,821   $ 11,791       $ 24,418
   Gas gathering, marketing and processing..           -           -        5,768       1,528      5,283          5,283
   Oil field services and international sales         16          32          396         201      3,606          3,606
                                             ----------- ----------- -----------  ----------- -----------     -------------
      Total operating revenues..............         745         649       16,412       4,550     20,680         33,307
Operating costs and expenses:
   Oil and natural gas production...........         318         268        4,390       1,126      4,740          7,779          
   Gas gathering, marketing and processing..           -           -        4,708       1,314      3,938          3,938
   Oil field services and international sales          6          26          267         327      3,424          3,424
   Depreciation and depletion...............         243         421        2,951       1,084      4,460          8,089
   General and administrative...............         769         977        1,225         443        651            701 
                                             ----------- ----------- -----------  ----------- -----------     -------------
      Total operating costs and expenses....       1,336       1,692       13,541       4,294     17,213         23,931
                                             ----------- ----------- -----------  ----------- -----------     -------------
Operating profit (loss).....................        (591)     (1,043)       2,871         256      3,467          9,376
   Other income.............................          52          77          344         186        155            155
   Interest expense.........................          (7)         (2)      (2,394)       (499)    (4,758)        (9,258)
   Provision for deferred income taxes......           -           -         (312)          -        432            (97)
   Minority interest in subsidiary earnings.           -           -            -           -        (20)           (20)
                                             ----------- -----------  -----------  ----------- -----------    -------------
Net income (loss) before extraordinary loss.        (547)       (968)         509         (57)      (724)            156

Extraordinary Loss from Early 
     Extinguishment of Debt.................           -            -           -           -     (1,384)              - 
                                               ---------    ----------  ----------   ----------  ---------    -------------     
Net Income (loss)...........................        (547)        (968)        509         (57)    (2,108)            156        
   Dividends applicable to preferred shares.        (579)        (617)       (406)       (340)      (438)           (438)           
                                               ---------    ----------  ----------  -----------  ---------    -------------
Net income (loss) applicable to 
     common shares..........................   $  (1,126)   $  (1,585)  $     103   $    (397)   $(2,546)           (282) 

Other Data:
EBITDA(1)...................................       $(297)      $(545)      $6,166   $   1,526   $  8,082        $ 17,620 
Cash interest expense(2)....................           7           2        2,347         485      4,605           9,123 
Capital expenditures(3).....................       1,945       1,244       41,471      37,301    141,677         141,677           
Ratio of EBITDA to cash interest expense and
   preferred share dividends(4).............           -           -        2.24x       1.85x      1.60x           1.84x     
Ratio of earnings to fixed charges(5).......           -           -        1.15x           -          -             -

</TABLE>


                                      -16-

<PAGE>

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


                                                                        December 31,               June 30, 1997
                                                            ----------------------------------     -------------
                                                             1994         1995         1996           Actual      
                                                            ------        -------     --------       --------    
                                                                                (dollars in thousands)
 
Balance Sheet Data:
Working capital......................................       $1,197       $  (916)     $ 2,279        $  4,170    
Property, plant and equipment, net...................        7,255        36,405       73,648         210,397     
Total assets.........................................        9,575        40,065       83,072         231,670   
Total debt(6)........................................          186         9,612       38,766         187,055
Stockholders' equity.................................        8,645        24,496       35,154          32,253
ACNTA(7).............................................            -             -            -         236,478      
Ratio of ACNTA to total debt(6)......................            -             -            -           1.26x       

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

     (1) EBITDA is defined as net income (loss) before income taxes and minority
interest,  plus the sum of depletion  and  depreciation  and  interest  expense.
EBITDA  is not a  measure  of cash  flow as  determined  by  generally  accepted
accounting  principles.  The Company has included information  concerning EBITDA
because  EBITDA  is a measure  used by  certain  investors  in  determining  the
Company's  historical ability to service its indebtedness.  EBITDA should not be
considered as an  alternative  to, or more  meaningful  than, net income or cash
flows as determined in accordance with generally accepted accounting  principles
or as an indicator of the Company's operating performance or liquidity.

     (2) Cash interest expense consists of interest expense less amortization of
debt issuance costs.

     (3) Capital expenditures include cash expended for acquisitions plus normal
additions to oil and natural gas properties and other fixed assets.

     (4) For  purposes  of  calculating  the ratio of  EBITDA  to cash  interest
expense  and  preferred  share  dividends,  cash  interest  expense  consists of
interest expense less amortization of debt issuance costs.  EBITDA for the years
ended  December  31,  1994 and 1995  would  have been  inadequate  to cover cash
interest  expense and preferred  share dividends by  approximately  $883,000 and
$1,164,000 respectively.

     (5) For  purposes of  calculating  the ratio of earnings to fixed  charges,
earnings consist of income (loss) applicable to common shares plus extraordinary
loss, plus provision for income taxes, plus fixed charges. Fixed charges consist
of interest  expense  (which  includes  amortization  of deferred  debt issuance
costs), plus the portion of rental expense under operating leases which has been
deemed by the Company to be  representative  of an appropriate  interest factor,
plus preferred share  dividends.  Earnings for the years ended December 31, 1994
and 1995 and the six  months  ended  June 30,  1996  and 1977  would  have  been
inadequate  to cover  fixed  charges by  approximately  $1,126,000,  $1,585,000,
$397,000 and $1,593,000,  respectively. EBITDA for the six months ended June 30,
1997 on a pro forma  basis  would have been  inadequate  to cover cash  interest
expenses and preferred dividends by $185,000.

     (6) Consists of long-term debt,  including current  maturities of long-term
debt, and excluding  production  payment  liabilities of $288,000,  $937,000 and
$831,000 as of December 31, 1995 and 1996 and June 30, 1997, respectively.

     (7) Adjusted  Consolidated Net Tangible Assets  ("ACNTA").  ACNTA includes:
$221,771,000 of adjusted SEC PV-10,  $4,170,000 of working capital,  $10,577,000
of book  value for other  tangible  assets  and less  $40,000  of book value for
minority interest.



                                      -17-

<PAGE>




        SUMMARY HISTORICAL AND PRO FORMA OPERATING, RESERVE AND WELL DATA

         The following table sets forth certain summary information with respect
to the Company's  operations for the periods  indicated and summary  information
with respect to the Company's estimated proved oil and natural gas reserves. The
pro forma operating data for the year ended December 31, 1996 give effect to the
Transactions  as if they had  occurred  on January  1,  1996,  and the pro forma
reserve and well data at December 31, 1996 give effect to the Transactions as if
they had occurred on December 31, 1996. The information  contained in this table
should be read in  conjunction  with  "Management's  Discussion  and Analysis of
Financial  Condition  and Results of  Operations,"  the  Consolidated  Financial
Statements  and the notes thereto,  the "Unaudited Pro Forma Combined  Financial
Data" and the notes thereto and "Business and Properties"  included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
<S>                                               <C>       <C>         <C>        <C>             <C>         <C> 
                                                           Year Ended December 31,                    Six Months
                                                                                                        Ended
                                                                                                       June 30,
                                                ------------------------------------------------- ---------------------  
                                                                                     Pro Forma
                                                   1994      1995        1996          1996          1996         1997
                                                ---------- ---------- ----------- --------------- ----------    -------
                                                                       (dollars in thousands)
Operating Data:
Production:
   Oil (MBbl)................................         42          30         191           1,105       90          240
   Natural gas (MMcf)........................         88         102       2,675          13,811      488        3,332
   Natural Gas Equivalents (MMcfe)...........        340         282       3,821          20,442    1,027        4,771
Average sales price:
   Oil (per Bbl).............................     $14.20      $15.60      $20.46          $20.15   $19.32       $18.33
   Natural gas (per Mcf).....................       1.53        1.46        2.37            2.22     2.23         2.22
   Natural Gas Equivalents (Mcfe)............       2.15        2.19        2.68            2.59     2.75         2.47
Average oil and natural gas production             
   expense (per Mcfe) (1)....................      $0.94       $0.95       $1.15           $0.84   $ 1.10       $  .99

</TABLE>

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


                                                               December 31,                    Pro Forma 1996
                                                  -----------------------------------  ----------------------------------
                                                                                          Dec. 31, 1996     Mar. 31, 1997
                                                  1994           1995        1996            Prices          Prices (2)
                                                  -----------------------------------  ----------------------------------
                                                      
Reserve and Well Data (3):
Proved Reserves:
   Oil (MBbl)...........................          1,261         3,768         5,338          20,629              19,851
   Natural gas (MMcf)...................          4,914        14,072        90,566         190,442             181,363
   Natural Gas Equivalents (MMcfe)......         12,477        36,678       122,596         314,218             300,470
Percent Proved Developed Reserves.......            15%           51%           68%             68%                 67%
Percent natural gas reserves............            39%           38%           74%             61%                 60%
Reserve Life (years)....................           10.9          16.2          16.6            14.6                14.0
Estimated future net cash flows before tax
   (thousands)..........................        $12,209       $45,940      $353,542        $822,385            $447,932
SEC PV-10 (thousands)...................         $7,775       $37,209      $164,766        $408,049            $224,831
Producing wells:
   Gross................................             51           462           729           2,581               2,581
   Net..................................             31           130           569           1,436               1,436
   Average Working Interest.............            61%           28%           78%             56%                 56%
Operated wells (4)......................             27           130           609           1,833               1,833
- -----------
</TABLE>

                                      -18-

<PAGE>

(1)  Includes lease  operating  expenses and production and ad valorem taxes, if
     applicable. For the years ended December 31, 1996 on a historical basis and
     December  31, 1996 on a pro forma  basis and the six months  ended June 30,
     1997,  includes  internal  transfer  price  expenses for gas  gathering and
     overhead  costs of $0.23  per  Mcfe,  $0.04  per Mcfe and  $0.19  per Mcfe,
     respectively.

(2)   Proved Reserves,  future net cash flows before tax and SEC PV-10 have been
      estimated  as of December  31, 1996 using March 31, 1997 market  prices of
      $20.41 per Bbl of oil and $2.30 per Mcf of natural  gas (with  appropriate
      adjustments for Btu content) and have not been adjusted for production for
      the three-month period ended March 31, 1997.

(3)   For limitations on the accuracy and reliability of reserves and future net
      cash flow  estimates,  see "Risk  Factors --  Uncertainty  of Estimates of
      Reserves and Future Net Cash Flows." For reserve pricing information,  see
      "Business and Properties -- Oil and Natural Gas Reserves."

(4)   Includes wells operated for third parties.




                                      -19-

<PAGE>



                                  RISK FACTORS

      Information  contained or incorporated by reference in this Prospectus may
contain   "forward-looking   statements"  within  the  meaning  of  the  Private
Securities  Litigation Reform Act of 1995, which can be identified by the use of
forward-looking  terminology  such as "may," "expect,"  "intend,"  "anticipate,"
"estimate" or "continue" or the negative thereof or other variations  thereon or
comparable  terminology.  The following  matters and certain other factors noted
throughout  this  Prospectus  constitute   cautionary   statements   identifying
important factors with respect to any such forward-looking statements, including
certain  risks and  uncertainties,  that could  cause  actual  results to differ
materially from those in such forward-looking statements.

      Prior to making  an  investment  decision,  prospective  investors  should
carefully  consider,  together  with the  other  information  contained  in this
Prospectus, the following risk factors:

Substantial Leverage; Ability to Service Debt

     The Company is highly leveraged, with outstanding long-term indebtedness of
approximately $187 million and stockholders'  equity of $32.2 million as of June
30, 1997. The Company's level of indebtedness has several  important  effects on
its future operations, including (i) a substantial portion of the Company's cash
flow from operations is dedicated to the payment of interest on its indebtedness
and is not available for other purposes, (ii) the covenants contained in the New
Credit  Facility  require the Company to meet certain  financial tests and limit
the  Company's  ability to borrow  additional  funds or to acquire or dispose of
assets,  and (iii) the Company's ability to obtain  additional  financing in the
future may be impaired.  Additionally,  the senior (as opposed to  subordinated)
status of the Notes,  the Company's  high debt to equity  ratio,  and the use of
substantially  all of the  Company's  assets as  collateral  for the New  Credit
Facility  will for the present time make it difficult  for the Company to obtain
financing  on an  unsecured  basis or to obtain  secured  financing  other  than
certain "purchase money" indebtedness collateralized by the acquired assets.

      Although  the Company  reported an operating  profit for fiscal  1996,  at
December 31, 1996 the Company had an accumulated  deficit of $5.1 million due to
operating  losses  incurred in prior years.  The  Company's  ability to meet its
financial  covenants and to make scheduled payments of principal and interest to
repay its  indebtedness,  including the Notes,  is dependent  upon its operating
results and its ability to obtain financing.  However, there can be no assurance
that the Company's  business will generate  sufficient cash flow from operations
or that future bank credit will be available in an amount  sufficient  to enable
the Company to service its indebtedness,  including the Notes, or make necessary
capital  expenditures.  In such event,  the Company  would be required to obtain
such financing from the sale of equity securities or other debt financing. There
can be no  assurance  that  any  such  financing  will  be  available  on  terms
acceptable  to the Company.  Should  sufficient  capital not be  available,  the
Company may not be able to continue to implement its strategy.

     The  New  Credit  Facility  limits  the  Company's  borrowings  to  amounts
determined  by the lenders,  in their sole  discretion,  based upon a variety of
factors including the amount of indebtedness  which can be adequately  supported
by the  value  of oil  and  natural  gas  reserves  and  assets,  contracts  and
throughput  attributable to the gas gathering  systems and processing plant, and
assets owned by the Company (the  "Borrowing  Base").  As of September 30, 1997,
the Company had $12.0 million borrowing availability under the Borrowing Base of
the New Credit  Facility.  If oil or  natural  gas prices  decline  below  their
current levels, the availability of funds under the New Credit Facility could be
materially adversely affected.

     The New Credit  Facility  also  requires  the  Company  to satisfy  certain
financial ratios in the future.  One covenant requires the Company to maintain a
ratio  of  the  Company's  funded  indebtedness  divided  by the  sum of  funded
indebtedness plus equity (the "Debt to  Capitalization  Ratio") of not more than
0.86 from the closing of the New Credit  Facility until March 31, 1998, not more
than 0.75 from April 1, 1998 until  September  30, 1998,  and not more than 0.70
thereafter.  At June 30, 1997, the Company had a debt to Capitalization Ratio of
0.86.  Another covenant requires the Company to maintain a ratio of Consolidated
EBITDA to Interest  Expense (as defined in the New Credit  Facility) of not less
than 2.00 to 1 through June 30, 1998, not less than 2.50 to 1 from July 1, 1998


                                      -20-

<PAGE>



through  December 31, 1998 and  not  less than 2.75 to 1 thereafter. The Company
had a ratio of Consolidated  EBITDA to Interest  Expense of 2.21 to 1 as of June
30, 1997. The failure to satisfy these  covenants or any of the other  covenants
in the New Credit Facility would constitute an event of default  thereunder and,
subject to certain  grace  periods,  may permit the  lenders to  accelerate  the
indebtedness then outstanding under the New Credit Facility and demand immediate
repayment thereof. See "Description of New Credit Facility."

      The agreement  with TCW relating to the TCW Preferred  Stock  requires the
Company to raise an aggregate of $15.0 million in additional  equity by December
31, 1997 or the Company  will be  required to redeem  333,333  shares of the TCW
Preferred  Stock  on June 30 of each of the  years  2006,  2007  and 2008 for an
aggregate  purchase price of $10.0 million plus any accrued and unpaid dividends
and interest  thereon.  Such a mandatory  redemption  obligation  of the Company
could have negative  implications  under the Company's  credit  arrangements and
could negatively  affect financial  covenants under future credit facilities and
affect the Company's ability to raise debt or equity capital in the future.

Holding Company Structure; Effective Subordination of Exchange Notes

      The Company is a holding company, the principal assets of which consist of
equity interests in its subsidiaries. The Outstanding Notes are and the Exchange
Notes will be a direct unsecured obligation of the Company, which derives all of
its revenues from the operations of its subsidiaries.  As a result,  the Company
will  be  dependent  on the  earnings  and  cash  flow  of,  and  dividends  and
distributions  or advances from, its subsidiaries to provide the funds necessary
to meet its debt service obligations,  including the payment of principal of and
interest on the Notes.  The payment of dividends  from the  subsidiaries  to the
Company and the payment of any interest on or the  repayment of any principal of
any loans or  advances  made by the  Company to any of its  subsidiaries  may be
subject to statutory  restrictions  and are contingent upon the earnings of such
subsidiaries.

     The Outstanding  Notes are and the Exchange Notes will be general unsecured
obligations  of the  Company,  ranking  pari  passu in right of  payment  to all
unsubordinated indebtedness of the Company and senior in right of payment to all
subordinated  indebtedness  of the Company.  The  Outstanding  Notes are and the
Exchange Notes will be  unconditionally  guaranteed,  jointly and severally,  by
each  of  the  Subsidiary  Guarantors.  The  Guarantees  are  general  unsecured
obligations of the Subsidiary Guarantors, ranking pari passu in right of payment
to all  unsubordinated  indebtedness of the Subsidiary  Guarantors and senior in
right of payment to all subordinated  indebtedness of the Subsidiary Guarantors.
However,  the Notes are effectively  subordinated to secured indebtedness of the
Company and the  Subsidiary  Guarantors to the extent of the value of the assets
securing  such  indebtedness.  In  the  event  of  a  default  on  such  secured
indebtedness, or a bankruptcy,  liquidation or reorganization of the Company and
its  subsidiaries,  such assets will be  available to satisfy  obligations  with
respect to the secured indebtedness before any payment therefrom will be made on
the Notes. As of September 30, 1997, the Company had  approximately  $48 million
of secured indebtedness outstanding (excluding unused commitments of $12 million
under the New Credit Facility).  The Company's  subsidiaries are also guarantors
of the New Credit  Facility.  The  Outstanding  Notes are and the Exchange Notes
will not be secured by any of the assets of the Company or its subsidiaries. The
indebtedness  incurred under the New Credit Facility is secured by liens against
substantially all of the Company's and its subsidiaries' assets.

Consequences of a Failure to Exchange Outstanding Notes

      The Outstanding Notes have not been registered under the Securities Act or
any state securities laws, and therefore,  may not be offered, sold or otherwise
transferred  except in  compliance  with the  registration  requirements  of the
Securities  Act and any other  applicable  securities  laws,  or  pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance  with  certain  other  conditions  and  restrictions,  including  the
Company's  and the  Trustee's  right in certain cases to require the delivery of
opinions  of counsel,  certifications  and other  information  prior to any such
transfer.  Outstanding  Notes that remain  outstanding after the consummation of
the Exchange Offer will continue to bear a legend  reflecting such  restrictions
on transfer.  In addition,  upon consummation of the Exchange Offer,  holders of
Outstanding Notes that remain  outstanding will not be entitled to any rights to
have  such  Outstanding  Notes  registered  under the  Securities  Act or to any
similar  rights under the  Registration  Agreement  (subject to certain  limited
exceptions). The Company currently intends to register under the


                                      -21-

<PAGE>


Securities  Act Outstanding  Notes  that  remain  outstanding after consummation
of the  Exchange  Offer  only if such  Outstanding  Notes  are  held by  Initial
Purchasers  and persons  ineligible to  participate in the Exchange Offer (other
than due solely to the status of such  person as an  "affiliate"  of the Company
within the meaning of Rule 405 under the Securities  Act). See  "Description  of
the Exchange Notes - Registration Agreement".  If Outstanding Notes are tendered
and  accepted  in  the  Exchange  Offer,   the  trading  market  for  untendered
Outstanding Notes is likely to diminish; accordingly,  holders who do not tender
their  Outstanding  Notes may  encounter  difficulties  in  selling  such  notes
following the Exchange Offer. The Exchange Notes, the Private Exchange Notes, if
any, and any Outstanding Notes that remain outstanding after consummation of the
Exchange  Offer will  constitute a single  series of debt  securities  under the
Indenture and, accordingly, will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding principal
amount thereof have taken certain actions or exercised  certain rights under the
Indenture.

     The Indenture  provides that, with respect to the Outstanding Notes, if the
Company or the  Subsidiary  Guarantors  fail to comply with  certain  provisions
concerning  registration rights,  specifically the timing of the Exchange Offer,
Additional  Interest (as defined  herein) will accrue and be payable  until such
time as such registration  defaults have been cured.  Following  consummation of
the Exchange Offer, neither the Outstanding Notes nor the Exchange Notes will be
entitled  to any  increase  in the  interest  rate  thereon  (subject to certain
limited exceptions.) See "Description of the Outstanding Notes" and "Description
of the Exchange Notes - Registration Agreement."

Volatility of Oil and Natural Gas Prices

      The Company's  revenues,  profitability  and the carrying value of its oil
and natural gas properties are  substantially  dependent upon prevailing  prices
of, and demand for,  oil and natural  gas and the costs of  acquiring,  finding,
developing and producing reserves. The Company's ability to maintain or increase
its borrowing capacity, to repay the Exchange Notes and outstanding indebtedness
under any current or future credit facility, and to obtain additional capital on
attractive  terms  is also  substantially  dependent  upon oil and  natural  gas
prices. Historically, the markets for oil and natural gas have been volatile and
are likely to continue to be volatile in the future.  Prices for oil and natural
gas are  subject to wide  fluctuations  in  response  to: (i)  relatively  minor
changes in the supply of, and demand  for,  oil and  natural  gas;  (ii)  market
uncertainty;  and (iii) a variety of additional factors, all of which are beyond
the Company's  control.  These factors  include  domestic and foreign  political
conditions,  the price and availability of domestic and imported oil and natural
gas, the level of consumer and industrial demand, weather,  domestic and foreign
government  relations,  the  price and  availability  of  alternative  fuels and
overall economic conditions.  The Company's production is predominantly weighted
toward natural gas,  making earnings and cash flow more sensitive to natural gas
price  fluctuations.  For 1996,  the Company has estimated  that a $0.10 per Mcf
change in natural gas prices  would have  resulted in a $250,000  difference  in
EBITDA,  and a $1.00 per Bbl  change in oil  prices  would  have  resulted  in a
$182,000  difference  in  EBITDA.  On a pro forma  basis for the  Permian  Basin
Acquisition  for 1996,  the Company has estimated that a $0.10 per Mcf change in
natural gas prices would have resulted in a $1,275,000 difference in EBITDA, and
a $1.00  per Bbl  change in oil  prices  would  have  resulted  in a  $1,055,000
difference in EBITDA. Furthermore, the marketability of the Company's production
depends in part upon the  availability,  proximity  and  capacity  of  gathering
systems, pipelines and processing facilities.  Volatility in oil and natural gas
prices could affect the Company's ability to market its production  through such
systems, pipelines or facilities.

      Under  full cost  accounting,  the  Company  would be  required  to take a
non-cash charge against earnings to the extent capitalized costs of acquisition,
exploration and development (net of depletion and  depreciation),  less deferred
income taxes,  exceed the SEC PV-10 of its Proved Reserves and the lower of cost
or fair value of unproved properties after income tax effects. See "Management's
Discussion  and Analysis of Financial  Condition  and Results of  Operations  --
Background."

Uncertainty of Estimates of Reserves and Future Net Cash Flows

      This  Prospectus  contains  estimates of the Company's oil and natural gas
reserves  and the future net cash  flows  from those  reserves,  which have been
prepared  or audited by certain  independent  petroleum  consultants.  There are
numerous  uncertainties  inherent in estimating quantities of Proved Reserves of
oil and natural gas and in projecting


                                      -22-


<PAGE>



future rates of production and the timing of development expenditures, including
many factors beyond the Company's control.  The estimates in this Prospectus are
based on various assumptions,  including, for example,  constant oil and natural
gas prices,  operating  expenses,  capital  expenditures and the availability of
funds, and, therefore,  are inherently imprecise  indications of future net cash
flows.  Actual  future  production,   cash  flows,  taxes,  operating  expenses,
development  expenditures  and  quantities  of  recoverable  oil and natural gas
reserves  may vary  substantially  from  those  assumed  in the  estimates.  Any
significant  variance in these assumptions could materially affect the estimated
quantity and value of reserves set forth in this Prospectus.  Additionally,  the
Company's  reserves  may be subject to  downward or upward  revision  based upon
actual production  performance,  results of future  development and exploration,
prevailing  oil and  natural  gas  prices and other  factors,  many of which are
beyond the Company's  control.  See "Business and  Properties -- Oil and Natural
Gas Reserves."

      The SEC PV-10 of Proved Reserves referred to in this Prospectus should not
be construed as the current market value of the estimated Proved Reserves of oil
and natural gas  attributable  to the Company's  properties.  In accordance with
applicable  requirements of the Commission,  the estimated discounted future net
cash flows from Proved  Reserves are  generally  based on prices and costs as of
the  date of the  estimate,  whereas  actual  future  prices  and  costs  may be
materially  higher or lower.  The  calculation of the SEC PV-10 of the Company's
oil and natural gas  reserves on a pro forma basis at December 31, 1996 is based
on average  prices at  December  31, 1996 of $24.18 per Bbl of oil and $4.05 per
Mcf of natural gas.  These  prices were higher than the market  prices of $20.41
per Bbl of oil and $2.30 per Mcf of natural  gas (with  appropriate  adjustments
for Btu content) at March 31, 1997 and are higher than historical prices used in
recent years to estimate the SEC PV-10 of the Company's reserves.  These numbers
compare to the Company's pro forma average  product  prices of $20.15 per Bbl of
oil and $2.22 per Mcf of  natural  gas,  which are based on the  average  of the
actual prices received at the respective  properties  during 1996. Actual future
net cash flows also will be  affected by (i) the timing of both  production  and
related  expenses;  (ii) changes in  consumption  levels and (iii)  governmental
regulations or taxation.  In addition,  the  calculation of the present value of
the future net cash flows using a 10% discount as required by the  Commission is
not necessarily the most appropriate  discount factor based on interest rates in
effect from time to time and risks associated with the Company's reserves or the
oil and gas  industry in general.  Furthermore,  the  Company's  reserves may be
subject to downward or upward revision based upon actual production,  results of
future  development,  supply and demand for oil and natural gas,  prevailing oil
and natural gas prices and other  factors.  See "Business and  Properties -- Oil
and Natural Gas Reserves."

Finding and Acquiring Additional Reserves; Depletion

      The Company's  future success  depends upon its ability to find or acquire
additional  oil and  natural gas  reserves  that are  economically  recoverable.
Except to the extent the Company conducts successful  exploration or development
activities  or  acquires  properties  containing  Proved  Reserves,  the  Proved
Reserves of the Company will generally decline as they are produced. The decline
rate varies  depending upon  reservoir  characteristics  and other factors.  The
Company's  future oil and natural gas reserves and production,  and,  therefore,
cash flow and income,  are highly  dependent upon the Company's level of success
in exploiting its current reserves and acquiring or finding additional reserves.
There can be no assurance that the Company's  planned  development  projects and
acquisition  activities will result in significant  additional  reserves or that
the Company will have success  drilling  productive wells at economic returns to
replace its current and future production.

Acquisition Risks

      The  Company  has grown  primarily  through  acquisitions  and  intends to
continue acquiring oil and natural gas properties. Although the Company performs
a review of the properties proposed to be acquired,  such reviews are subject to
uncertainties. It generally is not feasible to review in detail every individual
property involved in an acquisition.  Ordinarily,  review efforts are focused on
the higher-valued properties.  However, even a detailed review of all properties
and records may not reveal  existing or potential  problems;  nor will it permit
the Company to become sufficiently  familiar with the properties to assess fully
their  deficiencies  and  capabilities.  Inspections are not always performed on
every well, and potential  problems,  such as mechanical  integrity of equipment
and environmental conditions that may require significant remedial expenditures,
are not necessarily observable even when an inspection is undertaken.


                                      -23-

<PAGE>



      The Company has recently begun to focus its acquisition  efforts on larger
packages of oil and natural gas properties,  such as the properties  involved in
the Panoma and Permian Basin Acquisitions. The acquisition of larger oil and gas
properties may involve substantially higher costs and may pose additional issues
regarding  operations  and  management.  There can be no assurance  that oil and
natural gas properties  acquired by the Company will be successfully  integrated
into the Company's operations or will achieve desired profitability  objectives.
See "Business and Properties -- Recent Acquisitions."

Exploration and Development Risks; Waterflood Projects

      The  Company   intends  to  increase  its   development   and  exploration
activities.  Exploration drilling and, to a lesser extent,  development drilling
of oil and natural gas reserves involve a high degree of risk that no commercial
production  will be obtained  and/or that  production  will be  insufficient  to
recover  drilling and  completion  costs.  The cost of drilling,  completing and
operating wells is often  uncertain.  The Company's  drilling  operations may be
curtailed,  delayed or canceled as a result of numerous factors, including title
problems,  weather  conditions,  compliance with  governmental  requirements and
shortages or delays in the delivery of equipment.  Furthermore,  completion of a
well does not  assure a profit on the  investment  or a  recovery  of  drilling,
completion and operating  costs. See "Business and Properties -- Development and
Exploration Activities."

      There are certain risks  associated  with secondary  recovery  operations,
especially  the use of  waterflooding  techniques,  and drilling  activities  in
general.  Part of the Company's  inventory of development  prospects consists of
waterflood projects.  With respect to the Permian Basin Properties,  the Company
has identified  significant potential expenditures related to further developing
an existing waterflood.  The proposed waterflood project is estimated to cost an
aggregate of $38.1 million over a four-year period, which costs are reflected in
the Company's  reserve  reports.  While the reserve report for the Permian Basin
Properties  assumes  approximately  $6.6 million of development  expenditures in
1997 to enhance this  waterflood,  the Company is evaluating the timing of these
development  expenditures  relative to the Company's  other capital  expenditure
requirements.  The Company has initially budgeted approximately $5.0 million for
development expenditures on the Permian Basin Properties for 1997. Waterflooding
involves significant capital expenditures and uncertainty as to the total amount
of secondary reserves that can be recovered. In waterflood operations,  there is
generally a delay  between the  initiation of water  injection  into a formation
containing  hydrocarbons  and any increase in  production  that may result.  The
operating cost per unit of production of waterflood projects is generally higher
during the initial  phases of such  projects  due to the  purchase of  injection
water and related  costs,  as well as during the later stages of the life of the
project as production declines.  The degree of success, if any, of any secondary
recovery program depends on a large number of factors, including the porosity of
the  formation,  the  technique  used and the  location of injector  wells.  See
"Business and Properties -- Development and Exploration Activities."

Operating Hazards and Uninsured Risks; Production Curtailments

      The Company's oil and natural gas business involves a variety of operating
risks,  including,  but not  limited to,  unexpected  formations  or  pressures,
uncontrollable  flows of oil,  gas,  brine or well fluids  into the  environment
(including groundwater  contamination),  blowouts, fires, explosions,  pollution
and other risks, any of which could result in personal  injuries,  loss of life,
damage to  properties  and  substantial  losses.  Although  the Company  carries
insurance at levels which it believes are  reasonable,  it is not fully  insured
against all risks. The Company does not carry business  interruption  insurance.
Losses and liabilities arising from uninsured or under-insured events could have
a material  adverse  effect on the  financial  condition  and  operations of the
Company.

      From time to time, due primarily to contract terms, pipeline interruptions
or weather conditions, the producing wells in which the Company owns an interest
have been  subject  to  production  curtailments.  The  curtailments  range from
production  being partially  restricted to wells being completely  shut-in.  The
duration of curtailments varies from a few days to several months. In most cases
the  Company is  provided  only  limited  notice as to when  production  will be
curtailed  and the duration of such  curtailments.  The Company is not currently
experiencing any material curtailment on its production.



                                      -24-

<PAGE>



Marketing Risks

      For the year ended  December  31,  1996,  natural gas  revenues  comprised
approximately  62% of total oil and natural gas revenues on a  historical  basis
and  approximately  58% on a pro forma basis. The types of natural gas contracts
under which  production  is sold vary,  but  generally can be grouped into three
categories:  (i)  life-of-well,  (ii) long-term (one year or longer),  and (iii)
short-term  contracts.  Short-term  contracts are defined as contracts which may
have a primary term of less than one year,  but which are  cancelable  at either
party's discretion in 30 to 120 days. Substantially all of the Company's natural
gas production is currently  sold to gas marketing  firms or end users either on
the spot market on a  month-to-month  basis at prevailing  spot market prices or
under  long-term  contracts  based on current spot market  prices.  For the year
ended December 31, 1996, one purchaser  accounted for  approximately  91% of the
Company's  natural  gas  revenues.   The  Company  does  not  believe  that  any
discontinuation  of its sales  arrangement with such firm would be disruptive to
the Company's natural gas marketing operations.  See "Business and Properties --
Marketing of Production."

      Approximately  5% of the  estimated  natural  gas  reserves in the Permian
Basin  Properties  are  served by a single  gas  gathering  system  operated  by
Burlington Resources Oil and Gas Company, a Burlington affiliate. Burlington has
agreed,  however,  that it will deliver the natural gas at a sufficient pressure
to enter at least one third party gas transmission  system and that it will only
impose any natural gas  curtailments  in the same  proportion as its own natural
gas. The Company is not otherwise protected from increased gas gathering charges
that would make it uneconomic to continue production in times of low natural gas
prices.

Hedging Risks

     As of  March  31,  1997 on an historical  basis,  the  Company  had  hedged
approximately  (i) 50% of its natural gas production  through  January 1998, and
(ii) 85% of its oil  production  through  August 1997. As of June 30, 1997,  the
Company  had  hedged  approximately  16% of its  oil  production  and 50% of its
natural  gas  production.  These  hedges have in the past  involved  fixed price
arrangements  and other price  arrangements  at a variety of prices,  floors and
caps.  The  Company  is  currently  evaluating  the use of hedges on the oil and
natural gas produced from the Permian Basin  Properties.  The Company has in the
past and may in the future  enter into oil and natural  gas  futures  contracts,
options and swaps. The Company's  hedging  activities,  while intended to reduce
the  Company's  sensitivity  to changes in market prices of oil and natural gas,
are subject to a number of risks including instances in which the Company or the
counterparties  to its futures  contracts  could fail to purchase the contracted
quantities  of oil or  natural  gas.  Additionally,  the fixed  price  sales and
hedging  contracts  limit the benefits the Company will realize if actual prices
rise above the contract  prices.  See  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
--  Hedging  Activity"  and  Note  14 to the  Company's  Consolidated  Financial
Statements.

Laws and Regulations

      The Company's  operations are affected by extensive regulation pursuant to
various  federal,   state  and  local  laws  and  regulations  relating  to  the
exploration for and development,  production, gathering and marketing of oil and
natural  gas.  Matters  subject to  regulation  include  discharge  permits  for
drilling   operations,   drilling  and  abandonment  bonds  or  other  financial
responsibility  requirements,  reports  concerning  operations,  the  spacing of
wells,  unitization and pooling of properties,  and taxation. From time to time,
regulatory agencies have imposed price controls and limitations on production by
restricting  the  rate of  flow  of oil  and  natural  gas  wells  below  actual
production capacity in order to conserve supplies of oil and natural gas.

      Operations of the Company are also subject to numerous environmental laws,
including but not limited to, those governing management of waste, protection of
water,  air  quality,  the  discharge  of materials  into the  environment,  and
preservation of natural  resources.  Non-compliance  with environmental laws and
the  discharge of oil,  natural gas, or other  materials  into the air,  soil or
water  may  give  rise to  liabilities  to the  government  and  third  parties,
including  civil and  criminal  penalties,  and may require the Company to incur
costs to remedy the discharge.  Laws and regulations  protecting the environment
have become more  stringent in recent  years,  and may in certain  circumstances
impose


                                      -25-

<PAGE>



retroactive,  strict, and joint and several liability  rendering entities liable
for  environmental  damage without  regard to negligence or fault.  From time to
time the Company has agreed to indemnify  sellers of producing  properties  from
whom  the  Company  has  acquired  reserves  against  certain   liabilities  for
environmental claims associated with such properties.  There can be no assurance
that new laws or regulations,  or  modifications  of or new  interpretations  of
existing  laws and  regulations,  will not  increase  substantially  the cost of
compliance  or  otherwise  adversely  affect the  Company's  oil and natural gas
operations and financial  condition or that material  indemnity  claims will not
arise  against the Company with respect to  properties  acquired by the Company.
While the Company does not  anticipate  incurring  material  costs in connection
with environmental compliance and remediation, it cannot guarantee that material
costs will not be incurred. See "Business and Properties -- Regulation."

Competition

      The Company encounters  substantial  competition in acquiring  properties,
marketing  oil and natural gas,  securing  trained  personnel  and operating its
properties.   Many   competitors   have  financial  and  other   resources  that
substantially  exceed  those  of  the  Company.  The  Company's  competitors  in
acquisitions,   development,   exploration  and  production  include  major  oil
companies, numerous independents,  individual proprietors and others. Therefore,
competitors  may be able to pay more for desirable  leases and to evaluate,  bid
for and purchase a greater  number of properties or prospects than the financial
or personnel  resources of the Company will permit. See "Business and Properties
- -- Competition."

Dependence Upon Key Personnel

      The Company is substantially  dependent upon three key individuals  within
its management,  Gary C. Evans,  Matthew C. Lutz and Richard R. Frazier,  all of
whom were executives of Hunter prior to the Magnum Hunter Combination.  The loss
of the services of any one of these  individuals  could have a material  adverse
impact upon the Company. See "Management."

Change of Control

      Upon the  occurrence of a Change of Control,  the Company will be required
to offer to repurchase all or a portion of the outstanding  Notes at 101% of the
principal  amount  thereof,  plus  accrued  and unpaid  interest  to the date of
repurchase.  The  source of funds for any such  payment at  maturity  or earlier
repurchase will be the Company's available cash or cash generated from operating
or other sources, including,  without limitation,  borrowings or sales of assets
or equity  securities of the Company.  There can be no assurance that sufficient
funds will be available  at the time of any such event to pay such  principal or
to make any required  repurchase.  If an offer to  repurchase  is required to be
made and the Company does not have available  funds  sufficient to pay for Notes
tendered for  repurchase,  an event of default would occur under the  Indenture.
The occurrence of an event of default could result in  acceleration  of maturity
of the Notes and all amounts due under the New Credit Facility. See "Description
of Exchange Notes."

Lack of Public Market

     The  Outstanding  Notes  were  issued  to,  and the  Company  believes  are
currently  owned  by, a  relatively  small  number  of  beneficial  owners.  The
Outstanding  Notes have not been  registered  under the  Securities Act and will
continue to be subject to  restrictions  on  transferability  to the extent that
they are not exchanged for Exchange Notes.  See "-- Consequences of a Failure to
Exchange  Outstanding  Notes."  Although  the Exchange  Notes will  generally be
permitted  to be resold or  otherwise  transferred  by the holders  (who are not
affiliates  of the  Company  or  broker-dealers)  without  compliance  with  the
registration and prospectus delivery requirements under the Securities Act, they
will  constitute a new issue of securities  with no established  trading market.
The  Company  has been  advised  by the  Initial  Purchasers  that  the  Initial
Purchasers presently intend to make a market in the Exchange Notes. However, the
Initial  Purchasers  are not obligated to do so and any market  making  activity
with  respect to the  Exchange  Notes may be  discontinued  at any time  without
notice.  In addition,  such market making activity will be subject to the limits
imposed by the Securities Act and the Exchange Act and may be limited during the
Exchange Offer.  If the Exchange Notes are traded after their initial  issuance,
they may trade at a discount from their initial  offering price,  depending upon
prevailing interest rates,


                                      -26-

<PAGE>



the market for similar  securities and other factors  including general economic
conditions  and the financial  condition of the Company.  While the Company does
intend  to apply for a  listing  of the  Exchange  Notes on the  American  Stock
Exchange,  there can be no assurance as to the  development  or liquidity of any
market for the Exchange  Notes.  The liquidity  of, and trading  market for, the
Notes  also may be  adversely  affected  by general  declines  in the market for
similar  securities.  Such a decline may  adversely  affect such  liquidity  and
trading markets independent of the financial  performance of, and prospects for,
the Company.

     Notwithstanding  the  registration  of the  Exchange  Notes in the Exchange
Offer, holders who are "affiliates" (as defined in Rule 405 under the Securities
Act) of the Company may  publicly  offer for sale or resell the  Exchange  Notes
only in compliance  with the  provisions of Rule 144 under the  Securities  Act.
Each  broker-dealer that receives Exchange Notes for its own account in exchange
for  Outstanding  Notes,  where such  Outstanding  Notes were  acquired  by such
broker-dealer  as  a  result  of  market-making  activities  or   other  trading
activities,  must  acknowledge  that it will  deliver a  prospectus  meeting the
requirements  of the  Securities  Act in  connection  with  any  resale  of such
Exchange  Notes.  Subject to certain  provisions  set forth in the  Registration
Agreement, the Company has agreed that, for a period of up to 180 days after the
Registration  Statement  is  declared  effective,  it will make this  Prospectus
available to any Participating Broker-Dealer for use in connection with any such
resale.  However,  under  certain  circumstances,  the  Company has the right to
require that Participating  Broker-Dealers  suspend the resale of Exchange Notes
pursuant  to this  Prospectus.  See "The  Exchange  Offer -- Resales of Exchange
Notes."

Exchange Offer Procedures

     Any holder of the  Outstanding  Notes who is an  "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act or any broker-dealer who
purchased  Outstanding Notes from the Company to resell pursuant to Rule 144A or
any other available  exemption under the Securities Act will not be permitted or
entitled to tender such Outstanding  Notes in the Exchange Offer and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any sale or other transfer of such  Outstanding  Notes unless
such sale or transfer is made pursuant to an exemption  from such  requirements.
See "The Exchange Offer -- Resales of Exchange Notes."

     Each holder of  Outstanding  Notes who wishes to exchange  its  Outstanding
Notes for Exchange  Notes in the Exchange Offer will be required to make certain
representations to the Company set  forth  in "The Exchange  Offer -- Acceptance
for Exchange and Issuance of Exchange Notes."

     Issuance  of the  Exchange  Notes in  exchange  for the  Outstanding  Notes
pursuant to the  Exchange  Offer will be made only after  timely  receipt by the
Company of such Outstanding Notes, a properly completed and duly executed Letter
of  Transmittal  and all other  required  documents.  Therefore,  holders of the
Outstanding  Notes  desiring to tender such  Outstanding  Notes in exchange  for
Exchange  Notes should allow  sufficient  time to ensure  timely  delivery.  The
Company is under no duty to give notification of defects or irregularities  with
respect  to  tenders  of  Outstanding  Notes  for  exchange.  See "The  Exchange
Offer -- Procedures for Tendering Outstanding Notes."


                                      -27-
<PAGE>
Fraudulent Conveyance

      Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the  Subsidiary  Guarantors'  issuance  of the  Guarantees.  To the
extent  that a  court  were to find  that  (x) a  Guarantee  was  incurred  by a
Subsidiary  Guarantor  with  intent to hinder,  delay or defraud  any present or
future  creditor or the  Subsidiary  Guarantor  contemplated  insolvency  with a
design to prefer one or more  creditors to the  exclusion in whole or in part of
others or (y) a  Subsidiary  Guarantor  did not receive  fair  consideration  or
reasonably  equivalent  value for  issuing  its  Guarantee  and such  Subsidiary
Guarantor  (i) was  insolvent,  (ii) was  rendered  insolvent  by  reason of the
issuance of such  Guarantee,  (iii) was engaged or about to engage in a business
or  transaction  for which the  remaining  assets of such  Subsidiary  Guarantor
constituted unreasonably small capital to carry on its business or (iv) intended
to incur, or believed that it would incur,  debts beyond its ability to pay such
debts as they matured,  the court could avoid or  subordinate  such Guarantee in
favor of the  Subsidiary  Guarantor's  creditors.  Among other  things,  a legal
challenge  of a  Guarantee  on  fraudulent  conveyance  grounds may focus on the
benefits, if realized by the Subsidiary Guarantor as a result of the issuance by
the  Company of the  Notes.  The  Indenture  contains  a savings  clause,  which
generally  limits  the  obligations  of  each  Subsidiary  Guarantor  under  its
Guarantee  to the  maximum  amount as will,  after  giving  effect to all of the
liabilities  of  such  Subsidiary  Guarantor,  result  in such  obligations  not
constituting  a  fraudulent  conveyance.  To  the  extent  a  Guarantee  of  any
Subsidiary   Guarantor   was  avoided  as  a  fraudulent   conveyance   or  held
unenforceable for any other reason, holders of the Notes would cease to have any
claim against such  Subsidiary  Guarantor  and would be creditors  solely of the
Company and any  Subsidiary  Guarantor  whose  Guarantee was not avoided or held
unenforceable. In such event, the claims of the holders of the Notes against the
issuer of an invalid  Guarantee  would be  subject  to the prior  payment of all
liabilities of such Subsidiary Guarantor.  There can be no assurance that, after
providing for all prior claims,  there would be sufficient assets to satisfy the
claims of the holders of the Notes  relating  to any avoided  portions of any of
the Guarantees.

      The measure of  insolvency  for purposes of the  foregoing  considerations
will vary  depending  upon the law  applied in any such  proceeding.  Generally,
however,  a Subsidiary  Guarantor may be considered  insolvent if the sum of its
debts,  including contingent  liabilities,  was greater than the fair marketable
value of all of its assets at a fair valuation or if the present fair marketable
value of its assets was less than the amount  that would be  required to pay its
probable liability on its existing debts, including contingent  liabilities,  as
they become absolute and mature.

      Based upon financial and other information, the Company and the Subsidiary
Guarantors  believe that the Guarantees  are being incurred for proper  purposes
and in good faith and that the Company and each Subsidiary  Guarantor is solvent
and will continue to be solvent,  will have  sufficient  capital for carrying on
its  business  after  such  issuance  and will be able to pay its  debts as they
mature.  There  can be no  assurance,  however,  that a  court  passing  on such
standards would agree with the Company.



                                      -28-

<PAGE>



                                 USE OF PROCEEDS

      At April 30, 1997, following the closing of the Permian Basin Acquisition,
the Company's outstanding  indebtedness under the New Credit Facility was $119.5
million and under the Term Loan  Facility was $60.0  million.  The  indebtedness
under the New Credit Facility and the Term Loan Facility was incurred to pay the
$123.0  million  balance of the $133.0 million net purchase price in the Permian
Basin  Acquisition,   to  repay  the  approximately  $53.7  million  outstanding
indebtedness under the Previous Credit Facility as of April 30, 1997, and to pay
the  costs  associated  with  the  Permian  Basin  Acquisition  and the  related
financings.  The New Credit  Facility  currently  bears  interest at 7.4375% per
annum and matures on April 30, 2002. See "Description of New Credit Facility."

     On May 29,  1997,  the Company  completed  an  offering  of $140.0  million
aggregate  principal  amount of its 10% Senior  Notes due 2007.  Interest on the
Notes  will  accrue  from their date of  original  issuance  and will be payable
semi-annually  in arrears on June 1 and December 1 of each year,  commencing  on
December 1, 1997,  at the rate of 10% per annum.  In general,  the Notes will be
redeemable,  in whole or in part,  at the option of the Company on or after June
1, 2002, at the redemption prices set forth herein, plus accrued interest to the
date of  redemption.  The Notes will be  general  unsecured  obligations  of the
Company  and will rank pari passu with any  unsubordinated  indebtedness  of the
Company and will rank senior in right of payment to all subordinated obligations
of the Company.  The net proceeds  from the Offering were  approximately  $135.5
million after deducting fees and expenses of approximately  $4.5 million paid by
the Company. The Company utilized the net proceeds to repay the $60.0 million of
outstanding indebtedness under the Term Loan Facility and to reduce indebtedness
under the New Credit Facility by  approximately  $75.5 million.  As of September
30, 1997, the Company had  approximately  $48.0 million of secured  indebtedness
outstanding  (excluding unused commitments of $12.0 million under the New Credit
Facility).

      The  Exchange  Offer is  intended  to  satisfy  certain  of the  Company's
obligations under the Registration  Agreement.  The Company will not receive any
cash proceeds from the issuance of the Exchange Notes in the Exchange  Offer. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive  Outstanding Notes in like principal  amount.  The form
and terms of the Exchange  Notes are  identical in all material  respects to the
form and terms of the Outstanding  Notes,  except certain transfer  restrictions
and registration rights relating to the Outstanding Notes and except for certain
interest  provisions  relating to such registration  rights. See "Description of
the  Exchange  Notes." The  Outstanding  Notes  surrendered  in exchange for the
Exchange Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance  of  the  Exchange  Notes  will  not  result  in  any  increase  in the
outstanding debt of the Company.



                                      -29-

<PAGE>



                               THE EXCHANGE OFFER

Purpose and Effect of the Exchange Offer

     In connection with the sale of the Outstanding  Notes,  the Company and the
Subsidiary  Guarantors entered into the Registration  Agreement with the Initial
Purchasers,  pursuant to which the Company and the Subsidiary  Guarantors agreed
to file and to use their  best  efforts  to cause to become  effective  with the
Commission  a  registration  statement  with  respect  to  the  exchange  of the
Outstanding  Notes for debt  securities  with terms  identical  in all  material
respects (subject to certain  exceptions) to the terms of the Outstanding Notes.
A copy of the  Registration  Agreement  has  been  filed  as an  Exhibit  to the
Registration Statement of which this Prospectus is a part.

     The Exchange Offer is being made to satisfy the contractual  obligations of
the Company and the Subsidiary Guarantors under the Registration Agreement.  The
form and terms of the  Exchange  Notes are the same as the form and terms of the
Outstanding Notes except that: (i) the Exchange Notes have been registered under
the Securities Act and therefore will not be subject to certain  restrictions on
transfer  applicable to the Outstanding Notes and will not be entitled to resale
registration under the Registration  Agreement (subject to certain  exceptions),
although  the  Registration  Agreement  does  provide  for  prospectus  delivery
procedures  to assist  resales of Exchange  Notes,  and (ii) the Exchange  Notes
generally  will not provide for any increase in the interest  rate  thereon.  In
that regard, the Outstanding Notes provide that if the Company or the Subsidiary
Guarantors  fail to  comply  with  certain  provisions  concerning  registration
rights,  specifically the timing of the Exchange Offer, Additional Interest will
accrue and be payable  until such time as such  registration  defaults have been
cured.  Additional Interest will accrue and be payable  semi-annually until such
time as all  Registration  Defaults  have been cured.  See  "Description  of the
Outstanding  Notes" and "Risk  Factors -- Consequences  of a Failure to Exchange
Outstanding Notes."

      The  Exchange  Offer is not being  made to,  nor will the  Company  accept
tenders for exchange from,  holders of Outstanding  Notes in any jurisdiction in
which the Exchange  Offer or the  acceptance  thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.

     Unless the context  requires  otherwise,  the term "holder" with respect to
the  Exchange  Offer  means any person in whose name the  Outstanding  Notes are
registered  on the books of the Company or any other  person who has  obtained a
properly  completed bond power from the registered  holder,  or any person whose
Outstanding  Notes are held of record by the  Depository  who desires to deliver
such Outstanding Notes by book-entry transfer at the Depository. Persons holding
Outstanding  Notes  through the  Depository  and wishing to accept the  Exchange
Offer must do so pursuant to the  Depository's  Automated  Tender Offer Program.
See "-- Procedures for Tendering Outstanding Notes -- Book Entry Transfer."

Terms of the Exchange Offer

     The Company hereby offers, upon the terms and subject to the conditions set
forth in this  Prospectus  and in the  accompanying  Letter of  Transmittal,  to
exchange up to $140 million  aggregate  principal amount of Exchange Notes for a
like aggregate  principal  amount of Outstanding  Notes properly  tendered on or
prior to the Expiration  Date and not properly  withdrawn in accordance with the
procedures  described  below.  The  Company  will  issue,   promptly  after  the
Expiration Date, an aggregate principal amount of up to $140 million of Exchange
Notes in exchange for a like principal amount of Outstanding  Notes tendered and
accepted in connection with the Exchange Offer. The term "Expiration Date" means
5:00 p.m.,  New York City time, on December 2, 1997 unless the Exchange Offer is
extended by the Company (in which case the term "Expiration Date" shall mean the
latest  date and time to which the  Exchange  Offer is  extended).  Holders  may
tender  their  Outstanding  Notes in whole or in part in a  principal  amount of
$1,000 and integral  multiples  thereof.  The Exchange Offer is not  conditioned
upon any minimum number of Outstanding  Notes being tendered.  As of the date of
this  Prospectus,  $140 million  aggregate  principal  amount of the Outstanding
Notes is outstanding.

      Holders of  Outstanding  Notes do not have any  appraisal  or  dissenters'
rights in connection  with the Exchange  Offer.  Outstanding  Notes that are not
tendered for or are tendered  but not accepted in  connection  with the Exchange
Offer will remain  outstanding and be entitled to the benefits of the Indenture,
but  will  not  be  entitled  to  any  further  registration  rights  under  the
Registration Agreement, except under limited circumstances. See "Risk Factors --


                                      -30-


<PAGE>



Consequences of a Failure to Exchange  Outstanding Notes,"  "Description of the
Exchange Notes" and "Description of the Outstanding Notes."

     If any tendered  Outstanding Notes are not accepted for exchange because of
an invalid  tender,  the  occurrence of certain other events set forth herein or
otherwise,  certificates  for any  such  unaccepted  Outstanding  Notes  will be
returned,  without expense,  to the tendering holder thereof (or, in the case of
Outstanding  Notes tendered  pursuant to the procedures for book-entry  transfer
described  below,  such  Outstanding  Notes  will  be  credited  to  an  account
maintained  with the Depository for the  Outstanding  Notes)  promptly after the
Expiration  Date.  Holders who tender  Outstanding  Notes in connection with the
Exchange  Offer will not be required to pay  brokerage  commissions  or fees or,
subject to the  instructions  herein and in the Letter of Transmittal,  transfer
taxes with respect to the exchange of Outstanding  Notes in connection  with the
Exchange  Offer.  The  Company  will pay all charges  and  expenses,  other than
certain applicable taxes described below, in connection with the Exchange Offer.
See "-- Fees and Expenses."

      NEITHER THE BOARD OF  DIRECTORS  OF THE COMPANY NOR THE COMPANY  MAKES ANY
RECOMMENDATION  TO  HOLDERS  OF  OUTSTANDING  NOTES AS TO  WHETHER  TO TENDER OR
REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR OUTSTANDING NOTES PURSUANT TO
THE EXCHANGE  OFFER.  IN ADDITION,  NO ONE HAS BEEN  AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION.  HOLDERS  OF  OUTSTANDING  NOTES  MUST MAKE  THEIR OWN  DECISION
WHETHER TO TENDER  PURSUANT  TO THE  EXCHANGE  OFFER AND,  IF SO, THE  AGGREGATE
AMOUNT OF  OUTSTANDING  NOTES TO TENDER AFTER  READING THIS  PROSPECTUS  AND THE
LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR ADVISERS, IF ANY, BASED ON THEIR
OWN FINANCIAL POSITION AND REQUIREMENTS.

Acceptance for Exchange and Issuance of Exchange Notes

     Upon the terms and subject to the  conditions  of the Exchange  Offer,  the
Company will exchange,  and will issue to the Exchange Agent, Exchange Notes for
Outstanding Notes validly tendered and not withdrawn (pursuant to the withdrawal
rights  described  under "-- Withdrawal  Rights")  promptly after the Expiration
Date. In all cases, delivery of Exchange Notes in exchange for Outstanding Notes
tendered and accepted for exchange  pursuant to the Exchange  Offer will be made
only after timely  receipt by the Exchange Agent of (i)  Outstanding  Notes or a
book-entry  confirmation of a book-entry transfer (a "Book-Entry  Confirmation")
of such Outstanding  Notes into the Exchange Agent's account at the Depository's
book-entry  transfer  facility  system  (the  "Book-Entry  Transfer  Facility"),
pursuant  to  the  procedures  for  book-entry   transfer  described  under  "--
Procedures  for  Tendering   Outstanding  Notes  --  Book-Entry   Transfer,"  if
available,  (ii) the Letter of  Transmittal  (or  facsimile  thereof),  properly
completed  and duly  executed,  with any required  signature  guarantees,  or an
Agent's  Message  and  (iii)  any  other  documents  required  by the  Letter of
Transmittal.  The term "Agent's  Message"  means a message,  transmitted  by the
Book-Entry Transfer Facility to, and received by, the Exchange Agent and forming
a part of a Book-Entry  Confirmation,  which states that the Book-Entry Transfer
Facility  has received an express  acknowledgment  from the  participant  in the
Book-Entry  Transfer Facility tendering  Outstanding Notes which are the subject
of such Book-Entry Confirmation that such participant has received and agrees to
be bound by the terms of the Letter of  Transmittal,  and that the  Company  may
enforce such agreement against the participant.

      Subject to the terms and  conditions  of the Exchange  Offer,  the Company
will be deemed to have accepted for exchange, and thereby exchanged, Outstanding
Notes validly  tendered and not withdrawn as, if and when the Company gives oral
or written  notice to the Exchange  Agent of the  Company's  acceptance  of such
Outstanding  Notes for  exchange  pursuant to the Exchange  Offer.  The Exchange
Agent will act as agent for the Company for the purpose of receiving  tenders of
Outstanding Notes,  Letters of Transmittal and related  documents,  and as agent
for tendering holders for the purpose of receiving Outstanding Notes, Letters of
Transmittal  and related  documents and  transmitting  Exchange Notes to validly
tendering  holders.  Such exchange will be made  promptly  after the  Expiration
Date. If for any reason  whatsoever,  acceptance for exchange or the exchange of
any  Outstanding  Notes  tendered  pursuant  to the  Exchange  Offer is  delayed
(whether  before or after the Company's  acceptance  for exchange of Outstanding
Notes) or the  Company  extends  the  Exchange  Offer or is unable to accept for
exchange or exchange  Outstanding Notes tendered pursuant to the Exchange Offer,
then,  without prejudice to the Company's rights set forth herein,  the Exchange
Agent may,  nevertheless,  on behalf of the Company and subject to Rule 14e-1(c)
under the Exchange Act, retain tendered  Outstanding  Notes and such Outstanding
Notes may not be withdrawn except to the extent  tendering  holders are entitled
to withdrawal rights as described under "-- Withdrawal Rights."

     A holder of  Outstanding  Notes  will  warrant  and agree in the  Letter of
Transmittal that (i) it has full power and authority to tender,  exchange, sell,
assign and transfer Outstanding Notes and to acquire the Exchange Notes issuable
upon exchange thereof,  (ii) that the Company will acquire good,  marketable and
unencumbered  title to the  tendered  Outstanding  Notes,  free and clear of all
liens, restrictions,  charges and encumbrances,  and (iii) the Outstanding Notes
tendered for exchange are not subject to any adverse claims or proxies.


                                      -31-

<PAGE>

     In  addition,  the holder  will  represent  to the Company in the Letter of
Transmittal that (i) the Exchange Notes acquired  pursuant to the Exchange Offer
by the  holder of the  tendered  Outstanding  Notes are  being  acquired  in the
ordinary course of business of the person  receiving such Exchange  Notes,  (ii)
the  holder  will  have no  arrangement  or  understanding  with any  person  to
participate  in a  distribution  of such  Exchange  Notes  in  violation  of the
provisions of the Securities Act and (iii) the holder is not an  "affiliate," as
defined in Rule 405 under the Securities  Act of the Company.  See "--Resales of
Exchange  Notes."  The holder  also will  warrant  and agree that it will,  upon
request,  execute and deliver any additional  documents deemed by the Company or
the Exchange Agent to be necessary or desirable to complete the exchange,  sale,
assignment,  and  transfer of the  Outstanding  Notes  tendered  pursuant to the
Exchange Offer.

Procedures for Tendering Outstanding Notes

      Valid Tender

     In order for  Outstanding  Notes to be  validly  tendered  pursuant  to the
Exchange Offer, (a) the Exchange Agent must receive prior to the Expiration Date
a properly  completed  and duly  executed  Letter of  Transmittal  (or facsimile
thereof),  with  any  required  signature  guarantees  and  any  other  required
documents,  and either (i) the certificates for such Outstanding Notes or (ii) a
Book-Entry  Confirmation  of such  Outstanding  Notes into the Exchange  Agent's
account at the  Book-Entry  Transfer  Facility  pursuant to the  procedures  for
book-entry  transfer  described  below, if available,  or (b) the Exchange Agent
must receive  prior to the  Expiration  Date a Book-Entry  Confirmation  of such
Outstanding  Notes into the Exchange Agent's account at the Book-Entry  Transfer
Facility  with an Agent's  Message and any other  required  documents or (c) the
holder must comply with the  guaranteed  delivery  procedures  set forth  below.
Delivery of all documents  must be made to the Exchange Agent at its address set
forth herein.  Holders may also request that their respective brokers,  dealers,
commercial  banks,  trust  companies  or  nominees  effect  such tender for such
holders.

      If less than all of the Outstanding Notes are tendered, a tendering holder
should fill in the amount of Outstanding Notes being tendered in the appropriate
box on the  Letter  of  Transmittal.  The  entire  amount of  Outstanding  Notes
delivered  to the  Exchange  Agent will be deemed to have been  tendered  unless
otherwise indicated.

      THE METHOD OF DELIVERY OF CERTIFICATES,  THE LETTER OF TRANSMITTAL AND ALL
OTHER  REQUIRED  DOCUMENTS  ARE AT THE  OPTION  AND SOLE  RISK OF THE  TENDERING
HOLDER,  AND  DELIVERY  WILL BE DEEMED MADE ONLY WHEN  ACTUALLY  RECEIVED BY THE
EXCHANGE  AGENT.  IF  DELIVERY  IS BY  MAIL,  REGISTERED  MAIL,  RETURN  RECEIPT
REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.

      Book-Entry Transfer

     The  Exchange   Agent  will  establish  an  account  with  respect  to  the
Outstanding  Notes at the  Book-Entry  Transfer  Facility  for  purposes  of the
Exchange Offer within two business days after the date of this  Prospectus.  Any
financial  institution that is a participant in the Book-Entry Transfer Facility
may  make a  book-entry  delivery  of  the  Outstanding  Notes  by  causing  the
Depository to transfer such Outstanding  Notes into the Exchange Agent's account
at  the  Book-Entry  Transfer  Facility  in  accordance  with  the  Depository's
procedures for transfers. However, although delivery of Outstanding Notes may be
effected  through  book-entry  transfer into the Exchange Agent's account at the
Book-Entry  Transfer  Facility,  the Letter of Transmittal or an Agent's Message
must in any case be delivered  to and  received by the Exchange  Agent at one of
the Exchange  Agent's  addresses set forth under "-- Exchange Agent" on or prior
to the  Expiration  Date, or the guaranteed  delivery  procedure set forth below
must be complied with. The Depository's  Automated Tender Offer Program ("ATOP")
is the only method of processing exchange offers through the Book-Entry Transfer
Facility.  To accept  the  Exchange  Offer  through  ATOP,  participants  in the
Book-Entry Transfer Facility must send electronic instructions to the Depository
through the Depository's communication system in place of sending a signed, hard
copy Letter of  Transmittal.  The Depository is obligated to  communicate  those
electronic  instructions  to the Exchange  Agent.  To tender  Outstanding  Notes
through ATOP, the electronic instructions sent to the Depository and transmitted
by the  Depository to the Exchange Agent must contain the character  (i.e.,  the
Agent's Message) by which the participant acknowledges its receipt of and agrees
to be bound by the Letter of Transmittal.

                                      -32-
<PAGE>

   
      DELIVERY  OF  DOCUMENTS  TO  THE   DEPOSITORY  IN   ACCORDANCE   WITH  THE
DEPOSITORY'S  PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. THE
LETTER OF  TRANSMITTAL  MUST BE  RECEIVED BY THE  EXCHANGE  AGENT ON OR PRIOR TO
DECEMBER 2, 1997.
    
      Signature Guarantees

     Certificates  for the Outstanding  Notes need not be endorsed and signature
guarantees on the Letter of Transmittal are unnecessary unless (a) a certificate
for the Outstanding  Notes is registered in a name other than that of the person
surrendering  the  certificate or (b) such registered  holder  completes the box
entitled "Special Issuance  Instructions" or "Special Delivery  Instructions" in
the Letter of Transmittal.  In the case of (a) or (b) above,  such  certificates
for  Outstanding  Notes  must be duly  endorsed  or  accompanied  by a  properly
executed bond power,  with the endorsement or signature on the bond power and on
the Letter of  Transmittal  guaranteed  by a firm or other entity  identified in
Rule 17Ad-15  under the Exchange  Act as an  "eligible  guarantor"  institution,
including  (as such  terms  are  defined  therein):  (i) a bank;  (ii) a broker,
dealer, municipal securities broker or dealer or government securities broker or
dealer;  (iii) a credit union; (iv) a national securities  exchange,  registered
securities  association or clearing agency; or (v) a savings association that is
a participant in a Securities Transfer Association  (collectively,  an "Eligible
Institution"),  unless surrendered on behalf of such Eligible  Institution.  See
Instruction 5 to the Letter of Transmittal.

      Guaranteed Delivery

     If a holder  desires to tender  Outstanding  Notes pursuant to the Exchange
Offer and (i) the certificates  for such  Outstanding  Notes are not immediately
available,  (ii) such holder  cannot  complete  the  procedures  for  book-entry
transfer  of the  Outstanding  Notes on a timely  basis or (iii)  time  will not
permit  the  Letter of  Transmittal  or other  required  documents  to reach the
Exchange  Agent on or before the Expiration  Date,  such  Outstanding  Notes may
nevertheless be tendered, provided that all of the following guaranteed delivery
procedures are complied with:

      (i)   such tenders are made by or through an Eligible Institution;

      (ii)  a  properly   completed  and  duly  executed  Notice  of  Guaranteed
            Delivery,  substantially  in the form  accompanying  the  Letter  of
            Transmittal,  is received by the Exchange  Agent, as provided below,
            on or prior to the Expiration Date; and

     (iii)  the  certificates  representing  all tendered Outstanding  Notes, in
            proper form for transfer, or a Book-Entry Confirmation  with respect
            to such Outstanding  Notes,  together  with a properly completed and
            duly executed Letter of  Transmittal, or  Agent's  Message  and  any
            other required documents, are received by  the Exchange Agent within
            five  American  Stock  Exchange  trading  days  after  the  date  of
            execution of such Notice of Guaranteed Delivery.

The Notice of Guaranteed  Delivery may be delivered by hand, or  transmitted  by
facsimile, overnight courier or mail to the  Exchange  Agent and must  include a
guarantee  by an Eligible Institution in the form set forth in such notice.

     Notwithstanding  any other provision hereof, the delivery of Exchange Notes
in exchange for Outstanding Notes tendered and accepted for exchange pursuant to
the Exchange  Offer will in all cases be made only after  timely  receipt by the
Exchange  Agent of (i)  Outstanding  Notes,  or a Book-Entry  Confirmation  with
respect to such Outstanding  Notes, (ii) a properly  completed and duly executed
Letter of Transmittal (or facsimile thereof) or an Agent's Message and (iii) any
other required documents.  Accordingly, the delivery of Exchange Notes might not
be made to all  tendering  holders at the same time,  and will  depend upon when
Outstanding  Notes,  book-entry  confirmations with respect to Outstanding Notes
and other required  documents are received by the Exchange Agent.  The Company's
acceptance  for exchange of Outstanding  Notes  tendered  pursuant to any of the
procedures  described  above will  constitute  a binding  agreement  between the
tendering holder and the Company upon the terms and subject to the conditions of
the Exchange Offer.

                                      -33-
<PAGE>


      Determination of Validity

      All  questions  as  to  the  form  of  documents,   validity,  eligibility
(including  time  of  receipt)  and  acceptance  for  exchange  of any  tendered
Outstanding  Notes will be  determined by the Company,  in its sole  discretion,
whose  determination  shall be final and  binding on all  parties.  The  Company
reserves the absolute right, in its sole and absolute discretion,  to reject any
and all tenders  determined by it not to be in proper form or the  acceptance of
which, or exchange for, may, in the view of counsel to the Company, be unlawful.
No tender of  Outstanding  Notes will be deemed to have been  validly made until
all  irregularities  with  respect  to such  tender  have been  cured or waived.
Neither the Company,  any  affiliates  or assigns of the  Company,  the Exchange
Agent nor any other person shall be under any duty to give any  notification  of
any  irregularities  in tenders or incur any  liability  for failure to give any
such  notification.  The Company also  reserves the absolute  right,  subject to
applicable  law,  to waive  any  condition  or  irregularity  in any  tender  of
Outstanding Notes of any particular holder whether or not similar  conditions or
irregularities are waived in the case of other holders.

     A beneficial  owner of Outstanding  Notes that are held by or registered in
the name of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact  such entity  promptly if such  beneficial  holder
wishes to participate in the Exchange Offer. If such beneficial  owner wishes to
tender  directly,  such beneficial owner must, prior to completing and executing
the Letter of  Transmittal  and delivering its  Outstanding  Notes,  either make
appropriate  arrangements to register ownership of the Outstanding Notes in such
beneficial  owner's  name or obtain a  properly  completed  bond  power from the
registered holder. The transfer of record ownership may take considerable time.

     If the  Letter of  Transmittal  is signed by the  record  holder(s)  of the
Outstanding  Notes  tendered  thereby,  the signature must  correspond  with the
name(s)  written  on the  face  of the  Outstanding  Notes  without  alteration,
enlargement or any change whatsoever.  If the Letter of Transmittal is signed by
a participant in the Book-Entry Transfer Facility, the signature must correspond
with the name as it appears on the  security  position  listing as the holder of
the Outstanding Notes. If any Letter of Transmittal, endorsement, bond power,


                                      -34-

<PAGE>

power of attorney,  or any other document  required by the Letter of Transmittal
is signed by a trustee,  executor,  administrator,  guardian,  attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or representative
capacity such person  should so indicate when signing,  and unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion, of
such person's authority to so act must be submitted.

Resales of Exchange Notes

     The Company is making the  Exchange  Offer in reliance on a position of the
staff of the Division of  Corporation  Finance of the Commission as set forth in
certain  interpretive  letters addressed to third parties in other transactions.
However, the Company has not sought its own interpretive letter and there can be
no  assurance  that the staff of the  Division  of  Corporation  Finance  of the
Commission would make a determination with respect to the Exchange Offer similar
to that  made in such  interpretive  letters  to third  parties.  Based on these
interpretations by the staff of the Division of Corporation Finance, and subject
to the three immediately following sentences, the Company believes that Exchange
Notes issued pursuant to this Exchange Offer in exchange for  Outstanding  Notes
may be offered for resale,  resold and otherwise transferred by a holder thereof
(other than a holder who is a broker-dealer) without further compliance with the
registration  and  prospectus  delivery  requirements  of  the  Securities  Act,
provided  that (i) such  Exchange  Notes are acquired in the ordinary  course of
such  holder's  business and (ii) such holder is not  participating,  and has no
arrangement or understanding  with any person to participate,  in a distribution
(within the meaning of the Securities Act) of such Exchange Notes.  However, any
holder of  Outstanding  Notes who is an  "affiliate"  of the Company  within the
meaning of Rule 405 under the Securities Act, or any broker-dealer who purchased
Outstanding  Notes from the Company to resell pursuant to Rule 144A or any other
available  exemption  under the Securities  Act, (a) will not be able to rely on
the  interpretations of the staff of the Division of Corporation  Finance of the
Commission set forth in the above-mentioned  interpretive  letters, (b) will not
be permitted or entitled to tender such Outstanding  Notes in the Exchange Offer
and (c) must comply with the registration and prospectus  delivery  requirements
of the  Securities  Act in  connection  with any sale or other  transfer of such
Outstanding  Notes unless such sale or transfer is made pursuant to an exemption
from such requirements. In addition, any holder who tenders Outstanding Notes in
the Exchange Offer with the intention or for the purpose of  participating  in a
distribution  of the Exchange Notes cannot rely on such  interpretations  of the
staff of the Division of Corporation Finance of the Commission referred to above
and must comply with the  registration and prospectus  delivery  requirements of
the  Securities  Act  in  connection  with a  secondary  resale  transaction.  A
broker-dealer  who is not an "affiliate"  of the Company may  participate in the
Exchange Offer with respect to Outstanding Notes acquired for its own account as
a result of market-making activities or other trading activities,  provided that
(i)  in  connection   with  any  resales  of  Exchange  Notes  received  by  the
broker-dealer in exchange for such Outstanding Notes, the broker-dealer delivers
a  prospectus  meeting the  requirements  of the  Securities  Act,  and (ii) the
broker-dealer  has not entered into any  arrangement or  understanding  with any
person to participate  in a  distribution  (within the meaning of the Securities
Act) of such Exchange Notes. In the event that applicable interpretations by the
staff of the Division of Corporate Finance of the Commission change or otherwise
do not  permit  resales  of the  Exchange  Notes  without  compliance  with  the
registration and prospectus delivery requirements of the Securities Act, holders
of Exchange  Notes who transfer  Exchange  Notes in violation of the  prospectus
delivery  provisions  of  the  Securities  Act  or  without  an  exemption  from
registration thereunder may incur liability thereunder.

                                      -35-
<PAGE>

     Each holder of  Outstanding  Notes who wishes to exchange such  Outstanding
Notes for  Exchange  Notes in the  Exchange  Offer will be required to represent
that (i) it is not an "affiliate" of the Company,  (ii) any Exchange Notes to be
received by it are being  acquired in the ordinary  course of its business,  and
(iii) at the time of consummation of the Exchange Offer such holder will have no
arrangement  or  understanding  with any person to participate in a distribution
(within the meaning of the  Securities  Act) of such Exchange Notes in violation
of the Securities Act. Each Participating Broker-Dealer must acknowledge that it
acquired  the   Outstanding   Notes  for  its  own  account  as  the  result  of
market-making activities or other trading activities and must agree that it will
deliver  a  prospectus  meeting  the  requirements  of  the  Securities  Act  in
connection  with any resale of such Exchange  Notes.  The Letter of  Transmittal
states that by so acknowledging and by delivering a prospectus,  a Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the  Securities  Act. Based on the position taken by the staff of the
Division of Corporation  Finance of the Commission in the  interpretive  letters
referred to above, the Company believes that  Participating  Broker-Dealers  may
fulfill  their  prospectus  delivery  requirements  with respect to the Exchange
Notes received upon exchange of such  Outstanding  Notes (other than Outstanding
Notes  which  represent  an  unsold  allotment  from  the  original  sale of the
Outstanding  Notes) with a prospectus meeting the requirements of the Securities
Act that may be the  prospectus  prepared  for an  exchange  offer so long as it
contains a description of the plan of distribution with respect to the resale of
such Exchange Notes. Accordingly, this Prospectus may be used by a Participating
Broker-Dealer  during  the  period  referred  to in  the  immediately  following
sentence in connection  with resales of Exchange  Notes received in exchange for
Outstanding   Notes  where  such   Outstanding   Notes  were  acquired  by  such
Participating  Broker-Dealer for its own account as a result of market-making or
other  trading  activities.  Subject  to  certain  provisions  set  forth in the
Registration Agreement,  the Company has agreed that this Prospectus may be used
by a  Participating  Broker-Dealer  for such period of time as is  necessary  to
comply with  applicable law in connection  with resales of such Exchange  Notes,
provided  that such time  period  not  exceed  180 days  after the  Registration
Statement  is declared  effective.  Any  Participating  Broker-Dealer  who is an
"affiliate"  of the Company may not rely on such  interpretive  letters and must
comply  with  the  registration  and  prospectus  delivery  requirements  of the
Securities  Act  in  connection  with  any  resale  transaction.  See  "Plan  of
Distribution."

     Each  Participating  Broker-Dealer  will be deemed to have  agreed,  by its
acquisition  of the  Outstanding  Notes  or  Exchange  Notes  to be sold by such
Participating  Broker-Dealer,  that,  upon receipt of notice from the Company of
the  occurrence  of any  event or the  discovery  of any fact  which  makes  any
statement  contained or incorporated  by reference in this Prospectus  untrue in
any material respect or which causes this Prospectus to omit to state a material
fact  necessary in order to make the  statements  contained or  incorporated  by
reference herein, in light of the circumstances  under which they were made, not
misleading  or of the  occurrence  of  certain  other  events  specified  in the
Registration Agreement,  such Participating  Broker-Dealer will suspend the sale
of Exchange Notes pursuant to this  Prospectus  until the Company has amended or
supplemented  this  Prospectus to correct such  misstatement or omission and has
furnished copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer  or the  Company has given  notice  that the sale of the  Exchange
Notes may be resumed,  as the case may be. If the  Company  gives such notice to
suspend the sale of the  Exchange  Notes,  it shall  extend the  180-day  period
referred to above during which Participating  Broker-Dealers are entitled to use
this Prospectus in connection with the resale of Exchange Notes by the number of
days during the period from and  including the date of the giving of such notice
to and including the date when Participating  Broker-Dealers shall have received
copies of the amended or supplemented  Prospectus necessary to permit resales of
the Exchange  Notes or to and  including the date on which the Company has given
notice that the sale of Exchange Notes may be resumed, as the case may be.


                                      -36-
<PAGE>

Withdrawal Rights

     Except as otherwise  provided herein,  tenders of Outstanding  Notes may be
withdrawn  at any time on or  prior  to the  Expiration  Date.  In  order  for a
withdrawal  to  be  effective  a  written,   telegraphic,   telex  or  facsimile
transmission  or  (for  participants  in  the  Book-Entry   Transfer   Facility)
electronic ATOP  transmission of notice of withdrawal must be timely received by
the Exchange  Agent at one of its addresses set forth under "-- Exchange  Agent"
on or prior to the Expiration  Date. Any such notice of withdrawal  must specify
the name of the person who tendered the Outstanding  Notes to be withdrawn,  the
aggregate  principal  amount  of  Outstanding  Notes  to be  withdrawn,  and (if
certificates  for such  Outstanding  Notes have been  tendered)  the name of the
registered  holder  of the  Outstanding  Notes as set  forth on the  Outstanding
Notes, if different from that of the person who tendered such Outstanding Notes.
If Outstanding Notes have been delivered or otherwise identified to the Exchange
Agent,  then  prior to the  physical  release  of such  Outstanding  Notes,  the
tendering  holder  must  submit  the  serial  numbers  shown  on the  particular
Outstanding  Notes to be withdrawn and the signature on the notice of withdrawal
must be guaranteed by an Eligible Institution, except in the case of Outstanding
Notes tendered for the account of an Eligible Institution.  If Outstanding Notes
have been tendered pursuant to the procedures for book-entry  transfer set forth
in "--  Procedures  for Tendering  Outstanding  Notes," the notice of withdrawal
must  specify  the name and  number of the  account at the  Book-Entry  Transfer
Facility to be  credited  with the  withdrawn  Outstanding  Notes and  otherwise
comply  with  the  procedures  of  such  facility.  Withdrawals  of  tenders  of
Outstanding  Notes may not be rescinded.  Outstanding  Notes properly  withdrawn
will not be deemed validly  tendered for purposes of the Exchange Offer, but may
be  retendered  at any  subsequent  time on or prior to the  Expiration  Date by
following  any of the  procedures  described  above  under " --  Procedures  for
Tendering Outstanding Notes."

     All questions as to the validity,  form and eligibility  (including time of
receipt) of such  withdrawal  notices will be determined by the Company,  in its
sole discretion,  whose determination shall be final and binding on all parties.
Neither the Company,  any  affiliates  or assigns of the  Company,  the Exchange
Agent nor any other person shall be under any duty to give any  notification  of
any  irregularities  in any  notice of  withdrawal  or incur any  liability  for
failure to give any such  notification.  Any  Outstanding  Notes which have been
tendered but which are withdrawn  will be returned to the holder thereof (or, in
the case of Outstanding Notes tendered pursuant to the procedures for book-entry
transfer  described  above,  such  Outstanding  Notes  will be  credited  to the
account,  at  the  Book-Entry  Transfer  Facility  specified  in the  notice  of
withdrawal) promptly after withdrawal.



                                      -37-
<PAGE>

Interest on the Exchange Notes

      Each  Exchange  Note will bear  interest at the rate of 10% per annum from
the most recent date to which interest has been paid or duly provided for on the
Outstanding  Note  surrendered  in  exchange  for such  Exchange  Note or, if no
interest has been paid or duly provided for on such  Outstanding  Note, from May
29, 1997 (the date of original issuance of such Outstanding Notes).  Interest on
the Exchange Notes will be payable semiannually on June 1 and December 1 of each
year, commencing on December 1, 1997.

      Holders of  Outstanding  Notes whose  Outstanding  Notes are  accepted for
exchange will not receive  accrued  interest on such  Outstanding  Notes for any
period from and after the last interest  payment date to which interest has been
paid or duly provided for on such Outstanding  Notes prior to the original issue
date of the  Exchange  Notes  or,  if no such  interest  has  been  paid or duly
provided for, will not receive any accrued interest on such  Outstanding  Notes,
and will be deemed to have  waived the right to  receive  any  interest  on such
Outstanding  Notes accrued from and after such  interest  payment date or, if no
such interest has been paid or duly provided for, from and after May 29, 1997.

Exchange Agent

      First Union  National Bank of North  Carolina (the  "Exchange  Agent") has
been appointed as Exchange Agent for the Exchange Offer. Delivery of the Letters
of  Transmittal  and any  other  required  documents,  questions,  requests  for
assistance,  and requests for  additional  copies of this  Prospectus  or of the
Letter of Transmittal should be directed to the Exchange Agent as follows:


                                 First Union National Bank
                                 1525 W.T. Harris Blvd.     
                                 C3C/NC 1179
                                 Charlotte, North Carolina  28288
                                 Attn:  Mr. Mike Klotz -- Reorg

                                 By Facsimile Transmission:
                                 (for Eligible Institutions Only)

                                 First Union National Bank
                                 1525 W.T. Harris Blvd.     
                                 C3C/NC 1179
                                 Charlotte, North Carolina  28288

                                 Fax Number:  (704) 590-2786

                                 Confirm by Telephone:
                                 (800) 665-9343

      Delivery to other than the above  addresses or  facsimile  number will not
constitute a valid delivery.


                                      -38-
<PAGE>


Certain Conditions to the Exchange Offer 

     Notwithstanding  any other term of the Exchange Offer, the Company will not
be  required to accept for  exchange,  or exchange  any  Exchange  Notes for any
Outstanding  Notes,  and may  terminate  the Exchange  Offer as provided  herein
before the acceptance of any Outstanding Notes for exchange, if:

          (a)  any action or proceeding is instituted or threatened in any court
               or by any governmental agency with respect to the Exchange  Offer
               which  might  materially  impair  the  ability  of the Company to
               proceed with the Exchange Offer or a material adverse development
               shall have occurred in any existing  action  or  proceeding  with
               respect to the Company or the Subsidiary Guarantors; or

          (b)  any law,  statute,  rule  or regulation is adopted or enacted, or
               any existing law, statute, rule or  regulation is interpreted by 
               the staff of  the  Commission which might  materially  impair the
               ability of the Company to proceed with the Exchange Offer; or

          (c)  any governmental approval has not been obtained,  which  approval
               the  Company  shall deem  necessary  for  the consummation of the
               Exchange Offer as contemplated hereby.

     The Company expressly reserves the right, at any time or from time to time,
to extend  the  period of time  during  which the  Exchange  Offer is open,  and
thereby delay  acceptance for exchange of any Outstanding  Notes, by giving oral
or written  notice of such  extension  to the holders  thereof.  During any such
extensions, all Outstanding Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company.  Any Outstanding
Notes not accepted for exchange for any reason will be returned  without expense
to the tendering holder thereof as promptly as practicable  after the expiration
or termination of the Exchange Offer.

     The Company expressly reserves the right to amend or terminate the Exchange
Offer,  and not to accept for exchange  any  Outstanding  Notes not  theretofore
accepted for  exchange,  upon the  occurrence  of any of the  conditions  of the
Exchange  Offer  specified  above under  "--Certain  Conditions  to the Exchange
Offer."  The  Company  will  give  oral or  written  notice  of any  extensions,
amendment, non-acceptance or termination to the holders of the Outstanding Notes
as  promptly as  practicable,  such  notice in the case of any  extension  to be
issued no later than 9:00 a.m.,  New York City time,  on the next  business  day
after the previously scheduled Expiration Date.

     The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances  giving rise to any such
condition  or may be waived by the  Company  in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.

     In addition, the Company will not accept for exchange any Outstanding Notes
tendered,  and no  Exchange  Notes  will be  issued  in  exchange  for any  such
Outstanding  Notes,  if at such time any stop order  shall be  threatened  or in
effect  with  respect to the  Registration  Statement  of which this  Prospectus
constitutes  a part  or the  qualification  of the  Indenture  under  the  Trust
Indenture Act of 1939, as amended.
          
Fees and Expenses; Transfer Taxes

     The  expenses  of  soliciting  tenders  will be borne by the  Company.  The
principal solicitation is being made by mail; however,  additional  solicitation
may be made by  telecopy,  telephone,  or in  person  by  officers  and  regular
employees of the Company.  No additional  compensation  will be paid to any such
officers and employees who engage in soliciting tenders.


                                      -39-

<PAGE>

     The Company has not  retained any  dealer-manager  in  connection  with the
Exchange  Offer and will not make any  payment  to  brokers,  dealers  or others
soliciting  acceptances of the Exchange Offer. The Company,  however, has agreed
to pay the Exchange  Agent  reasonable  and customary  fees for its services and
will  reimburse  it for its  reasonable  out-of-pocket  expenses  in  connection
therewith.

     The expenses to be incurred in connection  with the Exchange  Offer will be
paid by the  Company.  Such  expenses  include fees and expenses of the Exchange
Agent, accounting and legal fees and printing costs, among others.

     Holders  who  tender  their  Outstanding  Notes  for  exchange  will not be
obligated  to pay any  transfer  taxes in  connection  therewith.  If,  however,
Exchange  Notes are to be delivered  to, or are to be issued in the name of, any
person other than the registered holder of the Outstanding Notes tendered, or if
a transfer tax is imposed for any reason other than the exchange of  Outstanding
Notes in  connection  with the  Exchange  Offer,  then  the  amount  of any such
transfer taxes (whether  imposed on the registered  holder or any other persons)
will be payable by the tendering holder. If satisfactory  evidence of payment of
such  taxes  or  exemption  therefrom  is  not  submitted  with  the  Letter  of
Transmittal,  the amount of such transfer taxes will be billed  directly to such
tendering holder.

Certain Federal Income Tax Considerations

     The  exchange of the  Outstanding  Notes for  Exchange  Notes by  tendering
holders  should not be a taxable  exchange for United States  federal income tax
purposes,  and such holders  should not  recognize  any taxable gain or loss for
United States federal income tax purposes as a result of such exchange.  Holders
of  Exchange  Notes will  continue  to be  required  to include  interest on the
Exchange Notes in gross income in accordance with their method of accounting for
United States federal income tax purposes. HOLDERS SHOULD REVIEW THE INFORMATION
SET FORTH UNDER "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" FOR A DISCUSSION OF
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS RELATING TO THE EXCHANGE
NOTES PRIOR TO TENDERING THE OUTSTANDING NOTES IN THE EXCHANGE OFFER.



                                      -40-

<PAGE>



                                 CAPITALIZATION

     The following  table sets forth the  capitalization  of the Company at June
30,  1997.  This  table  should  be read in  conjunction  with the  Consolidated
Financial  Statements  and related  notes  thereto  included  elsewhere  in this
Prospectus.

<TABLE>
<CAPTION>
<S>                                                              <C>                                                                
                                                                  
                                                                  June 30, 1997            
                                                                 ---------------
                                                              (dollars in thousands)
Long term debt, including current maturities:
   Credit facility(1).........................................      $ 47,055       
   10% Senior Notes due 2007..................................       140,000      
                                                                  ----------      
        Total long-term debt..................................       187,055     
                                                                   ---------       
Production payment liability..................................           831        
Stockholders' equity:
   Preferred Stock, $.001 par value, 10,000,000 shares
      authorized: 80,000 shares issued and outstanding of Series A
      Preferred Stock (no liquidation preference) and
      1,000,000 shares issued and outstanding of TCW Preferred             
      Stock(2) ($10 liquidation preference per share).........             1        
   Common Stock, $.002 par value, 50,000,000 shares
      authorized: 14,252,822 shares issued and 13,596,883 shares          29
      outstanding.............................................                     
   Additional paid-in capital.................................        39,782          
   Accumulated deficit........................................        (7,688)           
   Unrealized gain on investments.............................           130            
   Less treasury stock (655,939 shares of Common Stock).......            (1)             
                                                               --------------  
        Total stockholders' equity............................        32,253    

                                                                ------------   
        Total capitalization..................................     $ 231,670     
                                                                ------------   
                                                                ------------   

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

(1)   For a  discussion  of the New Credit  Facility,  see  "Description  of New
      Credit  Facility."  

(2)   TCW Preferred  Stock  refers  to the  1996 Series A Convertible  Preferred
      Stock issued to TCW.





                                      -41-

<PAGE>



                   UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

     The following  unaudited pro forma combined financial data are derived from
the Consolidated Financial Statements of the Company set forth elsewhere in this
Prospectus  and certain  historical  financial data in respect of various assets
acquired by the Company.  The historical revenues and oil and gas production and
gas  gathering  and  marketing  expenses  of the McLean  Gas  Plant,  the Panoma
Properties  and the Permian Basin  Properties  represent  amounts  recorded with
respect to such  properties  for the period  indicated.  The Unaudited Pro Forma
Income Statement for the year ended December 31, 1996 has been prepared assuming
the Panoma  Acquisition,  the issuance of the TCW  Preferred  Stock,  the McLean
Plant  Acquisition,  the conversion of the Series B and Series C Preferred Stock
into Common Stock,  the Permian Basin  Acquisition  (including the incurrence of
indebtedness  under the New Credit  Facility and the Term Loan  Facility and the
use of proceeds  therefrom)  and the  Offering  and the  application  of the net
proceeds therefrom had been consummated as of January 1, 1996. The Unaudited Pro
Forma Income  Statement for the six months ended June 30, 1997 has been prepared
assuming the Permian Basin Acquisition (including the incurrence of indebtedness
under the New Credit Facility and the Term Loan Facility and the use of proceeds
therefrom) and the Offering and the  application  of the net proceeds  therefrom
had been consummated as of January 1, 1997. The pro forma  adjustments set forth
on the attached  Unaudited Pro Forma Income Statements  reflect the following as
if they occurred on the dates hereinabove set forth:

(1)   Recent  Transactions. The Panoma Acquisition completed in July 1996;  the
      conversion or redemption of the Series B and Series C Preferred  Stock in
      1996; the issuance of the TCW  Preferred  Stock  in December 1996; and the
      McLean Plant Acquisition in January 1997.

(2)   Permian  Basin  Acquisition.  The Permian Basin  Acquisition  completed in
      April 1997 (including the incurrence of indebtedness  under the New Credit
      Facility  and  the  Term  Loan  Facility  to  finance  the  Permian  Basin
      Acquisition  and  repay  the   indebtedness   under  the  Previous  Credit
      Facility).

(3)   The   Offering.   The   Offering and the  application  of the net proceeds
      therefrom as described in "Use of Proceeds."


      The  unaudited  pro  forma  combined  financial  data  should  be  read in
conjunction  with  the  notes  thereto  and  with  the  Consolidated   Financial
Statements of the Company and the notes thereto and the historical  summaries of
revenues and direct operating  expenses of the Permian Basin Properties,  all of
which are included elsewhere in this Prospectus.

      The unaudited pro forma combined  financial data are not indicative of the
financial  position or results of operations of the Company which would actually
have  occurred if the  transactions  described  above had  occurred at the dates
presented or which may be obtained in the future.  In addition,  future  results
may vary  significantly  from the results  reflected in such  statements  due to
normal oil and natural gas production  declines,  changes in prices paid for oil
and natural gas, future acquisitions, drilling activity and other factors.




                                      -42-

<PAGE>




                  UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
                          Year Ended December 31, 1996
                             (dollars in thousands)

<TABLE>
<CAPTION>
<S>                           <C>            <C>            <C>                 <C>                <C>             <C>              
                                                                                                     Pro Forma     Pro Forma Recent
                                              Pro Forma        Pro Forma       Pro Forma Recent     Adjustments      Transactions,
                                 Magnum      Adjustments    Adjustments for    Transactions and    for Offering      Permian Basin
                                 Hunter      for Recent      Permian Basin       Permian Basin                      Acquisition and
                               Historical   Transactions      Acquisition         Acquisition                          Offering
                              ------------- --------------   -----------------  ------------------  -------------- -----------------
Operating Revenues:
     Oil and gas sales........     $10,248     $3,267 (1)       $39,433 (10)        $52,948         $     -             $52,948
     Gas gathering, marketing
         and processing.......       5,768      3,562 (2)            -               10,304               -              10,304
                                                  974 (1)
     Oil field services and
         international sales..         396        -                  -                  396               -                 396
                                  ----------  -------------  -----------------  ------------------  -------------- -----------------
         Total operating
              revenue.........      16,412      7,803             39,433             63,648               -              63,648
Operating Costs and   
     Expenses:
     Oil and gas production...       4,390     1,049  (1)        11,646 (10)         17,085               -              17,085
     Gas gathering, marketing
         and processing.......       4,708     1,476  (2)           -                 6,879               -               6,879
                                                 695  (1)
     Oil field services and
         international sales..         267                                              267               -                 267
     Depreciation and
         depletion............       2,951     1,203  (3)        12,961 (11)         17,282               -              17,282
                                                 167  (4)
     General and
         administrative.......       1,225       100  (5)           150 (12)          1,475               -               1,475
                                  ---------  -------------  -----------------  ------------------  ----------------  ---------------
         Total operating costs
              and expenses....      13,541     4,690             24,757              42,988               -              42,988
                                  ----------  -------------  -----------------  ------------------  ---------------- ---------------
Operating profit..............       2,871     3,113             14,676              20,660               -              20,660
     Other income.............         344            -             -                   344               -                 344
     Interest expense.........      (2,394)   (1,555) (6)       (14,059)(13)        (18,008)              262 (14)      (17,746)
                                  ----------  -------------  -----------------  ------------------  ---------------- ---------------
Income before tax,minority 
     interest and
     extraordinary item.......         821     1,558                617               2,996               262             3,258
     Provisions for deferred
         income taxes.........        (312)     (584) (7)          (231) (7)         (1,127)              (98)(7)        (1,225)
                                  ----------  -------------  -----------------  ------------------  ----------------  --------------
Income before extraordinary
      item...................          509       974                386               1,869               164             2,033 
     Dividends applicable to
         preferred shares.....        (406)      389  (8)            -                 (875)               -               (875)
                                                (858) (8)
                                  ----------  -------------  -----------------  ------------------  ----------------  --------------
     Income applicable
         to common shares
         before extraordinary item   $ 103    $   505           $    386           $    994           $   164           $ 1,158    
                                  ==========  =============  =================  ==================  ================  =============

Income per share 
         before extraordinary item   $ .01    $   .03           $    .03             $ .07             $  .01            $  .08
                                   ========   ==========        =========         =========           =========          ========== 

                             
Other Data:
     EBITDA(15)...............      $6,166     $4,483           $ 27,637          $ 38,286            $   -            $ 38,286
     Cash interest expense(9)        2,347      1,512             13,794            17,653              (312)            17,341
     Capital expenditures.....     $41,471     $2,500           $133,000          $176,971            $   -            $176,971

                             See accompanying notes to Unaudited Pro Forma Combined Financial Data.

</TABLE>


                                      -43-

<PAGE>

                  UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
                        Six Months Ended June 30, 1997
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                               Pro Forma                                            Pro Forma
                                               Magnum       Adjustments for     Pro Forma           Pro Forma      Permian Basin
                                               Hunter        Permian Basin    Permian Basin        Adjustments    Acquisition and
                                             Historical       Acquisition      Acquisition        For Offering       Offering
                                             -----------    ---------------   ---------------   ----------------  ----------------  
<S>                                          <C>            <C>               <C>               <C>                <C>
Operating Revenues:
       Oil and gas sales...............       $11,791       $ 12,627  (10)      $24,418             $     -          $  24,418
       Gas gathering, marketing
       and processing..................         5,283             -               5,283                   -              5,283
Oil field services and                          
   international sales.................         3,606             -               3,606                   -              3,606
                                            -------------    --------------   ---------------   -----------------  ---------------

Total operating revenue................        20,680         12,627             33,307                   -             33,307

Operating Costs and Expenses:
Oil and gas production.................         4,740          3,039  (10)        7,779                   -              7,779
Gas gathering, marketing and
         processing....................         3,938             -               3,938                   -              3,938

Oil field services and international
         sales.........................         3,424             -               3,424                   -              3,424
Depreciation and depletion.............         4,460          3,629  (11)        8,089                   -              8,089      
General and administrative.............           651             50  (12)          701                   -                701
                                           -------------     --------------   ---------------  ------------------  ---------------
Total operating costs and expenses.....        17,213          6,718             23,931                   -             23,931
                                           -------------     --------------   ---------------  ------------------  ---------------  

Operating profit.......................         3,467          5,909              9,376                  -              9,376
         Other income..................           155             -                 155                  -                155
         Interest expense..............        (4,758)        (4,587) (13)       (9,345)                 87  (14)      (9,258)
                                           -------------     --------------   ---------------  ------------------- --------------- 

Income before tax, minority interest and
   extraordinary item..................        (1,136)         1,322                186                  87               273

         Income tax (expense) benefit..           432           (497) (7)           (65)                (32) (7)          (97)      
         Minority interest in
         subsidiary earnings...........           (20)            -                (20)                   -               (20)
                                            ------------     -------------   ---------------   ------------------  ---------------
Income before extraordinary item.......          (724)           825               101                   55               156

         Dividends applicable to
         preferred shares..............          (438)            -               (438)                   -              (438)      
                                            ------------     -------------   ----------------  -------------------  --------------
Income (loss) applicable to common                      
         shares before extraordinary
         item..........................       $(1,162)         $ 825             $(337)            $    55           $   (282)
                                            ============     =============    ==============   ==================   ==============
Income (loss) per share                                                      
         before extraordinary item.....         $(0.09)        $0.07            $(0.02)            $     -           $  (0.02)
                                            ============    ==============   ===============   ===================  ==============

Other Data:
     EBITDA (15)                                $8,082        $9,538           $17,620             $     -           $ 17,620
     
     See accompanying notes to Unaudited Pro Forma Combined Financial Data.

</TABLE> 
                                      -44-
<PAGE>



              NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
                             (dollars in thousands)


(1)     To record the  operating  revenues  and oil and natural gas  production
         expenses and gas  gathering  and  marketing  expenses for the first six
         months of 1996 for the Panoma  Properties that were acquired  effective
         July 1, 1996 as if the Panoma  Acquisition  had  occurred on January 1,
         1996.

(2)     To record operating  revenues and gas gathering  and marketing expenses
         related  to the  Company's  50%  interest  in the   McLean  Gas  Plant,
         which was  acquired  for  $2,500 in  January 1997,  for the year ended
         December  31, 1996  as  if  the  McLean  Gas Plant had been acquired on
         January 1, 1996.  The  Company   will receive  100% of the net  profits
         generated by the facility until the $2,500 purchase price is recovered,
         after which it will receive 50% of the net profits. If the Company had
         received  50%  of  the  net profits  generated by  the McLean Gas Plant
         during  the pro forma  period  presented,  its  gross margin would have
         been reduced by $1,043.

(3)      To record the pro forma  depletion  adjustment to reflect the Company's
         depletion  expense  as if the  Panoma  Properties  that  were  acquired
         effective July 1, 1996 had been acquired on January 1, 1996.

(4)     To  record  one year of depreciation expense  on the McLean  Gas  Plant
         (depreciable  life is  15 years)  as  if  the McLean Gas Plant had been
         acquired on January 1, 1996.

(5)     To record estimated additional general and administrative expenses that
         would have been  incurred if the Panoma  Properties  that were acquired
         effective July 1, 1996 had been acquired on January 1, 1996.

(6)     To record interest  expense as if the McLean Plant  Acquisition and the
         Panoma  Acquisition had occurred on January 1, 1996 as set forth below.
         These  acquisitions  were assumed to be financed by the Previous Credit
         Facility with an average interest rate during 1996 of 7.625%.



McLean Gas Plant-interest...............................................$   191
Panoma Properties-interest..............................................  1,321
Panoma Properties-amortization of associated debt issuance costs........     43
                                                                      ----------
                                                                        $ 1,555
                                                                      ==========


(7)     To record  the  effect of the pro forma  adjustments  on  deferred  and
         current  federal and state income taxes at an assumed tax rate of 37.5%
         after  consideration  of  available  net  operating  losses  and  other
         carryforwards.

(8)     To remove  the $389 of  dividends  applicable  to Series B and Series C
         Preferred  Stock that was redeemed or converted to Common Stock in late
         1996 as if the  redemption  or  conversion  had  occurred on January 1,
         1996,  and to record  dividends at a rate of 8.75% on the TCW Preferred
         Stock  issued  in  December  1996 as if it had been  outstanding  since
         January 1, 1996.

(9)     Cash interest expense  consists of interest expense less   amortization
         of debt issuance costs, and excludes an extraordinary  charge of $1,800
         relating to debt issuance cost in  connection  with  repayment  of  the
         Term Loan  Facility.

(10)     To record the Permian Basin Properties  operating revenues and oil  and
         gas  production   expenses as if the  Permian   Basin   Acquisition had
         occurred on January 1, 1996 for the December 31, 1996 pro forma  income
         statement   and  on  January 1, 1997  for  the Pro Forma June 30,  1997
         income statement.

                                      -45-

<PAGE>
(11)     To record the pro forma  depletion  adjustment to reflect the Company's
         depletion  expense as if the Permian Basin Properties had been acquired
         on  January 1,  1996  for   the   December 31, 1996 pro  forma   income
         statement   and  on  January 1, 1997  for  the Pro Forma June 30,  1997
         income statement.

(12)     To  record  the  Company's  estimates  of  general  and  administrative
         expenses that would have been incurred if the Permian Basin  Properties
         had been acquired on  January 1, 1996  for  the  December 31, 1996  pro
         forma  income statement   and  on  January 1, 1997  for  the  June  30,
         1997  income  statement,  net  of estimated  fees that  would have been
         earned by the Company from third parties on the properties it operates,
         as follows:


                                                         1996        1997
                                                      ----------  ----------
Additional general and administrative expenses......  $   702      $  235
Operating fees earned from third parties............     (552)       (185)
                                                      ----------  ----------
                                                      $   150      $   50
                                                      ==========  ==========


(13)     To  record  the  interest  expense  associated  with the  borrowing  of
         $119,500 under the New Credit  Facility and $60,000 under the Term Loan
         Facility to complete the Permian Basin Acquisition and to refinance the
         Previous  Credit  Facility as if the  acquisition  and  refinancing had
         closed on the beginning of the respective periods.

         The New Credit  Facility and the Term Loan Facility are assumed to have
         interest rates of 9.0% and 11.5%, respectively. The debt issuance costs
         associated  with the  facilities  are as follows:

         New Credit Facility debt issuance costs..................       $  700
         Term Loan Facility debt issuance costs...................        1,800
                                                                      ----------
                                                                         $2,500
                                                                      ==========
                     
<TABLE>
<CAPTION>
The components of this interest expense adjustment are as follows:
<S>                                                                                                 <C>                 <C>        
                                                                                                         1996           1997
                                                                                                      ----------      ---------
Elimination of pro forma interest adjustments for McLean Plant Acquisition and Panoma                          
   Acquisition and amortization of associated debt issuance costs................................     $(1,555)         $   -
Elimination of historical interest expense on Previous Credit Facility...........................      (2,394)          (1,415)
Interest on New Credit Facility..................................................................      10,755            3,385
Amortization of debt issuance costs on New Credit Facility.......................................         133               44
Interest on Term Loan Facility...................................................................       6,900            2,300
Amortization of debt issuance costs on Term Loan Facility........................................         220               73
                                                                                                      ----------      ----------
                                                                                                      $14,059          $ 4,587
                                                                                                     ==========       ==========  
</TABLE>
                                      -46-

<PAGE>
                                      
(14)     To adjust interest expense to  reflect the  repayment of  the Term Loan
         Facility and repayment of $75,500 of indebtedness under the  New Credit
         Facility with the net proceeds  of the  Offering. The  assumed interest
         rate on the Notes is 10.0%. After repayment  of the Term Loan Facility,
         using the net  proceeds of the  Offering, the  New Credit Facility will
         bear interest on an assumed interest rate of 7.6% per annum. The $4,500
         of estimated  debt issuance  costs  are  amortized  using the effective
         yield method over the  life  of  the Notes.   This  adjustment excludes
         an  extraordinary  charge to  expense  of  $1,800  debt issuance  costs
         associated  with repayment of the Term Loan Facility. The components of
         the  interest  expense adjustment are as follows:

<TABLE>
<CAPTION>
<S>                                                                                                  <C>                <C>
                                                                                                        1996               1997
                                                                                                     ---------           --------

Interest on the Notes............................................................................    $ 14,000           $ 4,667
Amortization of debt issuance costs on Notes.....................................................         270                90
Elimination of interest on $75,500 of debt under New Credit Facility and effect of reduction
   of interest rate on New Credit Facility following repayment of Term Loan Facility.............      (7,412)           (2,471)
Elimination of interest and amortization of associated debt issuance costs on Term Loan
   Facility......................................................................................      (7,120)           (2,373)
                                                                                                     ----------         ----------
                                                                                                     $   (262)           $  (87)
                                                                                                     ==========         ==========
</TABLE>

(15)     EBITDA is defined as net income (loss) before income taxes and minority
         interest, plus  the   sum of depletion  and  depreciation  and interest
         expense.EBITDA is not a measure of cash flow as determined by generally
         accepted accounting principles.  The  Company  has included information
         concerning EBITDA because EBITDA is a measure used by certain investors
         in  determining  the  Company's  historical    ability to  service  its
         indebtedness. EBITDA should not be considered as an alternative to,  or
         more  meaningful  than,  net  income or  cash  flows  as  determined in
         accordance  with generally  accepted  accounting  principles  or as  an
         indicator of the Company's operating performance or liquidity.




                                      -47-

<PAGE>



                      SELECTED CONSOLIDATED FINANCIAL DATA

     The  following  historical  selected  consolidated  financial  data  of the
Company  are  derived  from,  and  qualified  by  reference  to,  the  Company's
Consolidated  Financial  Statements and the notes thereto.  The income statement
data for the six months ended June 30, 1997 are not  necessarily  indicative  of
results for a full year.  The historical  selected  financial data for the three
years  ended  December  31,  1996  were  derived  from  the  Company's   audited
consolidated  financial  statements.  The  selected  financial  data for the six
months  ended  June 30,  1996 and 1997  have  been  derived  from the  Company's
unaudited interim consolidated  financial statements and include, in the opinion
of  the  Company's  management,  all  adjustments  (consisting  of  only  normal
recurring  adjustments)  necessary to present  fairly the data for such periods.
The  information  contained  in this table  should be read in  conjunction  with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations,"  and the Consolidated  Financial  Statements of the Company and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
<S>                                                         <C>            <C>          <C>         <C>       <C>

                                                                                                         Six Months
                                                                                                            Ended
                                                                      Year Ended December 31,              June 30,
                                                            -------------------------------------   -------------------
                                                                  1994         1995        1996       1996        1997
                                                            -----------------------------------------------------------
                                                                                  (dollars in thousands)
Income Statement Data:
Operating revenues:
   Oil and natural gas.....................................   $     729    $     617   $  10,248  $    2,821   $ 11,791
   Gas gathering, marketing and processing.................           -            -       5,768       1,528      5,283
   Oil field services and international sales..............          16           32         396         201      3,606
                                                                                     
                                                              ----------     ----------  ----------  ----------  ---------
      Total operating revenues.............................         745          649      16,412       4,550     20,680
                                                              ----------     ----------  ----------  ----------  ---------
Operating costs and expenses:
   Oil and natural gas production..........................         318          268       4,390       1,126      4,740
   Gas gathering, marketing and processing.................           -            -       4,708       1,314      3,938
   Oil field services and international sales..............           6           26         267         327      3,424
   Depreciation and depletion..............................         243          421       2,951       1,084      4,460
   General and administrative..............................         769          977       1,225         443        651
                                                              ---------    ----------  ----------  -----------  ---------
      Total operating costs and expenses...................       1,336        1,692      13,541       4,294      17,213
                                                              ---------    ----------  ----------  -----------  ---------
Operating profit (loss)....................................        (591)      (1,043)      2,871         256      3,467
   Other income............................................          51           77         344         186        155
   Interest expense........................................          (7)          (2)     (2,394)       (499)    (4,758)
                                                              ---------    ----------  ----------  -----------  ---------
Net income (loss) before income tax and minority interest..        (547)        (968)        821         (57)    (1,136)
   Provision for deferred income taxes.....................           -            -        (312)           -       432
                                                              ---------    ----------  ----------  -----------  ---------
Net income (loss) before minority interest.................        (547)        (968)        509         (57)      (704)
   Minority interest in subsidiary earnings................           -            -           -           -        (20)
                                                              ---------    ----------  ----------   ----------  ---------
Net income (loss) before extraordinary loss................        (547)        (968)        509         (57)      (724)

Extraordinary loss from early extinguishment of debt.......           -            -           -           -     (1,384)
                                                              ---------    ----------  ----------   ----------  ---------         
Net Income (loss)..........................................        (547)        (968)        509         (57)    (2,108)   
   Dividends applicable to preferred shares................        (579)        (617)       (406)       (340)      (438)
                                                              ---------    ----------  ----------  -----------  ---------
Net income (loss) applicable to common shares..............   $  (1,126)   $  (1,585)  $     103   $    (397)   $(2,546)            

Income (loss) per common share
     Before extraordinary loss.............................      $(0.27)      $(0.28)      $0.01      $(0.03)    $(0.09)
     Extraordinary loss....................................           -            -           -           -      (0.10)
                                                              ---------    ----------  ----------   ----------  ---------   
     After Extraordinary loss.............................       $(0.27)      $(0.28)      $0.01      $(0.03)    $(0.19) 
  
Common shares used in per share calculation (in thousands).      4,167        5,607       12,486      11,659     13,645
Other Data:
EBITDA(1)..................................................   $   (297)    $   (545)   $   6,166   $   1,526   $  8,082
Cash interest expense(2)...................................          7            2        2,347         485      4,605
Capital expenditures(3)....................................      1,945        1,244       41,471      37,301    141,667

</TABLE>

                                      -48-

<PAGE>


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

                                                                                   December 31,                 
                                                                      ------------------------------------    June 30,
                                                                       1994          1995          1996          1997
                                                                      ------------------------------------- --------------
                                                                               (dollars in thousands)
Balance Sheet Data:
Working capital...............................................        $1,197        $(916)        $2,279     $   4,170
Property, plant and equipment, net............................         7,255        36,405        73,648       210,397
Total assets..................................................         9,575        40,065        83,072       231,670
Total debt(4).................................................           186         9,612        38,766       187,055
Stockholders' equity..........................................         8,645        24,496        35,154        32,253

- -----------
</TABLE>
     (1) EBITDA is defined as net income (loss) before income taxes and minority
interest,  plus the sum of depletion  and  depreciation  and  interest  expense.
EBITDA  is not a  measure  of cash  flow as  determined  by  generally  accepted
accounting  principles.  The Company has included information  concerning EBITDA
because  EBITDA  is a measure  used by  certain  investors  in  determining  the
Company's  historical ability to service its indebtedness.  EBITDA should not be
considered as an  alternative  to, or more  meaningful  than, net income or cash
flows as determined in accordance with generally accepted accounting  principles
or as an indicator of the Company's operating performance or liquidity.

     (2) Cash interest expense consists of interest expense less amortization of
debt issuance costs.

     (3) Capital expenditures include cash expended for acquisitions plus normal
additions to oil and natural gas properties and other fixed assets.

     (4) Consists of long-term debt,  including current  maturities of long-term
debt, and excluding  production  payment  liabilities of $288,000,  $937,000 and
$831,000 as of December 31, 1995 and 1996 and June 30, 1997, respectively.




                                      -49-

<PAGE>


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The  following  discussion  should  be read in  conjunction  with  the
Company's  Consolidated  Financial Statements,  "Selected Consolidated Financial
Data" and respective notes thereto,  included  elsewhere herein. The information
below should not be construed  to imply that the results  discussed  herein will
necessarily  continue into the future or that any conclusion reached herein will
necessarily  be  indicative  of actual  operating  results in the  future.  Such
discussion  represents  only the best present  assessment  of  management of the
Company.  Because of the size and scope of the Company's recent acquisitions and
the  relatively  small  scale of the  Company's  operations  prior to 1996,  the
results of operations from period to period are not necessarily comparative.

Background

         In  December  1995,   the  Company   entered  into  the  Magnum  Hunter
Combination  pursuant to which the Company issued to Hunter  5,085,077 shares of
Common  Stock and  111,825  shares  of  Series C  Preferred  Stock  (which  were
subsequently  converted into 335,475 shares of Common Stock) and assumed certain
liabilities in exchange for all the capital stock of Hunter's  subsidiaries (the
"Hunter  Subsidiaries").  The acquired assets included developed and undeveloped
oil and natural gas properties,  a gas gathering system,  and an established oil
and gas  consulting and operating  company,  and were valued at $12.5 million at
the time of acquisition  based upon the then current stock price.  In connection
with the Magnum Hunter  Combination,  the management of Hunter assumed operating
control of the Company.

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

                                      -50-
<PAGE>

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

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

        In April 1997, the Company  purchased the Permian Basin  Properties from
Burlington  for a net purchase  price of $133.0  million,  after  purchase price
adjustments  of $10.5  million to take into  account  production  cash flow from
January  1,  1997  to the  closing  date  and  other  minor  adjustments.  These
properties  consist of  approximately  1,852 producing oil and natural gas wells
and associated acreage in west Texas and southeast New Mexico.  This acquisition
substantially  increased the Company's cash flow and inventory of  exploitation,
development and exploration opportunities.

     On  April  29,  1997,  the  Company  received  and  accepted  two new  loan
commitments  from Bankers Trust Company,  as Agent, and Banque Paribas and First
Union  National  Bank of North  Carolina for senior  credit  facilities  for the
Company and several of its  subsidiaries.  The two new senior credit  facilities
were  structured as a $130 million  revolving line of credit with a term of five
years and a $60 million one year senior subordinated bridge facility convertible
into a five year term loan. The new credit  facilities were  conditioned,  among
other things, upon the closing of the Permian Basin Acquisition from Burlington,
which took place April 30, 1997.  The revolving line of credit gives the Company
the  flexibility of choosing a range of either "LIBOR" or "Prime" based interest
rate options.  This new credit  facility  replaced the previously  existing $100
million revolving credit facility.

     On May 29, 1997, the Company placed,  through a Rule 144A private placement
offering,  $140 million in Senior Notes due 2007.  Net proceeds from the sale of
the Senior Notes were used to completely repay the Company's  outstanding bridge
loan facility in the principal amount of $60 million with the remaining proceeds
used to repay a  substantial  portion  of the  Company's  outstanding  revolving
credit  facility.  The Notes have a 10% coupon,  with interest payable on June 1
and December 1, commencing on December 1, 1997.

      While the Company is  considering  acquisitions  and, to a lesser  extent,
plans to pursue selected exploratory drilling,  the Company intends to focus its
current  efforts on the substantial  inventory of  exploitation  and development
opportunities  arising from its recent acquisitions.  Prior to the Permian Basin
Acquisition, the Company approved a


                                      -51-
  

<PAGE>



$15.0 million  capital budget to be spent during 1997, of which $12.0 million is
allocated  for  development  drilling and $3.0 million is allocated  for several
exploration  projects.  To  facilitate  its  development  drilling  program,  in
December  1996  the  Company  issued  $10.0  million  of  TCW  Preferred  Stock.
Subsequent to the Permian Basin Acquisition,  the Company has initially budgeted
approximately  $5.0 million for  development  expenditures  on the Permian Basin
Properties for 1997.

        The Company uses the full cost method of accounting  for its  investment
in oil and natural gas properties. Under the full cost method of accounting, all
costs  of  acquisition,  exploration  and  development  of oil and  natural  gas
reserves are capitalized into a "full cost pool" as incurred,  and properties in
the pool are depleted  and charged to  operations  using the  unit-of-production
method based on the ratio of current  production to total proved oil and natural
gas  reserves.  To the extent that such  capitalized  costs (net of  accumulated
depreciation,  depletion and  amortization)  less deferred  taxes exceed the SEC
PV-10 of estimated  future net cash flow from Proved Reserves of oil and natural
gas, and the lower of cost or fair value of unproved properties after income tax
effects,  such  excess  costs  are  charged  to  operations.  Once  incurred,  a
write-down of oil and natural gas  properties is not  reversible at a later date
even if oil or natural  gas prices  increase.  While the  Company has never been
required  to  write-down  its asset  base,  significant  downward  revisions  of
quantity  estimates  or  declines  in oil and gas prices from those in effect on
December  31,  1996  which are not  offset by other  factors  could  result in a
write-down for impairment of oil and gas properties.

Comparison of Six Months Ended June 30, 1997 to Six Months Ended June 30,
1996

     As discussed  above,  the Company  acquired the Panoma  Properties  in June
1996, the McLean Gas Plant in January 1997, and the Permian Basin  Properties in
April 1997. As such,  the results of  operations  for the six month period ended
June 30, 1997,  included six months of operations  for Panoma and McLean and two
months for Permian Basin,  while the  corresponding  period in 1996 contained no
results related to these properties.  Unless otherwise stated,  the increases in
the  1997  interim   period  over  the  1996  period  were  a  result  of  these
acquisitions.

     Oil and natural gas sales were  $11,791,000  in 1997, a 318%  increase over
1996. The Company sold 239,752  barrels of oil, a 167%  increase,  and 3,332,349
Mcf of gas, a 583% increase,  in 1997. The price received for oil was $18.33 per
barrel and for gas was $2.22 per Mcf in 1997,  representing a 5% decrease in oil
price and a 1%  decrease  in gas price  compared  to 1996.  Oil and  natural gas
production  costs  increased  321% to  $4,740,000  in 1997 over 1996.  The gross
operating  margin from oil and natural gas  production was $7,051,000 in 1997, a
316% increase over 1996. On an equivalent unit basis, the gross margin was $1.48
per Mcfe in 1997 versus $1.65 in 1996, a 10% decrease.  The sales price declined
10% to $2.47 per Mcfe while production costs also declined 10% to $0.99 per Mcfe
from  1996 to 1997.  These  production  costs are  inclusive  of  gathering  and
overhead  charges of $0.19 per Mcfe. The sales price decline was caused by lower
oil and gas  prices in 1997,  while the lower  unit  production  costs  were the
result of lower Permian Basin  Properties unit costs,  principally gas gathering
fees, compared to the unit costs of the Company's other properties.  The overall
increase in the gross operating  margin from 1996 to 1997 was principally due to
the 364% increase in Mcfe sold, from 1,027,182 Mcfe to 4,770,861 Mcfe.

                                      -52-

<PAGE>

     Gas gathering,  marketing,  and processing  revenues were $5,283,000 in the
1997  period,  a  246%  increase  over  1996,  principally  as a  result  of the
acquisition of the Panoma Gas Gathering  System and the McLean Gas Plant.  Costs
from these  activities were $3,938,000 in 1997, a 200% increase over 1996. Gross
operating  margin  was  $1,345,000  in 1997  versus  $214,000  in  1996,  a 529%
increase. As a result of the acquisition of the Panoma System,  gathering system
throughput  increased 385% to 21,057 Mcf per day in 1997 compared with 4,344 Mcf
per  day in  1996.  Due to the  McLean  Plant  acquisition,  natural  gas  plant
processing  throughput  was 15,303 Mcf per day in 1997 versus  none  reported in
1996.  Gross operating margin from gathering  operations was $787,000,  or $0.22
per Mcf of throughput,  in 1997 versus  $214,000,  or $0.27 per Mcf in 1996. The
gross  operating  margin from natural gas processing was $558,000,  or $0.22 per
Mcf of throughput versus none reported in 1996.

     Revenues from oil field services and international sales were $3,606,000 in
1997, a $3,405,000  increase over 1996,  principally due to an increase in sales
of Hunter Butcher International,  L.L.C. in the amount of $3,398,000.  Operating
costs  increased 947% to $3,424,000 in 1997 from 1996,  also  principally due to
Hunter  Butcher in the amount of  $3,338,000.  The gross  operating  margin from
these  activities  was  $182,000  in 1997  versus a loss of $126,000 in the 1996
period.  The margin from Hunter  Butcher  operations  was $60,000 in 1997 versus
$32,000 in 1996. Oil field services  produced an operating margin of $122,000 in
1997 versus a loss of $158,000 in 1996.

     Depreciation and depletion expense increased 311% to $4,460,000 in 1997 due
to the acquisitions. Depletion expense on oil and gas production was $4,080,000,
or $0.86 per Mcfe, in 1997 versus $975,000,  or $0.95 per Mcfe in 1996.  General
and  administrative  expense was $651,000 in 1997, a 47% increase over 1996, due
to increased staffing and other costs as a result of the acquisitions.

     Operating  profit  increased to $3,467,000 in 1997 from $256,000 in 1996, a
1,245% increase.  Interest expense increased to $4,758,000 in 1997 from $499,000
in 1996,  an increase of 854%,  due to increased  levels of borrowing  under the
Company's  revolving  credit lines with banks,  the 10% Senior Notes, and bridge
financing  used to fund  the  acquisitions  previously  mentioned.  The  Company
incurred a net loss before  income tax and minority  interest of  $1,136,000  in
1997, versus a $57,000 loss in 1996,  principally due to interest expense on the
acquisitions  exceeding  operating  income  and  due to the  higher  charge  for
depreciation  and  depletion.  The Company  provided  for a deferred  income tax
benefit of $432,000  on this loss in 1997.  After  recording a $20,000  minority
interest in Hunter Butcher, the Company reported a net loss before extraordinary
item of $724,000,  or $0.09 per common share,  in 1997 versus a $57,000 loss, or
$0.03 per common share, in 1996.

                                      -53-

<PAGE>
     The Company realized an extraordinary  loss of $1,384,000 ($0.10 per common
share) as required under Accounting  Principles  Board ("APB")  Statement No. 26
and Statement of Financial  Accounting  Standards ("SFAS") No. 4, from the early
extinguishment  of bank debt. The early  extinguishment  was a result of the new
10% Senior Notes financing and amended  revolving  credit  agreements with banks
arranged to facilitate the $133 million purchase of the Permian Basin Properties
from Burlington.  The net loss, after the  extraordinary  charge,  applicable to
common  shares was  $2,546,000  ($0.19 per share) in 1997  compared to a loss of
$397,000 ($0.03 per share) in 1996. The Company accrued $436,000 in dividends on
its preferred stock in 1997 versus $340,000 in 1996.

Results of Operations for the Three Month Periods ended June 30, 1997 and 1996

     The results of  operations  for the three month period ended June 30, 1997,
included three months of operations for the Panoma Properties and the McLean Gas
Plant and two months for the Permian Basin  Properties,  while the corresponding
period  in 1996  contained  no  results  related  to  these  properties.  Unless
otherwise stated,  the increases in the 1997 interim period over the 1996 period
were a result of these acquisitions.

     Oil and natural gas sales were  $8,528,000  in 1997, a 492%  increase  over
1996. The Company sold 193,735  barrels of oil, a 326%  increase,  and 2,359,969
Mcf of gas, a 915% increase,  in 1997. The price received for oil was $17.76 per
barrel and for gas was $2.16 per Mcf in 1997,  representing  an 11%  decrease in
oil  price and a 5%  decrease  in gas price in 1997  compared  to 1996.  Oil and
natural gas production costs increased 460% to $3,143,000 in 1997 over 1996. The
gross  operating  margin from oil and natural gas  production  was $5,385,000 in
1997, a 512% increase over 1996. On an equivalent  unit basis,  the gross margin
was $1.53 per Mcfe in 1997 versus $1.74 in 1996, a 12% decrease. The sales price
for  natural  gas  declined  15% to $2.42 per Mcfe while  production  costs also
declined  20% to $0.89 per Mcfe from 1996 to 1997.  These  production  costs are
inclusive of gathering and overhead  charges of $0.09 per Mcfe.  The sales price
decline  was  caused by lower oil and gas  prices in 1997,  while the lower unit
production  costs were the result of lower Permian Basin  Properties unit costs,
principally  gas  gathering  fees,  compared to the unit costs of the  Company's
other  properties.  The overall increase in the gross operating margin from 1996
to 1997 was principally due to the 597% increase in Mcfe sold, from 505,136 Mcfe
to 3,522,379 Mcfe.

     Gas gathering,  marketing,  and processing  revenues were $1,391,000 in the
1997  period,  an  80%  increase  over  1996,  principally  as a  result  of the
acquisition of the Panoma gas gathering  system and the McLean Gas Plant.  Costs
from these  activities  were $978,000 in 1997, a 46% increase  over 1996.  Gross
operating  margin was $413,000 in 1997 versus $101,000 in 1996, a 309% increase.
As a result of the acquisition of the Panoma system, gathering system throughput
increased  338% to 18,796 Mcf per day in 1997 compared with 4,287 Mcf per day in
1996.  Due to the McLean Gas Plant  acquisition,  natural  gas plant  processing
throughput was 12,614 Mcf per day in 1997 versus none in 1996.  Gross  operating
margin from gathering  operations was $179,414,  or $0.10 per Mcf of throughput,
in 1997 versus  $101,000,  or $0.26 per Mcf in 1996. The gross operating  margin
from natural gas processing was $234,000, or $0.20 per Mcf of throughput in 1997
versus none in 1996.

     Revenues from oil field services and  international  sales were $135,000 in
1997, a 36% increase over 1996,  principally  due to increased  operator fees on
oil and gas  properties.  Operating  costs decreased 46% to $86,000 in 1997 from
1996 due to an increased allocation of operating costs to oil and gas production
costs.  The gross  operating  margin from these  activities  was $49,000 in 1997
versus a loss of $61,000 in the 1996 period.

     Depreciation and depletion expense increased 485% to $3,379,000 in 1997 due
to the acquisitions. Depletion expense on oil and gas production was $3,184,000,
or $0.90 per Mcfe, in 1997 versus $505,000,  or $1.00 per Mcfe, in 1996. General
and  administrative  expense was $429,000 in 1997, a 94% increase over 1996, due
to increased staffing and other costs as a result of the acquisitions.

                                      -54-

<PAGE>
     Operating  profit  increased to $2,039,000 in 1997 from $121,000 in 1996, a
1,585% increase.  Interest expense increased to $3,690,000 in 1997 from $245,000
in 1996, an increase of 1,406%,  due to increased  levels of borrowing under the
Company's  revolving  credit lines with banks,  the 10% Senior Notes, and bridge
financing  used to fund  the  acquisitions  previously  mentioned.  The  Company
incurred a net loss before  income tax and minority  interest of  $1,568,000  in
1997,  versus income of $36,000 in 1996,  principally due to interest expense on
the  acquisitions  exceeding  operating  income  (inclusive of depreciation  and
depletion  in the total  amount  of  $3,379,000).  The  Company  provided  for a
deferred  income  tax  benefit of  $596,000  on this loss in 1997.  The  Company
reported a net loss before  extraordinary item of $974,000,  or $0.09 per common
share, in 1997 versus income of $36,000 in 1996.

     The Company realized an extraordinary  loss of $1,384,000 ($0.10 per common
share) as required under Accounting  Principles  Board ("APB")  Statement No. 26
and Statement of Financial  Accounting  Standards ("SFAS") No. 4, from the early
extinguishment  of bank debt. The early  extinguishment  was a result of the new
10% Senior Notes financing and amended  revolving  credit  agreements with banks
arranged to facilitate the $133 million purchase of the Permian Basin Properties
from Burlington  Resources Inc. The net loss,  after the  extraordinary  charge,
applicable to common shares was $2,577,000 ($0.19 per share) in 1997 compared to
a loss of $132,000  ($0.03 per share) in 1996. The Company  accrued  $219,000 in
dividends on its preferred stock in 1997 versus $168,000 in 1996.

 
Comparison of Year Ended December 31, 1996 to Year End December 31, 1995

         After  deduction  for  preferred  dividends,  the Company  reported net
income  applicable to common shares for the year ended December 31, 1996 of $0.1
million, a $1.7 million increase as compared to the net loss of $1.6 million for
the year ended  December  31,  1995.  Prior to the  preferred  dividends in both
periods, the Company reported net income of $0.5 million in 1996, a $1.5 million
increase over 1995.  Net income per common share was $0.01 for 1996, a $0.29 per
share  increase  over 1995.  This  increase was the result of higher  production
volumes  in 1996 from (i)  acquisition  activities,  which  included  the Magnum
Hunter  Combination  in December 1995 and the Panoma  Acquisition  in July 1996,
(ii)  increased  prices  received  for oil and natural gas  products,  (iii) the
acquisition of gas gathering systems in the Panoma Acquisition, and (iv) natural
gas marketing  activity.  During 1996,  oil and natural gas  production  volumes
increased significantly to 3.8 Bcfe, an average of 10,470 Mcfe/d, as compared to
0.3 Bcfe, an average of 773 Mcfe/d, in 1995. The increased  revenues  recognized
from  production  volumes  were aided by a 22%  increase  in the  average  price
received per Mcfe of  production  to $2.68  during  1996.  The average oil price
increased  31% to $20.46 per Bbl in 1996, as compared to $15.60 per Bbl in 1995,
while  average  natural  gas  prices  increased  62% to $2.37 per Mcf in 1996 as
compared to $1.46 per Mcf in 1995.

       As a result of the acquisition activity and higher prices, total revenues
in 1996 were $16.4 million,  a $15.8 million  increase over 1995.  This increase
consisted  of an increase in oil and natural gas sales of $9.6 million from 1995
to 1996 and an increase in gas gathering, marketing and services revenue of $6.1
million over the same period.  After the Panoma  Acquisition  in July 1996,  the
percentage  of the  Company's  reserves  attributable  to natural gas was 74% as
compared to 38% at the end of 1995. Due to the Company's  owning more properties
and  larger  volume of  production,  oil and  natural  gas  production  expenses
increased  $4.1 million to $4.4 million in 1996 versus $0.3 million in 1995. The
average  cost of oil and natural  gas  produced  per Mcfe was $1.15 in 1996,  an
increase of $0.20 per Mcfe,  due to costs of startup of operations at the Panoma
Properties.

       Gross margin from oil and natural gas  production  increased $5.5 million
to $5.9  million  in 1996 from $0.4  million  in 1995.  Gross  margins  from gas
gathering,  marketing, and services increased to $1.1 million in 1996, from $0.0
million in 1995.



                                      -55-

<PAGE>



       Depreciation and depletion  expense  increased to $3.0 million in 1996, a
$2.5 million  increase over 1995, as a result of the Panoma  Acquisition and the
Magnum Hunter Combination.  The Company-wide depreciation and depletion rate was
$0.77 per Mcfe in 1996 versus $1.49 per Mcfe in 1995. General and administrative
expense  increased to $1.2 million in 1996, a $0.2 million  increase  over 1995,
due to higher operational  staffing and associated costs as a result of expanded
operations, partially offset by a reduction in promotional and related expenses.
Other income  increased to $0.3 million in 1996 due to a gain on sale of assets.
Interest  expense  increased to $2.4 million due to  increased  financing  costs
incurred  as  a  result  of  the  Magnum  Hunter   Combination  and  the  Panoma
Acquisition.

         The Company made a provision for deferred  income taxes of $0.3 million
in 1996.  No income  taxes were due for 1996 as a result of  utilization  of net
operating loss carryforwards.  At December 31, 1996 the Company had $6.9 million
available in such  carryforwards  to offset  against  future  income.  Dividends
applicable  to  preferred  stock  were $0.4  million  for 1996,  a $0.2  million
decrease from 1995, due to the redemption of the Series B and Series C Preferred
Stock  during 1996,  offset by the effect of the  issuance of the TCW  Preferred
Stock at the end of 1996.

Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994

        After deduction for preferred dividends, the Company reported a net loss
applicable  to  common  shares  for the year  ended  December  31,  1995 of $1.6
million,  an increased  loss of $0.5  million as compared to 1994.  Prior to the
preferred dividends in both periods, the Company reported a net loss for 1995 of
$1.0  million,  a $0.4  million  increase in net loss over 1994.  On a per share
basis,  the net loss was $0.28 and $0.27,  respectively,  for 1995 and 1994. The
increased  loss in 1995 as compared to 1994 was primarily due to higher  general
and administrative expenses in anticipation of the Magnum Hunter Combination and
a  higher  depletion  rate on the  Company's  pre-existing  properties  after an
evaluation of such reserves by the new management at year end 1995.

         Total revenues were $0.6 million in 1995, a $0.1 million  decrease from
1994.  This was the  result of a decrease  in oil and  natural  gas  sales.  The
Company's  production in 1995  decreased to 282 MMcfe,  a 58 MMcfe decrease from
1994, although the average price received per Mcfe increased in 1995 to $2.19, a
$0.04 per Mcfe  increase  from  1994.  Gross  margin  from oil and  natural  gas
production  was $0.3  million in 1995, a $0.1 million  decrease  from 1994.  The
decline in oil and natural gas production and margin was largely attributable to
a decline  in oil  production  volumes  from the South  Tonkawa  prospect  after
initial  flush  production  in 1994.  The  average  cost of oil and  natural gas
produced  per Mcfe in 1995 was $0.95,  an  increase of $0.01 per Mcfe over 1994.
Gross margin from services was essentially flat in 1995 compared to 1994.


                                      -56-
<PAGE>

        Depreciation and depletion  expense increased to $0.4 million in 1995, a
$0.2 million  increase over 1994, as a result of an increase in depletable  book
value of the  Company's  properties  and a  reduction  of the  estimated  proved
undeveloped  reserves of two of the  Company's  base  properties  after  further
evaluation  by  the  new  Hunter  management  at  year  end  1995.  General  and
administrative  expense  increased  to $1.0  million  in  1995,  a $0.2  million
increase over 1994, due to an increase in staffing levels in anticipation of the
Magnum Hunter Combination in December 1995.    Other income and interest expense
were essentially unchanged in 1995 from 1994.

        The Company made no  provision  for  deferred  income taxes in 1995.  No
income taxes were due for 1995 as a result of net operating loss  carryforwards.
Dividends applicable to preferred stock were $0.6 million, essentially unchanged
from 1994.

Liquidity and Capital Resources

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

     On April 30, 1997,  the Company  closed on the  acquisition  of the Permian
Basin Properties for a net purchase price of approximately $133 million.  At the
same time, the Company's $100 million  Previous  Credit Facility was replaced by
two new credit facilities, a revolving New Credit Facility of $130 million and a
Term Loan  Facility of $60  million,  for a total of $190  million.  The initial
advances under these new facilities  totaled $179.5 million,  including funds to
complete the Permian Basin  Acquisition,  to pay principal and accrued  interest
remaining on the $100 million Previous Credit Facility,  and to provide cash for
working capital purposes.

     On May 29, 1997,  the Company sold,  through a Rule 144A private  placement
offering,  $140 million in Senior Notes due 2007.  Net proceeds from the sale of
the Senior Notes were used to completely  repay the Company's Term Loan Facility
in the principal amount of $60 million with the remaining proceeds used to repay
a substantial  portion of the Company's  outstanding  New Credit  Facility.  The
Notes  have a 10%  coupon,  with  interest  payable  on June 1 and  December  1,
commencing  on December 1, 1997.  After  paydown,  the New Credit  Facility  was
reduced from $130 million to $75 million,  with a current  borrowing base of $60
million. Total long-term debt under the New Credit Facility at June 30, 1997 was
$47 million,  leaving $13 million  available to draw at such time,  prior to the
next borrowing base redetermination  occurring during the third quarter. At June
30,  1997,  the Company had $1.6 million in cash and cash  equivalents  and $4.2
million in net working  capital,  in addition to the funds  available  under the
revolving line of credit.


                                      -57-

<PAGE>
     For fiscal  1997,  the Company is currently  projecting  that it will spend
approximately $20 million on development and exploration activities, of which $3
million is budgeted on exploration  projects.  In addition,  with respect to the
recently closed Permian Basin  Properties  acquisition,  the Company projects to
spend  approximately $40 million in a development program to enhance an existing
waterflood  project in the Westbrook  Field located in Mitchell  County,  Texas.
This capital  expenditure is budgeted over a four year period beginning in 1997.
Based upon the Company's  anticipated level of operations,  management  believes
that cash flow from  operations  together  with the  availability  under the New
Credit  Facility  will be  adequate  to meet its  anticipated  requirements  for
working capital,  capital  expenditures and scheduled  interest payments for the
foreseeable  future.  The Company may seek to increase it liquidity  through the
sale of common equity  and/or the exercise of its publicly  traded  warrants.  A
depressed  price for oil or natural gas would have a material  adverse effect on
the Company's cash flow from operations and could cause the Company to alter its
planned capital expenditures.

         For 1996,  the Company  had a net  increase  in cash of  $143,000.  The
Company's operating activities provided net cash of $3,028,000, principally from
operating income before depreciation, depletion and deferred taxes, reduced by a
net increase in accounts  receivable  over  accounts  payable.  The Company used
$41,738,000 in investing  activities,  principally for additions to property and
equipment of  $41,471,000,  as well as  increases in deposits and other  assets.
Financing  activities  provided  $38,853,000  of  cash,   principally  from  the
aggregate  proceeds  from the  issuance of  long-term  debt of  $56,512,000  and
production  payments of  $750,000,  less  payments  on such debt and  production
payments of  $27,459,000,  as well as proceeds  from the  issuance of  preferred
stock of  $9,796,000.  The Company also paid $295,000 to redeem a portion of the
outstanding  Series C Preferred Stock and $438,000 to pay dividends on preferred
stock.

     For  1995,  the  Company  had a net  decrease  in cash of  $101,000  as the
proceeds received from the sale of preferred stock were principally used for oil
and natural gas  acquisition  and  development  activity  and for the payment of
dividends and  payables.  The Company's  operating  activities  used net cash of
$849,000, principally as a result of the net loss from operations and the payoff
of a substantial amount of accounts payable.  Investing activities used net cash
of  $2,007,000,  largely  from  acquisition  and  development  of  oil  and  gas
properties.  Financing activities accounted for net cash provided of $2,755,000,
principally  from the proceeds  received due to the issuance of preferred  stock
mentioned above. Partially offsetting the proceeds from the stock issuances were
advances  made to Magnum  Hunter  Production,  Inc.  for  acquisition  costs and
working  capital of $1,034,000,  prior to the Magnum Hunter  Combination and the
ultimate consolidation, and the payment of preferred dividends of $583,000.

   Capital Requirements

         Prior to the Permian Basin  Acquisition,  the Company  approved a $15.0
million  capital  budget to be spent  during  1997,  of which  $12.0  million is
allocated  for  development  drilling and $3.0 million is allocated  for several
exploration  projects.  To  facilitate  its  development  drilling  program,  in
December 1996 the Company issued $10.0 million of TCW Preferred Stock.


                                      -58-

<PAGE>
     On April 30, 1997, the Company  acquired from  Burlington,  effective as of
January 1, 1997, the Permian Basin Properties. The net purchase price was $133.0
million after adjustments of $10.5 million for production cash flow from January
1, 1997 to the closing date and other minor  adjustments.  The Company  financed
the  acquisition  of the Permian Basin  Properties  with the $130.0  million New
Credit  Facility  and the $60.0  million  Term  Loan  Facility.  The New  Credit
Facility and the Term Loan Facility were used to pay the $123.0 million  balance
of  the  net  purchase   price,  to  repay  the  $53.7  million  in  outstanding
indebtedness under the Previous Credit Facility and to pay costs associated with
the  Permian  Basin  Acquisition  and the  related  financings.  In  addition to
providing  the Company with  significant  new sources of earnings and  operating
cash flow,  management of the Company believes the Permian Basin Properties will
provide  significant  opportunities for exploitation and development of both oil
and natural gas reserves through a combination of enhanced recovery projects and
new drilling  projects.  The Company has initially  budgeted  approximately $5.0
million for development expenditures on the Permian Basin Properties for 1997.

     The Company has adopted a  "controlled  risk"  approach to its  exploratory
drilling  activity by  concentrating  in specific  regions in the United  States
(primarily   Oklahoma  and  Texas)  where  the  Company's  technical  staff  has
considerable experience and near proved producing properties where the potential
for significant  reserve additions  exists. To the extent feasible,  the Company
reduces its  exploration  risk by  diversifying  through  investment in multiple
prospects,  by farming out (promoting out) interests to industry partners and by
utilizing 3-D seismic surveys and other advanced technologies.

      As the Company  continues to increase its asset base,  management plans to
expand the scope of its oil and natural gas activities,  including the Company's
possible  participation in foreign energy  prospects.  The Company believes that
Latin America offers  significantly  greater  hydrocarbon reserve potential with
less competition than in the United States.  The Company does not plan to invest
in any foreign  prospects during 1997.  However,  the Company  anticipates that,
should it decide in the future to expand into Mexico,  Central  America or South
America,  any such  investment  would be made in an arrangement  that shares the
risks with one or more additional partners.

     Based upon the  Company's  anticipated  level of  operations,  the  Company
believes that cash flow from operations together with the availability under the
New Credit Facility  (approximately $12.0 million as of September 30, 1997) will
be adequate to meet its anticipated  requirements for working  capital,  capital
expenditures and scheduled  interest  payments for the foreseeable  future.  The
Company may seek to increase  its  liquidity  through the sale of common  equity
and/or the exercise of its publicly traded  warrants.  A depressed price for oil
or natural gas would have a material  adverse  effect on the Company's cash flow
from  operations  and could  cause the  Company  to alter  its  planned  capital
expenditures.

                                      -59-

<PAGE>
   Inflation and Changes in Prices

     During the past several years,  the Company has experienced  some inflation
in oil and natural gas prices with  moderate  increases in property  acquisition
and  development  costs.  During  1996,  the Company  received  somewhat  higher
commodity  prices for the natural  resources  produced from its properties.  The
results of operations  and cash flow of the Company have been, and will continue
to be,  affected to a certain  extent by the  volatility  in oil and natural gas
prices.  Should the Company experience a significant increase in oil and natural
gas prices that is sustained over a prolonged period, it would expect that there
would also be a  corresponding  increase in oil and  natural gas finding  costs,
lease acquisition costs, and operating expenses. Periodically the Company enters
into futures,  options, and swap contracts to reduce the effects of fluctuations
in crude oil and natural  gas  prices.  It is policy of the Company not to enter
any such  arrangements  which  exceed 50% of the  Company's  oil and natural gas
production during the next 12 months.


      The Company  markets  natural gas for its own account,  which  exposes the
Company to the  attendant  commodities  risk.  Hunter  Gas  Gathering,  Inc.,  a
subsidiary  of the Company,  currently  sells the majority of its natural gas to
Crosstex Energy Services  ("Crosstex"),  a gas marketing firm located in Dallas,
Texas  that  was  formed  in  January  1997  when  Comstock  Natural  Gas,  Inc.
("Comstock")  sold  its gas  gathering,  processing  and  marketing  operations.
Although  the Company sold  approximately  91% of its natural gas to Comstock in
1996 and has sold a  comparable  percentage  to  Crosstex  to date in 1997,  the
Company  does not believe  that any  discontinuation  of such sales  arrangement
would be  disruptive to the  Company's  gas  marketing  operations.  The Company
typically  obtains  letters of credit  guaranteeing  the payment of the purchase
price for its natural gas.

   Hedging Activity

     Periodically,  the Company enters into futures, options, and swap contracts
to reduce the effects of fluctuations in crude oil and natural gas prices. As of
June 30, 1997,  the Company had 16% of its oil production and 17% of its natural
gas production  hedged. At June 30, 1997, the Company had open contracts for oil
price  collars  of 15,000  Bbls of oil per month  (with cap and floor  prices of
$25.10 and $20.00,  respectively)  through  August 1997. At March 31, 1997,  the
Company had open  contracts  for natural gas price swaps of 100,000 MMBtu of gas
per month at $1.905 per MMBtu through January 1998, and another 100,000 MMBtu of
natural gas per month at $1.770 per MMBtu through January 1998.  These contracts
expire  monthly.  The Company has also entered into a hedge agreement to fix the
differential between the New York Mercantile Exchange ("NYMEX") price and the El
Paso Permian  Basin Index at $0.20 per MMBtu for 100,000 MMBtu per month for the
six-month  period  commencing  May 1, 1997. The gains or losses on the Company's
hedging transactions are determined as the difference between the contract price
and a  reference  price,  generally  closing  prices  on  NYMEX.  The  resulting
transaction  gains and losses are  determined  monthly  and are  included in the
period the hedged  production or inventory is sold. Net gains or losses relating
to these  derivatives for the years ended December 31, 1994, 1995, and 1996 were
$0.0, $0.0, and $(0.3) million, respectively.




                                      -60-

<PAGE>



                             BUSINESS AND PROPERTIES

The Company

      Magnum Hunter is an independent energy company engaged in the exploitation
and development,  acquisition,  exploration and operation of oil and natural gas
properties with a focus on Texas, Oklahoma and New Mexico. In December 1995, the
Company  consummated  the Magnum Hunter  Combination,  whereby the management of
Hunter assumed operating control of the Company. The new management  implemented
a business strategy emphasizing  acquisitions of long-lived Proved Reserves with
significant  exploitation  and  development   opportunities  where  the  Company
generally  can  control  the  operations  of the  properties.  As  part  of this
strategy,  in  June  1996  the  Company  acquired  the  Panoma  Properties  from
Burlington for $34.7 million.  Additionally, in April 1997, the Company acquired
the Permian Basin  Properties from Burlington for a net purchase price of $133.0
million.  While the Company is considering further acquisitions and, to a lesser
extent, plans to pursue selected exploratory drilling opportunities, the Company
intends to focus its efforts on the substantial  inventory of  exploitation  and
development opportunities arising from the acquisitions.

      The Company is a holding  company  that  operates  through  three  primary
subsidiaries:  (i) Gruy,  which conducts the Company's  operations;  (ii) Magnum
Hunter  Production,  Inc.,  which owns the Company's oil and natural gas assets;
and (iii) Hunter Gas Gathering, Inc., which owns the Company's gas gathering and
processing facilities.

      On a pro forma basis at December 31, 1996,  the Company had an interest in
2,581 wells and had estimated  Proved Reserves of 314.2 Bcfe with a SEC PV-10 of
$408.0  million.  As adjusted to use market  prices in effect on March 31, 1997,
the Proved Reserves were 300.5 Bcfe with an SEC PV-10 of $224.8 million on a pro
forma basis at December  31,  1996.  Approximately  68% of these  reserves  were
Proved  Developed  Producing  Reserves and 86% were  attributable  to the Panoma
Properties  and the Permian Basin  Properties.  On a pro forma basis at December
31, 1996, the Company's  Proved  Reserves had an estimated  Reserve Life of 14.6
years and were 61% natural gas. The Company serves as operator for approximately
71% of its  properties  (based  on the  number of  producing  wells in which the
Company owns an interest).  Additionally, the Company owns over 500 miles of gas
gathering systems and a 50% interest in a gas processing plant that is connected
to the gas gathering system purchased with the Panoma Properties.  In 1996, on a
pro forma basis,  the Company had revenues of $63.6  million and EBITDA of $38.3
million.

      Beginning with the Magnum Hunter Combination in December 1995, the Company
has made  nine  acquisitions  for an  aggregate  net  purchase  price of  $185.4
million.   This  strategy  has  added   approximately  305.6  Bcfe  of  reserves
(determined as of the respective times of their  acquisition) at an average cost
of $0.61 per Mcfe, as well as a 427 mile gas gathering system and a 50% interest
in the  McLean Gas  Plant.  As a result of its  acquisitions,  the  Company  has
achieved substantial growth as described below (comparing 1996 pro forma data to
1995 historical data):

   o    Proved Reserves increased to 314.2 Bcfe at year end 1996 (300.5 Bcfe  as
        adjusted  for  March 31,  1997 market prices) from 36.7 Bcfe at year end
        1995;

   o    Annual production increased to 20.4 Bcfe in 1996 from 0.3 Bcfe in 1995;

   o    SEC PV-10  increased to $408.0 million at year end 1996 ($224.8  million
        as adjusted for March 31, 1997 market prices) from $37.2 million at year
        end 1995; and

   o    EBITDA increased to $38.3 million in 1996 from $(0.5) million in 1995.




                                      -61-

<PAGE>



Company Strengths

   o    Quality of Reserves.  The  Company  has a high quality reserve base. The
        majority of the reserves are in the Permian Basin and Hugoton Embayment,
        both  of  which  are well-known, mature  oil and natural  gas  producing
        regions. The fields in which the properties  are  located generally have
        significant  production  history  and  performance  data.  In  addition,
        approximately 68% of  the Company's Proved  Reserves  were classified as
        Proved Developed Producing Reserves on a pro forma basis at December 31,
        1996. These attributes  reduce  the risks  associated  with  determining
        remaining reserves and forecasting future production from the properties
        The properties are also long-lived with an estimated Reserve  Life  on a
        pro forma basis at December 31, 1996 of 14.6 years.

   o    Substantial  Inventory of  Exploitation  and Development  Projects.  The
        Company has identified  over 400 development  drilling  locations on its
        properties.  The Company  believes the majority of these  locations  are
        low-risk  in-fill  drilling  opportunities  which should add incremental
        reserves  and  increase   production  rates.  In  addition  to  drilling
        opportunities,  the Company has  identified  several  enhanced  recovery
        projects which will include the use of waterflood and tertiary  recovery
        methods.

   o    Significant Operating Control. Through its Gruy subsidiary,  the Company
        operates  approximately  71% of the  properties  in  which  it  owns  an
        interest.  This  level of  operating  control  benefits  the  Company in
        numerous  ways by  enabling  the  Company to: (i) control the timing and
        nature of capital expenditures, (ii) identify and implement cost control
        programs,  (iii) respond quickly to operating  problems and (iv) receive
        overhead reimbursements from other working interest owners.

   o    Experienced Management. The Company's three senior managers have over 82
        combined  years of direct oil and natural gas experience in the areas of
        drilling  and  completions,   production  operations,  acquisitions  and
        divestitures  and  reservoir engineering.  Most members of the Company's
        technical staff, having spent their entire careers specializing in these
        regions,  have  in-depth  knowledge  of  the  Company's  core  operating
        regions.

   o    Balanced  Reserve Mix. On a pro forma basis at December  31,  1996,  the
        Company's  reserve mix was  approximately  39% oil and 61% natural  gas.
        This  balanced  portfolio  reduces  the  Company's  exposure to a single
        product's price volatility.

Business Strategy

      The Company's objective is to aggressively grow its reserves,  production,
cash flow and  earnings  utilizing a balanced  program of (i)  exploitation  and
development of acquired properties,  including development  drilling,  workovers
and cost reduction programs,  (ii) strategic  acquisitions and (iii) a selective
exploration  program.  Since the Magnum  Hunter  Combination,  the  Company  has
acquired  long-lived  properties with  significant  exploitation and development
potential  where the Company can control  operations on a high percentage of the
properties.  The Company is now  focusing  its efforts on fully  developing  the
large  inventory of properties  arising from its  acquisitions  and, to a lesser
extent, is identifying and participating in selected exploratory prospects.  The
Company is also evaluating several smaller strategic  acquisitions which fit the
Company's  objectives of having long-lived Proved Reserves with exploitation and
development potential and operating control.

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

   o    Exploitation and Development of Existing  Properties.  The Company has a
        substantial  inventory of exploitation  projects  including  development
        drilling, workovers and recompletions and cost reduction programs. As of
        December  31,  1996,  on a pro  forma  basis,  32%  (100.0  Bcfe) of the
        Company's total Proved  Reserves were  classified as Proved  Undeveloped
        Reserves.  The  Company  seeks to maximize  the value of the  properties
        through development activities including in-fill drilling, waterflooding
        and other enhanced  recovery  techniques.  Management  believes that the
        proximity of these Proved Undeveloped Reserves to existing


                                      -62-

<PAGE>



        production makes  development of these projects less risky and more cost
        effective than other drilling opportunities available to the Company.

   o    Operating Cost Management. The Company emphasizes  strict cost  controls
        in  all  aspects of  its business, and seeks  to operate  its properties
        wherever possible. By operating approximately 71% of its properties, the
        Company is generally able to control direct operating and drilling costs
        as  well  as  to  manage  the  timing  of  development  and exploration 
        activities.  For example,  following the Panoma Acquisition, the Company
        increased operating  margins by restoring  shut-in wells to  production,
        reducing the number  of field  employees, implementing  compression  and
        other improvements on the Panoma  gas gathering  system and purchasing a
        50% interest in the McLean Gas Plant. Management believes  it can  also 
        reduce operating costs on the Permian Basin  Properties by  reducing the
        number of field employees, using contract pumpers and implementing other
        efficiencies. Moreover, as a  result of its  acquisition of  the Permian
        Basin Properties, the Company expects  only a  moderate increase  in its
        general and administrative  expenses  in relation to the large number of
        properties  acquired.  Therefore,  the  Company  anticipates  that  such
        expenses will decline on a per Mcfe basis.

   o    Strategic Acquisitions.  Although the Company has an extensive inventory
        of  exploitation  and  development  opportunities,  it is  continuing to
        pursue  smaller   strategic   acquisitions  in  its  existing  areas  of
        operations which fit its objectives of having long-lived Proved Reserves
        with development potential and operating control.

   o    Expansion of  Gas Gathering and  Marketing  Operations.  The Company has
        implemented several programs to expand  and  increase  the efficiency of
        its gas gathering systems. The Company owns over 75% and markets 100% of
        the  natural gas  that  moves  through its  gas  gathering systems  and,
        therefore,directly benefits from any cost and productivity improvements.
        Since  the  Company  believes  that  its  gas  gathering  systems   have
        significant underutilized throughput capacity, it  is actively  pursuing
        several  opportunities  to  add   new  Company  and  third   party  well
        connections. The Company  is also considering  opportunities  to acquire
        complementary gas  gathering  systems and to form  joint  ventures  with
        other operators. In addition, the Company believes that  its acquisition
        of a 50% interest in the McLean Gas Plant allows the Company to  capture
        a portion  of the processing  profits on  natural gas  produced  at  the
        Panoma Properties that would otherwise go to third party processors.

Recent Acquisitions

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

 Permian Basin Acquisition

      On April 30, 1997, the Company acquired from  Burlington,  effective as of
January 1, 1997, the Permian Basin  Properties,  consisting of 25 field areas in
west Texas and 22 field areas in southeast New Mexico,  for a net purchase price
of $133.0 million after  adjustments  of $10.5 million for production  cash flow
from  January  1, 1997 to the  closing  date and other  minor  adjustments.  The
primary producing  formations  include the Yates,  Seven Rivers and Queen in Lea
and Eddy  Counties,  New Mexico;  the Atoka in the Brunson Ranch Field in Loving
County,  Texas; the Clearfork in the Westbrook Field in Mitchell County,  Texas;
the San Andres in the  Levelland/Slaughter  Field in Cochran County,  Texas; and
the Canyon Sand in Sutton County,  Texas. The Permian Basin  Properties  include
1,852 producing oil and natural gas wells on  approximately  113,810 gross acres
(82,175 net acres). One of the Company's subsidiaries,  Gruy, serves as operator
on approximately 66% of the wells on the Permian Basin Properties. Management of
the  Company   believes  the  Permian  Basin  Properties   provide   significant
opportunities  for  exploitation  and  development  of both oil and  natural gas
through enhanced recovery projects and drilling.

      During 1996,  daily net production  from the Permian Basin  Properties was
25.8 MMcf per day of natural gas and over 2,500 Bbl/d of oil. According to Ryder
Scott,  independent  petroleum  engineers engaged by the Company to evaluate the
Permian Basin Properties,  as of December 31, 1996, the Permian Basin Properties
had Proved  Reserves  of 15.3 MMBbl of oil and 99.9 Bcf of natural  gas, or on a
Natural Gas Equivalent Basis, 191.6 Bcfe. Ryder Scott


                                      -63-


<PAGE>



further  estimated  the future net cash flows and the SEC PV-10 for the  Permian
Basin  Properties to be $468.8 million and $243.3 million,  respectively,  as of
December  31, 1996 based on prices of $23.61 per Bbl of oil and $4.12 per Mcf of
natural gas at December  31, 1996.  Based on market  prices of $20.41 per Bbl of
oil and $2.30 per Mcf of natural  gas at March 31,  1997,  future net cash flows
and the SEC PV-10 for the Permian Basin  Properties  would be $267.3 million and
$139.6 million,  respectively, as of December 31, 1996. As of December 31, 1996,
approximately  68% of the Proved  Reserves were  classified as Proved  Developed
Producing Reserves.  See "-- Oil and Natural Gas Reserves."  Based on the $143.5
million gross  purchase  price and Proved  Reserves of 191.6 Bcfe as of December
31, 1996,  the Company paid  approximately  $0.75 per Mcfe for the Permian Basin
Properties.

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

   Westbrook. The Westbrook Field consists of 431 wells that cover approximately
   45 square  miles in Mitchell  County,  Texas and produce  from the  Clearfork
   formation at a depth of approximately  3,200 feet. The interests  acquired in
   the Permian Basin  Acquisition  include the following three properties in the
   Westbrook Field:

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

                                                                                         Net Revenue    Gross Oil Production
   Property                    Operator              Well Count        Working Interest     Interest             (Bbl/d)
- ------------------------      --------------        --------------    ----------------- -------------  ----------------------     
Southwest Westbrook Unit        Company                  135                 89.9%            77.1%                560
Morrison "G" Lease              Company                    2                 83.8%            72.9%                 10
North Westbrook Unit            Third Party              294                  2.0%             1.6%              1,560

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

         Ryder Scott attributed  approximately  10.0%, or $24.3 million,  of the
         SEC PV-10 at December 31, 1996 (9.9%,  or $13.8  million,  at such date
         using March 31, 1997 market prices) to a four year enhancement program,
         commencing in 1997, on an existing  waterflood project on the Westbrook
         Field  in  Mitchell   County,   Texas.   The  Company  has   identified
         approximately  250  drilling   locations,   including   production  and
         injection   wells,   to  further  develop  the  fields  at  a  cost  of
         approximately  $38.1 million.  When  completed,  the properties will be
         fully  developed  on a ten acre,  line  drive  waterflood  pattern,  as
         opposed to the  current  28 acre,  five-spot  pattern.  While the Ryder
         Scott  report  assumes   approximately   $6.6  million  of  development
         expenditures  on this  waterflood  enhancement  program  in  1997,  the
         Company  is  evaluating  the timing of these  development  expenditures
         relative to its other capital expenditure requirements. The Company has
         initially   budgeted   approximately   $5.0  million  for   development
         expenditures on the Permian Basin Properties for 1997.

         Levelland/Slaughter.  The Levelland and Slaughter Fields consist of 155
         wells located in Cochran County, Texas that produce from the San Andres
         formation  at a depth of 5,000  feet.  The  interests  acquired  in the
         Permian Basin Acquisition include the following three properties in the
         Levelland and Slaughter Fields:

<TABLE>
<CAPTION>
<S>                           <C>           <C>             <C>                 <C>             <C>
                                                                                Net Revenue     Gross Oil Production
  Property                     Operator     Well Count       Working Interest      Interest            (Bbl/d)
- -------------------           -----------   ----------      ------------------  ------------   --------------------- 
TLB Unit                        Company          52                100.0%            87.3%               90
Veal Lease                      Company          20                100.0%            87.1%              250
NW Slaughter Unit               Company          83                 74.9%            62.8%              310
</TABLE>
         Discovered  in the  1930's,  all three  properties  have been  actively
         waterflooded   since  the  1970's.   While  the  projects  are  mature,
         additional  drilling and waterflood  enhancement  is likely.  No Proved
         Undeveloped  Reserves  were  assigned by Ryder Scott to either the Veal
         Lease or the TLB Unit.  Proved  Undeveloped  Reserves  were assigned by
         Ryder  Scott  to the NW  Slaughter  Unit in  contemplation  of a carbon
         dioxide


                                      -64-

<PAGE>



         injection project which is anticipated for that property.  The operator
         of an adjacent property has been successfully  injecting carbon dioxide
         for several years to enhance production.

         Lea  County  Shallow  Properties.  The Lea  County  Shallow  Properties
         consist of approximately 300 wells in Lea County,  New Mexico which are
         in the Rhodes,  Jalmat,  Monument,  Langlia  Mattix,  Eumont and Eunice
         Fields.  The fields  produce from the Yates,  Seven  Rivers,  Queen and
         other  formations  at  depths  generally  shallower  than  3,000  feet.
         Production is generally  high Btu gas, which produces into low pressure
         gathering systems. No Proved Undeveloped Reserves have been assigned by
         Ryder  Scott  to the  properties,  but  the  Company  anticipates  that
         numerous  recompletion,  stimulation,  workover or development drilling
         opportunities  will result from  detailed  geological  and  engineering
         studies which are planned.

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

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

 Panoma Acquisition

         On June 28, 1996,  the Company  purchased  interests in 520 natural gas
wells in the Texas Panhandle and western  Oklahoma (469 of which are operated by
the Company) and the associated 427 mile gas gathering  system from  Burlington.
The net purchase  price,  after certain  purchase price  adjustments,  was $34.7
million, funded by borrowings under the Company's Previous Credit Facility. Gruy
is the operator of the gas gathering  system and the wells that were  previously
operated by  Burlington.  According  to Gaffney,  Cline,  independent  petroleum
engineers engaged by the Company to evaluate the Panoma  Properties,  the Proved
Reserves  attributable  to  the  Panoma  Properties  as  of  December  31,  1996
aggregated  77.3 Bcfe with an SEC PV-10 of $111.0  million.  As  adjusted to use
market prices in effect on March 31, 1997, the Proved  Reserves  attributable to
the Panoma  Properties as of December 31, 1996  aggregated 74.2 Bcfe with an SEC
PV-10 of $53.3 million.

         The Panoma Properties consist of approximately 520 natural gas wells in
the West Panhandle,  East Panhandle,  and South Erick Fields along a corridor 65
miles long and 20 miles wide stretching  from Beckham  County,  Oklahoma to Gray
County,  Texas.  All wells are less than 2,800 feet deep and produce dry natural
gas from the Granite  Wash and/or Brown  Dolomite  formations.  The  easternmost
fields are  developed  on 160 acre spacing  because the original  spacing of 640
acres proved inadequate to drain reserves  efficiently.  In-fill  development is
underway in the  westernmost  field with ten wells of a 40 well  program  having
been  completed  during  the  first six  months of 1997.  The  success  of,  and
information  obtained  from,  these first wells will determine the locations and
timing of the remaining wells for 1997.

 Magnum Hunter Combination

         The recent growth  experienced by the Company commenced with the Magnum
Hunter  Combination in December 1995. In that  transaction,  the Company assumed
certain liabilities and issued an aggregate value of


                                      -65-

<PAGE>



$12.5  million  of stock  consisting  of  5,085,077  shares of Common  Stock and
111,825  shares  of  the  Company's  Series  C  Preferred   Stock,   which  were
subsequently  converted into 335,475 shares of Common Stock.  In connection with
the Magnum  Hunter  Combination,  management  of the  Company  was  replaced  by
Hunter's   management   team.  The   acquisition  of  the  Hunter   Subsidiaries
significantly  increased  the size and  expanded  the  nature  of the  Company's
business.  The  Hunter  Subsidiaries  were  engaged  in:  (i)  the  acquisition,
production and sale of crude oil; (ii) the gathering, transmission and marketing
of natural gas;  (iii) the management and operation of producing oil and natural
gas  properties  for interest  owners;  and (iv) the provision of consulting and
U.S. export services to facilitate Latin American trade in energy products.  The
acquisition of Gruy, a Hunter  Subsidiary that  specializes in the management of
producing  properties,  has  enabled  the  Company  to gain a  higher  level  of
expertise in operating oil and natural gas properties. Estimated Proved Reserves
for the properties  acquired in the Magnum Hunter  Combination were 3.1 MMBbl of
oil and 11.0 Bcf of natural gas as of December 31, 1995.

 McLean Plant Acquisition

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

Development and Exploration Activities

 Overview

         While the Company is considering further  acquisitions and, to a lesser
extent, plans to pursue exploratory drilling opportunities,  the Company intends
to focus  its  current  efforts  on the  substantial  inventory  of  development
opportunities arising from its recent acquisitions.

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

 Development Drilling

         The Company's  development strategy focuses on maximizing the value and
productivity of its oil and natural gas asset base through development  drilling
and  enhanced  recovery   techniques.   The  Company  has  identified  over  400
development  drilling  locations on its properties.  In particular,  the Company
plans (i) to emphasize  in-fill drilling on its Panoma Properties and several of
its west Texas properties, (ii) to initiate waterflood projects on selected west
Texas  properties and (iii) to drill lateral  re-entry wells in its Austin Chalk
properties. In-fill drilling is the process of drilling a well between producing
wells to better exploit the reservoir. In a waterflood, water is injected into a
producing  formation to enhance  recovery by forcing oil into the producing well
bores.  Lateral re-entry wells are wells drilled horizontally from existing bore
holes  into  undrained  areas of the  reservoir.  In  exploiting  its  producing
properties,  the Company relies upon its in-house  technical  staff of petroleum
engineering  and geological  professionals  and utilizes the services of outside
consultants on a selective basis.

         Panoma Properties. The Company believes that developmental drilling can
         enhance the value of its recently  acquired  Panoma  Properties,  which
         produce  from the Brown  Dolomite and Granite  Wash  formations  in the
         Texas Panhandle and western  Oklahoma.  The Company has identified over
         80 in-fill drilling prospects on the Panoma Properties,  and subject to
         receiving  density  approvals from the Texas Railroad  Commission  (the
         state oil and gas  regulatory  agency),  the Company  plans to drill 40
         in-fill wells on the West  Panhandle  Field through the end of 1997. As
         of September 30, 1997, the  Company had completed approximately half of
         these wells.  Wells in the West


                                      -66-

<PAGE>



         Panhandle Field are currently  drilled on 640-acre  spacing as compared
         to 160-acre  spacing for wells  drilled in a  neighboring  field in the
         same geologic trend.

         West Texas.  The Company  believes it can enhance the value of selected
         west Texas  fields  through  in-fill  drilling  and  enhanced  recovery
         projects,  including  several  waterflood  projects.  While waterfloods
         typically take  considerable  time to respond to fluid  injection,  the
         west Texas properties have in-fill  drilling  potential that management
         believes could result in a somewhat  faster  increase in production and
         cash flow.

         Austin  Chalk.  The Company  believes that  horizontal  drilling can be
         successfully  used to augment the value of the Company's  properties in
         the Austin  Chalk  formation  of  central  Texas,  an area where  wells
         typically have high initial rates of production. The Company owns a 25%
         working  interest in 38 producing wells on  approximately  12,000 lease
         acres in Fayette and Gonzales Counties. The Company drilled one lateral
         well in the Austin  Chalk  formation  in 1996,  which was  successfully
         completed as an oil well. Geological studies indicate the potential for
         up to 16 new lateral  locations to be drilled from  existing bore holes
         into undrained areas of the reservoir. Drilling laterally from existing
         bore holes is advantageous,  as the cost is approximately  one-third of
         the expenditure required for a new well.

         Permian Basin  Properties.  In evaluating the Permian Basin Properties,
         the Company  believes  there are many  development  opportunities.  The
         Company has identified approximately 275 drilling locations,  including
         production  and  injection  wells,  on the  Permian  Basin  Properties.
         Engineering  and  geological   studies  are  being  initiated  to  more
         precisely  identify specific  development  locations.  In addition,  in
         evaluating  the  Permian  Basin  Properties,   Ryder  Scott  attributed
         approximately  10.0%, or $24.3 million,  of their SEC PV-10 at December
         31, 1996  (9.9%,  or $13.8  million,  at such date using March 31, 1997
         prices) to a four-year  enhancement program,  commencing in 1997, on an
         existing  waterflood on the Westbrook Field in Mitchell County,  Texas.
         The  proposed  waterflood  project is estimated to cost an aggregate of
         $38.1  million.   While  the  reserve  report  for  the  Permian  Basin
         Properties   assumes   approximately   $6.6   million  of   development
         expenditures  during  1997 to  enhance  this  waterflood  project,  the
         Company  is  evaluating  the timing of these  development  expenditures
         relative to its other capital expenditure requirements.

 Exploratory Drilling

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

         The  Company  was  successful  in  completing  four  out of  the  eight
exploratory  wells it  drilled  in  1996.  The  remaining  four  wells  were not
commercially  productive.  The  exploratory  wells  drilled by the Company  have
ranged in cost from approximately  $75,000 to $500,000 on a dry hole basis, with
an  average  of  approximately   $150,000  each.  The  Company  plans  to  spend
approximately  $3.0  million out of its $20.0  million  1997  capital  budget on
exploratory drilling.

     The Company  participates in a successful  exploratory gas discovery in the
Douglas  formation in western Oklahoma where a confirmation well is scheduled to
commence in the fourth quarter of 1997. The Company is presently testing another
exploratory  well drilled  earlier  this year in the Austin  Chalk  formation in
Fayette  County,   Texas.  This  potential  oil  well  is  the  Company's  first
exploratory  horizontal well. The Company's interests in these two wells are 25%
and 20%,  respectively.  The Company also plans to drill four or five additional
exploratory  wells in 1997,  including  a  prospect  identified  by 3-D  seismic
surveys  in  Victoria  County on the  Texas  Gulf  Coast and two or three  other
potential oil and natural gas wells on the Texas Gulf Coast. The Company is also
reviewing other exploration opportunities,  including potential prospects on the
Permian Basin Properties.



                                      -67-

<PAGE>



Gathering and Processing of Natural Gas

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

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

         The Panoma  system,  the largest of the  Company's  four gas  gathering
systems,  consists  of  approximately  427  total  miles of  pipeline.  The main
trunklines  run  east to west  for  approximately  66  miles  with  the east end
starting in Beckham  County,  Oklahoma and the west end starting in Gray County,
Texas.   Natural  gas  throughput  for  the  Panoma  gas  gathering   system  is
approximately  16.5 MMcf per day.  The Panoma  gas  gathering  system  currently
delivers  natural gas to El Paso Natural Gas Company for transport to markets in
western  Oklahoma and the West Coast,  although the Company is actively  seeking
additional   markets  for  such  natural  gas.  The  Company,   which   operates
approximately 489 of the approximately 540 wells connected to the Panoma system,
is also actively  seeking to add new wells to such system  through  acquisition,
development or arrangements with third party producers.

         The Company's North Appleby gas gathering  system is located  primarily
in Nacogdoches County in east Texas. Approximately 39 wells are connected to the
system,  which  delivers  approximately  3.0 MMcf per day for third  parties  to
Natural Gas Pipeline Co. for  transportation  to other  markets.  The  Company's
other two systems  deliver an  aggregate  of 1.5 MMcf per day for third  parties
from 66 wells into  various  markets.  The Company is  presently  negotiating  a
possible sale of one such system.

         Effective January 1, 1997, the Company purchased for $2.5 million a 50%
interest in the McLean Gas Plant, the gas processing  facility  connected to the
Company's  Panoma gas  gathering  system.  The purchase  also included a 23-mile
products  pipeline between the McLean Gas Plant and the Koch Pipeline at Lefors,
Texas and all natural gas and product purchase and sales  agreements  related to
the plant.  The McLean Gas Plant is a modern cryogenic gas processing plant with
a capacity of 23.0 MMcf per day with a current  throughput of 16.5 MMcf per day.
The Company  acquired  its 50%  interest in the plant from  Carrera Gas Company,
L.L.C. ("Carrera") of Tulsa, Oklahoma, which owns the remaining 50% of the plant
and operates such  facility.  Under terms of the Company's  operating  agreement
with Carrera,  the Company  receives 100% of the net profits from the McLean Gas
Plant  until it recoups  the $2.5  million  purchase  price,  at which point net
profits will be divided equally between the Company and Carrera.

Marketing of Production

 General

         The  Company  markets  all of its  natural  gas  production  as well as
natural gas it purchases from third parties to gas marketing  firms or end users
either on the spot market on a  month-to-month  basis at prevailing  spot market
prices or at negotiated prices under long-term contracts.  Marketing natural gas
for its own account exposes the Company to the attendant  commodities  risk. The
Company  currently  sells most of its natural gas to Crosstex,  a gas  marketing
firm in  Dallas,  Texas  formed  in  January  1997  when  Comstock  sold its gas
gathering,  processing  and  marketing  operations.  Although  the Company  sold
approximately  91% of its  natural  gas to  Comstock  in  1996  and  has  sold a
comparable  percentage to Crosstex to date in 1997, the Company does not believe
that any  discontinuation  of such sales  arrangement would be disruptive to the
Company's  natural  gas  marketing  operations.  The Company  typically  obtains
letters of credit guaranteeing the payment of the purchase price for its natural
gas.



                                      -68-

<PAGE>



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

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

Petroleum Management and Consulting Services; Other Activities

Gruy

          The Company acquired Gruy in the Magnum Hunter Combination in December
1995.  Gruy,  which conducts  operations for both the Company and third parties,
has a 37-year  history of managing  properties for third parties,  which include
banks,  financial  institutions,   bankruptcy  trustees,   estates,   individual
investors,  trusts and independent oil and natural gas companies.  Gruy provides
drilling,   completion   and  other   well-site   services;   advice   regarding
environmental  and  other  regulatory   compliance;   receipt  and  disbursement
functions and other managerial services;  petroleum  engineering  services;  and
consultation  as  an  expert  witness.  Gruy  manages,   operates  and  provides
consulting  services  on oil  and  natural  gas  properties  located  in  Texas,
Oklahoma,  Mississippi,  Louisiana,  New Mexico and Kansas. Gruy is an important
component of the  Company's  acquisition  program.  As the operator of wells for
third parties and as a provider of consulting  services for the energy industry,
Gruy is often able to identify attractive acquisition opportunities.

 Hunter Butcher

         The  Company  provides  consulting  services to Latin  American  energy
companies  through  Hunter  Butcher.  Hunter  Butcher has  primarily  focused on
assisting  energy-related  Mexican  companies in obtaining  financing  for their
purchases  in the  United  States of  products  for  export to  Mexico.  This is
accomplished through a commercial bank credit facility established to facilitate
short and medium term credit for Hunter  Butcher to purchase  these products and
resell  them to its  clients  at a slight  premium.  The  credit  risk to Hunter
Butcher on such resales is lessened by partial  guarantees of approximately  85%
to 90% of such  borrowings  by the Export  Import Bank of the United States (the
"ExIm  Bank"),  by credit  insurance  and through  deposits by Hunter  Butcher's
clients  to secure the  unguaranteed  portion of the  indebtedness  and  certain
interest.  Hunter Butcher could, however, incur a loss under such arrangement in
repaying  indebtedness  under the credit facility since the applicable ExIm Bank
guaranty  and deposit  would not be adequate  to pay  interest  under the credit
facility at the default rate or cover other possible  losses.  In addition,  the
Company itself may from time to time guarantee the  indebtedness  incurred under
the  credit  facility  by Hunter  Butcher  for its  clients,  but the New Credit
Facility limits the Company to  guaranteeing  not more than $3.0 million of such
indebtedness at any time.

 Possible Foreign Activities

     As the Company  continues to increase its asset base,  management  plans to
expand the scope of its oil and natural gas activities,  including the Company's
acquisition  of or  possible  participation  in foreign  prospects.  The Company
believes that Latin America offers greater  hydrocarbon  reserve  potential with
less  competition  than in North  America.  In expanding  into  Mexico,  Central
America or South America,  the Company  anticipates that any investment would be
made in  partnership  with one or more  partners  with  which it had  previously
worked  within the United  States.  The  Company  does not plan to invest in any
foreign prospects during 1997.



                                      -69-


<PAGE>



Oil and Natural Gas Reserves

 General

         All information set forth in this Prospectus regarding estimated proved
reserves, related estimated future net cash flows and SEC PV-10 of the Company's
oil and natural gas  interests  is taken from  reports  prepared (i) by Gaffney,
Cline and Glenn Harrison Petroleum  Consultants,  Inc. ("Glenn Harrison"),  both
independent  petroleum engineers in Dallas,  Texas with respect to the Company's
interests  at  December  31,  1996  (using  oil and  natural  gas prices at both
December  31,  1996 and  March 31,  1997),  (ii) by the  engineers  named in the
footnotes  to the  tables  below  with  respect to the  Company's  interests  at
December  31, 1994 and 1995 and (iii) by Ryder Scott with respect to the Permian
Basin  Properties at December 31, 1996 (using oil and natural gas prices at both
December  31,  1996 and March 31,  1997).  The  estimates  of these  independent
petroleum  engineers  were based upon their review of  production  histories and
other  geological,  economic,  ownership  and  engineering  data provided by the
Company,  and,  in the case of  Ryder  Scott's  report,  by  Burlington  and the
Company.

         In  accordance   with   Commission   guidelines  (and  except  for  the
alternative  estimates of future net cash flows and SEC PV-10 as of December 31,
1996 using March 31, 1997  prices),  the estimates of future net cash flows from
Proved  Reserves  and their SEC PV-10 are made using oil and  natural  gas sales
prices  in  effect  as of the  dates of such  estimates  and are  held  constant
throughout  the  life of the  properties.  The  Company's  estimates  of  Proved
Reserves, future net cash flows and SEC PV-10 were estimated using the following
weighted  average prices (other than prices at March 31, 1997,  which are market
prices as adjusted for Btu content), before deduction of production taxes:

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

                                                              Prices Used in Reserve Reports
                                                                      At December 31,
                                   ----------------------------------------------------------------------------
                                                                                      Pro Forma 1996 (1)
                                                                         --------------------------------------
                                                                           December 31, 1996     March 31, 1997
                                       1994        1995        1996           Prices (2)           Prices (3)
                                   ------------ ----------- ----------- ----------------------- ----------------

Natural gas (per Mcf)..............  $ 1.53      $ 1.46      $ 4.03             $ 4.05                $ 2.30
Oil (per Bbl)......................  $14.20      $15.60      $24.37             $24.18                $20.41

- -----------
</TABLE>
(1)      Gives effect to the Permian Basin Acquisition  as if it had occurred on
         December 31, 1996.
(2)      Proved  Reserves  attributable  to  the  Permian  Basin  Properties  at
         December 31, 1996 were  estimated  based upon weighted  average  prices
         (before  deduction of production taxes) of $4.12 per Mcf of natural gas
         and $23.61 per Bbl of oil.
(3)      Proved  Reserves  attributable  to  the  Permian  Basin  Properties  at
         December 31, 1996 using prices at March 31, 1997 were based upon market
         prices  (before  deduction  of  production  taxes)  of $2.30 per Mcf of
         natural gas and $20.41 per Bbl of oil.


                                      -70-

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

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

         Except for the effect of the decrease in oil and natural gas prices, no
major discovery or other favorable or adverse event is believed to have caused a
significant  change in these  estimates of the Company's  proved  reserves since
December 31, 1996.

         No estimates of Proved  Reserves of oil and natural gas have been filed
by the Company with,  or included in any report to, any United States  authority
or agency since January 1, 1996.

 Company Reserves

         The following tables set forth the estimated Proved Reserves of oil and
natural gas of the Company and the SEC PV-10  thereof on (i) an actual basis for
each year in the three-year  period ended December 31, 1996 and (ii) a pro forma
basis giving effect to the Permian Basin Acquisition.
<TABLE>
<CAPTION>
<S>                               <C>             <C>       <C>            <C>                 <C>

                                 Estimated Proved Oil and Natural Gas Reserves(1)


                                                                      At December 31,
                                    -----------------------------------------------------------------------------------
                                                                                          Pro Forma 1996 (4)
                                                                                ---------------------------------------
                                                                                December 31, 1996       March 31, 1997

                                         1994         1995 (2)   1996(3)           Prices                    Prices(5)
                                    -----------    ----------- ---------        ----------------        ---------------
Net natural gas reserves (Mcf):
   Proved Developed Producing
      Reserves......................     394,872   8,796,748   71,166,555           148,486,702             139,410,816
   Proved Developed Non-Producing
      Reserves......................           0           0      108,586               161,546                 160,960
   Proved Undeveloped Reserves......   4,519,335   5,275,168   19,290,856            41,793,954              41,791,208
                                     ------------  ----------  ------------     -----------------       ----------------
      Total Proved Reserves of                    
        natural gas.................   4,914,207  14,071,916   90,565,997           190,442,202             181,362,984
                                     -----------   ----------  ------------     -----------------       ----------------
Net oil reserves (Bbl):
   Proved Developed Producing
      Reserves......................     239,795   1,681,841    1,849,846            10,804,735              10,050,370
   Proved Developed Non-Producing
      Reserves......................           0           0      112,338               125,979                 119,641
   Proved Undeveloped Reserves......   1,020,725   2,085,898    3,376,071             9,698,562               9,681,158
                                       ---------  ----------   ------------     -----------------       ----------------
      Total Proved Reserves of oil..   1,260,520   3,767,739    5,338,255            20,629,276              19,851,169
                                       ---------  ----------   ------------     -----------------       ----------------
                                       
      Total Proved Reserves (Mcfe)..  12,477,327  36,678,350  122,595,527           314,217,858             300,469,998
                                      ==========  =========== ============      =================        ===============            

                                     


                                      -71-
<PAGE>

                   Estimated SEC PV-10 of Proved Reserves(1)

                                                                      At December 31,
                                       ---------------------------------------------------------------------------------
                                                                                              Pro Forma 1996 (4)
                                                                                 ---------------------------------------    
                                                                                   December 31, 1996    March 31, 1997              
                                         1994        1995 (2)        1996(3)            Prices             Prices(5)
                                       ----------- ------------- --------------- ---------------------------------------
Estimated SEC PV-10(6):
   Proved Developed Producing
      Reserves......................   $5,337,427   $19,036,205    $115,858,134      $295,509,505      $161,683,897
   Proved Developed Non-Producing
      Reserves......................            0             0         664,308           987,032           682,003
   Proved Undeveloped Reserves......    2,437,383    18,173,125      48,244,017       111,552,418        62,465,119
                                        ---------- -------------  --------------   --------------      ---------------
   Total SEC PV-10 of Proved
      Reserves......................   $7,774,810   $37,209,330    $164,766,459      $408,048,955      $224,831,019

                                        =========   ===========    ============      ============      ==============
</TABLE>

(1)   Based upon  reserve  reports at  December  31,  1994  prepared  by Hensley
      Consultants,  Inc.,  independent petroleum consultants in Tulsa, Oklahoma;
      reserve  reports  at  December  31,  1994  and 1995  prepared  by James J.
      Weisman,  Jr.;  and  reserve  reports at  December  31,  1996  prepared by
      Gaffney,  Cline and Glenn Harrison.  Reserve  information  relating to the
      Permian  Basin  Properties  is based upon reserve  reports at December 31,
      1996 prepared by Ryder Scott.
(2)   Includes reserves acquired in the Magnum Hunter Combination. See "Business
      and Properties -- Recent Acquisitions."
(3)   Includes reserves acquired in the Panoma Acquisition.  See  "Business  and
      Properties -- Recent Acquisitions."
(4)   Gives effect to  the Permian Basin Acquisition as if it  had  occurred  on
      December 31, 1996.
(5)   Proved Reserves and SEC PV-10 have been estimated as of December 31,  1996
      using March 31, 1997 market prices of $20.41 per Bbl of oil and $2.30  per
      Mcf of  natural gas.  Such Proved  Reserves  and SEC  PV-10 have  not been
      adjusted for production for the  three-month  period ended March 31, 1997.
(6)   SEC PV-10 differs from the standardized  measure of discounted  future net
      cash flows set forth in the notes to the Consolidated Financial Statements
      of the Company,  which is  calculated  after  provision  for future income
      taxes.

Significant Properties

      On December 31, 1996,  after giving pro forma effect to the Permian  Basin
Acquisition,  86% of the Company's  Proved Reserves on a Bcfe basis were located
in the Permian  Basin  Properties  and the Panoma  Properties.  On such date the
Company's properties included,  on a pro forma basis, working interests in 2,581
gross (1,436 net)  productive  oil and natural gas wells.  The Company also held
interests in 10,992 gross (5,003 net) undeveloped  acres on a pro forma basis at
December 31, 1996.

                                      -72-

<PAGE>
      The  following  table sets forth summary  information  with respect to the
Company's  estimated Proved Reserves of oil and natural gas on a pro forma basis
at December 31, 1996.
<TABLE>
<CAPTION>
<S>                                     <C>                 <C>           <C>        <C>                <C>

                                                SEC PV-10 (1)                                           
                                        ----------------------------                                     Natural Gas     
                                                             % of          Oil        Natural Gas        Equivalent
                                             Amount          Total        (Bbl)          (Mcf)             (Mcfe)
                                        ----------------  ----------  ------------  --------------    ------------------            
Permian Basin Properties(2)(3).........     $243,282         59.6%    15,291,021     99,876,205         191,622,331
Panoma Properties(4)...................      111,030         27.2%        28,531     77,114,928          77,286,115
Other(5)...............................       53,736         13.2%     5,309,724     13,451,068          45,309,412
                                        ----------------  ----------  ------------  --------------    ------------------
      Total(2).........................     $408,048        100.0%    20,629,276    190,442,202         314,217,858
                                        ================  ========== =============  ==============    ==================
                                  

- -----------
</TABLE>
(1)      SEC PV-10 differs from the  standardized  measure of discounted  future
         net cash  flows set forth in the  Notes to the  Consolidated  Financial
         Statements  of the Company,  which is  calculated  after  provision for
         future income taxes.
(2)      Gives effect to the Permian Basin Acquisition as if it had occurred  on
         December 31, 1996.
(3)      Based on a reserve report at December 31, 1996 prepared by Ryder Scott.
(4)      Based on a  reserve report  at December 31, 1996  prepared by  Gaffney,
         Cline.
(5)      Based  on  reserve  reports  at  December 31, 1996 prepared by Gaffney,
         Cline and by Glenn Harrison.
                                      -73-

<PAGE>
 Permian Basin Reserves

         The  following  tables set forth as of December 31, 1996 the  estimated
Proved Reserves and the SEC PV-10 thereof for the Permian Basin Properties.
<TABLE>
<CAPTION>
<S>                                                                   <C>                     <C>

                                   Estimated Proved Oil and Natural Gas Reserves
                                        of the Permian Basin Properties(1)


                                                                                At December 31, 1996
                                                                    -----------------------------------------
                                                                      December 31, 1996       March 31, 1997
                                                                            Prices              Prices(2)
                                                                    -----------------------------------------
Net natural gas reserves (Mcf):
         Proved Developed Producing Reserves...................           77,320,147           71,319,816
         Proved Developed Non-Producing Reserves...............               52,960               52,960
         Proved Undeveloped Reserves...........................           22,503,098           22,503,098
                                                                    -------------------      ----------------                       
                  Total Proved Reserves of natural gas.........           99,876,205           93,875,874
                                                                    -------------------      ----------------
                                                                                                
Net oil reserves (Bbl):
         Proved Developed Producing Reserves...................            8,954,889            8,296,370
         Proved Developed Non-Producing Reserves...............               13,641               13,641
         Proved Undeveloped Reserves...........................            6,322,491            6,304,139
                                                                    -------------------     -----------------
                  Total Proved Reserves of oil.................           15,291,021           14,614,150
                                                                    -------------------     -----------------

                  Total Proved Reserves (Mcfe).................          191,622,331          181,560,774
                                                                     ==================      ================

</TABLE>


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

                                      Estimated SEC PV-10 of Proved Reserves
                                        of the Permian Basin Properties(1)


                                                                                At December 31, 1996
                                                                 ---------------------------------------------------
                                                                       December 31, 1996          March 31, 1997
                                                                             Prices                  Prices(2)
                                                                 ---------------------------------------------------
Estimated SEC PV-10(3):
         Proved Developed Producing Reserves....................          $179,651,371             $103,553,897
         Proved Developed Non-Producing Reserves................               322,724                  232,003
         Proved Undeveloped Reserves............................            63,308,400               35,782,169
                                                                 ---------------------------  ----------------------
                  Total SEC PV-10 of Proved Reserves............          $243,282,495             $139,568,069
                                                                 ===========================  ======================
</TABLE>
-----------

(1)      Based upon reserve reports at December 31,1996 prepared by Ryder Scott.
(2)      Proved  Reserves  and SEC PV-10 have been  estimated as of December 31,
         1996 using March 31,  1997  market  prices of $20.41 per Bbl of oil and
         $2.30 per Mcf of natural  gas at the  Permian  Basin  Properties.  Such
         Proved Reserves and SEC PV-10 have not been adjusted for production for
         the three-month period ended March 31, 1997.
(3)      SEC PV-10 differs from the  standardized  measure of discounted  future
         net cash  flows set forth in the  notes to the  Consolidated  Financial
         Statements  of the Company,  which is  calculated  after  provision for
         future income taxes.


                                      -74-

<PAGE>

Oil and Natural Gas Production, Prices and Costs

         The following table shows the  approximate net production  attributable
to the Company's oil and natural gas interests,  the average sales price and the
average  production  expense  attributable  to the Company's oil and natural gas
production for the periods indicated.  Except for pro forma data, production and
sales information relating to properties acquired or disposed of is reflected in
this table only since or up to the closing date of their respective  acquisition
or sale and may  affect  the  comparability  of the  data  between  the  periods
presented.
<TABLE>
<CAPTION>
<S>                                               <C>         <C>          <C>       <C>            <C>        <C>
                                                                                                       Six Months
                                                              Year Ended December 31,                 Ended June 30,
                                                  ----------------------------------------------- ------------------
                                                                                      Pro Forma
                                                     1994        1995       1996       1996 (1)      1996       1997
                                                  ----------- ---------- ----------- ------------ ---------- -------
Oil and natural gas production:
         Oil (MBbl)..............................          42         30         191        1,105       90       240
         Natural gas (MMcf)......................          88        102       2,675       13,811      488     3,332 
         Natural Gas Equivalents (MMcfe).........         340        282       3,821       20,442    1,027     4,771 
Average sales price(2):
         Oil (per Bbl)...........................      $14.20     $15.60      $20.46       $20.15   $19.32    $18.33
         Natural gas (per Mcf)...................        1.53       1.46        2.37         2.22     2.23      2.22
         Natural Gas Equivalents (per Mcfe)......        2.15       2.19        2.68         2.59     2.75      2.47
Oil and natural gas production expense
         (per Mcfe)(3)...........................       $0.94      $0.95       $1.15        $0.83    $1.10     $0.99
- -----------
</TABLE>
(1)  Gives  effect to the Permian  Basin  Acquisition  as if it had  occurred on
     January  1, 1996. 

(2)  Before  deduction of  production  taxes and net of hedging  results for the
     three years ended December 31, 1996.

(3)  Includes lease  operating  expenses and production and ad valorem taxes, if
     applicable. For the years ended December 31, 1996 on a historical basis and
     December  31, 1996 on a pro forma  basis and the six months  ended June 30,
     1997,  includes  internal  transfer  price  expenses for gas  gathering and
     overhead  costs of $0.23  per  Mcfe,  $0.04  per Mcfe and  $0.19  per Mcfe,
     respectively.

Drilling Activity

         The following  table sets forth the results of the  Company's  drilling
activities  during the three fiscal years ended December 31, 1996 and the period
from January 1, 1997 through June 30, 1997.
<TABLE>
<CAPTION>
<S>            <C>                 <C>                 <C>            <C>       <C>                 <C>


                                                  Gross Wells (1)                       Net Wells (2)
                                    ------------------------------------------ ---------------------------------------
    Year          Type of Well         Producing (3)      Dry (4)      Total      Producing (3)      Dry (4)      Total
- ------------- --------------------- ------------------ ------------- --------- ------------------ ------------- -------
1994          Exploratory                   -                -           -             -                -           -
              Development                   2                1           3            0.50            0.25        0.75
1995          Exploratory                   2                -           2            0.55              -         0.55
              Development                   -                -           -             -                -           -
1996          Exploratory                   4                4           8            2.63            2.60        5.23
              Development                   3                -           3            0.66              -         0.66
1997(5)       Exploratory                   -                -           -             -                -           -
              Development                   4                -           4            3.40              -         3.40
- -----------
</TABLE>

(1)      The  number  of gross  wells is the  total  number  of wells in which a
         working  interest is owned.  Fluid  injection  wells for waterflood and
         other enhanced recovery projects are not included as gross wells.
(2)      The number  of  net wells is the sum of  fractional  working  interests
         owned in gross wells expressed as whole numbers and fractions thereof.
(3)      A  producing  well  is  an  exploratory or development well found to be
         capable of producing either oil or natural gas in sufficient quantities
         to justify completion as an oil or natural gas well.
(4)      A  dry  well  is an  exploratory  or  development well  that  is not  a
         producing well.
(5)      Based on wells completed through June 30, 1997.



                                      -75-

<PAGE>

Oil and Natural Gas Wells

         The following table sets forth the number of productive oil and natural
gas wells in which the Company had a working interest at December 31, 1996.
<TABLE>
<S>                                                              <C>       <C>       <C>       <C>       <C>       <C>

                                                                                   Productive Wells
                                                                                As of December 31, 1996
                                                                 -------------------------------------------------------
                                                                         Gross (1)                     Net (2)
                                                                 -------------------------------------------------------
                                                                    Oil      Gas      Total      Oil      Gas      Total
                                                                 -------------------------------------------------------
Texas.........................................................       113      447       560     53.35   381.72    435.07
Oklahoma......................................................        26      117       143     21.85   103.09    124.94
Mississippi...................................................         4       -          4      2.98    -          2.98
New Mexico....................................................         3        3         6      2.48     0.64      3.12
California....................................................        14       -         14      1.05    -          1.05
Kansas........................................................         2       -          2      1.90    -          1.90
                                                                 -------    -------  -------- --------  --------  --------          
                  Total    ...................................       162      567       729     83.61   485.45    569.06
                                                                 =======    =======  ======== ========  ========  ========

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

(1)      The number of  gross  wells is  the  total  number of wells in  which a
         working  interest  is owned.  Well counts include  wells  with multiple
         completions, but do not include injector wells.
(2)      The number  of net  wells is  the  sum of fractional  working interests
         owned in gross wells expressed as whole numbers and fractions thereof.

         On a pro forma basis at December  31,  1996,  the Company had a working
interest in 2,581 gross (1,436 net) productive oil and natural gas wells.

Oil and Natural Gas Acreage

         The following table summarizes the Company's  developed and undeveloped
leasehold acreage at December 31, 1996.
<TABLE>
<CAPTION>
<S>                                                              <C>            <C>            <C>          <C>


                                                                        Developed                  Undeveloped
                                                               ----------------------------------------------------
Location                                                           Gross (1)      Net (2)      Gross (1)    Net (2)
- --------                                                       -------------    ----------- ------------- ----------
Texas.........................................................       167,216       151,293     10,432         4,711
Oklahoma......................................................        45,610        42,982       -             -
Mississippi...................................................           528           452       -             -
New Mexico....................................................           840           702       -             -
California....................................................           509            38       -             -
Kansas........................................................            80            69       -             -

                                                               -------------    ------------  ------------  --------
      Total...................................................       214,783       195,536     10,432         4,711
</TABLE> 
- -----------

(1)      The number of  gross acres  is the  total  number of  acres  in which a
         working interest is owned.
(2)      The number  of  net acres is  the sum of  fractional working  interests
         owned in gross acres expressed as whole numbers and fractions thereof.

         On a pro forma basis at December 31, 1996,  the Company held  interests
in 328,033  gross  (277,419  net)  developed  acres and 10,992 gross (5,003 net)
undeveloped acres.

         Substantially  all of the Company's  interests  are  leasehold  working
interests  or  overriding  royalty  interests  (as  opposed  to  mineral  or fee
interests) under standard onshore oil and natural gas leases. As is customary in
the industry, the Company generally acquires oil and natural gas acreage without
any  warranty  of title  except  as to  claims  made by,  through  or under  the
transferor.  Although the Company has title  examined  prior to  acquisition  of
developed  acreage  in those  cases in which the  economic  significance  of the
acreage justifies the cost, there can be no assurance


                                      -76-

<PAGE>

that losses will not result from title defects or from defects in the assignment
of leasehold rights. In many instances, title opinions may not be obtained if in
the Company's judgment it would be uneconomical or impractical to do so.

Competition

         The oil and gas  industry  is highly  competitive.  Competitors  of the
Company  include  major oil  companies,  other  independent  oil and natural gas
concerns,   and  individual   producers  and  operators,   many  of  which  have
substantially  greater financial resources and larger staffs and facilities than
those of the Company. In addition, the Company frequently encounters competition
in the acquisition of oil and natural gas properties and gas gathering  systems,
and in its  management  and  consulting  business.  The principal  means of such
competition are the amount and terms of the consideration offered. The principal
means  of such  competition  with  respect  to the sale of oil and  natural  gas
production are product  availability and price. The price at which the Company's
natural  gas may be sold will  continue  to be  affected by a number of factors,
including  the price of  alternate  fuels  such as oil and coal and  competition
among   various    natural   gas   producers    and    marketers.    See   "Risk
Factors -- Competition."

Regulation

 General Federal and State Regulation

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

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

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

                                      -77-
                           

<PAGE>

     The price the Company receives from the sale of oil and natural gas liquids
is affected by the cost of transporting products to market. Effective January 1,
1995,  FERC  implemented   regulations   establishing  an  indexing  system  for
transportation rates for oil pipelines, which, generally, would index such rates
to  inflation,  subject to certain  conditions  and  limitations.  The  Railroad
Commission  of the  State of  Texas is  considering  adopting  rules to  prevent
discriminatory   transportation   practices  by  intrastate  gas  gatherers  and
transporters  by requiring  the  disclosure  of rate  information  under varying
conditions  of service.  The Company is not able to predict with  certainty  the
effects,  if  any,  of  these  regulations  on  its  operations.   However,  the
regulations may increase  transportation costs or reduce wellhead prices for oil
and natural gas liquids.

         Finally,  from time to time  regulatory  agencies  have  imposed  price
controls and  limitations on production by  restricting  the rate of flow of oil
and  natural gas wells below  natural  production  capacity in order to conserve
supplies of oil and natural gas. See "Risk Factors -- Laws and Regulations."

 Environmental Regulation

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

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

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



                                      -78-


<PAGE>


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

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

         Additionally,  in the course of the  Company's  routine oil and natural
gas  operations,  surface spills and leaks,  including  casing leaks,  of oil or
other  materials  occur,  and the Company  incurs  costs for waste  handling and
environmental compliance.  Moreover, the Company is able to control directly the
operations   of  only   those   wells  for  which  it  acts  as  the   operator.
Notwithstanding  the  Company's  lack of control over wells owned by the Company
but operated by others,  the failure of the  operator to comply with  applicable
environmental regulations may, in certain circumstances,  be attributable to the
Company. The Company currently expects to spend approximately  $725,000 over the
next five years in connection  with  remediation and  environmental  compliance,
including  $75,000 for the  remainder of 1997,  $200,000 in 1998 and $150,000 in
1999.

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

Employees

     At June 30, 1997, the Company had 50 full-time employees of which nine were
management,  15 were  administrative  and 26 were field  employees.  None of the
Company's  employees  are  represented  by a  union.  Management  considers  its
relations with employees to be good.

Facilities

     The Company  occupies  approximately  11,590 square feet of office space at
600 East Las Colinas Boulevard,  Suite 1200,  Irving,  Texas, under a lease that
expires in November 2001. The Company owns a field office and production yard in
Shamrock, Texas, consisting of approximately four acres of land.

Legal Proceedings

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


                                      -79-

<PAGE>
                                   MANAGEMENT

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

                  Name                       Age                   Title
                  ----                       ---                   -----
Gary C. Evans............................    40     Director, President and Chief Executive Officer 
                                                    of the Company
Matthew C. Lutz..........................    63     Chairman and Executive Vice President of Exploration and
                                                    Business Development of the Company
Chris Tong...............................    41     Senior Vice President and Chief Financial Officer of the Company   
David S. Krueger.........................    47     Vice President and Chief Accounting Officer of the Company
Morgan F. Johnston.......................    36     Vice President, General Counsel and Secretary of the Company
Richard R. Frazier.......................    50     President and Chief Operating Officer of Magnum Hunter
                                                    Production, Inc. and Chief Operating Officer of Gruy
R. Renn Rothrock, Jr.....................    54     President of both Hunter Gas Gathering, Inc. and Gruy and
                                                    Executive Vice President of Magnum Hunter Production, Inc.
Gerald W. Bolfing........................    68     Director of the Company
Oscar C. Lindemann.......................    74     Director of the Company
John H. Trescot, Jr......................    72     Director of the Company
James E. Upfield.........................    75     Director of the Company

</TABLE>

     Gary C.  Evans has  served as  President,  Chief  Executive  Officer  and a
director of the Company since December 31, 1995 and Chairman and Chief Executive
Officer of all of the Hunter  Subsidiaries since their formation or acquisition.
He served as Chief  Financial  Officer from January 1997 to September  1997.  He
acted as  Chairman,  President  and  Chief  Executive  Officer  of  Hunter  from
September  1992 until  October  1996.  Previously,  he was  President  and Chief
Operating  Officer of Hunter from December 1990 to September  1992. From 1985 to
1990, Mr. Evans was Chairman,  President and Chief Executive  Officer of Sunbelt
Energy,  Inc. and its subsidiaries,  which were merged with Hunter. From 1981 to
1985, Mr. Evans was associated  with the Mercantile Bank of Canada where he held
various positions including Vice President and Manager of the Energy Division of
the  Southwestern  United  States.  From  1978 to 1981,  he  served  in  various
capacities with National Bank of Commerce (now BancTexas, N.A.) including Credit
Manager and Credit Officer.  Mr. Evans serves on the Board of Directors of Karts
International  Incorporated,  an OTC traded company, and Digital  Communications
Technology Corporation, an American Stock Exchange listed company.

         Matthew C. Lutz  became  Chairman  as of March 31,  1997  after  having
served as Vice  Chairman of the Company  since  December 31, 1995.  Mr. Lutz has
also served as Executive Vice President of Exploration and Business  Development
since  December  31,  1995.  Mr. Lutz held  similar  positions  with Hunter from
September  1993 until October 1996.  From 1984 through 1992, Mr. Lutz was Senior
Vice  President  of  Exploration  and on  the  Board  of  Directors  of  Enserch
Exploration,  Inc. with  responsibility for such company's worldwide oil and gas
exploration and development program. Prior to joining Enserch, Mr. Lutz spent 28
years with Getty Oil Company. He advanced through several technical, supervisory
and  managerial  positions  which gave him  various  responsibilities  including
exploration,   production,  lease  acquisition,   administration  and  financial
planning.

     Chris Tong became Senior Vice President and Chief  Financial  Officer as of
August 18, 1997.  Previously,  Mr. Tong was Senior Vice  President of Finance of
Tejas Acadian  Holding Company and its  subsidiaries  including Tejas Gas Corp.,
Acadian  Gas  Corporation  and  Transok,  Inc.,  all of which  are  wholly-owned
subsidiaries  of Tejas Gas  Corporation.  Mr.  Tong held these  positions  since
August 1996, and served in other treasury  positions with Tejas beginning August
1989.  He is  also  responsible  for  managing  Tejas'  property  and  liability
insurance.  From  1980 to  1989, Mr.  Tong  served  in  various  energy  lending
capacities with Canadian  Imperial Bank of Commerce,  Post Oak Bank, and Bankers
Trust  Company in Houston,  Texas.  Prior to his banking  career,  Mr. Tong also
served  over a  year  with  Superior  Oil  Company  as a  Reservoir  Engineering
Assistant.  Mr.  Tong  is a  Summa  Cum  Laude  graduate  of the  University  of
Southwestern  Louisiana  with a Bachelor of Arts degree in Economics and a minor
in Mathematics.

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

                                      -80-

<PAGE>


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

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

     R. Renn Rothrock, Jr. has been President of both Hunter Gas Gathering, Inc.
and Gruy and Executive  Vice President of Magnum Hunter  Production,  Inc. since
January 1994. He served as Executive Vice President and Chief Operating  Officer
of Gruy from May 1988 until  January  1994.  Mr.  Rothrock  was  Executive  Vice
President and General Manager of Gruy  Engineering  Corporation  from 1986 until
May 1988. Over his 28-year  career,  Mr. Rothrock has also served as a reservoir
engineer and operations  research  engineer at Skelly Oil Company and as an area
engineer at Amerada Petroleum  Corporation;  the Engineering Editor of Petroleum
Engineer International  Magazine; Vice President and Energy Manager of the First
National  Bank of Mobile,  Alabama;  Executive  Vice  President of Energy Assets
International  Corporation, a public company that financed oil and gas ventures;
and the producer and operator of his own gas gathering and transportation system
Mr. Rothrock earned a B.S. degree in Petroleum Engineering and an M.S. degree in
Engineering  from the  University of Oklahoma.  He is a member of the Society of
Professional  Engineers,  the National  Society of Professional  Engineers,  the
National  Academy of Forensic  Engineers and the Texas  Society of  Professional
Engineers.  Mr.  Rothrock  is a  registered  Professional  Engineer in Texas and
Oklahoma.

         Gerald W. Bolfing has been a director of the Company since December 31,
1995.  Mr.  Bolfing was  appointed a director of Hunter in August 1993. He is an
investor  in the oil and gas  business  and a past  officer  of one of  Hunter's
former  subsidiaries.  From 1962 to 1980,  Mr.  Bolfing was a partner in Bolfing
Food Stores in Waco,  Texas.  During this time, he also joined American  Service
Company  in  Atlanta,  Georgia  from 1964 to 1965,  and was  active  with  Cable
Advertising  Systems,  Inc. of  Kerrville,  Texas from 1978 to 1981. He joined a
Hunter  subsidiary  in the well  servicing  business  in 1981 where he  remained
active until its  divestiture  in 1992. Mr. Bolfing is on the board of directors
of Capital Marketing Corporation of Hurst, Texas.

     Oscar C.  Lindemann has served as a director of the Company since  December
31,  1995.  Mr.  Lindemann  was  previously  a director  of Hunter,  having been
appointed in November  1995. Mr.  Lindemann has over 40 years  experience in the
financial  industry.  Mr. Lindemann began his banking career with the Texas Bank
and Trust in  Dallas,  Texas in 1951.  He  served  the bank  until  1977 in many
capacities,  including Chief Executive Officer and Chairman of the Board.  Since
leaving Texas Bank and Trust,  he has served as Vice Chairman of both the United
National Bank and the National Bank of Commerce,  also in Dallas.  Mr. Lindemann
has also  served as a  consultant  to the  banking  industry.  He  retired  from
commercial  banking in 1987.  Mr.  Lindemann is a former  President of the Texas
Bankers  Association,  and a former state representative to the American Bankers
Association.  He was a Founding  Director and Board Member of VISA, and a member
of the Reserve City Bankers Association.  He has served as an instructor at both
the Southwestern Graduate School of Banking at Southern Methodist University and
the School of Banking


                                      -81-


<PAGE>



of  the  South  at  Louisianna  State  University.  He  has  also  served  as  a
faculty member for four years in the College of Business  Administration  at the
University of Texas in Austin teaching various banking subjects.

     John W. Trescot,  Jr. has served as a director of the Company since June 5,
1997.  For the  last  five  years,  Mr.  Trescot  has  been a  principal  of AWA
Management  Corporation,  a professional  consulting  firm  specializing in oil,
timber,  pulp and paper,  and  financial  management.  Early in his career,  Mr.
Trescot held various  positions in woodlands,  and pulp and paper,  advancing to
the  position of Senior Vice  President,  Southern  Operations  at Hudson Pulp &
Paper Corp.  (now part of Georgia  Pacific  Corp.) Later Mr. Trescot became Vice
President  of The  Charter  Company,  a  corporation  with  operations  in  oil,
communications  and insurance.  In 1979, Mr. Trescot became the Chief  Executive
Officer of "Jari"  Florestal e  Agropecuaria,  Ltda., a pulp,  timber,  rice and
kaolin  operation in the Amazon Basin of Brazil owned by D.K.  Ludwig.  In 1981,
Mr. Trescot became the Chief Executive Officer of TOT Drilling Corp., a contract
drilling company drilling in west Texas and New Mexico.

         James E. Upfield has served as a director of the Company since December
31, 1995.  Mr.  Upfield was  appointed a director of Hunter in August 1992.  Mr.
Upfield is Chairman of Temtex Industries,  Inc. based in Dallas, Texas, a public
company that produces consumer hard goods and building  materials.  In 1969, Mr.
Upfield served on a select  Presidential  Committee serving postal operations of
the United  States of America.  He later  accepted  the  responsibility  for the
Dallas region,  which  encompassed  Texas and Louisiana.  From 1959 to 1967, Mr.
Upfield  was  President  of  Baifield  Industries,  Inc.  ("Baifield")  and  its
predecessor,  a company he founded in 1949 which  merged with  Baifield in 1963.
Baifield was engaged in prime  government  contracts  for  military  systems and
sub-systems in the production of high-strength,  light-weight metal products. In
1967, Baifield was acquired by Automatic Sprinkler Corporation of America, where
Mr.  Upfield   remained  until  resigning  in  1968  to  pursue  other  business
opportunities.

Significant Officers of Subsidiaries

         R. Douglas  Cronk,  age 50, has been Vice  President of Operations  for
Magnum  Hunter  Production,  Inc.  since May 1996, at which time the Company had
acquired  from Mr. Cronk 100% of the capital stock of Rampart  Petroleum,  Inc.,
based in Abilene,  Texas.  Rampart has been an active  operating and exploration
company in the north  central and west Texas  region  since  1983.  Prior to the
formation of Rampart,  Mr. Cronk was an  independent  oil and gas  consultant in
Houston,  Texas for  approximately  two years. From 1974 to 1981, Mr. Cronk held
various positions with subsidiaries of Deutsch  Corporation of Tulsa,  Oklahoma,
including  Southland  Drilling and Production  where he became Vice President of
Drilling and  Production.  Mr. Cronk is a Chemical  Engineer  graduate  from the
University of Tulsa.

     Russell A. Talley,  age 64, has been  Executive Vice President and Drilling
Manager of Gruy Company since January 1991. From 1959 to 1970, Mr. Talley worked
for  Diamond  Shamrock  Oil & Gas  Company  in  Amarillo,  Texas,  where  he had
substantial responsibilities in drilling, production and workover programs. From
1970 to 1985, Mr. Talley worked for Samedan Oil  Corporation in Houston,  Texas,
where he became the Manager of Offshore Drilling and Production.  He managed all
domestic  and  Canadian   drilling   operations  and  supervised   international
operations in Ecuador,  the North Sea and Canada.  From 1985 to 1987, Mr. Talley
was Vice  President  of  Operations  for Seagull  Energy E & P, Inc. in Houston,
where he was responsible for all onshore and offshore  drilling  operations.  In
1988 he established  Texstar Energy Operators,  Inc., which was acquired by Gruy
in 1991.


                                      -82-

<PAGE>

                             PRINCIPAL STOCKHOLDERS
                        AND SHARE OWNERSHIP OF MANAGEMENT

Security Ownership

     The  following  table sets forth certain  information  as of June 30, 1997,
regarding  the share  ownership  of the Company by (i) each person  known to the
Company to be the beneficial owner of more than 5% of the outstanding  shares of
Common Stock of the  Company,  (ii) each  director,  (iii) the  Company's  Chief
Executive Officer and the two other most highly  compensated  executive officers
of the Company, and (iv) all directors and executive officers of the Company, as
a group.  None of the directors or executive  officers named below owned,  as of
June 30, 1997, any shares of the Company's  Series A Preferred  Stock or its TCW
Preferred  Stock. The business address of each officer and director listed below
is: c/o Magnum Hunter Resources,  Inc., 600 East Las Colinas Blvd.,  Suite 1200,
Irving, Texas 75039.

<TABLE>
<CAPTION>
<S>                                                                                       <C>              <C>        
                                  Common Stock
                               Beneficially Owned
                                                                                                            Percent
                                                                                           Number of          of
                                                                                            Shares         Class (1)
                                                                                          -----------      ----------
Directors and Executive Officers
   Gary C. Evans.....................................................................     1,653,060 (2)      12.1%
   Matthew C. Lutz...................................................................       145,460           1.1
   Gerald W. Bolfing.................................................................       323,144           2.4
   Oscar C. Lindemann................................................................         1,185            *
   John H. Trescot, Jr...............................................................        20,837            *
   James E. Upfield..................................................................        29,268            *
   Richard R. Frazier................................................................        47,745            *


                                                                                      ------------        ----------
   All directors and executive officers as a group (8 persons).......................     2,220,699          16.3%
Beneficial owners of 5% or more (excluding persons named above)

   TCW Group, Inc.
   865 South Figueroa Street
   Los Angeles, CA 90017.............................................................     1,702,127 (3)      11.1%

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

* Less than 1%

(1)      The number of shares outstanding was calculated in accordance with Rule
         13d-3(d) promulgated under the Exchange Act.
(2)      Includes 17,024 shares held in the name of Jacquelyn Evelyn Enterprises
         Inc., a corporation whose sole shareholder is Mr. Evans'wife. Mr. Evans
         disclaims any ownership in such securities other than those in which he
         has an economic interest.
(3)      Consists of shares attributable to shares of Common Stock issuable upon
         conversion of 1,000,000 shares of the Company's TCW Preferred Stock.


                              CERTAIN TRANSACTIONS

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


                                      -83-

<PAGE>



                       DESCRIPTION OF NEW CREDIT FACILITY

     On April 30,  1997,  the Company  entered into a $130.0  million  revolving
credit  facility  (the "New Credit  Facility")  with Bankers Trust  Company,  as
Administrative  Agent,  Banque  Paribas and First Union  National  Bank of North
Carolina (collectively,  the "Lenders").  The purpose of the New Credit Facility
was to (i) repay the remaining $53.7 million of indebtedness  under the Previous
Credit Facility, (ii) partially finance the Permian Basin Acquisition, and (iii)
provide funds for working  capital  support and general  corporate  purposes.  A
$20.0 million letter of credit sub-facility is available as support for purposes
approved by the Lenders.

     The New  Credit  Facility  is  subject to a  Borrowing  Base  determination
established  on October 1 and April 1 of each year by the  Lenders.  The current
Borrowing Base is $60.0 million. The Borrowing Base was reduced to this level on
May 29, 1997,  due to the issuance of the  Outstanding  Notes.  On such date the
Company applied  approximately  $75.5 million of the proceeds of the Offering of
the Outstanding  Notes to reduce  indebtedness  under the New Credit Facility to
$44 million, with First Union National Bank of North Carolina's participation in
such loan being repaid and it ceasing to be a Lender.

         Under the terms of the New Credit Facility, the Company must maintain a
Debt to  Capitalization  Ratio of not more than 0.86 until March 31,  1998,  not
more than 0.75 from April 1, 1998  until  September  30,  1998 and not more than
0.70 thereafter.  Another  covenant  requires the Company to maintain a ratio of
Consolidated  EBITDA to Interest Expense of not less than 2.00 to 1 through June
30, 1998,  not less than 2.50 to 1 from July 1, 1998 until December 31, 1998 and
not less than 2.75 to 1 thereafter.

         The Company may select an interest rate equal to the Base Rate (defined
in the New Credit  Facility as the higher of (i) the prime rate of Bankers Trust
Company or (ii) the sum of the overnight rate on federal funds transactions plus
0.50%) or a LIBOR-based rate, which varies depending upon the Company's usage of
its Borrowing  Base.  The  LIBOR-based  interest rate will range from LIBOR plus
1.00% if less than 25% of the  Borrowing  Base is used to LIBOR plus 1.75% if at
least 75% of the Borrowing Base is used. The New Credit Facility currently bears
interest at 7.4375% per annum.

         The New Credit  Facility  has a maturity of five years with no required
principal  payments  until  maturity,  provided that the  outstanding  principal
balance does not exceed the Borrowing Base determinations  established from time
to time by the Lenders.  Indebtedness under the New Credit Facility  constitutes
Senior  Indebtedness.  Outstanding  indebtedness  is secured by a first priority
security  interest taken by the Lenders in substantially all assets owned now or
in the future by the Company  (including its  subsidiaries).  All of the capital
stock of all  wholly  owned  material  subsidiaries  of the  Company  is pledged
pursuant  to the  New  Credit  Facility.  Each  of the  Company's  wholly  owned
subsidiaries has guaranteed the New Credit Facility.

         The representations and warranties, conditions to extensions of credit,
events of default and  indemnifications  are substantially the same as under the
Previous  Credit  Facility.  The  New  Credit  Facility  also  contains  certain
financial and other covenants,  which include a minimum tangible net worth test,
a  minimum  current  ratio  and  other  covenants  in  addition  to the  Debt to
Capitalization Ratio and the ratio of Consolidated EBITDA to Interest Expense.


                                      -84-

<PAGE>

                          DESCRIPTION OF THE EXCHANGE NOTES

         The Exchange Notes will be issued under an indenture (the  "Indenture")
dated as of May 29, 1997 by and among the Company, the Subsidiary Guarantors and
First Union National Bank of North Carolina,  as Trustee (the  "Trustee").  Upon
the  issuance  of the  Exchange  Notes,  the  Indenture  will be  subject to and
governed by the  provisions of the Trust  Indenture Act of 1939, as amended (the
"TIA").

     The  Exchange  Notes  will  be  issued  under  the  same  Indenture  as the
Outstanding  Notes,  and the Exchange Notes, the Private Exchange Notes (if any)
and the  Outstanding  Notes will  constitute a single series of debt  securities
under the Indenture.  In the event that the Exchange Offer is  consummated,  any
Outstanding  Notes that remain  outstanding  after  consummation of the Exchange
Offer,  the Private Exchange Notes and the Exchange Notes issued in the Exchange
Offer will vote together as a single class for purposes of  determining  whether
holders of the requisite  percentage in  outstanding  principal  amount of Notes
have taken certain actions or exercised certain rights under the Indenture.  The
Exchange  Notes,  the  Private  Exchange  Notes  and the  Outstanding  Notes are
sometimes collectively referred to herein as the "Notes."

     The  following  summary of certain  provisions  of the  Indenture  does not
purport to be complete  and is subject to, and is  qualified  in its entirety by
reference to, the TIA and all of the provisions of the Indenture,  including the
definitions  of  certain  terms  therein  and  those  terms  made a part  of the
Indenture by reference to the TIA as in effect on the date of the  Indenture.  A
copy of the form of Indenture may be obtained from the Company.  The definitions
of certain  capitalized  terms used in the following summary are set forth below
under  "-- Certain  Definitions." Capitalized terms used in this summary and not
otherwise defined below have the meaning assigned to them in the Indenture.  For
purposes of this "Description of the Exchange Notes" section,  references to the
"Company" include only Magnum Hunter Resources, Inc. and not its Subsidiaries.

     The Outstanding  Notes are and the Exchange Notes will be general unsecured
obligations  of the  Company  ranking  pari  passu in right  of  payment  to all
unsubordinated  indebtedness  of the  Company  and will rank  senior in right of
payment to all subordinated  indebtedness of the Company. The Guarantees will be
general  unsecured  obligations of the Subsidiary  Guarantors and will rank pari
passu in right of payment to all  unsubordinated  indebtedness of the Subsidiary
Guarantors  and  will  rank  senior  in  right of  payment  to all  subordinated
indebtedness  of  the  Subsidiary   Guarantors.   However,  the  Notes  will  be
effectively  subordinated  to  secured  indebtedness  of  the  Company  and  the
Subsidiary  Guarantors  to the extent of the value of the assets  securing  such
indebtedness.  As of  September  30,  1997,  the Company had  approximately  $48
million of secured indebtedness outstanding.

     The Exchange Notes will be issued in fully  registered  form only,  without
coupons,  in denominations of $1,000 and integral multiples thereof.  Initially,
the Trustee will act as paying agent and registrar for the Exchange  Notes.  The
Exchange Notes may be presented for registration of transfer and exchange at the
offices of the registrar,  which initially will be the Trustee's corporate trust
office.  The Company may change any paying agent and registrar without notice to
holders  of the Notes (the  "Holders").  The  Company  will pay  principal  (and
premium,  if any) on the Exchange Notes at the Trustee's corporate office in New
York, New York. At the Company's  option,  interest may be paid at the Trustee's
corporate  trust  office or by check mailed to the  registered  addresses of the
Holders.  Any Outstanding Notes that remain  outstanding after the completion of
the Exchange  Offer,  together with the Exchange Notes and the Private  Exchange
Notes issued in connection with the Exchange Offer,  will be treated as a single
class of securities under the Indenture. See "The Exchange Offer."

Principal, Maturity and Interest

     The Notes are limited in  aggregate  principal  amount to $140  million and
will mature on June 1, 2007.  Interest on the Notes generally will accrue at the
rate of 10% per annum and will be payable  semi-annually  in cash on each June 1
and  December  1,  commencing  on  December  1,  1997,  to the  Persons  who are
registered  Holders  at the close of  business  on the May 15 and  November  15,
respectively,  immediately  preceding  the  applicable  interest  payment  date.
Interest  on the Notes will accrue  from and  including  the most recent date to
which  interest  has been  paid or,  if no  interest  has  been  paid,  from and
including the date of issuance. Interest generally will be computed on the basis
of a 365 day year.



                                      -85-

<PAGE>



         The Exchange Notes will not be entitled to the benefit of any mandatory
sinking fund.

Redemption

          Optional  Redemption.  The Notes will be redeemable,  at the Company's
option,  in whole at any time or in part from time to time, on and after June 1,
2002,  upon not less than 30 nor more  than 60 days'  notice,  at the  following
redemption  prices (expressed as percentages of the principal amount thereof) if
redeemed during the 12-month period  commencing on June 1 of the years set forth
below,  plus, in each case,  accrued  interest,  if any,  thereon to the date of
redemption:


Year                                                             Percentage
- ----                                                             ----------
2002....................................................          105.000%
2003....................................................          103.333%
2004....................................................          101.667%
2005 and thereafter.....................................          100.000%

           Optional Redemption upon Equity Offerings.  At any time, or from time
to time, on or prior to June 1, 2000, the Company may, at its option, use all or
a portion of the net cash proceeds of one or more Equity  Offerings (as defined)
to redeem up to 35% of the aggregate  principal  amount of the Notes  originally
issued at a redemption price equal to 110% of the aggregate  principal amount of
the Notes to be redeemed,  plus accrued interest, if any, thereon to the date of
redemption;  provided,  however,  that at least 65% of the  aggregate  principal
amount of Notes originally issued remains  outstanding  immediately after giving
effect to any such redemption.  In order to effect the foregoing redemption with
the proceeds of any Equity Offering,  the Company shall make such redemption not
more than 60 days after the consummation of any such Equity Offering.

Selection and Notice of Redemption

         In the event that less than all of the Notes are to be  redeemed at any
time,  selection of such Notes, or portions thereof, for redemption will be made
by the Trustee in compliance  with the  requirements  of the principal  national
securities exchange,  if any, on which the Notes are listed or, if the Notes are
not then listed on a national securities  exchange,  on a pro rata basis, by lot
or by such  other  method  as the  Trustee  shall  deem  fair  and  appropriate;
provided,  however,  that no Notes of a principal amount of $1,000 or less shall
be redeemed in part; and provided, further, that if a partial redemption is made
with the  proceeds  of an Equity  Offering,  selection  of the Notes or portions
thereof for redemption  shall be made by the Trustee only on a pro rata basis or
on as nearly a pro rata basis as is  practicable  (subject to the  procedures of
DTC), unless such method is otherwise prohibited.  Notice of redemption shall be
mailed  by  first-class  mail at least 30 but not more than 60 days  before  the
redemption  date to each  Holder  of  Notes  to be  redeemed  at its  registered
address.  If any Note is to be redeemed in part only,  the notice of  redemption
that  relates  to such Note shall  state the  portion  of the  principal  amount
thereof to be redeemed. A new Note in a principal amount equal to the unredeemed
portion  thereof  will  be  issued  in the  name  of  the  Holder  thereof  upon
cancellation of the original Note. On and after the applicable  redemption date,
interest will cease to accrue on Notes or portions thereof called for redemption
as long as the Company has  deposited  with the paying agent for the Notes funds
in satisfaction of the applicable redemption price pursuant to the Indenture.

Guarantees

         Each Subsidiary Guarantor will unconditionally  guarantee,  on a senior
basis,  jointly  and  severally,  to each Holder and the  Trustee,  the full and
prompt  performance  of the  Company's  obligations  under the Indenture and the
Notes, including the payment of principal of and interest on the Notes.

         The  obligations  of each  Subsidiary  Guarantor will be limited to the
maximum  amount  which,  after giving effect to all other  contingent  and fixed
liabilities  of  such  Subsidiary  Guarantor  and  after  giving  effect  to any
collections  from or  payments  made by or on  behalf  of any  other  Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Guarantee or pursuant to its contribution  obligations  under the Indenture,
will result


                                      -86-

<PAGE>



in the  obligations  of  such  Subsidiary  Guarantor  under  its  Guarantee  not
constituting  a fraudulent  conveyance or fraudulent  transfer  under federal or
state law. Each Subsidiary  Guarantor that makes a payment or distribution under
its Guarantee  shall be entitled to a  contribution  from each other  Subsidiary
Guarantor  in an amount  pro rata,  based on the net  assets of each  Subsidiary
Guarantor, determined in accordance with GAAP.

         Each Subsidiary  Guarantor may  consolidate  with or merge into or sell
its assets to the Company or another Subsidiary Guarantor that is a Wholly Owned
Restricted  Subsidiary without limitation,  or with or to other Persons upon the
terms and conditions set forth in the Indenture. See "-Certain Covenants-Merger,
Consolidation  and Sale of Assets."  In the event all of the Capital  Stock of a
Subsidiary Guarantor is sold by the Company and/or one or more of its Restricted
Subsidiaries  and the sale complies with the  provisions  set forth in "-Certain
Covenants-Limitation on Asset Sales," such Subsidiary Guarantor's Guarantee will
be released.

         Separate  financial  statements of the  Subsidiary  Guarantors  are not
included  herein  because such  Subsidiary  Guarantors are jointly and severally
liable with respect to the  Company's  obligations  under the  Indenture and the
Notes,  and the  aggregate  net assets,  earnings  and equity of the  Subsidiary
Guarantors  and the  Company  are  substantially  equivalent  to the net assets,
earnings and equity of the Company on a consolidated basis.
   
     If the  Non-Guarantor  Subsidiaries  (as defined),  individually  or in the
aggregate,  and any such direct or indirect subsidiaries of the Company that are
created,  acquired or owned in the future,  ceases to be  inconsequential to the
Company on a  consolidated  basis,  the Company  will  either:  (i) present in a
footnote to its consolidated financial statements in future Exchange Act reports
condensed  consolidated  financial  information  for the  Company,  the combined
Guarantors and the combined Non-Guarantor  Subsidiaries as of the same dates and
for the same periods as the consolidated financial statements for so long as any
subsidiary guarantees remain outstanding; or (ii) request additional relief from
the Division with respect to the filing obligations of the Guarantors.
    

Holding Company Structure

         The Company is a holding company for its Subsidiaries, with no material
operations  of  its  own.  Accordingly,   the  Company  is  dependent  upon  the
distribution  of the  earnings  of its  Subsidiaries,  whether  in the  form  of
dividends,  advances  or  payments on account of  intercompany  obligations,  to
service its debt  obligations.  In addition,  the claims of the Holders of Notes
are subject to the prior payment of all secured  indebtedness of the Guarantors.
There can be no assurance  that,  after  providing for all such secured  claims,
there would be sufficient assets available from the Company and its Subsidiaries
to satisfy the claims of the Holders of Notes. See "Risk Factors-Holding Company
Structure; Effective Subordination of Notes."

Change of Control

         The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require  that the Company  purchase  all or a
portion  of such  Holder's  Notes  pursuant  to the offer  described  below (the
"Change of Control  Offer"),  at a purchase price equal to 101% of the principal
amount thereof, plus accrued interest, if any, thereon to the date of purchase.

         Within 30 days  following  the date upon  which the  Change of  Control
occurred,  the Company must send,  by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state,  among other things,  the purchase date,
which must be no earlier  than 30 days nor later than 45 days from the date such
notice is mailed,  other than as may be required by law (the  "Change of Control
Payment  Date").  A Change of Control Offer shall remain open for a period of 20
Business Days or such longer period as may be required by law.  Holders electing
to have a Note purchased  pursuant to a Change of Control Offer will be required
to  surrender  the  Note,  with the form  entitled  "Option  of  Holder to Elect
Purchase"  on the  reverse of the Note  completed,  to the paying  agent for the
Notes at the address  specified  in the notice prior to the close of business on
the third Business Day prior to the Change of Control Payment Date.

         If a Change of Control  Offer is made,  there can be no assurance  that
the Company will have  available  funds  sufficient to pay the Change of Control
purchase  price for all the Notes that might be delivered by Holders  seeking to
accept the Change of Control  Offer.  In the event the  Company is  required  to
purchase  outstanding  Notes pursuant to a Change of Control Offer,  the Company
expects that it would seek third party  financing to the extent it does not have
available  funds to meet its  purchase  obligations.  However,  there  can be no
assurance that the Company would be able to obtain such financing. Additionally,
the occurrence of a Change of Control would constitute an event of default under
the Senior  Credit  Facility  which  would  permit  the  lenders  thereunder  to
accelerate all indebtedness under the Senior Credit Facility.



                                      -87-

<PAGE>



         Neither the Board of Directors of the Company nor the Trustee may waive
the covenant  relating to the  Company's  obligation to make a Change of Control
Offer.  Restrictions  in the  Indenture  described  herein on the ability of the
Company and its Restricted  Subsidiaries to incur  additional  Indebtedness,  to
grant liens on their  property,  to make  Restricted  Payments and to make Asset
Sales may also make more  difficult  or  discourage  a takeover of the  Company,
whether favored or opposed by the management of the Company. Consummation of any
such transaction in certain  circumstances may require  repurchase of the Notes,
and there can be no assurance that the Company or the acquiring  party will have
sufficient financial resources to effect such repurchase.  Such restrictions and
the restrictions on transactions with Affiliates may, in certain  circumstances,
make more  difficult or discourage  any  leveraged  buyout of the Company by the
management  of the  Company.  While such  restrictions  cover a wide  variety of
arrangements  which  have  traditionally  been used to effect  highly  leveraged
transactions,  the Indenture  may not afford the Holders of Notes  protection in
all  circumstances  from the adverse aspects of a highly leveraged  transaction,
reorganization, restructuring, merger or similar transaction.

         The Company will comply with the  requirements  of Rule 14e-1 under the
Exchange Act and any other  securities  laws and  regulations  thereunder to the
extent  such  laws  and  regulations  are  applicable  in  connection  with  the
repurchase of Notes  pursuant to a Change of Control  Offer.  To the extent that
the provisions of any securities  laws or regulations  conflict with the "Change
of Control"  provisions  of the  Indenture,  the Company  shall  comply with the
applicable  securities  laws and  regulations  and  shall  not be deemed to have
breached  its  obligations  under the  "Change  of  Control"  provisions  of the
Indenture by virtue thereof.

Certain Covenants

         The Indenture contains, among others, the following covenants:

          Limitation  on  Incurrence  of  Additional  Indebtedness.  Other  than
Permitted  Indebtedness,  the Company will not, and will not cause or permit any
of its  Restricted  Subsidiaries  to,  directly or  indirectly,  create,  incur,
assume,  guarantee,  acquire,  become liable,  contingently  or otherwise,  with
respect  to, or  otherwise  become  responsible  for  payment of  (collectively,
"incur")   any   Indebtedness   (including,    without   limitation,    Acquired
Indebtedness);  provided,  however, that if no Default or Event of Default shall
have  occurred  and be  continuing  at the  time of or as a  consequence  of the
incurrence of any such Indebtedness, the Company and the Restricted Subsidiaries
or any of them  may  incur  Indebtedness,  in each  case,  if on the date of the
incurrence of such Indebtedness, after giving pro forma effect to the incurrence
thereof and the receipt and application of the proceeds therefrom,  both (a) the
Company's  Consolidated  EBITDA Coverage Ratio would have been greater than 2.25
to 1.0 if such proposed  incurrence is on or prior to June 30, 1998 and at least
equal  to 2.5 to 1.0 if  such  proposed  incurrence  is  thereafter  and (b) the
Company's Adjusted Consolidated Net Tangible Assets are equal to or greater than
150%  of  the  aggregate  consolidated  Indebtedness  of  the  Company  and  its
Restricted Subsidiaries.

         For purposes of determining any particular amount of Indebtedness under
this   covenant,   guarantees  of   Indebtedness   otherwise   included  in  the
determination of such amount shall not also be included.

         Indebtedness  of a Person  existing at the time such  Person  becomes a
Restricted Subsidiary (whether by merger, consolidation,  acquisition of Capital
Stock or  otherwise)  or is merged  with or into the  Company or any  Restricted
Subsidiary or which is secured by a Lien on an asset  acquired by the Company or
a  Restricted  Subsidiary  (whether or not such  Indebtedness  is assumed by the
acquiring  Person)  shall be deemed  incurred  at the time the Person  becomes a
Restricted  Subsidiary or at the time of the asset acquisition,  as the case may
be.

         The Company will not, and will not permit any Subsidiary  Guarantor to,
incur any  Indebtedness  which by its  terms  (or by the terms of any  agreement
governing  such  Indebtedness)  is  subordinated  in  right  of  payment  to any
Indebtedness  of the Company or such Subsidiary  Guarantor,  as the case may be,
other than the Notes and the Guarantees  unless such Indebtedness is also by its
terms  (or by the  terms of any  agreement  governing  such  Indebtedness)  made
expressly  subordinate in right of payment to the Notes or the Guarantee of such
Subsidiary Guarantor,  as the case may be, pursuant to subordination  provisions
that are substantially identical to the subordination


                                      -88-

<PAGE>



provisions of such  Indebtedness  (or agreement)  that are most favorable to the
holders of such other Indebtedness of the Company or such Subsidiary  Guarantor,
as the case may be.

         Limitation on Restricted  Payments.  The Company will not, and will not
cause or permit any of its Restricted  Subsidiaries  to, directly or indirectly,
(a) declare or pay any dividend or make any  distribution  (other than dividends
or distributions  made to the Company or any Wholly Owned Restricted  Subsidiary
and other  than any  dividends  or  distributions  payable  solely in  Qualified
Capital  Stock of the  Company or  warrants,  rights or options to  purchase  or
acquire  shares of Qualified  Capital  Stock of the Company) on or in respect of
shares of the  Capital  Stock of the  Company or any  Restricted  Subsidiary  to
holders of such Capital  Stock,  (b)  purchase,  redeem or otherwise  acquire or
retire for value any Capital Stock of the Company or any  Restricted  Subsidiary
or any warrants, rights or options to purchase or acquire shares of any class of
such Capital Stock other than through the exchange  therefor solely of Qualified
Capital  Stock of the  Company or  warrants,  rights or options to  purchase  or
acquire shares of Qualified Capital Stock of the Company, (c) make any principal
payment on, purchase,  defease, redeem, prepay, decrease or otherwise acquire or
retire for value, prior to any scheduled final maturity,  scheduled repayment or
scheduled sinking fund payment,  any Indebtedness of the Company or a Subsidiary
Guarantor that is subordinate or junior in right of payment to the Notes or such
Subsidiary Guarantor's Guarantee, as the case may be, or (d) make any Investment
(other than a Permitted  Investment) (each of the foregoing actions set forth in
clauses (a), (b), (c) and (d) being referred to as a "Restricted  Payment"),  if
at the time of such  Restricted  Payment  or  immediately  after  giving  effect
thereto,  (i) a  Default  or an Event of  Default  shall  have  occurred  and be
continuing or (ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with "-Limitation
on Incurrence of Additional Indebtedness" above or (iii) the aggregate amount of
Restricted Payments (including such proposed Restricted Payment) made subsequent
to the Issue Date (the amount expended for such purposes, if other than in cash,
being the fair market value of such  property as  determined  reasonably  and in
good faith by the Board of Directors  of the  Company)  shall exceed the sum of:
(A) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated
Net  Income  shall be a loss,  minus 100% of such  loss) of the  Company  earned
subsequent  to the Issue Date and on or prior to the last date of the  Company's
fiscal quarter  immediately  preceding such  Restricted  Payment (the "Reference
Date") (treating such period as a single  accounting  period);  plus (B) 100% of
the aggregate  net cash proceeds  received by the Company from any Person (other
than a  Restricted  Subsidiary  of the  Company)  from  the  issuance  and  sale
subsequent to the Issue Date and on or prior to the Reference  Date of Qualified
Capital  Stock of the  Company;  plus (C)  without  duplication  of any  amounts
included in clause  (iii)(B)  above,  100% of the aggregate net cash proceeds of
any equity  contribution  received by the Company from a holder of the Company's
Capital Stock (excluding,  in the case of clauses (iii)(B) and (C), any net cash
proceeds from an Equity  Offering to the extent used to redeem the Notes);  plus
(D) an  amount  equal  to the  net  reduction  in  Investments  in  Unrestricted
Subsidiaries resulting from dividends, interest payments, repayments of loans or
advances,  or other  transfers  of cash,  in each case to the  Company or to any
Restricted Subsidiary of the Company from Unrestricted Subsidiaries (but without
duplication of any such amount included in calculating  cumulative  Consolidated
Net Income of the Company), or from redesignations of Unrestricted  Subsidiaries
as Restricted  Subsidiaries  (in each case valued as provided in "-Limitation on
Designation of Unrestricted  Subsidiaries" below), not to exceed, in the case of
any Unrestricted  Subsidiary,  the amount of Investments  previously made by the
Company or any Restricted  Subsidiary in such Unrestricted  Subsidiary and which
was  treated as a  Restricted  Payment  under the  Indenture;  plus (E)  without
duplication of the immediately  preceding  subclause (D), an amount equal to the
lesser  of the  cost or net  cash  proceeds  received  upon  the  sale or  other
disposition of any  Investment  made after the Issue Date which had been treated
as a Restricted Payment (but without  duplication of any such amount included in
calculating cumulative Consolidated Net Income of the Company).

         Notwithstanding  the  foregoing,   the  provisions  set  forth  in  the
immediately  preceding  paragraph  shall not  prohibit:  (1) the  payment of any
dividend or redemption  payment  within 60 days after the date of declaration of
such  dividend  or the  applicable  redemption  if the  dividend  or  redemption
payment,  as the  case  may  be,  would  have  been  permitted  on the  date  of
declaration;  (2) if no Default or Event of Default  shall have  occurred and be
continuing,  the  acquisition  of any  shares of Capital  Stock of the  Company,
through the application of net proceeds of a  substantially  concurrent sale for
cash  (other  than to a  Restricted  Subsidiary  of the  Company)  of  shares of
Qualified  Capital  Stock of the Company;  (3) if no Default or Event of Default
shall have occurred and be continuing,  the  acquisition of any  Indebtedness of
the Company or Subsidiary  Guarantor  that is  subordinate or junior in right of
payment to the Notes


                                      -89-

<PAGE>



or such Subsidiary Guarantor's Guarantee,  as the case may be, either (A) solely
in exchange  for shares of Qualified  Capital  Stock of the Company or warrants,
rights or options to purchase or acquire  shares of Qualified  Capital  Stock of
the Company,  or (B) through the  application of net proceeds of a substantially
concurrent sale for cash (other than to a Restricted  Subsidiary of the Company)
of (I) shares of  Qualified  Capital  Stock of the  Company or (II)  Refinancing
Indebtedness;  (4) if no Default or Event of Default  shall have occurred and be
continuing,  the  redemption of the TCW Preferred  Stock to the extent  required
pursuant to the terms thereof as a result of the Company not having  received at
least $15 million of net cash proceeds from the issuance and sale by the Company
of Common  Stock;  (5) if no Default or Event of Default shall have occurred and
be continuing,  the payment of dividends on the TCW Preferred Stock; and (6) the
initial designation of Hunter Butcher International Limited Liability Company as
an Unrestricted  Subsidiary.  In determining the aggregate  amount of Restricted
Payments made  subsequent  to the Issue Date in accordance  with clause (iii) of
the immediately  preceding paragraph,  amounts expended pursuant to clauses (1),
(2), (4), (5) and (6) shall be included in such calculation.

     Limitation  on Asset  Sales.  The Company  will not,  and will not cause or
permit any of its Restricted  Subsidiaries  to,  consummate an Asset Sale unless
(a) the Company or the  applicable  Restricted  Subsidiary,  as the case may be,
receives consideration at the time of such Asset Sale at least equal to the fair
market value of the assets sold or otherwise  disposed of (as determined in good
faith by the Company's Board of Directors or senior  management of the Company);
(b) (i) at  least  85% of the  consideration  received  by the  Company  or such
Restricted Subsidiary,  as the case may be, from such Asset Sale shall be in the
form  of  cash  or  Cash  Equivalents  and is  received  at  the  time  of  such
disposition;  and (c) upon the  consummation of an Asset Sale, the Company shall
apply,  or cause such  Restricted  Subsidiary  to apply,  the Net Cash  Proceeds
relating  to such Asset Sale  within 270 days of receipt  thereof  either (i) to
repay or prepay  Indebtedness  outstanding  under the  Senior  Credit  Facility,
including,  without limitation, a permanent reduction in the related commitment,
(ii) to repay or prepay any  Indebtedness  of the  Company  that is secured by a
Lien permitted to be incurred pursuant to "-Limitation on Liens" below, (iii) to
make an investment in properties or assets that replace the properties or assets
that were the subject of such Asset Sale or in properties or assets that will be
used in the business of the Company and its Restricted  Subsidiaries as existing
on the Issue Date or in  businesses  reasonably  related  thereto  ("Replacement
Assets"),  (iv) to an investment in Crude Oil and Natural Gas Related  Assets or
(v) a  combination  of  prepayment  and  investment  permitted by the  foregoing
clauses  (c)(i)  through  (c)(iv).  On the 271st day after an Asset Sale or such
earlier date, if any, as the Board of Directors of the Company determines not to
apply the Net Cash Proceeds  relating to such Asset Sale as set forth in clauses
(c)(i)  through  (c)(iv) of the next  preceding  sentence  (each a "Net Proceeds
Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which have been
received by the Company or such  Restricted  Subsidiary  but which have not been
applied on or before  such Net  Proceeds  Offer  Trigger  Date as  permitted  in
clauses  (c)(i)  through  (c)(iv) of the next  preceding  sentence  (each a "Net
Proceeds  Offer  Amount")  shall be  applied by the  Company or such  Restricted
Subsidiary,  as the case may be, to make an offer to purchase  (a "Net  Proceeds
Offer") on a date (the "Net Proceeds  Offer Payment  Date") not less than 30 nor
more than 45 days following the applicable Net Proceeds Offer Trigger Date, from
all Holders on a pro rata basis, that principal amount of Notes purchasable with
the Net Proceeds  Offer Amount at a price equal to 100% of the principal  amount
of the Notes to be purchased,  plus accrued and unpaid interest, if any, thereon
to the date of  purchase;  provided,  however,  that if at any time any non-cash
consideration received by the Company or any Restricted Subsidiary,  as the case
may be, in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash  (other than  interest  received  with  respect to any such
non-cash consideration),  then such conversion or disposition shall be deemed to
constitute an Asset Sale  hereunder  and the Net Cash Proceeds  thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate  unutilized Net Proceeds Offer Amount equal to
or in excess of $5  million  resulting  from one or more  Asset  Sales (at which
time, the entire  unutilized Net Proceeds Offer Amount,  and not just the amount
in  excess  of $5  million,  shall  be  applied  as  required  pursuant  to this
paragraph).

         In the event of the transfer of substantially  all (but not all) of the
property  and  assets  of the  Company  and its  Restricted  Subsidiaries  as an
entirety to a Person in a transaction  permitted under "--Merger,  Consolidation
and Sale of Assets," the successor  corporation shall be deemed to have sold the
properties  and assets of the Company  and its  Restricted  Subsidiaries  not so
transferred for purposes of this covenant,  and shall comply with the provisions
of this  covenant  with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such


                                      -90-

<PAGE>



properties and assets of the Company or its Restricted Subsidiaries deemed to be
sold shall be deemed to be Net Cash Proceeds for purposes of this covenant.

         Notwithstanding the two immediately preceding  paragraphs,  the Company
and its  Restricted  Subsidiaries  will be permitted to consummate an Asset Sale
without  complying with such paragraphs to the extent (a) the  consideration for
such Asset Sale constitutes  Replacement Assets and/or Crude Oil and Natural Gas
Related  Assets  and (b) such  Asset Sale is for fair  market  value;  provided,
however,  that any consideration not constituting  Replacement  Assets and Crude
Oil and  Natural  Gas  Related  Assets  received  by the  Company  or any of its
Restricted  Subsidiaries  in  connection  with any Asset  Sale  permitted  to be
consummated  under this paragraph shall  constitute Net Cash Proceeds subject to
the provisions of the two immediately preceding paragraphs.

         Notice of each Net Proceeds  Offer will be mailed to the record Holders
as shown on the register of Holders  within 30 days  following  the Net Proceeds
Offer  Trigger  Date,  with a copy to the  Trustee,  and shall  comply  with the
procedures set forth in the Indenture. Upon receiving notice of the Net Proceeds
Offer,  Holders may elect to tender  their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders  properly tender
Notes with an  aggregate  principal  amount  exceeding  the Net  Proceeds  Offer
Amount,  Notes of tendering Holders will be purchased on a pro rata basis (based
on principal  amounts  tendered).  A Net Proceeds  Offer shall remain open for a
period of 20 Business Days or such longer period as may be required by law.

         The Company's  ability to repurchase  Notes in a Net Proceeds  Offer is
restricted by the terms of the Senior  Credit  Facility and may be prohibited or
otherwise limited by the terms of any then existing  borrowing  arrangements and
the Company's financial resources.

         The Company will comply with the  requirements  of Rule 14e-1 under the
Exchange Act and any other  securities  laws and  regulations  thereunder to the
extent  such  laws  and  regulations  are  applicable  in  connection  with  the
repurchase  of Notes  pursuant to a Net Proceeds  Offer.  To the extent that the
provisions of any securities laws or regulations  conflict with the "Asset Sale"
provisions  of the  Indenture,  the Company  shall  comply  with the  applicable
securities  laws and  regulations  and shall not be deemed to have  breached its
obligations  under  the  "Asset  Sale"  provisions  of the  Indenture  by virtue
thereof.

         Limitation  on  Dividend  and  Other  Payment  Restrictions   Affecting
Restricted Subsidiaries.  The Company will not, and will not cause or permit any
of its Restricted  Subsidiaries to, directly or indirectly,  create or otherwise
cause or permit to exist or become  effective any  encumbrance or restriction on
the ability of any Restricted  Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances,
or to pay any Indebtedness or other obligation owed, to the Company or any other
Restricted Subsidiary; (c) guarantee any Indebtedness or any other obligation of
the Company or any Restricted Subsidiary; or (d) transfer any of its property or
assets to the Company or any other Restricted  Subsidiary (each such encumbrance
or  restriction,  a  "Payment  Restriction"),  except for such  encumbrances  or
restrictions  existing  under or by reason  of:  (i)  applicable  law;  (ii) the
Indenture;  (iii) the Senior  Credit  Facility;  (iv)  customary  non-assignment
provisions  of any contract or any lease  governing a leasehold  interest of any
Restricted Subsidiary; (v) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to such Restricted  Subsidiary,  or
the properties or assets of such Restricted Subsidiary, other than the Person or
the properties or assets of the Person so acquired;  (vi) agreements existing on
the Issue Date to the extent and in the manner such  agreements are in effect on
the Issue  Date;  (vii)  customary  restrictions  with  respect to a  Restricted
Subsidiary  of the Company  pursuant to an agreement  that has been entered into
for the sale or  disposition  of  Capital  Stock or  assets  of such  Restricted
Subsidiary  to be  consummated  in  accordance  with the terms of the  Indenture
solely in  respect of the assets or  Capital  Stock to be sold or  disposed  of;
(viii) any instrument  governing a Permitted Lien, to the extent and only to the
extent such  instrument  restricts the transfer or other  disposition  of assets
subject to such  Permitted  Lien;  or (ix) an  agreement  governing  Refinancing
Indebtedness incurred to Refinance the Indebtedness issued,  assumed or incurred
pursuant to an agreement  referred to in clause (ii),  (iii), (v) or (vi) above;
provided,   however,  that  the  provisions  relating  to  such  encumbrance  or
restriction contained in any such Refinancing Indebtedness are no less favorable
to the Holders in any material  respect as  determined by the Board of Directors
of the Company in their reasonable and good faith judgment than the


                                      -91-

<PAGE>



provisions  relating  to  such  encumbrance  or  restriction  contained  in  the
applicable agreement referred to in such clause (ii), (iii), (v) or (vi).

         Limitation on Preferred Stock of Restricted  Subsidiaries.  The Company
will  not  cause or  permit  any of its  Restricted  Subsidiaries  to issue  any
Preferred  Stock  (other  than to the  Company or to a Wholly  Owned  Restricted
Subsidiary)  or permit  any Person  (other  than the  Company or a Wholly  Owned
Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary.

         Limitation on Liens.  Other than Permitted Liens, the Company will not,
and will not cause or permit any of its Restricted  Subsidiaries to, directly or
indirectly,  create, incur, assume or permit or suffer to exist any Liens of any
kind  against  or upon any  property  or  assets  of the  Company  or any of its
Restricted  Subsidiaries  (whether owned on the Issue Date or acquired after the
Issue Date) or any proceeds  therefrom,  or assign or otherwise convey any right
to receive income or profits  therefrom unless (a) in the case of Liens securing
Indebtedness that is expressly  subordinate or junior in right of payment to the
Notes or any  Guarantee,  the Notes or such  Guarantee,  as the case may be, are
secured  by a Lien on such  property,  assets  or  proceeds  that is  senior  in
priority  to such  Liens at least to the same  extent as the Notes are senior in
priority  to such  Indebtedness  and (b) in all other  cases,  the Notes and the
Guarantees are equally and ratably secured.

         Merger,  Consolidation  and Sale of Assets.  The Company will not, in a
single transaction or series of related transactions,  consolidate or merge with
or into any  Person,  or sell,  assign,  transfer,  lease,  convey or  otherwise
dispose  of (or cause or  permit  any  Restricted  Subsidiary  to sell,  assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's  assets  (determined on a  consolidated  basis for the Company and its
Restricted Subsidiaries), whether as an entirety or substantially as an entirety
to any Person  unless:  (a) either (i) the  Company  shall be the  surviving  or
continuing  corporation or (ii) the Person (if other than the Company) formed by
such  consolidation  or into which the  Company  is merged or the  Person  which
acquires by sale, assignment,  transfer,  lease, conveyance or other disposition
the  properties  and  assets  of the  Company  and its  Restricted  Subsidiaries
substantially as an entirety (the "Surviving Entity") (x) shall be a corporation
organized and validly  existing under the laws of the United States or any state
thereof  or the  District  of  Columbia  and  (y)  shall  expressly  assume,  by
supplemental  indenture  (in form and  substance  satisfactory  to the Trustee),
executed  and  delivered to the  Trustee,  the due and  punctual  payment of the
principal  of,  premium,  if  any,  and  interest  on all of the  Notes  and the
performance of every covenant of the Notes,  the Indenture and the  Registration
Rights  Agreement on the part of the Company to be  performed  or observed;  (b)
immediately   after  giving  effect  to  such  transaction  and  the  assumption
contemplated  by  clause  (a)(ii)(y)  above  (including  giving  effect  to  any
Indebtedness  incurred or  anticipated  to be incurred in connection  with or in
respect of such transaction),  the Company or such Surviving Entity, as the case
may be, (i) shall have a  Consolidated  Net Worth  equal to or greater  than the
Consolidated Net Worth of the Company  immediately prior to such transaction and
(ii) shall be able to incur at least  $1.00 of  additional  Indebtedness  (other
than  Permitted   Indebtedness)   pursuant  to  "-Limitation  on  Incurrence  of
Additional  Indebtedness"  above; (c) immediately  before and immediately  after
giving effect to such  transaction  and the  assumption  contemplated  by clause
(a)(ii)(y)  above  (including,   without   limitation,   giving  effect  to  any
Indebtedness  incurred or  anticipated  to be incurred  and any Lien  granted in
connection  with or in  respect  of the  transaction),  no  Default  or Event of
Default  shall  have  occurred  or be  continuing;  and (d) the  Company  or the
Surviving  Entity,  as the case may be,  shall have  delivered to the Trustee an
officers'  certificate  and an  opinion  of  counsel,  each  stating  that  such
consolidation,  merger, sale, assignment,  transfer,  lease, conveyance or other
disposition and, if a supplemental indenture is required in connection with such
transaction,  such supplemental  indenture comply with the applicable provisions
of the Indenture and that all conditions  precedent in the Indenture relating to
such transaction have been satisfied;  provided,  however, that such counsel may
rely, as to matters of fact, on a certificate or certificates of officers of the
Company.

         For purposes of the foregoing, the transfer (by lease, assignment, sale
or  otherwise,  in a single  transaction  or series of  transactions)  of all or
substantially  all of the  properties  or  assets  of  one  or  more  Restricted
Subsidiaries the Capital Stock of which  constitutes all or substantially all of
the properties and assets of the Company,  shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.



                                      -92-

<PAGE>



         Upon any consolidation, combination or merger or any transfer of all or
substantially all of the assets of the Company in accordance with the foregoing,
in which the Company is not the  continuing  corporation,  the successor  Person
formed by such  consolidation  or into  which the  Company is merged or to which
such conveyance,  lease or transfer is made shall succeed to, and be substituted
for, and may exercise  every right and power of, the Company under the Indenture
and the Notes with the same effect as if such surviving entity had been named as
such.

         Each Subsidiary  Guarantor  (other than any Subsidiary  Guarantor whose
Guarantee is to be released in  accordance  with the terms of the  Guarantee and
the Indenture in connection with any  transaction  complying with the provisions
of the Indenture described under "-Limitation on Asset Sales") will not, and the
Company will not cause or permit any Subsidiary  Guarantor to,  consolidate with
or merge with or into any Person  other than the  Company or another  Subsidiary
Guarantor that is a Wholly Owned Restricted  Subsidiary  unless:  (a) the entity
formed by or  surviving  any such  consolidation  or merger  (if other  than the
Subsidiary  Guarantor)  or to  which  such  sale,  lease,  conveyance  or  other
disposition  shall have been made is a corporation  organized and existing under
the laws of the United  States or any state thereof or the District of Columbia;
(b) such entity  assumes by execution  of a  supplemental  indenture  all of the
obligations of the Subsidiary  Guarantor  under its Guarantee;  (c)  immediately
after giving  effect to such  transaction,  no Default or Event of Default shall
have occurred and be continuing; and (d) immediately after giving effect to such
transaction and the use of any net proceeds  therefrom on a pro forma basis, the
Company  could satisfy the  provisions  of clause (b) of the first  paragraph of
this covenant.  Any merger or consolidation  of a Subsidiary  Guarantor with and
into the  Company  (with the  Company  being the  surviving  entity)  or another
Subsidiary  Guarantor  that is a Wholly Owned  Restricted  Subsidiary  need only
comply with clause (d) of the first paragraph of this covenant.

         Limitations on Transactions with Affiliates.  (a) The Company will not,
and will not cause or permit any of its Restricted  Subsidiaries to, directly or
indirectly,  enter into,  amend or permit or suffer to exist any  transaction or
series of related  transactions  (including,  without limitation,  the purchase,
sale, lease or exchange of any property, the guaranteeing of any Indebtedness or
the  rendering  of any  service)  with,  or for the  benefit  of,  any of  their
respective  Affiliates  (each  an  "Affiliate  Transaction"),   other  than  (i)
Affiliate  Transactions  permitted under paragraph (b) of this covenant and (ii)
Affiliate  Transactions  that are on terms that are fair and  reasonable  to the
Company or the applicable Restricted Subsidiary and are no less favorable to the
Company or the applicable Restricted Subsidiary than those that might reasonably
have been obtained in a comparable  transaction at such time on an  arm's-length
basis from a Person that is not an Affiliate  of the Company or such  Restricted
Subsidiary.  All Affiliate  Transactions  (and each series of related  Affiliate
Transactions  which are similar or part of a common  plan)  involving  aggregate
payments  or other  property  with a fair  market  value in excess of $1 million
shall be approved by the Board of Directors of the Company,  such approval to be
evidenced  by a Board  Resolution  stating  that  such  Board of  Directors  has
determined that such transaction complies with the foregoing provisions.  If the
Company or any Restricted  Subsidiary enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an  aggregate  fair market value of more than $10  million,  the Company  shall,
prior to the consummation thereof, obtain a favorable opinion as to the fairness
of such  transaction  or series of related  transactions  to the  Company or the
relevant  Restricted  Subsidiary,  as the case may be, from a financial point of
view, from an Independent Advisor and file the same with the Trustee.

         (b) The  restrictions  set forth in  clause  (a) shall not apply to (i)
reasonable fees and  compensation  paid to and indemnity  provided on behalf of,
officers,  directors,  employees or consultants of the Company or any Restricted
Subsidiary  as  determined  in good  faith by the Board of  Directors  or senior
management  of the Company or such  Restricted  Subsidiary,  as the case may be;
(ii)  transactions  exclusively  between  or among  the  Company  and any of its
Restricted   Subsidiaries  or  exclusively  between  or  among  such  Restricted
Subsidiaries;  provided,  however,  that  such  transactions  are not  otherwise
prohibited by the  Indenture;  and (iii)  Restricted  Payments  permitted by the
Indenture.

         Limitation on Restricted and  Unrestricted  Subsidiaries.  The Board of
Directors  of the  Company  may,  if no Default  or Event of Default  shall have
occurred and be continuing or would arise  therefrom,  designate an Unrestricted
Subsidiary to be a Restricted Subsidiary;  provided,  however, that (i) any such
redesignation  shall  be  deemed  to be an  incurrence  as of the  date  of such
redesignation by the Company and its Restricted Subsidiaries of the Indebtedness
(if any) of such  redesignated  Subsidiary  for  purposes  of  "--Limitation  on
Incurrence of Additional Indebtedness" above,


                                      -93-

<PAGE>



(ii)  unless  such  redesignated  Subsidiary  shall  not have  any  Indebtedness
outstanding,  other than Indebtedness which would be Permitted Indebtedness,  no
such designation  shall be permitted if immediately  after giving effect to such
redesignation and the incurrence of any such additional Indebtedness the Company
could  not  incur  $1.00  of  additional   Indebtedness  (other  than  Permitted
Indebtedness) pursuant to "-Limitation on Incurrence of Additional Indebtedness"
above and (iii) such Subsidiary assumes by execution of a supplemental indenture
all of the obligations of a Subsidiary Guarantor under a Guarantee.

         The Board of  Directors of the Company also may, if no Default or Event
of Default  shall have  occurred  and be  continuing  or would arise  therefrom,
designate any Restricted Subsidiary to be an Unrestricted Subsidiary if (i) such
designation is at that time permitted under "-Limitation on Restricted Payments"
above and (ii) immediately after giving effect to such designation,  the Company
could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to "-Limitation on Incurrence of Additional  Indebtedness"  above.  Any
such  designation by the Board of Directors shall be evidenced to the Trustee by
the filing with the Trustee of a certified  copy of the  resolution of the Board
of Directors giving effect to such designation or redesignation and an Officers'
Certificate  certifying that such designation or redesignation complied with the
foregoing  conditions  and setting  forth in  reasonable  detail the  underlying
calculations.  In the event that any  Restricted  Subsidiary  is  designated  an
Unrestricted  Subsidiary  in  accordance  with this  covenant,  such  Restricted
Subsidiary's Guarantee will be released.

         For purposes of the covenant described under "-Limitation on Restricted
Payments"  above,  (i) an "Investment"  shall be deemed to have been made at the
time any Restricted Subsidiary is designated as an Unrestricted Subsidiary in an
amount (proportionate to the Company's equity interest in such Subsidiary) equal
to the net worth of such Restricted  Subsidiary at the time that such Restricted
Subsidiary  is designated as an  Unrestricted  Subsidiary;  (ii) at any date the
aggregate amount of all Restricted  Payments made as Investments since the Issue
Date shall exclude and be reduced by an amount  (proportionate  to the Company's
equity interest in such  Subsidiary)  equal to the net worth of any Unrestricted
Subsidiary  at the time  that  such  Unrestricted  Subsidiary  is  designated  a
Restricted  Subsidiary,  not to exceed, in the case of any such redesignation of
an Unrestricted Subsidiary as a Restricted Subsidiary, the amount of Investments
previously  made  by  the  Company  and  its  Restricted  Subsidiaries  in  such
Unrestricted  Subsidiary (in each case (i) and (ii) "net worth" to be calculated
based upon the fair market value of the assets of such Subsidiary as of any such
date  of  designation);  and  (iii)  any  property  transferred  to or  from  an
Unrestricted  Subsidiary shall be valued at its fair market value at the time of
such transfer.

         Notwithstanding the foregoing, the Board of Directors may not designate
any  Subsidiary of the Company to be an  Unrestricted  Subsidiary if, after such
designation,  (a) the Company or any Restricted  Subsidiary (i) provides  credit
support for, or a guarantee of, any  Indebtedness of such Subsidiary  (including
any undertaking,  agreement or instrument  evidencing such Indebtedness) or (ii)
is directly or indirectly  liable for any Indebtedness of such Subsidiary or (b)
such  Subsidiary  owns any  Capital  Stock  of, or owns or holds any Lien on any
property  of,  any  Restricted  Subsidiary  which  is  not a  Subsidiary  of the
Subsidiary to be so designated.

         Subsidiaries  of the Company  that are not  designated  by the Board of
Directors  as  Restricted  or  Unrestricted  Subsidiaries  will be  deemed to be
Restricted  Subsidiaries.  Notwithstanding any provisions of this covenant,  all
Subsidiaries of an Unrestricted Subsidiary will be Unrestricted Subsidiaries.

         Additional  Subsidiary  Guarantees.  If  the  Company  or  any  of  its
Restricted   Subsidiaries  transfers  or  causes  to  be  transferred,   in  one
transaction or a series of related transactions,  any property to any Restricted
Subsidiary that is not a Subsidiary  Guarantor,  or if the Company or any of its
Restricted  Subsidiaries shall organize,  acquire or otherwise invest in or hold
an  Investment  in  another   Restricted   Subsidiary   that  causes  the  total
consolidated assets owned by all Restricted Subsidiaries that are not Subsidiary
Guarantors to exceed in the aggregate 1% of the total consolidated assets of the
Company,  then  the  Company  shall  cause  one or more of such  transferees  or
acquired or other Restricted Subsidiaries to become Subsidiary Guarantors to the
extent necessary to cause the total consolidated  assets owned by all Restricted
Subsidiaries  that are not Subsidiary  Guarantors not to exceed in the aggregate
1% of the total  consolidated  assets of the  Company.  If  required to become a
Subsidiary  Guarantor  pursuant  to the  immediately  preceding  sentence,  such
transferee  or acquired  or other  Restricted  Subsidiary  shall (a) execute and
deliver to the Trustee a supplemental indenture in form reasonably  satisfactory
to the Trustee pursuant to which such


                                      -94-

<PAGE>



Restricted  Subsidiary  shall  unconditionally  guarantee  all of the  Company's
obligations  under  the Notes  and the  Indenture  on the terms set forth in the
Indenture  and (b)  deliver to the  Trustee  an  opinion  of  counsel  that such
supplemental indenture has been duly authorized,  executed and delivered by such
Restricted  Subsidiary and constitutes a legal,  valid,  binding and enforceable
obligation of such Restricted Subsidiary. Thereafter, such Restricted Subsidiary
shall be a Subsidiary Guarantor for all purposes of the Indenture.

         Limitation  on Conduct of Business.  The Company will not, and will not
permit  any of its  Restricted  Subsidiaries  to,  engage in the  conduct of any
business other than the Crude Oil and Natural Gas Business.

         Reports to Holders.  The Company will deliver to the Trustee  within 15
days after the filing of the same with the  Commission,  copies of the quarterly
and annual reports and of the information,  documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section 13
or 15(d) of the  Exchange  Act.  Notwithstanding  that  the  Company  may not be
subject to the  reporting  requirements  of Section 13 or 15(d) of the  Exchange
Act, the Company will file with the  Commission,  to the extent  permitted,  and
provide the Trustee and Holders with such annual  reports and such  information,
documents and other  reports  specified in Sections 13 and 15(d) of the Exchange
Act.  The Company  will also comply with the other  provisions  of 314(a) of the
TIA.

Events of Default

         The  following  events  are  defined  in the  Indenture  as  "Events of
Default":

                  (a)      the failure to pay interest (including any Additional
         Interest) on any Notes when the same  becomes due  and payable  and the
         default continues for a period of 30 days;

                  (b) the failure to pay the  principal on any Notes,  when such
         principal  becomes due and payable,  at maturity,  upon  redemption  or
         otherwise  (including  the failure to make a payment to purchase  Notes
         tendered  pursuant  to a Change  of  Control  Offer  or a Net  Proceeds
         Offer);

                  (c) a default in the  observance or  performance  of any other
         covenant  or  agreement   contained  in  the  Indenture  which  default
         continues  for a period of 45 days after the Company  receives  written
         notice  specifying  the default  (and  demanding  that such  default be
         remedied)  from the  Trustee  or the  Holders  of at  least  25% of the
         outstanding  principal  amount  of the Notes  (except  in the case of a
         default with respect to observance or  performance  of any of the terms
         or provisions  of "-Change of Control" or "Certain  Covenants - Merger,
         Consolidation and Sale of Assets" or "-Limitation on Asset Sales" which
         will  constitute an Event of Default with such notice  requirement  but
         without such passage of time requirement);

                  (d) a default  under any  mortgage,  indenture  or  instrument
         under  which  there may be issued or by which  there may be  secured or
         evidenced  any  Indebtedness  of  the  Company  or  of  any  Restricted
         Subsidiary (or the payment of which is guaranteed by the Company or any
         Restricted  Subsidiary),  whether  such  Indebtedness  now exists or is
         created after the Issue Date,  which default (i) is caused by a failure
         to  pay  principal  of  or  premium,   if  any,  or  interest  on  such
         Indebtedness  after  any  applicable  grace  period  provided  in  such
         Indebtedness on the date of such default (a "payment  default") or (ii)
         results in the acceleration of such  Indebtedness  prior to its express
         maturity  and,  in  each  case,  the  principal   amount  of  any  such
         Indebtedness,  together  with the  principal  amount of any other  such
         Indebtedness  under  which  there  has been a  payment  default  or the
         maturity  of which  has  been so  accelerated,  aggregates  at least $5
         million;

                  (e) one or more judgments in an aggregate  amount in excess of
         $5 million  (unless  covered by insurance by a reputable  insurer as to
         which the insurer has not disclaimed coverage) shall have been rendered
         against  the  Company or any of its  Restricted  Subsidiaries  and such
         judgments  remain  undischarged,  unpaid or unstayed for a period of 60
         days after such judgment or judgments become final and non-appealable;



                                      -95-

<PAGE>



                  (f)      certain events of bankruptcy affecting the Company or
         any of its Significant Subsidiaries; or

                  (g) any of the Guarantees cease to be in full force and effect
         or any of the  Guarantees  are  declared to be null and void or invalid
         and  unenforceable  or any  of  the  Subsidiary  Guarantors  denies  or
         disaffirms its liability under its Guarantees  (other than by reason of
         release of a Subsidiary  Guarantor in accordance  with the terms of the
         Indenture).

         The  Indenture  provides  that,  if an Event of Default  (other than an
Event of Default  specified in clause (f) above  relating to the Company)  shall
occur and be continuing, the Trustee or the Holders of at least 25% in principal
amount of outstanding  Notes may declare the principal of, premium,  if any, and
accrued and unpaid  interest on all the Notes to be due and payable by notice in
writing to the Company and the Trustee  specifying the Event of Default and that
it is a "notice of acceleration",  and the same shall become immediately due and
payable.  If an Event of Default  specified in clause (f) above  relating to the
Company occurs and is continuing,  then all unpaid principal of, and premium, if
any, and accrued and unpaid interest on all of the outstanding  Notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder.

         The  Indenture  provides  that,  at any  time  after a  declaration  of
acceleration with respect to the Notes as described in the preceding  paragraph,
the  Holders of a majority  in  principal  amount of the Notes may  rescind  and
cancel such  declaration and its  consequences  (a) if the rescission  would not
conflict with any judgment or decree, (b) if all existing Events of Default have
been cured or waived except  nonpayment of principal or interest that has become
due solely because of such  acceleration,  (c) to the extent the payment of such
interest is lawful,  interest on overdue  installments  of interest  and overdue
principal,   which  has  become  due  otherwise  than  by  such  declaration  of
acceleration,  has been  paid,  (d) if the  Company  has paid  the  Trustee  its
reasonable   compensation   and   reimbursed   the  Trustee  for  its  expenses,
disbursements  and  advances  and (e) in the  event of the cure or  waiver of an
Event of  Default of the type  described  in clause  (f) of the  description  of
Events  of  Default  above,   the  Trustee  shall  have  received  an  officers'
certificate  and an opinion of counsel that such Event of Default has been cured
or waived; provided, however, that such counsel may rely, as to matters of fact,
on a certificate or certificates of officers of the Company.  No such rescission
shall affect any subsequent Default or impair any right consequent thereto.

         The Indenture  provides  that, at any time prior to the  declaration of
acceleration of the Notes,  the Holders of a majority in principal amount of the
Notes may waive any existing  Default or Event of Default  under the  Indenture,
and its  consequences,  except a default in the payment of the  principal  of or
interest on any Notes.

         The Indenture  provides that,  Holders of the Notes may not enforce the
Indenture  or the Notes except as provided in the  Indenture  and under the TIA.
During the existence of an Event of Default, the Trustee is required to exercise
such rights and powers  vested in it under the Indenture and use the same degree
of care and skill in its exercise thereof as a prudent man would exercise or use
under the  circumstances  in the  conduct  of his own  affairs.  Subject  to the
provisions  of the Indenture  relating to the duties of the Trustee,  whether or
not an Event of Default shall occur and be  continuing,  the Trustee is under no
obligation  to exercise any of its rights or powers  under the  Indenture at the
request,  order or  direction  of any of the  Holders,  unless such Holders have
offered to the Trustee  reasonable  indemnity.  Subject to all provisions of the
Indenture and applicable  law, the Holders of a majority in aggregate  principal
amount of the then outstanding  Notes have the right to direct the time,  method
and place of conducting any  proceeding for any remedy  available to the Trustee
or exercising any trust or power conferred on the Trustee.

         Under the  Indenture,  the Company is required to provide an  officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default  (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.




                                      -96-

<PAGE>



Legal Defeasance and Covenant Defeasance

         The  Company  may,  at its  option  and at any time,  elect to have its
obligations  and the  corresponding  obligations  of the  Subsidiary  Guarantors
discharged  with respect to the  outstanding  Notes ("Legal  Defeasance").  Such
Legal  Defeasance  means  that the  Company  shall be  deemed  to have  paid and
discharged the entire  indebtedness  represented by the outstanding  Notes,  and
satisfied all of its obligations  with respect to the Notes,  except for (a) the
rights of Holders to receive  payments in respect of the principal of,  premium,
if any, and interest on the Notes when such  payments are due, (b) the Company's
obligations  with  respect  to the Notes  concerning  issuing  temporary  Notes,
registration  of  Notes,  mutilated,  destroyed,  lost or  stolen  Notes and the
maintenance of an office or agency for payments,  (c) the rights, powers, trust,
duties and immunities of the Trustee and the Company's obligations in connection
therewith and (d) the Legal Defeasance provisions of the Indenture. In addition,
the Company may, at its option and at any time, elect to have the obligations of
the Company released with respect to certain covenants that are described in the
Indenture  ("Covenant  Defeasance")  and  thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes.  In the event Covenant  Defeasance  occurs,  certain events (other
than  non-payment,  bankruptcy,  receivership,   reorganization  and  insolvency
events)  described under "-Events of Default" will no longer constitute an Event
of Default with respect to the Notes.

         In order to exercise  either Legal  Defeasance or Covenant  Defeasance,
(a) the Company must  irrevocably  deposit with the Trustee,  in trust,  for the
benefit of the Holders cash in United States dollars, non-callable United States
government  obligations,  or a combination  thereof,  in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the Notes
on the stated date for payment thereof or on the applicable  redemption date, as
the case may be; (b) in the case of Legal  Defeasance,  the  Company  shall have
delivered to the Trustee an opinion of counsel in the United  States  reasonably
acceptable to the Trustee  confirming that (i) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (ii) since
the date of the  Indenture,  there has been a change in the  applicable  federal
income  tax law,  in either  case to the effect  that,  and based  thereon  such
opinion of counsel shall confirm  that,  the Holders will not recognize  income,
gain or  loss  for  federal  income  tax  purposes  as a  result  of such  Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same  manner  and at the same  times as would  have been the case if such  Legal
Defeasance had not occurred, (c) in the case of Covenant Defeasance, the Company
shall have  delivered to the Trustee an opinion of counsel in the United  States
reasonably  acceptable  to the  Trustee  confirming  that the  Holders  will not
recognize  income,  gain or loss for federal  income tax purposes as a result of
such Covenant  Defeasance  and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant  Defeasance  had not occurred;  (d) no Default or Event of Default
shall have  occurred and be continuing on the date of such deposit or insofar as
Events of Default from  bankruptcy or insolvency  events are  concerned,  at any
time in the period  ending on the 91st day after the date of  deposit;  (e) such
Legal  Defeasance  or  Covenant  Defeasance  shall  not  result  in a breach  or
violation of, or constitute a default under the Indenture or any other agreement
or instrument to which the Company or any of its  Restricted  Subsidiaries  is a
party or by which the Company or any of its  Restricted  Subsidiaries  is bound;
(f) the Company  shall have  delivered to the Trustee an  officers'  certificate
stating  that  the  deposit  was not made by the  Company  with  the  intent  of
preferring  the  Holders  over any other  creditors  of the  Company or with the
intent of defeating,  hindering,  delaying or defrauding any other  creditors of
the Company or others;  (g) the Company  shall have  delivered to the Trustee an
officers'  certificate  and  an  opinion  of  counsel,  each  stating  that  all
conditions  precedent  provided for or relating to the Legal  Defeasance  or the
Covenant  Defeasance,  as the case may be, have been  complied  with;  provided,
however,  that such counsel may rely, as to matters of fact, on a certificate or
certificates of officers of the Company; (h) the Company shall have delivered to
the  Trustee  an  opinion  of  counsel  to the  effect  that  after the 91st day
following the deposit,  the trust funds will not be subject to the effect of any
applicable  bankruptcy,  insolvency,  reorganization  or similar laws  affecting
creditors' rights generally;  provided,  however, that such counsel may rely, as
to matters of fact, on a certificate or certificates of officers of the Company;
and (i) certain other customary conditions precedent are satisfied.




                                      -97-

<PAGE>



Satisfaction and Discharge

         The Indenture will be discharged and will cease to be of further effect
(except as to surviving  rights of  registration  of transfer or exchange of the
Notes, as expressly  provided for in the Indenture) as to all outstanding  Notes
when (a) either  (i) all the  Notes,  theretofore  authenticated  and  delivered
(except  lost,  stolen or destroyed  Notes which have been  replaced or paid and
Notes for  whose  payment  money  has  theretofore  been  deposited  in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or  discharged  from  such  trust)  have  been  delivered  to  the  Trustee  for
cancellation  or (ii) all Notes not  theretofore  delivered  to the  Trustee for
cancellation  have  become  due and  payable  and the  Company  has  irrevocably
deposited  or  caused  to be  deposited  with the  Trustee  funds  in an  amount
sufficient  to pay and  discharge  the  entire  Indebtedness  on the  Notes  not
theretofore  delivered  to the  Trustee  for  cancellation,  for  principal  of,
premium,  if any, and interest on the Notes to the date of deposit together with
irrevocable  instructions  from the Company  directing the Trustee to apply such
funds to the payment thereof at maturity or redemption,  as the case may be; (b)
the Company has paid all other sums payable  under the Indenture by the Company;
and (c) the Company has delivered to the Trustee an officers' certificate and an
opinion of counsel  stating that all  conditions  precedent  under the Indenture
relating to the  satisfaction  and discharge of the Indenture have been complied
with; provided, however, that such counsel may rely, as to matters of fact, on a
certificate or certificates of officers of the Company.

Modification of the Indenture

         From time to time,  the  Company,  the  Subsidiary  Guarantors  and the
Trustee, without the consent of the Holders, may amend the Indenture for certain
specified purposes, including curing ambiguities, defects or inconsistencies, to
comply with any  requirements  of the  Commission in order to effect or maintain
the  qualification  of the  Indenture  under the TIA or to make any change  that
would provide any  additional  benefit or rights to the Holders or that does not
adversely  affect the rights of any Holder.  In formulating  its opinion on such
matters,  the  Trustee  will be  entitled  to rely on such  evidence as it deems
appropriate,  including,  without  limitation,  solely on an opinion of counsel;
provided,  however, that in delivering such opinion of counsel, such counsel may
rely, as to matters of fact, on a certificate or certificates of officers of the
Company.  Other  modifications  and amendments of the Indenture may be made with
the  consent  of the  Holders  of a  majority  in  principal  amount of the then
outstanding Notes issued under the Indenture,  except that,  without the consent
of each Holder  affected  thereby,  no  amendment  may: (a) reduce the amount of
Notes whose  Holders  must  consent to an  amendment;  (b) reduce the rate of or
change  or have  the  effect  of  changing  the time for  payment  of  interest,
including  defaulted  interest,  on any Notes;  (c) reduce the  principal  of or
change or have the effect of changing the fixed maturity of any Notes, or change
the date on which any Notes may be  subject  to  redemption  or  repurchase,  or
reduce the redemption or repurchase  price therefor;  (d) make any Notes payable
in money other than that stated in the Notes;  (e) make any change in provisions
of the  Indenture  protecting  the right of each  Holder to  receive  payment of
principal  of and  interest on such Note on or after the due date  thereof or to
bring suit to enforce  such  payment,  or  permitting  Holders of a majority  in
principal  amount of Notes to waive  Defaults or Events of  Default;  (f) amend,
change or modify in any material  respect the  obligation of the Company to make
and  consummate a Change of Control Offer in the event of a Change of Control or
make and consummate a Net Proceeds Offer with respect to any Asset Sale that has
been  consummated or modify any of the  provisions or  definitions  with respect
thereto;  (g) modify or change any  provision  of the  Indenture  or the related
definitions  affecting  the  ranking of the Notes or any  Guarantee  in a manner
which  adversely  affects the Holders;  or (h) release any Subsidiary  Guarantor
from any of its obligations under its Guarantee or the Indenture  otherwise than
in accordance with the terms of the Indenture.

Governing Law

         The Indenture provides that the Indenture, the Notes and the Guarantees
will be governed by, and construed in accordance  with, the laws of the State of
New York but without giving effect to applicable  principles of conflicts of law
to the extent that the application of the law of another  jurisdiction  would be
required thereby.



                                      -98-

<PAGE>



The Trustee

     First Union  National  Bank is the Trustee under the Indenture and has been
appointed Exchange Agent for the Exchange Offer.

         The Indenture  provides that, except during the continuance of an Event
of Default,  the Trustee will perform only such duties as are  specifically  set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture,  and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.

         The Indenture and the provisions of the TIA contain certain limitations
on the rights of the  Trustee,  should it become a creditor  of the Company or a
Subsidiary  Guarantor,  to obtain  payments  of claims  in  certain  cases or to
realize on certain property received in respect of any such claim as security or
otherwise.  Subject to the TIA, the Trustee will be permitted to engage in other
transactions;  provided,  however,  that if the Trustee acquires any conflicting
interest as described in the TIA, it must eliminate such conflict or resign.

Registration Agreement

     The Company,  the Subsidiary  Guarantors and the Initial Purchasers entered
into the Registration  Agreement on May 29, 1997, which required the Company and
the Subsidiary  Guarantors,  among other things,  to commence the Exchange Offer
and maintain the  effectiveness of the  Registration  Statement on the terms set
forth herein.  In addition to their  obligations in connection with the Exchange
Offer (and assuming the Exchange Offer is consummated by December 10, 1997), the
Company and the  Subsidiary  Guarantors  will have a  continuing  obligation  to
register  Notes for resale under a Form S-3  Registration  Statement (the "Shelf
Registration  Statement") if either (i) any Holder of Private  Exchange Notes so
requests in writing to the Company within 60 days after the  consummation of the
Exchange  Offer or  (ii) in  the case of any  Holder  that  participates  in the
Exchange Offer,  such Holder does not receive  Exchange Notes on the date of the
exchange that may be sold without restriction under state and federal securities
laws (other than due solely to the status of such Holder as an  affiliate of the
Company  within the  meaning of the  Securities  Act).  If the  Company  and the
Subsidiary  Guarantors  are required to file the Shelf  Registration  Statement,
they must keep the Shelf Registration  Statement  effective under the Securities
Act,  subject to certain  exceptions,  until May 29, 1999 or such shorter period
ending when all of the Notes covered by such Shelf  Registration  Statement have
been sold. The Company and the Subsidiary Guarantors are required to pay certain
additional interest (the "Additional Interest") on the Notes if a required Shelf
Registration  Statement  is not  filed  with,  or  declared  effective  by,  the
Commission within the prescribed time periods.

     In the event of the  filing of a Shelf  Registration  Statement  or if this
Prospectus  is  required  to be  delivered  under  the  Securities  Act  by  any
Participating  Broker-Dealer who seeks to sell Exchange Notes during the 180-day
period following the  effectiveness of the Registration  Statement of which this
Prospectus  is a part,  the Company  will provide to each Holder of the Notes or
such Participating Broker-Dealer copies of, respectively, this Prospectus or the
prospectus which is part of the Shelf Registration  Statement. A Holder of Notes
that sells such Notes  pursuant to the Shelf  Registration  Statement  generally
will be  required  to be named  as a  selling  security  holder  in the  related
prospectus and to deliver a prospectus to purchasers, will be subject to certain
of the civil liability  provisions of the Securities Act in connection with such
sales and will be bound by the provisions of the  Registration  Agreement  which
are applicable to such Holder (including certain  indemnification  obligations).
In  addition,  each  Holder of Notes to be  covered  by the  Shelf  Registration
Statement will be required to furnish to the Company such information  regarding
such  Holder  and the  proposed  distribution  of its Notes as the  Company  may
reasonably  request in order for such  Holder to have its Notes  included in the
Shelf Registration Statement.

                                      -99-

<PAGE>

     Pursuant to the Registration Agreement,  each Holder of Notes to be covered
by the Shelf Registration Statement and each Participating  Broker-Dealer agrees
by its  acquisition  of such Notes that,  upon actual receipt of any notice from
the Company of (i) the issuance by the  Commission of any stop order  suspending
the  effectiveness of the  Registration  Statement of which this Prospectus is a
part or the Shelf Registration  Statement,  as appropriate,  (ii) the receipt by
the Company of any  notification of the suspension of the  qualification  or the
exemption  from  qualification  of  such  Registration  Statement  or the  Shelf
Registration  Statement,  as  appropriate,  or the  Notes  in any  jurisdiction,
(iii) the  occurrence  of an  event,  the  existence  of  any  condition  or any
information becoming known which causes this Prospectus or the prospectus in the
Shelf  Registration  Statement to contain an untrue statement of a material fact
or omit to state a material fact  required to be stated  therein or necessary to
make the statements therein not misleading or (iv) the  Company's  determination
that a post-effective  amendment is appropriate,  each Holder (or  Participating
Broker-Dealer,  as the case may be) will discontinue its sale of Notes until the
Company has amended or  supplemented  the applicable  prospectus or advised such
Holder  (or  Participating   Broker-Dealer)  that  the  use  of  the  applicable
prospectus may be resumed,  as the case may be. If the Company suspends the sale
of Notes  under  such  circumstances,  the  relevant  period  during  which this
Registration Statement or the Shelf Registration  Statement, as the case may be,
must remain effective shall be correspondingly extended.

     This summary of certain  provisions  of the  Registration  Agreement is not
complete and is subject to, and is qualified in its entirety by, the  provisions
of the Registration  Agreement,  a copy of which has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part.



Certain Definitions

         Set forth below is a summary of certain of the defined terms to be used
in the  Indenture.  Reference  is made to the  form of  Indenture  for the  full
definition  of all such terms,  as well as any other terms used herein for which
no definition is provided.

         "Acquired  Indebtedness"  means  Indebtedness of a Person or any of its
Subsidiaries  (i)  existing  at  the  time  such  Person  becomes  a  Restricted
Subsidiary or at the time it merges or  consolidates  with the Company or any of
its Restricted Subsidiaries or (ii) which becomes Indebtedness of the Company or
a Restricted  Subsidiary in connection  with the acquisition of assets from such
Person,  in each case not incurred in  connection  with, or in  anticipation  or
contemplation  of,  such  Person  becoming  a  Restricted   Subsidiary  or  such
acquisition, merger or consolidation.

                                     -100-
<PAGE>
         "Adjusted    Consolidated   Net   Tangible   Assets"   means   (without
duplication),  as of the date of  determination,  (a) the sum of (i)  discounted
future net  revenues  from  proved oil and gas  reserves  of the Company and its
consolidated  Subsidiaries,  calculated in accordance with Commission guidelines
(before  any  state  or  federal  income  tax),  as  estimated  by a  nationally
recognized firm of independent  petroleum engineers as of a date no earlier than
the date of the Company's latest annual consolidated  financial  statements,  as
increased by, as of the date of determination,  the estimated  discounted future
net revenues  from (A)  estimated  proved oil and natural gas reserves  acquired
since  the date of such  year-end  reserve  report,  and (B)  estimated  oil and
natural gas reserves attributable to upward revisions of estimates of proved oil
and gas  reserves  since  the  date  of  such  year-end  reserve  report  due to
exploration,  development or exploitation activities, in each case calculated in
accordance  with  Commission  guidelines  (utilizing the prices utilized in such
year-end reserve report), and decreased by, as of the date of determination, the
estimated  discounted  future net revenues from (C) estimated proved oil and gas
reserves  produced or disposed of since the date of such year-end reserve report
and  (D)  estimated  oil and  natural  gas  reserves  attributable  to  downward
revisions of estimates of proved oil and natural gas reserves  since the date of
such year-end  reserve  report due to changes in geological  conditions or other
factors which would, in accordance with standard industry  practice,  cause such
revisions,  in each case  calculated in accordance  with  Commission  guidelines
(utilizing  the prices  utilized in such  year-end  reserve  report);  provided,
however,  that,  in the  case of each of the  determinations  made  pursuant  to
clauses (A) through (D), such  increases and decreases  shall be as estimated by
the Company's petroleum engineers,  unless in the event that there is a Material
Change as a result of such  acquisitions,  dispositions  or revisions,  then the
discounted future net revenues utilized for purposes of this clause (a)(i) shall
be  confirmed  in  writing,  by a  nationally  recognized  firm  of  independent
petroleum engineers (which may be the Company's  independent petroleum engineers
who prepare the Company's annual reserve report) plus (ii) the capitalized costs
that are  attributable  to oil and natural gas properties of the Company and its
Subsidiaries to which no proved oil and gas reserves are attributable,  based on
the  Company's  books and  records as of a date no earlier  than the date of the
Company's latest annual or quarterly  financial  statements,  plus (iii) the Net
Working  Capital  on a date no  earlier  than the date of the  Company's  latest
consolidated annual or quarterly financial  statements plus (iv) with respect to
each  other  tangible  asset  of  the  Company  or its  consolidated  Restricted
Subsidiaries  specifically  including,  but not to the  exclusion  of any  other
qualifying  tangible  assets,  the  Company's  or  its  consolidated  Restricted
Subsidiaries'  gas  gathering  and  processing  facilities  and unproved oil and
natural gas properties (less any remaining deferred income taxes which have been
allocated to such


                                      -101-

<PAGE>



gas gathering and  processing  facilities  in  connection  with the  acquisition
thereof),  land, equipment,  leasehold improvements,  investments carried on the
equity method,  restricted cash and the carrying value of marketable securities,
the greater of (A) the net book value of such other  tangible asset on a date no
earlier than the date of the Company's latest  consolidated  annual or quarterly
financial  statements  or (B) the appraised  value,  as estimated by a qualified
Independent  Advisor,  of such  other  tangible  assets of the  Company  and its
Restricted Subsidiaries,  as of a date no earlier than the date of the Company's
latest audited  financial  statements  minus (b) minority  interests and, to the
extent not otherwise taken into account in determining Adjusted Consolidated Net
Tangible  Assets,  any natural gas balancing  liabilities of the Company and its
consolidated  Restricted  Subsidiaries reflected in the Company's latest audited
financial statements. In addition to, but without duplication of, the foregoing,
for purposes of this  definition,  "Adjusted  Consolidated  Net Tangible Assets"
shall be  calculated  after  giving  effect,  on a pro forma  basis,  to (1) any
Investment  not  prohibited by the  Indenture,  to and including the date of the
transaction  giving  rise to the need to  calculate  Adjusted  Consolidated  Net
Tangible Assets (the "Assets  Transaction Date"), in any other Person that, as a
result of such Investment,  becomes a Restricted  Subsidiary of the Company, (2)
the  acquisition,  to and  including  the Assets  Transaction  Date (by  merger,
consolidation  or  purchase  of stock or  assets),  of any  business  or assets,
including, without limitation, Permitted Industry Investments, and (3) any sales
or other  dispositions of assets permitted by the Indenture (other than sales of
Hydrocarbons  or other  mineral  products in the  ordinary  course of  business)
occurring on or prior to the Assets Transaction Date.

         "Affiliate"  means, with respect to any specified Person, (a) any other
Person who directly or indirectly through one or more  intermediaries  controls,
or is controlled by, or under common control with, such specified Person and (b)
any Related  Person of such Person.  The term  "control"  means the  possession,
directly or  indirectly,  of the power to direct or cause the  direction  of the
management  and policies of a Person,  whether  through the  ownership of voting
securities,   by  contract  or  otherwise;   and  the  terms  "controlling"  and
"controlled" have meanings correlative of the foregoing.

         "Affiliate  Transaction"  has the  meaning  set  forth  under  "Certain
Covenants-Limitation on Transactions with Affiliates."

         "Asset  Acquisition"  means (a) an  Investment  by the  Company  or any
Restricted  Subsidiary  in any other Person  pursuant to which such Person shall
become a Restricted  Subsidiary,  or shall be merged with or into the Company or
any  Restricted  Subsidiary,  or  (b)  the  acquisition  by the  Company  or any
Restricted  Subsidiary  of the assets of any  Person  (other  than a  Restricted
Subsidiary)  which  constitute  all or  substantially  all of the assets of such
Person or comprises any division or line of business of such Person or any other
properties  or  assets  of such  Person  other  than in the  ordinary  course of
business.

         "Asset Sale" means any direct or indirect sale,  issuance,  conveyance,
transfer,  exchange,  lease  (other than  operating  leases  entered into in the
ordinary  course of  business),  assignment  or other  transfer for value by the
Company or any of its Restricted  Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Restricted  Subsidiary of
(a) any Capital Stock of any Restricted Subsidiary; or (b) any other property or
assets  (including  any  interests  therein)  of the  Company or any  Restricted
Subsidiary,  including any  disposition by means of a merger,  consolidation  or
similar transaction;  provided,  however, that Asset Sales shall not include (i)
the  sale,  lease,   conveyance,   disposition  or  other  transfer  of  all  or
substantially all of the assets of the Company in a transaction which is made in
compliance with the provisions of "-Certain Covenants-Merger,  Consolidation and
Sale of Assets," (ii) any Investment in an Unrestricted Subsidiary which is made
in  compliance  with  the  provisions  of  "-Certain   Covenants-Limitation   on
Restricted   Payments"  above,  (iii)  disposals  or  replacements  of  obsolete
equipment in the ordinary course of business, (iv) the sale, lease,  conveyance,
disposition  or other  transfer  (each,  a  "Transfer")  by the  Company  or any
Restricted  Subsidiary  of  assets or  property  to the  Company  or one or more
Restricted  Subsidiaries,  (v) any  disposition of Hydrocarbons or other mineral
products for value in the  ordinary  course of business and (vi) the Transfer by
the Company or any  Restricted  Subsidiary of assets or property in the ordinary
course of business;  provided, however, that the aggregate amount (valued at the
fair market  value of such assets or property at the time of such  Transfer)  of
all such assets and property  Transferred  since the Issue Date pursuant to this
clause (vi) shall not exceed $1 million in any one year.



                                      -102-

<PAGE>



         "Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.

         "Board  Resolution"  means,  with  respect to any  Person,  a copy of a
resolution  certified by the Secretary or an Assistant  Secretary of such Person
to have been duly  adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such  certification,  and  delivered to the
Trustee.

         "Business Day" means any day other than a Saturday, Sunday or any other
day on which  banking  institutions  in the City of New  York  are  required  or
authorized by law or other governmental action to be closed.

         "Capital  Stock"  means  (a)  with  respect  to any  Person  that  is a
corporation, any and all shares, interests,  participations or other equivalents
(however  designated  and whether or not voting) of corporate  stock,  including
each class of Common Stock and Preferred  Stock of such Person and including any
warrants,  options or rights to acquire  any of the  foregoing  and  instruments
convertible into any of the foregoing and (b) with respect to any Person that is
not a corporation,  any and all  partnership  or other equity  interests of such
Person.

         "Capitalized  Lease Obligation" means, as to any Person, the discounted
present  value of the rental  obligations  of such  Person  under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation at such date, determined in accordance with GAAP.

         "Cash  Equivalents"  means (a) marketable direct obligations issued by,
or unconditionally  guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States,  in
each case maturing  within one year from the date of  acquisition  thereof;  (b)
marketable  direct  obligations  issued by any state of the United States or any
political  subdivision of any such state or any public  instrumentality  thereof
maturing  within one year from the date of acquisition  thereof and, at the time
of  acquisition,  having one of the two highest  ratings  obtainable from either
Standard  & Poor's  Corporation  ("S&P")  or  Moody's  Investors  Service,  Inc.
("Moody's");  (c) commercial  paper maturing no more than one year from the date
of creation thereof and, at the time of acquisition, having a rating of at least
A-1 from S&P or at least  P-1 from  Moody's;  (d)  certificates  of  deposit  or
bankers'  acceptances  maturing  within  one year  from the date of  acquisition
thereof issued by any bank organized  under the laws of the United States or any
state  thereof or the  District  of Columbia  or any United  States  branch of a
foreign  bank having at the date of  acquisition  thereof  combined  capital and
surplus of not less than $250 million; (e) repurchase obligations with a term of
not more than seven days for  underlying  securities  of the types  described in
clause (a) above entered into with any bank meeting the qualifications specified
in clause (d) above and (f) money market  mutual or similar  funds having assets
in excess of $100 million.

         "Change  of  Control"  means  the  occurrence  of  one or  more  of the
following  events:  (a) any sale,  lease,  exchange  or other  transfer  (in one
transaction or a series of related  transactions) of all or substantially all of
the assets of the Company to any Person or group of related Persons for purposes
of Section  13(d) of the Exchange Act (a "Group")  (whether or not  otherwise in
compliance  with the  provisions  of the  Indenture);  (b) the  approval  by the
holders  of  Capital  Stock  of the  Company  of any  plan or  proposal  for the
liquidation  or  dissolution  of  the  Company  (whether  or  not  otherwise  in
compliance with the provisions of the Indenture);  (c) any Person or Group shall
become the owner,  directly or indirectly,  beneficially or of record, of shares
representing more than 40% of the aggregate ordinary voting power represented by
the issued and outstanding  Capital Stock of the Company; or (d) the replacement
of a majority of the Board of Directors  of the Company  over a two-year  period
from the directors who  constituted the Board of Directors of the Company at the
beginning of such period with directors  whose  replacement  shall not have been
approved (by  recommendation,  nomination or election,  as the case may be) by a
vote of at least a majority of the Board of  Directors of the Company then still
in office who either were members of such Board of Directors at the beginning of
such  period  or whose  election  as a member  of such  Board of  Directors  was
previously so approved.

         "Change of Control Offer" has  the  meaning set forth under "-Change of
 Control."

         "Change  of  Control  Payment Date"  has  the  meaning set forth  under
 "-Change of Control."


                                      -103-

<PAGE>



         "Common  Stock" of any Person  means any and all shares,  interests  or
other  participations in, and other equivalents  (however designated and whether
voting or non-voting) of such Person's common stock,  whether outstanding on the
Issue Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.

         "Commission" means the Securities and Exchange Commission.

         "Company Properties" means all Properties,  and equity,  partnership or
other ownership interests therein, that are related or incidental to, or used or
useful in connection  with, the conduct or operation of any business  activities
of the Company or the Subsidiaries, which business activities are not prohibited
by the terms of the Indenture.

         "Consolidated   EBITDA"  means,  for  any  period,   the  sum  (without
duplication) of (a) Consolidated  Net Income and (b) to the extent  Consolidated
Net Income has been reduced thereby, (i) all income taxes of the Company and its
Restricted  Subsidiaries paid or accrued in accordance with GAAP for such period
(other than income taxes attributable to extraordinary,  unusual or nonrecurring
gains or losses  or taxes  attributable  to sales or  dispositions  outside  the
ordinary course of business),  (ii)  Consolidated  Interest  Expense,  (iii) the
amount of any Preferred  Stock  dividends paid by the Company and its Restricted
Subsidiaries and (iv)  Consolidated  Non-cash  Charges,  less any non-cash items
increasing  Consolidated  Net Income for such  period,  all as  determined  on a
consolidated basis for the Company and its Restricted Subsidiaries in accordance
with GAAP.

         "Consolidated  EBITDA  Coverage  Ratio"  means,  with  respect  to  the
Company,  the ratio of (a)  Consolidated  EBITDA of the Company  during the four
full fiscal  quarters  for which  financial  information  in respect  thereof is
available  (the  "Four  Quarter  Period")  ending on or prior to the date of the
transaction  giving  rise  to the  need to  calculate  the  Consolidated  EBITDA
Coverage Ratio (the "Transaction Date") to (b) Consolidated Fixed Charges of the
Company for the Four Quarter  Period.  In addition to and without  limitation of
the  foregoing,  for  purposes  of this  definition,  "Consolidated  EBITDA" and
"Consolidated  Fixed Charges" shall be calculated  after giving effect  (without
duplication) on a pro forma basis for the period of such  calculation to (a) the
incurrence  or  repayment  of  any  Indebtedness  of the  Company  or any of its
Restricted  Subsidiaries  (and the  application of the proceeds  thereof) giving
rise to the need to make such  calculation  and any  incurrence  or repayment of
other Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of  indebtedness  in the ordinary course of business for
working  capital  purposes  pursuant to working  capital  facilities,  occurring
during the Four Quarter Period or at any time  subsequent to the last day of the
Four  Quarter  Period  and on or  prior  to the  Transaction  Date,  as if  such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (b) any Asset
Sales  or  Asset  Acquisitions   (including,   without  limitation,   any  Asset
Acquisition  giving rise to the need to make such calculation as a result of the
Company or one of its Restricted  Subsidiaries (including any Person who becomes
a  Restricted  Subsidiary  as a  result  of the  Asset  Acquisition)  incurring,
assuming  or  otherwise  being  liable  for  Acquired  Indebtedness,   and  also
including,  without  limitation,  any  Consolidated  EBITDA  attributable to the
assets which are the subject of the Asset  Acquisition  or Asset Sale during the
Four Quarter  Period)  occurring  during the Four Quarter  Period or at any time
subsequent  to the last day of the Four  Quarter  Period  and on or prior to the
Transaction  Date,  as if such Asset Sale or Asset  Acquisition  (including  the
incurrence, assumption or liability for any such Acquired Indebtedness) occurred
on the  first  day of the Four  Quarter  Period.  If the  Company  or any of its
Restricted  Subsidiaries  directly or indirectly  guarantees  Indebtedness  of a
third Person, the preceding sentence shall give effect to the incurrence of such
guaranteed  Indebtedness as if the Company or the Restricted Subsidiary,  as the
case  may be,  had  directly  incurred  or  otherwise  assumed  such  guaranteed
Indebtedness.  Furthermore,  in  calculating  "Consolidated  Fixed  Charges" for
purposes  of  determining  the  denominator  (but  not  the  numerator)  of this
"Consolidated  EBITDA Coverage Ratio," (i) interest on outstanding  Indebtedness
determined  on a  fluctuating  basis as of the  Transaction  Date and which will
continue to be so  determined  thereafter  shall be deemed to have  accrued at a
fixed  rate per annum  equal to the rate of  interest  on such  Indebtedness  in
effect on the Transaction  Date; (ii) if interest on any  Indebtedness  actually
incurred on the  Transaction  Date may  optionally  be determined at an interest
rate based upon a factor of a prime or similar  rate, a  eurocurrency  interbank
offered  rate,  or  other  rates,  then  the  interest  rate  in  effect  on the
Transaction  Date will be deemed to have been in effect  during the Four Quarter
Period;  (iii)   notwithstanding   clauses  (i)  and  (ii)  above,  interest  on
Indebtedness  determined on a fluctuating  basis, to the extent such interest is
covered by agreements relating to Interest Swap


                                      -104-

<PAGE>



Obligations,  shall be deemed to  accrue at the rate per annum  resulting  after
giving effect to the operation of such agreements.

         "Consolidated Fixed Charges" means, with respect to the Company for any
period,  the sum,  without  duplication,  of (a)  Consolidated  Interest Expense
(including any premium or penalty paid in connection  with redeeming or retiring
Indebtedness of the Company and its Restricted  Subsidiaries prior to the stated
maturity thereof pursuant to the agreements  governing such Indebtedness),  plus
(b) the  product of (i) the  amount of all  dividend  payments  on any series of
Preferred  Stock of the Company (other than dividends paid in Qualified  Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(ii) a fraction,  the numerator of which is one and the  denominator of which is
one minus  the then  current  effective  consolidated  federal,  state and local
income tax rate of such Person, expressed as a decimal.

         "Consolidated  Interest Expense" means, with respect to the Company for
any period, the sum of, without  duplication:  (a) the aggregate of the interest
expense  of  the  Company  and  its  Restricted  Subsidiaries  for  such  period
determined on a consolidated  basis in accordance with GAAP,  including  without
limitation,  (i) any amortization of original issue discount, (ii) the net costs
under Interest Swap  Obligations,  (iii) all  capitalized  interest and (iv) the
interest  portion  of any  deferred  payment  obligation;  and (b) the  interest
component of Capitalized Lease Obligations paid,  accrued and/or scheduled to be
paid or accrued by the  Company  and its  Restricted  Subsidiaries  during  such
period, as determined on a consolidated basis in accordance with GAAP.

         "Consolidated  Net Income"  means,  with respect to the Company for any
period,  the  aggregate  net income (or loss) of the Company and its  Restricted
Subsidiaries for such period on a consolidated  basis,  determined in accordance
with  GAAP;  provided,  however,  that there  shall be  excluded  therefrom  (a)
after-tax gains from Asset Sales or abandonments or reserves  relating  thereto,
(b) after-tax items classified as  extraordinary or nonrecurring  gains, (c) the
net  income of any  Person  acquired  in a "pooling  of  interests"  transaction
accrued  prior to the date it becomes a  Restricted  Subsidiary  or is merged or
consolidated with the Company or any Restricted  Subsidiary,  (d) the net income
(but not loss) of any Restricted  Subsidiary to the extent that the  declaration
of dividends or similar  distributions  by that  Restricted  Subsidiary  of that
income is restricted by charter,  contract,  operation of law or otherwise,  (e)
the net income of any Person in which the Company has an interest,  other than a
Restricted  Subsidiary,  except to the extent of cash dividends or distributions
actually paid to the Company or to a Restricted  Subsidiary by such Person,  (f)
income or loss  attributable  to  discontinued  operations  (including,  without
limitation,  operations  disposed  of during  such  period  whether  or not such
operations were classified as  discontinued)  and (g) in the case of a successor
to the Company by  consolidation  or merger or as a transferee  of the Company's
assets,  any net income  (or loss) of the  successor  corporation  prior to such
consolidation, merger or transfer of assets.

         "Consolidated  Net  Worth"  of any  Person  as of any  date  means  the
consolidated  stockholders' equity of such Person,  determined on a consolidated
basis in accordance with GAAP, less (without  duplication)  amounts attributable
to Disqualified Capital Stock of such Person.

         "Consolidated Non-cash Charges" means, with respect to the Company, for
any  period,  the  aggregate  depreciation,  depletion,  amortization  and other
non-cash  expenses  of the  Company  and its  Restricted  Subsidiaries  reducing
Consolidated  Net  Income  of the  Company  for  such  period,  determined  on a
consolidated   basis  in  accordance  with  GAAP  (excluding  any  such  charges
constituting an extraordinary  item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).

         "Consolidation" means, with respect to any Person, the consolidation of
the accounts of the  Restricted  Subsidiaries  of such Person with those of such
Person, all in accordance with GAAP;  provided,  however,  that  "consolidation"
will not include consolidation of the accounts of any Unrestricted Subsidiary of
such Person with the  accounts of such  Person.  The term  "consolidated"  has a
correlative meaning to the foregoing.

        "Covenant Defeasance" has the meaning set forth under "-Legal Defeasance
 and Covenant Defeasance."



                                      -105-

<PAGE>



         "Crude  Oil and  Natural  Gas  Business"  means  (i)  the  acquisition,
exploration, development, operation and disposition of interests in oil, natural
gas and other Hydrocarbon properties located in the Western Hemisphere, (ii) the
gathering, marketing, treating, processing, storage, selling and transporting of
any production from such interests or properties of the Company or of others and
(iii) activities incidental to the foregoing.

         "Crude Oil and Natural Gas Hedge Agreements" means, with respect to any
Person,  any oil and gas agreements and other  agreements or arrangements or any
combination  thereof  entered  into by such  Person  in the  ordinary  course of
business and that are designed to provide protection against oil and natural gas
price fluctuations.

         "Crude Oil and Natural Gas Properties" means all Properties,  including
equity or other ownership interests therein, owned by any Person which have been
assigned "proved oil and gas reserves" as defined in Rule 4-10 of Regulation S-X
of the Securities Act as in effect on the Issue Date.

         "Crude Oil and Natural  Gas Related  Assets"  means any  Investment  or
capital   expenditure  (but  not  including  additions  to  working  capital  or
repayments of any revolving credit or working capital borrowings) by the Company
or any Subsidiary of the Company which is related to the business of the Company
and its  Subsidiaries  as it is  conducted  on the date of the Asset Sale giving
rise to the Net Cash Proceeds to be reinvested.

         "Currency Agreement" means any foreign exchange contract, currency swap
agreement  or other  similar  agreement or  arrangement  designed to protect the
Company or any  Restricted  Subsidiary of the Company  against  fluctuations  in
currency values.

         "Default"  means an event or condition  the  occurrence of which is, or
with the lapse of time or the  giving  of  notice or both  would be, an Event of
Default.

         "Disqualified  Capital  Stock" means that portion of any Capital  Stock
which,  by  its  terms  (or by  the  terms  of any  security  into  which  it is
convertible  or for  which it is  exchangeable),  or upon the  happening  of any
event,  matures  or  is  mandatorily  redeemable,  pursuant  to a  sinking  fund
obligation or otherwise,  or is mandatorily redeemable at the sole option of the
holder  thereof,  in whole or in part,  in either case, on or prior to the final
maturity of the Notes.

         "Equity Offering"  means an  offering of Qualified Capital Stock of the
Company.

         "Exchange Act" means the  Securities  Exchange Act of 1934, as amended,
or any successor statute or statutes thereto.

         "fair market value" means,  with respect to any asset or property,  the
price which could be negotiated in an arm's-length, free market transaction, for
cash,  between an informed and willing seller and an informed and willing buyer,
neither  of  whom  is  under  undue  pressure  or  compulsion  to  complete  the
transaction.  Fair market value shall be determined by the Board of Directors of
the Company  acting  reasonably  and in good faith and shall be  evidenced  by a
Board  Resolution of the Company  delivered to the Trustee;  provided,  however,
that (A) if the aggregate  non-cash  consideration to be received by the Company
or any Restricted Subsidiary from any Asset Sale shall reasonably be expected to
exceed $5 million  or (B) if the net worth of any  Restricted  Subsidiary  to be
designated as an Unrestricted  Subsidiary shall reasonably be expected to exceed
$10  million,  then fair market  value  shall be  determined  by an  Independent
Advisor.

         "GAAP" means generally accepted accounting  principles set forth in the
opinions and  pronouncements of the Accounting  Principles Board of the American
Institute of Certified Public  Accountants and statements and  pronouncements of
the Financial Accounting Standards Board as of any date of determination.

         "Holder" means any Person holding a Note.



                                      -106-

<PAGE>



         "Hydrocarbons"  means oil, natural gas,  casinghead gas, drip gasoline,
natural  gasoline,   condensate,   distillate,   liquid  hydrocarbons,   gaseous
hydrocarbons and all  constituents,  elements or compounds  thereof and products
processed therefrom.

         "Incur" has the meaning set forth under "-Certain Covenants- Limitation
on Incurrence of Additional Indebtedness."

         "Indebtedness"  means with respect to any Person,  without duplication,
(a) all  Obligations of such Person for borrowed  money,  (b) all Obligations of
such Person evidenced by bonds, debentures,  notes or other similar instruments,
(c) all  Capitalized  Lease  Obligations of such Person,  (d) all Obligations of
such Person issued or assumed as the deferred  purchase  price of property,  all
conditional  sale  obligations  and all  Obligations  under any title  retention
agreement (but excluding  trade accounts  payable),  (e) all Obligations for the
reimbursement  of any  obligor on a letter of  credit,  banker's  acceptance  or
similar credit transaction,  (f) guarantees and other contingent  obligations in
respect of Indebtedness  referred to in clauses (a) through (e) above and clause
(h) below,  (g) all  Obligations  of any other Person of the type referred to in
clauses (a)  through (f) above which are secured by any Lien on any  property or
asset of such  Person,  the  amount of such  Obligation  being  deemed to be the
lesser of the fair market  value of such  property or asset or the amount of the
Obligation so secured, (h) all Obligations under Crude Oil and Natural Gas Hedge
Agreements,  Currency  Agreements  and  Interest  Swap  Obligations  and (i) all
Disqualified Capital Stock issued by such Person with the amount of Indebtedness
represented by such Disqualified Capital Stock being equal to the greater of its
voluntary or involuntary liquidation preference and its maximum fixed redemption
price or repurchase  price. For purposes  hereof,  the "maximum fixed repurchase
price" of any Disqualified  Capital Stock which does not have a fixed repurchase
price shall be  calculated  in  accordance  with the terms of such  Disqualified
Capital Stock as if such  Disqualified  Capital Stock were purchased on any date
on which  Indebtedness  shall  be  required  to be  determined  pursuant  to the
Indenture,  and if such price is based  upon,  or  measured  by, the fair market
value of such  Disqualified  Capital  Stock,  such fair  market  value  shall be
determined  reasonably  and in good  faith  by the  Board  of  Directors  of the
Company.  The  "amount" or  "principal  amount" of  Indebtedness  at any time of
determination  as used herein  represented by (a) any  Indebtedness  issued at a
price that is less than the  principal  amount at maturity  thereof shall be the
face amount of the  liability  in respect  thereof,  (b) any  Capitalized  Lease
Obligation  shall be the amount  determined  in accordance  with the  definition
thereof,  (c) any  Interest  Swap  Obligations  included  in the  definition  of
Permitted  Indebtedness shall be zero, (d) all other  unconditional  obligations
shall be the amount of the liability thereof  determined in accordance with GAAP
and (e) all other contingent  obligations shall be the maximum liability at such
date of such Person.

         "Independent  Advisor"  means  a  reputable  accounting,  appraisal  or
nationally  recognized  investment  banking,  engineering or consulting firm (a)
which does not, and whose  directors,  officers and  employees or  Affiliates do
not, have a direct or indirect  material  financial  interest in the Company and
(b)  which,  in the  judgment  of the  Board of  Directors  of the  Company,  is
otherwise disinterested, independent and qualified to perform the task for which
it is to be engaged.

         "Interest  Swap  Obligations"  means  the  obligations  of  any  Person
pursuant  to any  arrangement  with  any  other  Person,  whereby,  directly  or
indirectly,  such  Person is  entitled  to  receive  from time to time  periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated  notional  amount in exchange for periodic  payments made by such other
Person calculated by applying a fixed or a floating rate of interest on the same
notional  amount and shall  include,  without  limitation,  interest rate swaps,
caps, floors, collars and similar agreements.

         "Investment"  means, with respect to any Person, any direct or indirect
(i) loan, advance or other extension of credit (including, without limitation, a
guarantee) or capital contribution to (by means of any transfer of cash or other
property  (valued at the fair market  value  thereof as of the date of transfer)
others or any  payment  for  property  or  services  for the  account  or use of
others),  (ii)  purchase or  acquisition  by such  Person of any Capital  Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person (whether by merger, consolidation,  amalgamation or otherwise and
whether  or not  purchased  directly  from  the  issuer  of such  securities  or
evidences of Indebtedness), (iii) guarantee or assumption of the Indebtedness of
any other Person (other than the guarantee or assumption of Indebtedness of such
Person or a Restricted Subsidiary of such Person which guarantee


                                      -107-

<PAGE>



or  assumption  is  made  in  compliance   with  the   provisions  of  "-Certain
Covenants-Limitation on Incurrence of Additional  Indebtedness" above), and (iv)
other items that would be classified as  investments  on a balance sheet of such
Person  prepared  in  accordance  with  GAAP.   Notwithstanding  the  foregoing,
"Investment"  shall  exclude  extensions  of trade credit by the Company and its
Restricted  Subsidiaries  on  commercially  reasonable  terms in accordance with
normal trade practices of the Company or such Restricted Subsidiary, as the case
may be. The amount of any  Investment  shall not be adjusted  for  increases  or
decreases in value,  or write- ups,  write-downs  or write-offs  with respect to
such Investment.  If the Company or any Restricted Subsidiary sells or otherwise
disposes of any Capital  Stock of any  Restricted  Subsidiary  such that,  after
giving effect to any such sale or  disposition,  it ceases to be a Subsidiary of
the Company,  the Company shall be deemed to have made an Investment on the date
of any such sale or  disposition  equal to the fair market  value of the Capital
Stock of such Restricted Subsidiary not sold or disposed of.

         "Issue Date" means the date of original issuance of the Notes.

         "Legal Defeasance" has  the meaning set forth under " -Legal Defeasance
and Covenant Defeasance."

         "Lien"  means  any lien,  mortgage,  deed of  trust,  pledge,  security
interest,  charge or encumbrance of any kind (including any conditional  sale or
other  title  retention  agreement,  any  lease in the  nature  thereof  and any
agreement to give any security interest).

         "Material Change" means an increase or decrease of more than 10% during
a fiscal quarter in the discounted future net cash flows (excluding changes that
result  solely from  changes in prices) from proved oil and natural gas reserves
of the Company and consolidated Subsidiaries (before any state or federal income
tax); provided,  however,  that the following will be excluded from the Material
Change  calculation:  (i) any acquisitions during the quarter of oil and natural
gas reserves that have been estimated by independent  petroleum engineers and on
which a report or reports exist, (ii) any disposition of properties  existing at
the  beginning  of such  quarter  that  have been  disposed  of as  provided  in
"Limitation  on Asset  Sales" and (iii) any  reserves  added  during the quarter
attributable  to the drilling or  recompletion of wells not included in previous
reserve estimates, but which will be included in future quarters.

         "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
in the  form of cash  or Cash  Equivalents  including  payments  in  respect  of
deferred  payment  obligations  when  received  in the  form  of  cash  or  Cash
Equivalents  received by the Company or any of its Restricted  Subsidiaries from
such Asset Sale net of (a) reasonable  out-of-pocket  expenses and fees relating
to such  Asset  Sale  (including,  without  limitation,  legal,  accounting  and
investment banking fees and sales commissions),  (b) taxes paid or payable after
taking into account any reduction in consolidated tax liability due to available
tax credits or  deductions  and any tax sharing  arrangements,  (c) repayment of
Indebtedness  that is required to be repaid in  connection  with such Asset Sale
and (d) appropriate  amounts  (determined by the Chief Financial  Officer of the
Company) to be provided by the Company or any Restricted Subsidiary, as the case
may be,  as a  reserve,  in  accordance  with  GAAP,  against  any post  closing
adjustments or liabilities  associated  with such Asset Sale and retained by the
Company or any Restricted Subsidiary, as the case may be, after such Asset Sale,
including,  without  limitation,   pension  and  other  post-employment  benefit
liabilities,  liabilities related to environmental matters and liabilities under
any indemnification  obligations  associated with such Asset Sale (but excluding
any payments which, by the terms of the indemnities  will not be made during the
term of the Notes).

         "Net Proceeds Offer" has the meaning set forth under "-Certain
Covenants-Limitation on Asset Sales."

         "Net Proceeds Offer Amount" has the meaning set forth under "-Certain 
Covenants-Limitation on Asset Sales." 

         "Net Proceeds Offer Payment Date" has the meaning set forth under
"-Certain Covenants--Limitation on Asset Sales."



                                      -108-

<PAGE>



         "Net Proceeds Offer Trigger Date"  has  the  meaning  set  forth  under
"-Certain Covenants-Limitation on Asset Sales."

         "Net Working  Capital"  means (i) all current assets of the Company and
its consolidated Subsidiaries, minus (ii) all current liabilities of the Company
and its  consolidated  Subsidiaries,  except  current  liabilities  included  in
Indebtedness,  in each case as set forth in financial  statements of the Company
prepared in accordance with GAAP.

         "Obligations" means all obligations for principal,  premium,  interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.

         "Payment  Restriction"  has  the  meaning  set  forth  under  "-Certain
Covenants-Limitation  on  Dividend  and  Other  Payment  Restrictions  Affecting
Restricted Subsidiaries."

         "Permitted Indebtedness" means,  without  duplication,  each   of   the
following:

                  (a)  the Exchange Notes, the Private Exchange Notes,  if  any,
         and the Guarantees;

                  (b)  Indebtedness  incurred  pursuant  to  the  Senior  Credit
         Facility in an aggregate  principal  amount at any time outstanding not
         to exceed $60.0 million  reduced by any required  permanent  repayments
         (which  are  accompanied  by  a  corresponding   permanent   commitment
         reduction)  thereunder  (it being  recognized  that a reduction  in the
         borrowing  base  in and  of  itself  shall  not be  deemed  a  required
         permanent repayment);

                  (c) Interest Swap  Obligations  of the Company or a Restricted
         Subsidiary  covering   Indebtedness  of  the  Company  or  any  of  its
         Restricted  Subsidiaries;  provided,  however,  that such Interest Swap
         Obligations  are entered into to protect the Company and its Restricted
         Subsidiaries  from  fluctuations  in  interest  rates  on  Indebtedness
         incurred in  accordance  with the  Indenture to the extent the notional
         principal  amount of such Interest Swap Obligations does not exceed the
         principal  amount  of the  Indebtedness  to which  such  Interest  Swap
         Obligation relates;

                  (d) Indebtedness of a Restricted  Subsidiary to the Company or
         to  a  Wholly  Owned   Restricted   Subsidiary  for  so  long  as  such
         Indebtedness  is held  by the  Company  or a  Wholly  Owned  Restricted
         Subsidiary, in each case subject to no Lien held by a Person other than
         the Company or a Wholly Owned Restricted Subsidiary; provided, however,
         that if as of any date any Person  other  than the  Company or a Wholly
         Owned  Restricted  Subsidiary  owns or holds any such  Indebtedness  or
         holds a Lien in respect of such Indebtedness, such date shall be deemed
         the incurrence of Indebtedness not constituting  Permitted Indebtedness
         by the issuer of such Indebtedness;

                  (e)  Indebtedness of the Company to a Wholly Owned  Restricted
         Subsidiary for so long as such  Indebtedness  is held by a Wholly Owned
         Restricted  Subsidiary,  in each  case  subject  to no Lien;  provided,
         however,  that (i) any  Indebtedness of the Company to any Wholly Owned
         Restricted  Subsidiary that is not a Subsidiary  Guarantor is unsecured
         and  subordinated,  pursuant to a written  agreement,  to the Company's
         obligations  under  the  Indenture  and the Notes and (ii) if as of any
         date any Person other than a Wholly Owned Restricted Subsidiary owns or
         holds  any  such  Indebtedness  or  holds  a Lien  in  respect  of such
         Indebtedness,  such date shall be deemed the incurrence of Indebtedness
         not constituting Permitted Indebtedness by the Company;

                  (f) Indebtedness  arising from the honoring by a bank or other
         financial   institution  of  a  check,   draft  or  similar  instrument
         inadvertently (except in the case of daylight overdrafts) drawn against
         insufficient  funds  in the  ordinary  course  of  business;  provided,
         however,  that such  Indebtedness is  extinguished  within two Business
         Days of incurrence;



                                      -109-

<PAGE>



                  (g)  Indebtedness  of the  Company  or  any of its  Restricted
         Subsidiaries  represented  by letters of credit for the  account of the
         Company or such Restricted Subsidiary,  as the case may be, in order to
         provide security for workers' compensation claims,  payment obligations
         in connection with self-insurance,  bid, performance on surety bonds or
         completion guarantees or similar requirements in the ordinary course of
         business;

                  (h)      Refinancing Indebtedness;

                  (i)      Capitalized  Lease  Obligations  and  Purchase  Money
         Indebtedness of the Company or any of its Restricted  Subsidiaries  not
         to exceed $5 million at any one time outstanding;

                  (j)      Obligations arising in connection with Crude Oil  and
         Natural Gas Hedge Agreements of the Company or a Restricted Subsidiary;

                  (k) Indebtedness under Currency Agreements; provided, however,
         that in the case of Currency  Agreements  which relate to Indebtedness,
         such  Currency  Agreements  do not  increase  the  Indebtedness  of the
         Company and its  Restricted  Subsidiaries  outstanding  other than as a
         result of fluctuations in foreign currency  exchange rates or by reason
         of fees, indemnities and compensation payable thereunder;

                  (l)  additional  Indebtedness  of  the  Company  or any of its
         Restricted  Subsidiaries in an aggregate  principal  amount at any time
         outstanding not to exceed the greater of (i) $10.0 million or (ii) 5.0%
         of Adjusted Consolidated Net Tangible Assets of the Company; and

                  (m)  Indebtedness  owed by the Company in connection  with its
         guaranty of the  obligations  of Hunter Butcher  International  Limited
         Liability  Company to Wells Fargo HSBC Trade Bank N.A.,  provided  that
         the amount guaranteed by the Company does not exceed $3.0 million.

         "Permitted  Industry   Investments"  means  (i)  capital  expenditures,
including, without limitation,  acquisitions of Company Properties and interests
therein;  (ii) (a) entry into  operating  agreements,  joint  ventures,  working
interests,  royalty interests,  mineral leases, unitization agreements,  pooling
arrangements or other similar or customary agreements, transactions, properties,
interests or  arrangements,  and  Investments  and  expenditures  in  connection
therewith or pursuant thereto, in each case made or entered into in the ordinary
course  of the oil and  natural  gas  business,  and (b)  exchanges  of  Company
Properties  for  other  Company  Properties  of at  least  equivalent  value  as
determined  in good faith by the Board of Directors  of the  Company;  and (iii)
Investments  of operating  funds on behalf of co-owners of Crude Oil and Natural
Gas Properties of the Company or the  Subsidiaries  pursuant to joint  operating
agreements.

         "Permitted  Investments"  means (a)  Investments  by the Company or any
Restricted  Subsidiary  in any Person that is or will become  immediately  after
such Investment a Restricted  Subsidiary or that will merge or consolidate  into
the  Company or a  Restricted  Subsidiary  that is not  subject  to any  Payment
Restriction;  (b)  Investments  in the  Company  by any  Restricted  Subsidiary;
provided,  however, that any Indebtedness evidencing any such Investment held by
a  Restricted  Subsidiary  that is not a Subsidiary  Guarantor is unsecured  and
subordinated,  pursuant to a written  agreement,  to the  Company's  obligations
under the Notes and the Indenture; (c) Investments in cash and Cash Equivalents;
(d) Investments  made by the Company or its Restricted  Subsidiaries as a result
of  consideration  received in connection  with an Asset Sale made in compliance
with  "-Certain  Covenants-Limitation  on  Asset  Sales"  above;  (e)  Permitted
Industry   Investments;   and  (f)  additional   Investments   in   Unrestricted
Subsidiaries in an aggregate amount not to exceed $5 million at any one time.

         "Permitted  Junior  Securities"  means any securities of the Company or
any other Person that are (i) equity  securities  without  special  covenants or
(ii) subordinated in right of payment to all Senior Indebtedness that may at the
time be outstanding, to substantially the same extent as, or to a greater extent
than,  the Notes are  subordinated  as provided in the  Indenture,  in any event
pursuant to a court order so providing  and as to which (a) the rate of interest
on such securities  shall not exceed the effective rate of interest on the Notes
on the date of the Indenture, (b) such


                                      -110-

<PAGE>



securities  shall not be  entitled  to the  benefits  of  covenants  or defaults
materially  more  beneficial  to the  holders of such  securities  than those in
effect  with  respect  to the  Notes on the date of the  Indenture  and (c) such
securities  shall not  provide  for  amortization  (including  sinking  fund and
mandatory  prepayment  provisions)  commencing  prior  to the  date  six  months
following  the final  scheduled  maturity  date of the Senior  Indebtedness  (as
modified by the plan of  reorganization  of readjustment  pursuant to which such
securities are issued).

         "Permitted Liens" means each of the following types of Liens:

                  (a) Liens  existing  as of the Issue Date to the extent and in
         the  manner  such  Liens  are in  effect  on the  Issue  Date  (and any
         extensions,  replacements  or  renewals  thereof  covering  property or
         assets secured by such Liens on the Issue Date);

                  (b)      Liens  securing  Indebtedness outstanding under  the 
         Senior Credit Facility;

                  (c)      Liens securing the Notes and the Guarantees;

                  (d)      Liens  of  the Company or a  Restricted  Subsidiary  
         on assets of any Restricted Subsidiary;

                  (e) Liens securing Refinancing  Indebtedness which is incurred
         to  Refinance  any  Indebtedness  which  has  been  secured  by a  Lien
         permitted under the Indenture and which has been incurred in accordance
         with the  provisions of the  Indenture;  provided,  however,  that such
         Liens  (x) are no  less  favorable  to the  Holders  and  are not  more
         favorable to the lienholders  with respect to such Liens than the Liens
         in respect of the  Indebtedness  being Refinanced and (y) do not extend
         to or  cover  any  property  or  assets  of the  Company  or any of its
         Restricted Subsidiaries not securing the Indebtedness so Refinanced;

                  (f) Liens for taxes,  assessments or  governmental  charges or
         claims  either (i) not  delinquent  or (ii)  contested in good faith by
         appropriate  proceedings  and as to which the  Company or a  Restricted
         Subsidiary,  as the case may be, shall have set aside on its books such
         reserves as may be required pursuant to GAAP;

                  (g)  statutory  and  contractual  Liens of landlords to secure
         rent  arising in the  ordinary  course of  business  to the extent such
         Liens  relate  only to the  tangible  property  of the lessee  which is
         located  on  such   property  and  Liens  of  carriers,   warehousemen,
         mechanics, suppliers, materialmen, repairmen and other Liens imposed by
         law  incurred  in the  ordinary  course  of  business  for sums not yet
         delinquent or being  contested in good faith,  if such reserve or other
         appropriate provision,  if any, as shall be required by GAAP shall have
         been made in respect thereof;

                  (h) Liens incurred or deposits made in the ordinary  course of
         business (i) in  connection  with workers'  compensation,  unemployment
         insurance  and  other  types of  social  security,  including  any Lien
         securing  letters of credit  issued in the ordinary  course of business
         consistent  with past  practice  in  connection  therewith,  or (ii) to
         secure the performance of tenders,  statutory  obligations,  surety and
         appeal bonds,  bids,  leases,  government  contracts,  performance  and
         return-of-money  bonds  and other  similar  obligations  (exclusive  of
         obligations for the payment of borrowed money);

                  (i) judgment and attachment Liens not giving rise to an Event
         of Default;

                  (j) easements, rights-of-way, zoning restrictions, restrictive
         covenants,  minor  imperfections  in title and other similar charges or
         encumbrances  in  respect  of  real  property  not  interfering  in any
         material  respect  with the  ordinary  conduct of the  business  of the
         Company or any of its Restricted Subsidiaries;

                  (k) any  interest or title of a lessor  under any  Capitalized
         Lease  Obligation;  provided  that  such  Liens  do not  extend  to any
         property  or  assets  which are not  leased  property  subject  to such
         Capitalized Lease Obligation;


                                      -111-

<PAGE>



                  (l) Liens securing Purchase Money  Indebtedness of the Company
         or any Restricted Subsidiary;  provided, however, that (i) the Purchase
         Money  Indebtedness  shall not be secured by any  property or assets of
         the Company or any  Restricted  Subsidiary  other than the property and
         assets so acquired or constructed  (except for proceeds,  improvements,
         rents and similar items relating to the property or assets so acquired)
         and (ii) the Lien securing such Indebtedness shall be created within 90
         days of such acquisition or construction;

                  (m) Liens securing  reimbursement  obligations with respect to
         commercial  letters  of  credit  which  encumber  documents  and  other
         property  relating to such  letters of credit and products and proceeds
         thereof;

                  (n) Liens  encumbering  deposits  made to  secure  obligations
         arising   from   statutory,   regulatory,   contractual,   or  warranty
         requirements  of the  Company  or any of its  Restricted  Subsidiaries,
         including rights of offset and set-off;

                  (o) Liens securing Interest Swap Obligations  which  Interest 
         Swap Obligations relate to  Indebtedness  that is  otherwise  permitted
         under the Indenture and Liens securing Crude Oil and Natural Gas  Hedge
         Agreements;

                  (p)  Liens   securing   Acquired   Indebtedness   incurred  in
         accordance  with  "--Certain   Covenants-Limitation  on  Incurrence  of
         Additional Indebtedness" above; provided,  however, that (i) such Liens
         secured  such  Acquired  Indebtedness  at the time of and  prior to the
         incurrence of such Acquired Indebtedness by the Company or a Restricted
         Subsidiary and were not granted in connection  with, or in anticipation
         of, the  incurrence of such Acquired  Indebtedness  by the Company or a
         Restricted Subsidiary and (ii) such Liens do not extend to or cover any
         property  or  assets  of  the  Company  or of  any  of  its  Restricted
         Subsidiaries  other  than the  property  or  assets  that  secured  the
         Acquired  Indebtedness  prior  to the  time  such  Indebtedness  became
         Acquired Indebtedness of the Company or a Restricted Subsidiary (except
         for proceeds,  improvements,  rents and similar  items  relating to the
         property  or  assets  so  secured)  and  are no more  favorable  to the
         lienholders than those securing the Acquired  Indebtedness prior to the
         incurrence of such Acquired Indebtedness by the Company or a Restricted
         Subsidiary;

                  (q) Liens on, or  related  to,  properties  and  assets of the
         Company  and its  Subsidiaries  to  secure  all or a part of the  costs
         incurred in the ordinary course of business of  exploration,  drilling,
         development,  production,  processing,  gas gathering,  transportation,
         marketing or storage, or operation thereof;

                  (r) Liens on pipeline or pipeline facilities,  Hydrocarbons or
         properties and assets of the Company and its  Subsidiaries  which arise
         out of operation of law;

                  (s) royalties,  overriding royalties,  revenue interests,  net
         revenue  interests,  net  profit  interests,   reversionary  interests,
         production payments, production sales contracts, preferential rights of
         purchase,  operating  agreements,  working  interests and other similar
         interests,  properties,  arrangements and agreements, all as ordinarily
         exist with  respect to  Properties  and assets of the  Company  and its
         Subsidiaries or otherwise as are customary in the oil and gas business;

                  (t) with respect to any  Properties  and assets of the Company
         and its  Subsidiaries,  Liens arising under, or in connection  with, or
         related to, farm-out, farm-in, joint operation, area of mutual interest
         agreements and/or other similar or customary  arrangements,  agreements
         or  interests  that the Company or any  Subsidiary  determines  in good
         faith to be necessary for the economic development of such Property;

                  (u) any (a) interest or title of a lessor or  sublessor  under
         any lease, (b) restriction or encumbrance that the interest or title of
         such  lessor  or  sublessor  may  be  subject  to  (including,  without
         limitation,  ground  leases  or  other  prior  leases  of  the  demised
         premises,  mortgages,  mechanics' liens, tax liens, and easements),  or
         (c) subordination of the interest of the lessee or sublessee under such
         lease to any  restrictions or encumbrance  referred to in the preceding
         clause (b);


                                      -112-

<PAGE>



                  (v) Liens in favor of collecting or payor banks having a right
         of setoff,  revocation,  refund or chargeback  with respect to money or
         instruments of the Company or any Restricted Subsidiary on deposit with
         or in possession of such bank; and

                  (w)      Liens incurred in the ordinary course of business and
         not exceeding $2.0 million in the aggregate at any one time.

         "Person" means an individual, partnership, corporation,  unincorporated
organization,  limited liability company,  trust, estate, or joint venture, or a
governmental agency or political subdivision thereof.

         "Preferred  Stock" of any Person means any Capital Stock of such Person
that has  preferential  rights to any other  Capital  Stock of such  Person with
respect to dividends or redemptions or upon liquidation.

         "Property"  means,  with respect to any Person,  any  interests of such
Person in any kind of property or asset,  whether  real,  personal or mixed,  or
tangible  or  intangible,   including,   without   limitation,   Capital  Stock,
partnership  interests  and other  equity or  ownership  interests  in any other
Person.

         "Private Exchange Notes" means senior notes of the Company,  guaranteed
by the Subsidiary Guarantors,  issued in exchange for the Notes and identical in
all  material  respects to the  Exchange  Notes,  except for the  placement of a
restrictive legend on such Private Exchange Notes.

         "Purchase Money  Indebtedness"  means  Indebtedness the net proceeds of
which are used to  finance  the cost  (including  the cost of  construction)  of
property  or assets  acquired  in the normal  course of  business  by the Person
incurring such Indebtedness.

         "Qualified   Capital  Stock"  means  any  Capital  Stock  that  is  not
Disqualified Capital Stock.

         "Reference Date" has the meaning set forth under "- Certain Covenants -
Limitation on Restricted Payments."

         "Refinance"  means,  in respect of any  security  or  Indebtedness,  to
refinance,  extend, renew, refund, repay, prepay,  redeem, defease or retire, or
to issue a security  or  Indebtedness  in  exchange  or  replacement  for,  such
security or Indebtedness  in whole or in part.  "Refinanced"  and  "Refinancing"
shall have correlative meanings.

         "Refinancing  Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
"- Certain  Covenants - Limitation on  Incurrence  of  Additional  Indebtedness"
above (other than  pursuant to clause (b),  (c),  (d),  (e), (f), (g), (i), (j),
(k), (l) or (m) of the definition of Permitted Indebtedness),  in each case that
does  not (i)  result  in an  increase  in the  aggregate  principal  amount  of
Indebtedness  of such Person as of the date of such proposed  Refinancing  (plus
the amount of any premium  required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable  expenses incurred
by  the  Company  and  its  Restricted  Subsidiaries  in  connection  with  such
Refinancing)  or (ii) create  Indebtedness  with (x) a Weighted  Average Life to
Maturity  that is less  than  the  Weighted  Average  Life  to  Maturity  of the
Indebtedness  being  Refinanced or (y) a final  maturity  earlier than the final
maturity of the Indebtedness being Refinanced;  provided,  however,  that (1) if
such  Indebtedness  being  Refinanced  is  Indebtedness  of  the  Company  or  a
Subsidiary Guarantor,  then such Refinancing  Indebtedness shall be Indebtedness
solely  of the  Company  and/or  such  Subsidiary  Guarantor  and  (2)  if  such
Indebtedness  being  Refinanced  is  subordinate  or  junior  to the  Notes or a
Guarantee,  then such Refinancing Indebtedness shall be subordinate to the Notes
or such  Guarantee,  as the case may be, at least to the same  extent and in the
same manner as the Indebtedness being Refinanced.

         "Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Issue Date among the Company, the Subsidiary  Guarantors and the
Initial Purchasers.



                                      -113-

<PAGE>



         "Related  Person"  of any Person  means any other  Person  directly  or
indirectly  owning 10% or more of the  outstanding  voting  Common Stock of such
Person (or, in the case of a Person  that is not a  corporation,  10% or more of
the equity interest in such Person).

         "Replacement Assets" has the meaning set forth under "-Certain
Covenants - Limitation on Asset Sales."

         "Restricted Payment" has the meaning set forth under "- Certain 
Covenants - Limitation on Restricted Payments."

         "Restricted  Subsidiary"  means any  Subsidiary of the Company that has
not  been  designated  by the  Board of  Directors  of the  Company,  by a Board
Resolution  delivered to the Trustee, as an Unrestricted  Subsidiary pursuant to
and in  compliance  with "- Certain  Covenants - Limitation  on  Restricted  and
Unrestricted Subsidiaries" above. Any such designation may be revoked by a Board
Resolution of the Company delivered to the Trustee, subject to the provisions of
such covenant.

         "Sale  and  Leaseback   Transaction"   means  any  direct  or  indirect
arrangement  with any Person or to which any such  Person is a party,  providing
for the  leasing to the  Company or a  Restricted  Subsidiary  of any  Property,
whether owned by the Company or any  Restricted  Subsidiary at the Issue Date or
later  acquired which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom funds
have been or are to be advanced by such Person on the security of such Property.

         "Senior  Credit   Facility"  means  the  Amended  and  Restated  Credit
Agreement  dated as of April 30, 1997,  by and among the Company,  Bankers Trust
Company, as Administrative  Agent and as Issuing Bank, First Union National Bank
of North Carolina, as Syndication Agent and Collateral Agent, Banque Paribas, as
Documentation  Agent, and each of the Lenders named therein, or any successor or
replacement  agreement  and  whether by the same or any other  agent,  lender or
group of  lenders,  together  with the  related  documents  thereto  (including,
without limitation,  any guarantee agreements and security  documents),  in each
case as such agreements may be amended  (including any amendment and restatement
thereof),  supplemented or otherwise  modified from time to time,  including any
agreements  extending  the maturity of,  refinancing,  replacing,  increasing or
otherwise  restructuring  all or any  portion  of the  Indebtedness  under  such
agreements.

         "Significant  Subsidiary"  shall  have the  meaning  set  forth in Rule
1.02(w) of Regulation S-X under the Securities Act.

         "Subsidiary",  with respect to any Person, means (a) any corporation of
which the  outstanding  Capital  Stock  having at least a majority  of the votes
entitled to be cast in the election of directors  under  ordinary  circumstances
shall at the time be owned,  directly or  indirectly,  by such Person or (b) any
other Person of which at least a majority of the voting interests under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.

         "Subsidiary  Guarantor"  means  (a)  each of the  Company's  Restricted
Subsidiaries  as of the  Issue  Date  and (b) each of the  Company's  Restricted
Subsidiaries that in the future executes a supplemental  indenture in which such
Restricted  Subsidiary  agrees  to be bound by the terms of the  Indenture  as a
Subsidiary  Guarantor;   provided,  however,  that  any  Person  constituting  a
Subsidiary  Guarantor as described  above shall cease to constitute a Subsidiary
Guarantor  when its  Guarantee is released in  accordance  with the terms of the
Indenture.

         "Surviving Entity" has the meaning set forth under "- Certain Covenants
 - Merger, Consolidation and Sale of Assets."

         "TCW  Preferred  Stock" means the one million  shares of the  Company's
1996  Series A  Convertible  Preferred  Stock,  $0.001 par value per share and a
$10.00  stated  value per share with a quarterly  dividend  rate of $0.21875 per
share.



                                      -114-

<PAGE>



         "Unrestricted   Subsidiary"   means  any   Subsidiary  of  the  Company
designated as such pursuant to and in  compliance  with " - Certain  Covenants -
Limitation  on  Restricted  and  Unrestricted   Subsidiaries"  above;  provided,
however,  the Unrestricted  Subsidiaries  shall initially include Hunter Butcher
International  Limited Liability Company. Any such designation may be revoked by
a Board  Resolution  of the Company  delivered  to the  Trustee,  subject to the
provisions of such covenant.

         "Weighted  Average  Life  to  Maturity"  means,  when  applied  to  any
Indebtedness  at any date, the number of years obtained by dividing (a) the then
outstanding  aggregate principal amount of such Indebtedness into (b) the sum of
the total of the products  obtained by  multiplying  (i) the amount of each then
remaining  installment,  sinking fund, serial maturity or other required payment
of principal,  including payment at final maturity,  in respect thereof, by (ii)
the number of years  (calculated to the nearest  one-twelfth)  which will elapse
between such date and the making of such payment.

         "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which all the outstanding  voting  securities  normally  entitled to vote in the
election  of  directors  are  owned  by the  Company  or  another  Wholly  Owned
Restricted Subsidiary.

                      DESCRIPTION OF THE OUTSTANDING NOTES

     The terms of the Outstanding  Notes are identical in all material  respects
to the  Exchange  Notes,  except  that  the  Outstanding  Notes  have  not  been
registered  under the  Securities  Act, are subject to certain  restrictions  on
transfer and are entitled to certain  registration rights under the Registration
Agreement  (which rights  terminate upon the consummation of the Exchange Offer,
except  under  limited   circumstances)   (see   "Description  of  the  Exchange
Notes-Registration  Agreement"). In addition, the Outstanding Notes provide that
if the  Company  or the  Subsidiary  Guarantors  fail  to  comply  with  certain
provisions concerning registration rights,  primarily the timing of the Exchange
Offer,  Additional  Interest  will accrue and be payable until such time as such
registration  defaults  have been cured.  The Exchange  Notes  generally are not
entitled to any such Additional Interest. The Outstanding Notes and the Exchange
Notes will  constitute a single series of debt  securities  under the Indenture.
See "Description of the Exchange Notes."


                    CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

     The following  summary  describes  certain United States federal income tax
consequences  generally applicable to a holder that exchanges  Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer,  but does not purport to be a
complete analysis of all the potential tax considerations relating thereto. This
summary is based on the Internal  Revenue Code of 1986, as amended (the "Code"),
existing, temporary and proposed Treasury Regulations,  Internal Revenue Service
("IRS") rulings and judicial  decisions now in effect,  all of which are subject
to change (possibly with retroactive effect) or different interpretations.  This
summary deals (i) only with holders  ("Holders") that hold Outstanding Notes and
will hold  Exchange  Notes  received  therefor as "capital  assets"  (within the
meaning of Section  1221 of the Code) and (ii)  primarily  with Holders that are
citizens  or  residents  of the  United  States,  or  any  state  thereof,  or a
corporation  or other entity  created or organized  under the laws of the United
States, or any political  subdivision  thereof, an estate the income of which is
subject to United  States  federal  income tax  regardless  of source or that is
otherwise  subject to United States  federal income tax on a net income basis in
respect of the Notes, or a trust whose  administration is subject to the primary
supervision  of a United  States  court and which has one or more United  States
fiduciaries who have the authority to control all  substantial  decisions of the
trust ("U.S. Holders"). This summary does not address tax considerations arising
under the laws of any foreign,  state or local  jurisdiction  or  applicable  to
investors  that may be subject to special tax rules,  such as banks,  tax-exempt
organizations,  insurance  companies,  dealers in  securities  or  currencies or
persons that will hold  Outstanding  Notes and Exchange Notes as a position in a
hedging transaction,  "straddle" or "conversion transaction" or other integrated
investment  transaction for tax purposes.  The Company has not sought any ruling
from the IRS with respect to the statements made and the conclusions  reached in
the  following  summary,  and there can be no assurance  that the IRS will agree
with such statements and conclusions.



                                      -115-

<PAGE>



         INVESTORS  CONSIDERING  THE EXCHANGE OF OUTSTANDING  NOTES FOR EXCHANGE
NOTES  PURSUANT TO THE  EXCHANGE  OFFER  SHOULD  CONSULT  THEIR OWN TAX ADVISERS
REGARDING  THE  FEDERAL,  STATE,  LOCAL AND  FOREIGN TAX  CONSEQUENCES  OF THEIR
PARTICIPATION  IN THE EXCHANGE OFFER AND THEIR  OWNERSHIP AND DISPOSITION OF THE
EXCHANGE NOTES, AND THE EFFECT THAT THEIR PARTICULAR  CIRCUMSTANCES  MAY HAVE ON
SUCH TAX CONSEQUENCES.

The Exchange Offer

     Pursuant  to  recently  issued  Treasury   Regulations,   the  exchange  of
Outstanding  Notes for Exchange  Notes pursuant to the Exchange Offer should not
constitute a significant modification of the terms of the Outstanding Notes and,
accordingly,  such exchange should not be treated as a taxable event for federal
income tax purposes.  Therefore, such exchange should have no federal income tax
consequences  to U.S.  Holders of  Outstanding  Notes,  and each U.S.  Holder of
Exchange Notes will continue to be required to include  interest on the Exchange
Notes in its gross  income in  accordance  with its  method  of  accounting  for
federal income tax purposes.

Payment of Interest and Additional Interest

         Interest on an  Outstanding  Note or Exchange  Note  generally  will be
includable  in the income of a U.S.  Holder as ordinary  income at the time such
interest is received or accrued, in accordance with such U.S. Holder's method of
accounting for United States federal income tax purposes.  The Outstanding Notes
were treated by the Company as issued without  original  issue discount  ("OID")
within the meaning of the Code.  Had the Company  failed to effect the  Exchange
Offer  on a  timely  basis,  Additional  Interest  would  have  accrued  on  the
Outstanding  Notes.  Because the Company  determined  that, when the Outstanding
Notes were issued,  there was only a remote  possibility that events would occur
which would cause the Additional  Interest to accrue on the  Outstanding  Notes,
the Company  determined  that the Additional  Interest  should not be taken into
account in concluding that the Outstanding Notes were issued without OID.

Sale, Exchange or Redemption of the Notes

     Subject to the  discussion  of the  Exchange  Offer  above,  upon the sale,
exchange or redemption of an Outstanding  Note or Exchange  Note, a U.S.  Holder
generally  will recognize  capital gain or loss equal to the difference  between
(i) the  amount  of cash  proceeds  and the fair  market  value of any  property
received on the sale,  exchange or redemption  (except to the extent such amount
is  attributable  to accrued  interest  income or market discount not previously
included  in income  which is taxable  as  ordinary  income)  and (ii) such U.S.
Holder's  adjusted tax basis in the  Outstanding  Note or Exchange  Note. A U.S.
Holder's  adjusted tax basis in an  Outstanding  Note or Exchange Note generally
will equal the cost of the Outstanding Note or Exchange Note to such U.S. Holder
increased by the amount of interest income on the  Outstanding  Note or Exchange
Note previously taken into income by the U.S. Holder but not yet received by the
U.S.  Holder  and by the  amount of any market  discount  previously  taken into
income  by the U.S.  Holder,  and  reduced  by the  amount  of any bond  premium
amortized by the U.S. Holder with respect to the  Outstanding  Notes or Exchange
Notes and by any principal  payments on the Outstanding Notes or Exchange Notes.
Except to the extent that an intention to call the Outstanding Notes or Exchange
Notes prior to their maturity  existed at the time of their original issue as an
agreement or  understanding  between the Company and the  original  holders of a
substantial  amount  of the  Outstanding  Notes  or  Exchange  Notes  (which  is
unlikely),  gain  or loss  realized  by a U.S.  Holder  on the  sale,  exchange,
redemption  or other  disposition  of an  Outstanding  Note or an Exchange  Note
generally will be long-term  capital gain or loss if the U.S.  Holder's  holding
period in the  Outstanding  Note or  Exchange  Note is more than one year at the
time of disposition (subject to the market discount rules discussed below).

Amortizable Bond Premium

         Generally,  the excess of a U.S.  Holder's tax basis in an  Outstanding
Note or Exchange  Note over the amount  payable at maturity is bond premium that
the U.S.  Holder may elect to amortize  under Section 171 of the Code on a yield
to maturity basis over the period from the U.S. Holder's acquisition date to the
maturity date of the  Outstanding  Note or Exchange Note. The  amortizable  bond
premium is treated as an offset to interest  income on the  Outstanding  Note or
Exchange Note for United States federal income tax purposes.  A U.S.  Holder who
elects to


                                      -116-

<PAGE>



amortize  bond  premium  must  reduce its tax basis in the  Outstanding  Note or
Exchange Note by the  deductions  allowable  for  amortizable  bond premium.  An
election to amortize bond premium is revocable  only with the consent of the IRS
and applies to all obligations  owned or acquired by the U.S. Holder on or after
the first day of the taxable year to which the election applies.

         An  Outstanding  Note or Exchange  Note may be called or submitted  for
redemption  at a premium  prior to maturity.  See  "Description  of the Exchange
Notes--Optional  Redemption."  An earlier  call date is treated as the  maturity
date of the Outstanding  Note or Exchange Note and the amount of bond premium is
determined  by  treating  the  amount  payable  on such call date as the  amount
payable at maturity,  if such a calculation produces a smaller bond premium than
the method described in the preceding paragraph. If a U.S. Holder is required to
amortize and deduct the bond  premium by  reference to a certain call date,  the
Outstanding  Note or Exchange  Note will be treated as maturing on that date for
the  amount  then  payable.  If the  Outstanding  Note or  Exchange  Note is not
redeemed  on that call  date,  the  Outstanding  Note or  Exchange  Note will be
treated as  reissued on that date for the amount of the call price on that date.
If an Outstanding Note or Exchange Note purchased at a premium is redeemed prior
to its maturity, a U.S. Holder who has elected to deduct the bond premium may be
permitted to deduct any remaining  unamortized  bond premium as an ordinary loss
in the taxable year of the redemption.

Market Discount

         The resale of  Outstanding  Notes or Exchange  Notes may be affected by
the market discount provisions of the Code. A U.S. Holder has market discount if
an Outstanding Note or Exchange Note is purchased (other than at original issue)
at an amount below the stated  redemption  price at maturity of the  Outstanding
Note or Exchange Note. A de minimis amount of market discount is ignored. A U.S.
Holder of an Outstanding  Note or Exchange Note with market discount must either
elect to include  market  discount in income as it accrues or treat a portion of
the gain recognized on the disposition or retirement of the Outstanding  Note or
Exchange Note as ordinary income.  The amount of gain treated as ordinary income
would equal the lesser of (i) the gain recognized (or the  appreciation,  in the
case of a  nontaxable  transaction  such as a gift) or (ii) the  portion  of the
market  discount that accrued on a ratable basis (or, if elected,  on a constant
interest rate basis) while the Outstanding Note or Exchange Note was held by the
U.S. Holder.

         A U.S.  Holder who acquires an  Outstanding  Note or Exchange Note at a
market discount also may be required to defer a portion of any interest  expense
that otherwise may be deductible on any  indebtedness  incurred or maintained to
purchase or carry such  Outstanding  Note or Exchange Note until the U.S. Holder
disposes  of the  Outstanding  Note or Exchange  Note in a taxable  transaction.
Moreover,  to the extent of any accrued market discount on such Outstanding Note
or Exchange Note, any partial  principal  payment with respect to an Outstanding
Note or Exchange  Note will be includable  as ordinary  income upon receipt,  as
will the fair market value of the  Outstanding  Note or Exchange Note on certain
otherwise non-taxable transfers (such as gifts).

         A U.S.  Holder of  Outstanding  Notes or Exchange  Notes  acquired at a
market  discount  may elect for United  States  federal  income tax  purposes to
include  market  discount in gross income as the discount  accrues,  either on a
straight-line basis or on a constant interest rate basis. This current inclusion
election,  once made, applies to all market discount obligations acquired by the
U.S.  Holder on or after the  first day of the first  taxable  year to which the
election  applies,  and may not be revoked  without the consent of the IRS. If a
U.S. Holder of Outstanding  Notes or Exchange Notes makes such an election,  the
foregoing  rules with respect to the recognition of ordinary income on sales and
other dispositions of such debt instruments and on any partial principal payment
with respect to the  Outstanding  Notes or Exchange  Notes,  and the deferral of
interest deductions on indebtedness  incurred or maintained to purchase or carry
such debt instruments, would not apply.

Non-U.S. Holders

         Under  present  United  States  federal  income  and estate tax law and
subject to the discussion of backup withholding below:



                                      -117-

<PAGE>



                  (a)  Payments  of  interest  on the  Outstanding  Notes or the
         Exchange Notes by the Company or any agent of the Company to any holder
         of an Outstanding Note or an Exchange Note that is not a U.S. Holder (a
         "Non-U.S.  Holder")  will  not be  subject  to  United  States  federal
         withholding tax,  provided that such interest income is not effectively
         connected with a United States trade or business of the Non-U.S. Holder
         and   provided  that  (i) the  Non-U.S. Holder  does  not  actually  or
         constructively  own 10% or more of the total  combined  voting power of
         all classes of stock of the Company entitled to vote; (ii) the Non-U.S.
         Holder is not a controlled  foreign  corporation that is related to the
         Company through stock ownership;  (iii) either (A) the beneficial owner
         of the Outstanding Notes or the Exchange Notes certifies (by submitting
         to the Company or its agent a Form W-8 (or a suitable substitute form))
         in compliance  with  applicable  laws and regulations to the Company or
         its agent, under penalties of perjury,  that it is not a "United States
         person" as defined in the Code and provides its name and address or (B)
         a securities clearing organization, bank or other financial institution
         that holds customers' securities in the ordinary course of its trade or
         business (a "financial institution"),  that holds the Outstanding Notes
         on behalf of the beneficial owner, and that provides a statement to the
         Company  or its  agent  in  which  it  certifies  that a Form W-8 (or a
         suitable  substitute  form) has been received from the beneficial owner
         by it or by a financial institution between it and the beneficial owner
         and  furnishes  the payor with a copy  thereof;  and (iv) the  Non-U.S.
         Holder is not a bank which acquired the  Outstanding  Notes or Exchange
         Notes in  consideration  for an extension of credit made  pursuant to a
         loan agreement entered into in the ordinary course of business.   A Non
         -U.S. Holder that is not exempt from  tax under  these  rules generally
         will  be subject to United States  federal  income tax  withholding  at
         a rate of 30% unless the  interest is  effectively  connected  with the
         conduct  of  a  United  States trade  or  business,  in  which case the
         interest will be subject to the United  States  federal  income tax  on
         net income  that  applies to United  States  persons  generally.   Non-
         U.S.  Holders  should  consult applicable  income  tax  treaties, which
         may include different rules.

                  (b) A Non-U.S.  Holder generally will not be subject to United
         States federal  withholding tax on gain realized on the sale,  exchange
         or redemption of an Outstanding Note or an Exchange Note unless (i) the
         gain is effectively connected with a United States trade or business of
         the Non-U.S.  Holder,  (ii) in the case of a Non-U.S.  Holder who is an
         individual, such Holder is present in the United States for a period or
         periods  aggregating  183 days or more during the  taxable  year of the
         disposition  or (iii) the  Holder is  subject  to tax  pursuant  to the
         provisions of the Code applicable to certain United States expatriates.
         If the Company is a "United States real property  holding  corporation"
         within  the  meaning of the Code,  a Non-U.S.  Holder may be subject to
         United States  federal  income tax with respect to gain realized on the
         disposition,  which tax may be  required  to be  withheld.  The  amount
         withheld in accordance with these rules will be creditable  against the
         Non-U.S.  Holder's  United States  federal income tax liability and may
         entitle the Non-U.S.  Holder to a refund upon  furnishing  the required
         information to the IRS.  Non-U.S.  Holders  should  consult  applicable
         income tax treaties, which may provide different rules.

                  (c)  An  Outstanding  Note  or an  Exchange  Note  held  by an
         individual who at the time of death is not a citizen or resident of the
         United States will not be subject to United States  federal  estate tax
         as a result of such  individual's  death if, at the time of such death,
         the  individual did not actually or  constructively  own 10% or more of
         the total combined  voting power of all classes of stock of the Company
         entitled  to vote  and  the  income  on the  Outstanding  Notes  or the
         Exchange  Notes  would not have  been  effectively  connected  with the
         conduct of a trade or business by the individual in  the  United States
         had such income been received by the decedent at the time of his death.
<PAGE>
         Recently proposed Treasury  regulations that would be effective January
1, 1998,  provide  for  several  alternative  methods  for  Non-U.S.  Holders or
"qualified  intermediaries" who hold the Outstanding Notes or the Exchange Notes
on behalf  of  Non-U.S.  Holders  to obtain an  exemption  from  withholding  on
interest payments.  The proposed Treasury regulations also would require, in the
case of Outstanding Notes or Exchange Notes held by a foreign partnership,  that
(i) the certification  described in clause (a) (iii) of the preceding  paragraph
be provided by the partners rather than by the foreign  partnership and (ii) the
partnership provide certain information to the payor,  including a United States
taxpayer  identification  number. A look-through rule would apply in the case of
tiered  partnerships.  There can be no  assurance  as to  whether  the  proposed
Treasury  regulations  will be  adopted or as to the  provisions  that they will
include if and when adopted in temporary or final form.

     Except to the  extent  that an  applicable  treaty  otherwise  provides,  a
Non-U.S. Holder generally will be taxed in the same manner as a U.S. Holder with
respect to interest  if the  interest  income is  effectively  connected  with a
United States trade or business of the Non-U.S.  Holder.  Effectively  connected
interest  received  by a  corporate  Non-U.S.  Holder  may also,  under  certain
circumstances,  be subject to an additional  "branch  profits tax" at a 30% rate
(or,  if  applicable,  a lower  treaty  rate).  Even  through  such  effectively
connected  interest is subject to income  tax,  and may be subject to the branch
profits  tax,  it is not  subject  to  withholding  tax if the  Non-U.S.  Holder
delivers a properly executed IRS Form 4224 to the payor.
 
Information Reporting and Backup Withholding Tax

         In general,  information reporting  requirements may apply to principal
and interest payments on an Outstanding Note or Exchange Note and to payments of
the proceeds of the sale of an  Outstanding  Note or Exchange Note. A 31% backup
withholding  tax  may  apply  to  such  payments  unless  the  Holder  (i)  is a
corporation,  Non-U.S.  Holder or comes within  certain other exempt  categories
and,  when  required,  demonstrates  its  exemption,  or (ii) provides a correct
taxpayer identification number, certifies as to no loss of exemption from backup
withholding and otherwise  complies with  applicable  requirements of the backup
withholding rules. A Holder of an Outstanding Note or Exchange Note who does not
provide the Company with the Holder's correct taxpayer identification number may
be subject to  penalties  imposed by the IRS.  Any  amounts  withheld  under the
backup  withholding rules from a payment to a Holder will be allowed as a credit
against such  Holder's  United  States  federal  income tax,  provided  that the
required information is furnished to the IRS.



                                      -118-

<PAGE>



                          BOOK-ENTRY; DELIVERY AND FORM

     The Outstanding Notes and the related guarantees are and the Exchange Notes
(and related guarantees)  initially will be represented by one or more permanent
global  certificates in definitive,  fully registered form (the "Global Notes").
The Global Notes will be deposited on the Issue Date with,  or on behalf of, The
Depository Trust Company,  New York, New York (the  "Depository") and registered
in the name of a nominee of the Depository.

     The  Global  Notes.   The  Company  expects  that  pursuant  to  procedures
established  by the  Depository  (i) upon the issuance of the Global Notes,  the
Depository or its custodian will credit,  on its internal system,  the principal
amount  of Notes of the  individual  beneficial  interests  represented  by such
Global Notes to the  respective  accounts of persons who have accounts with such
depositary and (ii)  ownership of beneficial  interests in the Global Notes will
be shown on, and the transfer of such  ownership  will be effected only through,
records  maintained by the  Depository or its nominee (with respect to interests
of participants)  and the records of participants  (with respect to interests of
persons other than participants).  Such accounts initially will be designated by
or on behalf of the Initial Purchasers and ownership of beneficial  interests in
the  Global  Notes  will be  limited  to  persons  who  have  accounts  with the
Depository  ("participants") or persons who hold interests through participants.
QIBs and  institutional  Accredited  Investors  who are not QIBs may hold  their
interests  in the Global  Notes  directly  through  the  Depository  if they are
participants  in such system,  or  indirectly  through  organizations  which are
participants in such system.

     So long as the  Depository,  or its  nominee,  is the  registered  owner or
holder of the Notes, the Depository or such nominee, as the case may be, will be
considered  the sole  owner or holder of the Notes  represented  by such  Global
Notes for all purposes under the Indenture.  No beneficial  owner of an interest
in the Global Notes will be able to transfer that interest  except in accordance
with the  Depository's  procedures,  in addition to those provided for under the
Indenture with respect to the Notes.

     Payments  of the  principal  of,  premium  (if  any),  interest  (including
Additional  Interest) on, the Global Notes will be made to the Depository or its
nominee,  as the case  may be,  as the  registered  owner  thereof.  None of the
Company,  the  Trustee  or any  Paying  Agent  will have any  responsibility  or
liability for any aspect of the records  relating to or payments made on account
of  beneficial  ownership  interests  in the  Global  Notes or for  maintaining,
supervising  or  reviewing  any records  relating to such  beneficial  ownership
interest.

     The Company expects that the Depository or its nominee, upon receipt of any
payment of principal,  premium, if any, interest (including Additional Interest)
on the Global Notes, will credit participants' accounts with payments in amounts
proportionate to their respective  beneficial  interests in the principal amount
of the Global  Notes as shown on the records of the  Depository  or its nominee.
The Company also expects that payments by  participants  to owners of beneficial
interests in the Global Notes held through such participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers  registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.

     Transfers  between  participants  in the Depository will be effected in the
ordinary way through the  Depository's  same-day funds system in accordance with
the Depository rules and will be settled in same day funds. If a holder requires
physical delivery of


                                      -119-

<PAGE>



     a Certificated Security for any reason,  including to sell Notes to persons
in states  which  require  physical  delivery  of the Notes,  or to pledge  such
securities,  such  holder  must  transfer  its  interest  in a Global  Note,  in
accordance with the normal  procedures of the Depository and with the procedures
set forth in the Indenture.

     The  Depository  has  advised  the  Company  that it will  take any  action
permitted to be taken by a holder of Notes  (including the presentation of Notes
for  exchange  as  described  below)  only  at the  direction  of  one  or  more
participants  to whose account the the Depository  interests in the Global Notes
are  credited  and only in respect of such  portion of the  aggregate  principal
amount of Notes as to which such  participant or participants  has or have given
such  direction.  However,  if there is an Event of Default under the Indenture,
the Depository will exchange the Global Notes for Certificated Securities, which
it will distribute to its  participants. 

     The  Depository  has advised the Company as follows:  the  Depository  is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal  Reserve  System,  a "clearing  corporation"  within the
meaning  of the  Uniform  Commercial  Code and a  "Clearing  Agency"  registered
pursuant to the  provisions  of Section 17A of the  Securities  Exchange  Act of
1934,  as amended  (the  "Exchange  Act").  The  Depository  was created to hold
securities for its  participants  and facilitate the clearance and settlement of
securities  transactions  between  participants  through  electronic  book-entry
changes  in  accounts  of its  participants,  thereby  eliminating  the need for
physical movement of certificates.  Participants  include securities brokers and
dealers,  banks,  trust  companies and clearing  corporations  and certain other
organizations.  Indirect  access to the the  Depository  system is  available to
others such as banks, brokers, dealers and trust companies that clear through or
maintain  a  custodial  relationship  with a  participant,  either  directly  or
indirectly ("indirect participants").

     Although the Depository has agreed to the foregoing  procedures in order to
facilitate  transfers of interests in the Global Notes among participants of the
Depository,  it is under no  obligation  to perform  such  procedures,  and such
procedures may be discontinued at any time.  Neither the Company nor the Trustee
will  have any  responsibility  for the  performance  by the  Depository  or its
participants or indirect participants of their respective  obligations under the
rules and procedures governing their operations.

     Certificated Securities.  If (i) the Depository is at any time unwilling or
unable  to  continue  as a  depositary  for  the  Global  Note  and a  successor
depositary  is not  appointed by the Company  within 90 days or (ii) an Event of
Default has  occurred and is  continuing  and the  Registrar  (as defined in the
Indenture)  has  received  a  written  request  from  the  Depository  to  issue
certificated  securities,  permanent  certificated securities  will be issued in
exchange for the Global Notes.


                                      -120-

<PAGE>



                              PLAN OF DISTRIBUTION

     Based on  interpretations  of the  staff  of the  Division  of  Corporation
Finance  of the  Commission  set  forth in  no-action  letters  issued  to third
parties,  the Company believes that,  except as described below,  Exchange Notes
issued  pursuant to the  Exchange  Offer may be offered  for resale,  resold and
otherwise   transferred  by  the  respective  holders  thereof  without  further
compliance with the  registration  and prospectus  delivery  requirements of the
Securities  Act,  provided  that (i) such  Exchange  Notes are  acquired  in the
ordinary  course  of  such  holder's  business  and  (ii)  such  holder  is  not
participating,  and has no  arrangement  or  understanding  with any  person  to
participate,  in a distribution  of the Exchange  Notes. A holder of Outstanding
Notes that is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act or that is a broker-dealer  that purchased  Outstanding Notes
from the Company to resell pursuant to an exemption from registration  under the
Securities  Act (a)  cannot  rely on such  interpretations  by the  staff of the
Division of Corporation Finance of the Commission,  (b) will not be permitted or
entitled to tender such  Outstanding  Notes in the  Exchange  Offer and (c) must
comply  with  the  registration  and  prospectus  delivery  requirements  of the
Securities Act in connection with any sale or other transfer of such Outstanding
Notes unless such sale or transfer is made  pursuant to an  exemption  from such
requirements.  In  addition,  any holder who  tenders  Outstanding  Notes in the
Exchange  Offer with the  intention  or for the  purpose of  participating  in a
distribution  of the Exchange  Notes cannot rely on such  interpretation  by the
staff of the  Commission  and must comply with the  registration  and prospectus
delivery  requirements  of the  Securities  Act in  connection  with a secondary
resale   transaction.   Unless  an  exemption  from  registration  is  otherwise
available,  any such  resale  transaction  should  be  covered  by an  effective
registration  statement containing selling security holders information required
by Item 507 of Regulation  S-K under the  Securities  Act. To date, the staff of
the  Commission  has taken the position that a  broker-dealer  that has acquired
securities in exchange for securities  that were acquired by such  broker-dealer
as a result of market-making  activities or other trading activities may fulfill
its  prospectus  delivery  requirements  with  the  prospectus  contained  in an
exchange offer registration statement.

     Each holder of  Outstanding  Notes who wishes to exchange  its  Outstanding
Notes for Exchange  Notes in the Exchange Offer will be required to make certain
representations to the Company set forth in "The Exchange Offer - Acceptance for
Exchange and Issuance of Exchange  Notes."  

     Each  broker-dealer  that  receives  Exchange  Notes  for its  own  account
pursuant  to the  Exchange  Offer  must  acknowledge  that  it  will  deliver  a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. This Prospectus may be used by a broker-dealer in
connection  with resales of Exchange Notes received in exchange for  Outstanding
Notes where such  Outstanding  Notes were acquired as a result of  market-making
activities or other trading activities. The Company has agreed that, starting on
the date the Registration  Statement is declared  effective and generally ending
on the close of business on the 180th day following such date, it will make this
Prospectus  available to any  broker-dealer  for use in connection with any such
resale. See "The Exchange Offer - Resales of Exchange Notes."


                                      -121

<PAGE>
         The Company  will not receive  any  proceeds  from any sale of Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their own
account  pursuant to the Exchange  Offer may be sold from time to time in one or
more transactions in the  over-the-counter  market, in negotiated  transactions,
through the writing of options on the Exchange  Notes or a  combination  of such
methods of resale,  at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated  prices.  Any such resale
may be made directly to  purchasers or to or through  brokers or dealers who may
receive  compensation  in the form of commissions  or concessions  from any such
broker-dealer   and/or  the   purchasers  of  any  such  Exchange   Notes.   Any
broker-dealer  that resells  Exchange Notes that were received by it for its own
account   pursuant  to  the  Exchange  Offer  and  any  broker  or  dealer  that
participates  in a  distribution  of such Exchange  Notes may be deemed to be an
"underwriter"  within the meaning of the  Securities Act and any profit from any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting  compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.

     In  general,  for a period  of 180  days  after  the date the  Registration
Statement is declared  effective,  the Company  will  promptly  send  additional
copies of this  Prospectus and any amendment or supplement to this Prospectus to
any  Participating  Broker-Dealer  that requests such documents in the Letter of
Transmittal.  The Company and the  Subsidiary  Guarantors  has agreed to pay the
expenses incident to the Exchange Offer, other than any discounts or commissions
incurred upon the sale of the Notes.  The Company and the Subsidiary  Guarantors
will  indemnify  the  holders of the  Outstanding  Notes and each  Participating
Broker-Dealer selling Exchange Notes during a period generally not to exceed 180
days after the effective  date of the  Registration  Statement  against  certain
liabilities, including liabilities under the Securities Act.

                                     -122-
<PAGE>

                                  LEGAL MATTERS

         The validity of the Exchange Notes issued in the Exchange Offer will be
passed upon for the Company by Thompson & Knight, P.C., Dallas, Texas.

                                    EXPERTS

     The  consolidated  balance  sheet of Magnum  Hunter  Resources,  Inc. as of
December  31,  1996  and the  related  consolidated  statements  of  operations,
stockholders' equity and cash flows for the year then ended,  included elsewhere
and incorporated by reference in this Prospectus,  have been audited by Deloitte
& Touche LLP, independent  auditors, as stated in their report which is included
and  incorporated by reference herein and have been so included in reliance upon
the report of such firm given upon their  authority as experts in accounting and
auditing.

     The financial statements of the Company as of December 31, 1995 and for the
year  then  ended  have  been  audited  by Hein +  Associates  LLP,  independent
certified  public  accountants,  as stated in their report which is included and
incorporated by reference  herein and have been so included in reliance upon the
report of such firm given  upon their  authority  as experts in  accounting  and
auditing.  The change in  accountants  from Hein + Associates  LLP to Deloitte &
Touche LLP was  effective  for fiscal 1996 and was not due to any  disagreements
between the Company and Hein + Associates LLP.

     The historical  summaries of revenues and direct operating  expenses of the
Permian Basin  Properties for the years ended  December 31, 1996,  1995 and 1994
and the Properties Acquired June 28, 1996 have been audited by Hein + Associates
LLP, independent  certified public accountants,  as stated in their reports, the
first of which is included and  incorporated by reference  herein and the second
of which is  incorporated  by  reference  herein  and have been so  included  in
reliance  upon the report of such firm given upon their  authority as experts in
accounting and auditing.

                                     
         The reference to the report of Ryder Scott Co.,  independent  petroleum
consultants,  contained herein  estimating the Proved Reserves,  future net cash
flows from such Proved  Reserves and the SEC PV-10 of such estimated  future net
cash flows for the Permian  Basin  Properties as of December 31, 1996 is made in
reliance  upon the  authority  of such firm as an expert  with  respect  to such
matters.

         The  reference  to the  report of  Gaffney,  Cline &  Associates  Inc.,
independent  petroleum  consultants,  contained  herein  estimating  the  Proved
Reserves,  future net cash flows from such Proved  Reserves and the SEC PV-10 of
such estimated  future net cash flows for the Company's  properties  (other than
certain west Texas  properties) as of December 31, 1996 is made in reliance upon
the authority of such firm as experts with respect to such matters.

         The reference to the report of Glenn  Harrison  Petroleum  Consultants,
Inc.,  independent  petroleum  consultants,   contained  herein  estimating  the
Company's Proved  Reserves,  future net cash flows from such Proved Reserves and
the SEC PV-10 of such  estimated  future net cash flows for  certain  west Texas
properties  as of December  31, 1996 is made in reliance  upon the  authority of
such firm as experts with respect to such matters.

         The reference to the reports of James J. Weisman,  Jr., an  independent
petroleum  engineer,  contained  herein auditing the Company's  estimates of its
Proved Reserves,  the estimated future net cash flows from such Proved Reserves,
and the SEC PV-10 of such  estimated  future net cash flows as of  December  31,
1995 and estimating Hunter's Proved Reserves,  the estimated net cash flows from
such Proved Reserves, and the SEC PV-10 of such


                                      -123-

<PAGE>



future net cash  flows as of  December  31,  1994 is made in  reliance  upon the
authority of such individual as an expert with respect to such matters.

         The reference to the report of Hensley Consultants,  Inc.,  independent
petroleum   consultants,   contained  herein  estimating  the  Company's  Proved
Reserves, the estimated future net cash flows from such Proved Reserves, and the
SEC PV-10 of such  estimated  future net cash flows as of  December  31, 1994 is
made in reliance upon the authority of such firm as experts with respect to such
matters.

                              AVAILABLE INFORMATION

         The  Company  is  subject  to  the  informational  requirements  of the
Exchange Act and, in accordance therewith,  files reports,  proxy statements and
other information with the Commission.  Such reports, proxy statements and other
information  can be inspected and copied at the office of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W.,  Washington,  D.C. 20549, as well
as the regional offices of the Commission at Citicorp  Center,  500 West Madison
Street, Suite 1400, Chicago,  Illinois 60661, and Seven World Trade Center, 13th
Floor,  New York, New York 10048.  Copies of such information can be obtained by
mail from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington,  D.C. 20549, at prescribed rates.  Additionally,
the Commission maintains a web site that contains reports,  proxy statements and
other  information  regarding  registrants  that  file  electronically  with the
Commission. The address of the Commission's web site is http://www.sec.gov.  The
Company's  Common Stock is listed on the American  Stock  Exchange and copies of
reports,  proxy statements and other information concerning the Company also can
be inspected at the offices of the American  Stock  Exchange,  86 Trinity Place,
New York, New York 10006-1881.

     In addition,  the Company has agreed that, whether or not it is required to
do so by the rules and regulations of the  Commission,  for so long as any Notes
remain  outstanding,  it will  furnish to the  holders of the Notes and,  to the
extent  permitted by applicable law or regulation,  file with the Commission (i)
all  quarterly  and annual  financial  information  that would be required to be
contained  in a  filing  with the  Commission  on Forms  10-Q and 10-K  (or,  if
permitted,  Forms 10-QSB and 10-KSB) if the Company  were  required to file such
Forms,  including for each a "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereof by the Company's independent certified public accountants
and (ii) all  reports  that would be required to be filed on Form 8-K if it were
required  to file such  reports.  In  addition,  for so long as any of the Notes
remain outstanding,  the Company has agreed to make available to any prospective
purchaser of the Notes or beneficial  owner of the Notes, in connection with any
sale thereof,  the information  required by Rule 144A(d)(4) under the Securities
Act. Any such request should be directed to the Company at the address and phone
number set forth below.

         This Prospectus  constitutes a part of a registration statement on Form
S-4 (the  "Registration  Statement")  filed by the Company  with the  Commission
under the Securities  Act. This  Prospectus does not contain all the information
set forth in the Registration  Statement,  certain parts of which are omitted in
accordance with the rules and  regulations of the  Commission,  and reference is
hereby made to the Registration  Statement and to the exhibits  relating thereto
for  further  information  with  respect  to the  Company  and  the  Notes.  Any
statements  contained  herein  concerning the provisions of any document are not
necessarily complete, and, in each instance, reference is made to a copy of such
document filed as an exhibit to the  Registration  Statement or otherwise  filed
with the  Commission.  Each such  statement is qualified in its entirety by such
reference.

         The Company, a corporation  organized under the laws of Nevada, has its
principal  executive offices located at 600 East Las Colinas Blvd.,  Suite 1200,
Irving, Texas 75039; its telephone number is (972) 401-0752.



                                      -124-

<PAGE>



                 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

         The  following  documents  and  information  heretofore  filed with the
Commission  by the  Company  are  hereby  incorporated  by  reference  into this
Prospectus:

1.       The Company's Annual Report on Form 10-KSB for the year ended December
         31, 1996, as amended by Form 10-KSB/A filed June 27, 1997;

2.       An amendment to the Company's Quarterly Report on Form 10-QSB/A for the
         quarter ended September 30, 1996, filed on March 18, 1997;

3.       The Company's  Quarterly Report on Form  10-QSB for the quarters  ended
         March 31, 1997, as amended by Form 10-QSB/A filed on  May 21, 1997, and
         June 30, 1997; and

4.       The  Company's  Current  Reports  on Form 8-K dated  June 28,  1996 (as
         amended by Forms 8-K/A  filed on August 13, 1996 and August 16,  1996),
         December 23, 1996,  January 20, 1997 (as amended by Form 8-K/A filed on
         February 5, 1997), February 28, 1997, May 20, 1997 and May 29, 1997.

         All documents  subsequently  filed by the Company  pursuant to Sections
13(a),  13(c),  14 or 15(d) of the  Securities  Exchange Act of 1934, as amended
(the "Exchange  Act"),  prior to the termination of the Offering shall be deemed
to be  incorporated  by reference  into this  Prospectus and to be a part hereof
from the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded  for purposes of this  Prospectus to the extent that a
statement  contained  herein or in any other  subsequently  filed document which
also  is or is  deemed  to be  incorporated  by  reference  herein  modifies  or
supersedes such statement.  Any statement so modified or superseded shall not be
deemed,  except as so  modified  or  superseded,  to  constitute  a part of this
Prospectus.

         The Company will provide  without charge to each person,  including any
beneficial  owner, to whom this Prospectus is delivered,  on the written or oral
request of any such person, a copy of any and all of the documents  incorporated
by  reference  herein  (other  than  exhibits  to such  documents  which are not
specifically incorporated by reference in such documents).  Written requests for
such copies should be directed to the Company, 600 East Las Colinas Blvd., Suite
1200,  Irving,  Texas 75039,  Attention:  Morgan F.  Johnston,  Vice  President,
General  Counsel  and  Secretary.  Telephone  requests  may be  directed  to Mr.
Johnston at (972) 401-0752.




                                      -125-

<PAGE>



                                    GLOSSARY

         The terms defined in this glossary are used throughout this Prospectus.

 Bbl.                               One stock tank barrel, or 42 U.S. gallons 
                                    liquid volume, used herein in reference to
                                    oil or other liquid hydrocarbons.

 Bbl/d.                             One billion cubic feet of natural gas per 
                                    day.

 Bcf.                               One billion cubic feet of natural gas.

 Bcfe.                              One billion cubic feet of natural gas
                                    equivalents converting one Bbl of oil to six
                                    Mcf of natural gas.

 Btu.                               British Thermal Unit, the quantity of heat 
                                    required to raise one pound of water by one
                                    degree Fahrenheit.

 Developed Acreage.                 The number of acres which are allocated or 
                                    assignable to producing wells or wells
                                    capable of production.

 Development Well.                  A well drilled within the proved area of an
                                    oil or gas reservoir to the depth of a
                                    stratigraphic horizon known to be productive

 Dry Hole.                          A well found to be incapable of producing 
                                    either oil or natural gas in sufficient
                                    quantities to justify completion as an oil
                                    or natural gas well.

 Exploratory Well.                  A well drilled to find and produce oil or
                                    gas in an unproved area, to find a new
                                    reservoir in a field previously found to be
                                    productive of oil or gas in another 
                                    reservoir, or to extend a known reservoir.

 Gross acres or gross  wells.       The  total  acres or wells,  as the case may
                                    be, in which a working interest is owned.

 In-fill Well.                      A well drilled between known producing 
                                    wells to better exploit the reservoir.

 MBbl.                              One thousand barrels of oil or other liquid
                                    hydrocarbons.

 Mcf.                               One thousand cubic feet of natural gas.

 Mcfe.                              One thousand cubic feet of natural gas 
                                    equivalents converting one Bbl of oil to six
                                    Mcf of natural gas.

 Mcfe/d.                            Mcfe per day.

 MMBbl.                             One million barrels of oil or other liquid 
                                    hydrocarbons.

 MMBtu.                             One million Btu.

 MMcf.                              One million cubic feet of natural gas.

 MMcfe.                             One million cubic feet of natural gas
                                    equivalents converting one Bbl of oil to six
                                    Mcf of natural gas.



                                      -126-

<PAGE>



 MMcf/d.                            One million cubic feet of natural gas per
                                    day.

 Natural Gas Equivalent.            The amount of natural gas having the same
                                    Btu content as a given quantity of oil,
                                    with one Bbl of oil being converted to six 
                                    Mcf of natural gas.

 Net Acres or Net Wells.            The sum of the fractional working interests
                                    owned in gross acres or gross wells.

 Net Oil and Gas Sales.             Oil and natural gas sales less oil and 
                                    natural gas production expenses.

 Net Revenue  Interest.             A share  of the  Working Interest  that does
                                    not bear  any  portion  of  the  expense  of
                                    drilling  and  completing  a  well  and that
                                    represents the holder's share of  production
                                    after satisfaction of all royalty,overriding
                                    royalty, oil payments and other nonoperating
                                    interests.

Productive Well.                    A well that is producing oil or natural gas
                                    or that is capable of production in
                                    paying quantities.

Proved Developed
Non-Producing Reserves.             Reserves that consist of (i) proved reserves
                                    from wells which have been completed and 
                                    tested but are not producing due to lack of
                                    market or minor completion problems which 
                                    are expected to be corrected and (ii) proved
                                    reserves currently behind the pipe in 
                                    existing wells and which are expected to be
                                    productive due to both the well log 
                                    characteristics and analogous production in
                                    the immediate vicinity of the wells.

Proved Developed
Producing Reserves.                 Reserves that can be expected to be
                                    recovered from currently producing zones
                                    under the continuation of present operating 
                                    methods.

Proved Developed Reserves.          Reserves that can be expected to be 
                                    recovered through existing wells with 
                                    existing equipment and operating methods.

Proved Reserves.                    The estimated  quantities of oil,
                                    natural gas and  natural  gas liquids  which
                                    geological and engineering  data demonstrate
                                    with reasonable  certainty to be recoverable
                                    in future years from known  reservoirs under
                                    existing economic and operating conditions.

Proved Undeveloped  Reserves.       Proved reserves that are expected to be 
                                    recovered from new wells on undrilled 
                                    acreage, or from existing wells
                                    where  a  relatively  major  expenditure  is
                                    required for recompletion.


                                     -127-
<PAGE>

 Recompletion.                      The completion for production of an existing
                                    wellbore in a different formation or
                                    producing horizon from that in which the 
                                    well was previously completed.

 Reserve Life.                      The  estimated  productive  life of a
                                    proved  reservoir  based  upon the  economic
                                    limit    of   such    reservoir    producing
                                    hydrocarbons in paying  quantities  assuming
                                    certain  price  and  cost  parameters.   For
                                    purposes of this Prospectus, reserve life is
                                    calculated  by dividing the Proved  Reserves
                                    (on an Mcfe  basis) at the end of the period
                                    by projected production volumes for the next
                                    12 months.

 Royalty Interest.                  An interest in an oil and natural gas 
                                    property entitling the owner to a share of 
                                    oil and natural gas production free of cost
                                    of production.

 SEC PV-10.                         The present  value  of proved reserves is an
                                    estimate  of the  discounted future net cash
                                    flows  from   each   of  the  properties  at
                                    December  31,   1996,    or   as   otherwise
                                    indicated. Net  cash  flow is defined as net
                                    revenues  less,  after  deducting production
                                    and ad valorem taxes,  future  capital costs
                                    and operating expenses, but before deducting
                                    federal  income  taxes. As required by rules
                                    of the Commission, the future net cash flows
                                    have been  discounted  at  an annual rate of
                                    10% to determine their "present value."  The
                                    present  value  is  shown  to  indicate  the
                                    effect of time on the value of  the  revenue
                                    stream and should not  be construed as being
                                    the fair market value of  the properties. In
                                    accordance with Commission rules,  estimates
                                    have been made using  constant  oil  and gas
                                    prices and operating  costs, at December 31,
                                    1996, or as otherwise indicated.

Undeveloped Acreage.                Lease  acreage on which wells have
                                    not been  drilled  or  completed  to a point
                                    that   would   permit  the   production   of
                                    commercial quantities of oil and natural gas
                                    regardless of whether such acreage  contains
                                    proved reserves.

 Working Interest.                  The operating interest that gives
                                    the owner the  right to drill,  produce  and
                                    conduct operating activities on the property
                                    and a share of  production,  subject  to all
                                    royalties,  overriding  royalties  and other
                                    burdens  and to all  costs  of  exploration,
                                    development  and operations and all risks in
                                    connection therewith.


                                      -128-

<PAGE>

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



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                                                             Page
Audited Financial Statements
   Independent Auditors' Report-Deloitte & Touche LLP.....................................................       F-2
   Independent Auditors' Report-Hein + Associates LLP.....................................................       F-3
   Consolidated Balance Sheets as of December 31, 1996 and 1995...........................................       F-4
   Consolidated Statements of Operations for the years ended December 31, 1996 and 1995...................       F-6
   Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996 and 1995.........       F-7
   Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995...................       F-9
   Notes to Consolidated Financial Statements.............................................................      F-10
   Supplemental Information on Oil and Gas Producing Activities (Unaudited)...............................      F-27
Unaudited Consolidated Financial Statements
   Consolidated Balance Sheet as of June 30, 1997 (Unaudited) ...........................................       F-30
   Consolidated Statements of Operations for the three months ended June 30, 1997 and 1996
      and the six months ended June 30, 1997 and 1996 (Unaudited).........................................      F-31
   Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996
      (Unaudited).........................................................................................      F-32
   Notes to Consolidated Financial Statements (Unaudited).................................................      F-33
Financial Statements of Permian Basin Properties
   Independent Auditors' Report-Hein + Associates LLP.....................................................      F-35
   Historical Summaries of Revenues and Direct Operating Expenses of the Permian Basin Properties
      for the years ended December 31, 1996, 1995 and 1994 and for the four month periods ended April 30,
      1997 and 1996.......................................................................................      F-36
   Notes to Historical Summaries of Revenues and Direct Operating Expenses for the years ended
      December 31, 1996, 1995 and 1994 and for the four month periods ended April 30, 1997 and 1996.......      F-37



</TABLE>

                                       F-1

<PAGE>



                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Magnum Hunter Resources, Inc.

We have audited the  accompanying  consolidated  balance  sheet of Magnum Hunter
Resources,  Inc.  and  Subsidiaries  as of December  31,  1996,  and the related
consolidated 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
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our 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 Magnum Hunter Resources,  Inc.
and  Subsidiaries  as of December 31, 1996, and the results of their  operations
and their cash  flows for the year then  ended,  in  conformity  with  generally
accepted accounting principles.

Deloitte & Touche LLP

Dallas, Texas
March 14, 1997 (April 30, 1997 as to Note 16)




                                       F-2

<PAGE>



                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Magnum Hunter Resources, Inc.

We have audited the  accompanying  consolidated  balance  sheet of Magnum Hunter
Resources,  Inc.  (formerly  Magnum  Petroleum,  Inc.)  and  Subsidiaries  as of
December 31, 1995, and the related consolidated  statements of operations,  cash
flows,  and  stockholders'  equity  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
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our 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 Magnum Hunter Resources,  Inc.
and  Subsidiaries  as of December 31, 1995, and the results of their  operations
and their cash  flows for the year then  ended,  in  conformity  with  generally
accepted accounting principles.

As  discussed in Note 2 to the  financial  statements,  the Company  changed its
method of accounting  for oil and gas producing  operations  from the successful
efforts method to the full cost method.

HEIN + ASSOCIATES LLP

Dallas, Texas
April 3, 1996




                                       F-3

<PAGE>

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                            (in thousands of dollars)
<TABLE>
<CAPTION>
                                                                                                December 31,     December 31,
                                                                                                   1996              1995
                                                                                           -----------------------------------------
 <S>                                                                                         <C>                   <C>
                                         ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                                             $         1,687       $      1,544
     Securities available for sale                                                                     233                101
     Accounts receivable:
     Trade, net of allowance of $132 and $134                                                        4,372              1,247
     Due from affiliates                                                                               241                116
     Notes receivable from affiliate                                                                   264                121
     Current portion of long-term note receivable                                                      198                201
     Prepaid and other                                                                                  52                 22
                                                                                           -----------------------------------------
          TOTAL CURRENT ASSETS                                                                       7,047              3,352
                                                                                           -----------------------------------------
PROPERTY, PLANT AND EQUIPMENT
     Oil and gas properties, full cost method:
          Unproved                                                                                     459                843
          Proved                                                                                    70,575             36,257
     Pipelines                                                                                       7,102              1,087
     Other property                                                                                    381                146
                                                                                            ---------------------------------------
           TOTAL PROPERTY, PLANT AND EQUIPMENT                                                      78,517             38,333
     Accumulated depreciation, depletion and impairment                                             (4,869)            (1,928)
                                                                                             ---------------------------------------
          NET PROPERTY, PLANT AND EQUIPMENT                                                         73,648             36,405
                                                                                             ---------------------------------------

OTHER ASSETS

     Deposits and other assets                                                                        645                118
     Long-term notes receivable, net of imputed interest                                            1,732                190
                                                                                             ---------------------------------------
         TOTAL ASSETS                                                                         $    83,072           $ 40,065
                                                                                             =================      ==============
The accompanying notes are an integral part of these consolidated financial statements.

                                      F-4

<PAGE>
                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS (continued)
                            (in thousands of dollars)


                          LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Trade accounts payable and accrued liabilities                                           $       3,698       $      1,283
    Gas imbalance payable                                                                              242
    Dividends payable                                                                                   22                177
    Suspended revenue payable                                                                          784                794
    Current maturities of long-term debt                                                                22              2,014
                                                                                            ----------------------------------------
          TOTAL CURRENT LIABILITIES                                                                  4,768              4,268
                                                                                            ----------------------------------------
LONG-TERM LIABILITIES

   Long-term debt, less current maturities                                                          38,744              7,598
   Production payment liability                                                                        937                288
   Other                                                                                               -                  290
   Deferred income taxes                                                                             3,469              3,125

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred stock - $.001 par value; 10,000,000 shares authorized
          216,000 designated as Series A; 80,000 and 80,000 issued and outstanding, respectively,
                 liquidation amount $0                                                                 -                   -
          925,000 designated as Series B; none and 62,050 issued and outstanding, respectively         -                   -
          625,000 designated as Series C; none and 625,000 shares issued and outstanding,
                respectively                                                                           -                    1
          1,000,000 designated as 1996 Series A Convertible ; 1,000,000 and none issued and
                outstanding, respectively, liquidation amount $10,000,000                                1                 -
       Common stock - $.002 par value; 50,000,000 shares authorized;
         14,252,822 issued and 11,598,183 shares issued and outstanding, respectively                   29                 23
       Additional paid-in capital                                                                   40,216             29,660 
       Accumulated deficit                                                                          (5,142)            (5,245)
       Unrealized gain on investments                                                                   51                 57
                                                                                           ----------------------------------------
                                                                                                    35,155             24,496
      Treasury stock (544,495 shares of common stock)                                                   (1)                -
                                                                                           -----------------------------------------
         TOTAL STOCKHOLDERS' EQUITY                                                                 35,154             24,496

                   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                 $     83,072       $     40,065
                                                                                              =================     ==============

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




                                      F-5
 </TABLE>

                                  

<PAGE>
                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (in thousands, except for per share amounts)
<TABLE>
<CAPTION>
                                                                                     For the Years Ended
                                                                                        December 31,
                                                                                ---------------------------
                                                                                  1996               1995
                                                                                ---------------------------
 <S>                                                                               <C>             <C>

OPERATING REVENUE
     Oil and gas sales                                                          $  10,248       $     617
     Gas gathering and marketing                                                    5,768               -
     Oil field services and commissions                                               396              32
                                                                                ---------------------------
          TOTAL OPERATING REVENUE                                                  16,412             649
                                                                                ---------------------------
OPERATING COSTS AND EXPENSES
     Oil and gas production                                                         4,390             268
     Gas gathering and marketing                                                    4,708               -
     Costs related to other services                                                  267              26
     Depreciation and depletion                                                     2,951             421
     General and administrative                                                     1,225             977
                                                                                ---------------------------
         TOTAL OPERATING COSTS AND EXPENSES                                        13,541           1,692
                                                                                ---------------------------
OPERATING PROFIT (LOSS)                                                             2,871          (1,043)

OTHER INCOME                                                                          344              77
INTEREST EXPENSE                                                                   (2,394)             (2)
                                                                                ---------------------------
NET INCOME (LOSS) BEFORE INCOME TAXES                                                 821            (968)

     Provision for deferred income taxes                                             (312)             -
                                                                                ---------------------------
NET INCOME (LOSS)                                                                     509            (968)


DIVIDENDS APPLICABLE TO PREFERRED SHARES                                             (406)           (617)
                                                                                ---------------------------
INCOME (LOSS) APPLICABLE TO COMMON SHARES                                       $     103       $  (1,585)
                                                                                =============   ===========

INCOME (LOSS) PER COMMON SHARE                                                  $    0.01      $   (0.28)
                                                                                =============   ===========

COMMON SHARES USED IN PER SHARE CALCULATION                                        12,485,893     5,606,669
                                                                                =============   ===========

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

                                      F-6
</TABLE>

<PAGE>
                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
                            (in thousands of dollars)
<TABLE>
<CAPTION>

                                                                                                                 Additional
                                                       Preferred  Stock      Common    Stock   Treasury   Stock   Paid-In
                                                       Shares     Amount     Shares   Amount    Shares    Amount  Capital
                                                       -----------------------------------------------------------------------------
<S>                                                    <C>        <C>       <C>       <C>        <C>      <C>    <C>
Balance at December 31, 1994                            645,775  $     1    4,537,045     $9                        $12,606
                                                       -----------------------------------------------------------------------------

Conversion of preferred stock to common stock           (11,300)      -       28,900       -
Issuance and costs from exercise of warrants             20,750       -      833,324       2                          2,841
Issuance of Series C preferred stock                                                                                    249
Issuance of common stock to acquire oil and gas                                                                      
     properties                                                              386,615       1                          1,378
Issuance of common stock for services                                        602,222       1                          1,370
Issued to directors for collateral                                           125,000       -
Sale of investment shares
Payments received on receivable from stockholders       
Acquisition of Hunter Resources, Inc. for Series C
     preferred stock and common stock                   111,825      -     5,085,077      10                         11,216
Dividends declared on preferred stock
Net loss from operations
Unrealized gain on investments

                                                       -----------------------------------------------------------------------------
Balance at December 31, 1995                            767,050   $    1  11,598,183     $23      -        -        $29,660
                                                       -----------------------------------------------------------------------------
Conversion of preferred stock to common stock           (658,934)     (1)  1,821,638       4                             (3)
Redemption of 28,116 shares of Series C preferred stock  (28,116)                                                      (294)
Issuance of 1996 Series A convertible preferred stock,
     net of offering costs                             1,000,000       1                                              9,785
Shares issued as collateral, returned and held
     as treasury stock                                                       610,170        1   (610,170)    (1)         (1)
Exercise of employees' common stock options                                    -            -     12,258      -           9
Issuance of common stock to acquire oil and gas properties                   188,410        1     51,300      -         938
Sale of investment shares
Dividends declared on preferred stock                                         34,421        -      2,117      -         122
Net income from operations
Unrealized gain on investments


                                                       -----------------------------------------------------------------------------
Balance at December 31, 1996                           1,080,000   $  1   14,252,822   $  29   (544,495)    $(1)    $40,216
                                                       =========   ====== ==========   ======= =========    =====  ========



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

                                      F-7
<PAGE>
                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
           FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (continued)
                           (in thousands of dollars)
<TABLE>
<CAPTION>
                                                                                                   Unrealized Gain
                                                    Deferred Costs                  Receivable      (Loss) On
                                                    of Warrant         Accumulated  from            Investments
                                                    Offerings          Deficit      Stockholder
                                                  -------------------------------------------------------------
<S>                                                   <C>                 <C>           <C>             <C>
Balance at December 31, 1994                        $(240)              $(3,659)      $(63)            $ (9)
                                                  -------------------------------------------------------------

Conversion preferred stock to common stock
Issuance and costs from exercise of warrants          240
Issuance of Series C preferred stock
Issuance of common stock for services and
     to acquire oil and gas properties
Issued to directors for collateral
Sale of investment shares                                                                                9
Payments received on receivable from stockholders                                        63
Acquisition of Hunter Resources, Inc. for Series C
     preferred stock and common stock
Dividends declared on preferred stock                                      (618)
Net income from operations                                                 (968)
Unrealized gain on investments                                                                          57
                                                 --------------------------------------------------------------
Balance at December 31, 1995                      $   -                 $(5,245)       $ -            $ 57
                                                 --------------------------------------------------------------

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


                                                --------------------------------------------------------------
Balance at December 31, 1996                      $   -               $(5,142)          $  -         $ 51
                                                 =========             =======         =========     =====


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

</TABLE>


                                       F-8
<PAGE>

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (in thousands of dollars)
<TABLE>
<CAPTION>
                                                                                          For the Years Ended
                                                                                               December 31,
                                                                                   ------------------------------
                                                                                        1996            1995
                                                                                   ------------------------------
<S>                                                                                   <C>               <C>
CASH FLOW FROM OPERATING ACTIVITIES:
   Net income (loss)                                                               $   509            $ (968)
   Adjustments to reconcile net income (loss) to cash provided by (used for)
          operating activities:
      Depreciation and depletion                                                     2,951               421
      Deferred income taxes                                                            312                 -
      Common stock issued for services                                                   -               102
      (Gain) Loss on sale of assets                                                   (143)               76
      Other                                                                             32                15
      Changes in certain assets and liabilities:
        Accounts receivable                                                         (3,250)              (37)
        Costs in excess of billings on uncompleted drilling contracts                    -                55
        Deposits and other assets                                                      (30)                -
        Accounts payable and accrued liabilities                                     2,647              (513)
                                                                                   ------------------------------
Net Cash Provided By (Used By) Operating Activities                                $ 3,028            $ (849)
                                                                                   ------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sale of assets                                                        318                88
   Additions to property and equipment                                             (41,471)           (1,244)
   Increase in deposits and other assets                                              (527)                -
   Loan made for promissory note receivable                                            (58)             (121)
   Payments received on promissory notes receivable                                      -               334
   Purchase of securities available for sale                                             -               (30)
   Obligations and property acquisitions funded in Hunter acquisition                    -            (1,034)
                                                                                   ------------------------------
   Net Cash Used By Investing Activities                                           (41,738)           (2,007)
                                                                                   ------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of long-term debt and production payment                  57,262                 -
   Payments of principal on long-term debt and production payment                  (27,459)             (186)
   Payments on other liabilities                                                      (290)                -
   Proceeds from issuance of common and preferred stock,
           net of offering costs                                                     9,796             3,332
   Redemption of preferred stock                                                      (295)                -
   Payments received on notes receivable                                               277                62
   Increase in segregated funds for payments of notes payable                            -               130
   Dividends paid                                                                     (438)             (583)
                                                                                  -------------------------------

   Net Cash Provided By Financing Activities                                        38,853             2,755
                                                                                  -------------------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   143              (101)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                     1,544             1,645
                                                                                   ------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                        $  1,687         $   1,544
                                                                                  ============     ==========



</TABLE>


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

                                      F-9

                           
<PAGE>



                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Organization and Nature of Operations

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

 Merger and Consolidation

         The accompanying consolidated financial statements include the accounts
of the  Company  and its  existing  wholly-owned  subsidiaries,  Gruy  Petroleum
Management  Company,  Hunter Gas Gathering,  Inc.,  Inesco  Corporation,  Magnum
Hunter Production, Inc., Midland Hunter Petroleum Limited Liability Company, and
SPL  Gas  Marketing,   Inc.  and  its  51%  owned  subsidiary,   Hunter  Butcher
International  Limited Liability Company. As more fully discussed in Note 3, the
Company  entered  into an amended  definitive  agreement on December 19, 1995 to
acquire  all of the  assets,  subject  to the  existing  liabilities,  of Hunter
Resources,  Inc.  ("Hunter").  The  purchase was  accounted  for by the purchase
method  effective  December 31, 1995.  As such,  the  accompanying  consolidated
financial  statements  for 1995  include the balance  sheet  accounts of Hunter.
However, the Statement of Operations for 1995 does not include the operations of
Hunter  for  that  fiscal  year.  All  significant   intercompany  accounts  and
transactions  have been eliminated in consolidation.  Certain  reclassifications
have been made to the  consolidated  financial  statements  of the prior year to
conform with the current presentation.

 Cash and Cash Equivalents

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

 Investments

         In  1994,  the  Company  adopted  Statement  of  Financial   Accounting
Standards  No.  115,  Accounting  for  Certain  Investments  in Debt and  Equity
Securities.  Under this standard, the equity securities held by the Company that
have  readily   determinable  fair  values  are  classified  as  current  assets
available-for-sale  and are measured at fair value.  Unrealized gains and losses
for these  investments  are reported as a separate  component  of  stockholders'
equity. In 1994, investments in equity securities for which sale within one year
was  restricted  by  governmental  securities  regulations  were  classified  as
non-current assets.

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




                                      F-10

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

         At December 31, 1995, the Company's  available for sale  securities had
an amortized cost basis of $44,440, gross unrealized gains reported in equity of
$57,200 and a fair market value of $101,640.  During 1995,  securities were sold
for gross proceeds of $73,083 and the Company realized a gain of $19,370.

 Suspended Revenues

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

 Oil and Gas Producing Operations

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

         All  capitalized  costs  of  oil  and  gas  properties,  including  the
estimated  future  costs  to  develop  proved  reserves,  are  amortized  on the
unit-of-production  method using  estimates of proved  reserves.  Cost  directly
associated  with the  acquisition  and  evaluation  of unproved  properties  are
excluded from the amortization base until the related  properties are evaluated.
Such  unproved  properties  are  assessed  periodically  and any  provision  for
impairment is transferred to the full-cost  amortization  base. Sales of oil and
gas  properties  are credited to the full-cost pool unless the sale would have a
significant  effect on the  amortization  rate.  Abandonments  of properties are
accounted for as adjustments to capitalized  costs with no loss recognized.  The
Company's unproved properties excluded from the amortization base were $459,000,
$843,000, and $700,000 at December 31, 1996, 1995, and 1994, respectively. These
costs arose in 1995 and 1994 and are  expected to be evaluated  and  transferred
into the amortization base over the next twelve months.

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

 Drilling Operations

         Fees from  fixed-price  contracts with other working interest owners to
drill, complete and place oil and gas wells into production, less related costs,
are accounted for as adjustments to oil and gas properties.

 Pipelines

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

 



                                      F-11

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Property

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

Other Oil and Gas Related Services

         Other oil and gas related  services consist largely of fees earned from
the Company's  salt water  disposal  facility.  Such fees are  recognized in the
month the disposal service is provided.

 Impact of Recently Issued Pronouncements

         The Financial Accounting Standards Board has issued Statement  No. 121,
("SFAS No. 121") "Accounting for Impairments of Long-Lived Assets and Assets  to
be Disposed of", and Statement No. 123,"Accounting For Stock-Based Compensation"
 ("SFAS No. 123"). The Company adopted the provisions of SFAS No.121 in 1996 but
it did not  have  any effect on the Company's consolidated financial statements,
and it adopted the disclosures only portion of  SFAS No. 123 as it  continued to
follow the  provisions of APB No.  25 which is  the intrinsic  value  method  of
accounting  for  stock-based  compensation. See  Note 15  which  follows for the
effect of stock based compensation on a pro forma basis.

 Income Taxes

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

 Income or Loss Per Common Share

         Income or loss per common share is based on the weighted average number
of shares of common stock outstanding.  Convertible securities and warrants were
anti-dilutive  at December 31, 1996, 1995, and 1994 and were not included in the
calculation of income or loss per common share.

 Deferred Cost of Warrant Exercise Offering

         The  Company  incurred  costs  to  update  its  registration  statement
relating to Series C preferred  stock that is convertible  into common stock and
relating to common  stock  purchase  warrants.  The Company made an offer to the
warrant holders  allowing them to exercise their warrants at a discount  through
February 16, 1995. As presented in Note 9, certain of the common stock  purchase
warrants were  exercised  prior to the  expiration of the discount  period.  The
Company had deferred direct costs as of December 31, 1994 of $240,281 related to
the discounted warrant


                                      F-12

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

exercise offering.  Such costs and $250,488 incurred in 1995 were offset against
the proceeds  received in 1995 from the exercise of the warrants.  There were no
warrants exercised during 1996.

 Use of Estimates and Certain Significant Estimates

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

NOTE 2-CHANGE IN ACCOUNTING METHOD

         The Company  accounted for its oil and gas producing  activities  using
the successful efforts method from inception through June 30, 1995. However, the
full cost method has  subsequently  been adopted.  The Company is of the opinion
that the full cost method of accounting is preferable to the successful  efforts
method of accounting for its oil and gas activities for the following reasons:

     (1) The Company  recently  acquired  the  subsidiaries  of Hunter (See note
3),which  comprise  corporations  engaged in oil and gas related  activities and
which utilize the full cost method of accounting for these activities.  For both
legal and accounting purposes, the Company is the acquiring entity; however, the
subsidiaries  are  increasing  their oil and gas activities and have more proved
oil and gas reserves than the Company. Furthermore,  management of Hunter became
the  management of the Company upon  completion of the  acquisition.  One of the
Hunter subsidiaries  specializes in the management of oil and gas properties and
all accounting  functions and financial  reporting  have been  undertaken by the
subsidiary's  personnel.  The  individuals  employed  by the  subsidiaries  have
comprised the vast majority of the Company's  employees and the Company believes
that by allowing these employees and Hunter's  management to continue to use the
full cost method,  it would greatly  benefit in accurately  reporting on its oil
and gas operations.

     (2) The subsidiaries  have established  relationships  with lending sources
which the Company intends to continue to utilize and expand upon.  These sources
are accustomed to evaluating the subsidiaries'  financial statements on the full
cost method of accounting.  The Company intends to request additional  borrowing
arrangements  from these  lenders and believes  that it is  desirable  for these
lending sources to review financial statements prepared on a consistent basis.

         The accompanying  financial  statements have been restated to apply the
full cost method  retroactively.  This  change in  accounting  principle  has no
significant  effect on income taxes. The effect of the accounting  change on net
loss and accumulated  deficit as previously  reported for the respective periods
is:
<TABLE>
<CAPTION>
<S>                                                                                            <C>

                                                                                                    Year Ended
                                                                                                December 31, 1994
                                                                                              --------------------- 
Statement of Operations:
Net Loss as Previously Recorded............................................................           $(1,258,808)
Adjustment for Effect of Change in Accounting Principle that is Applied Retroactively......               $712,426
Net Loss as Adjusted.......................................................................             $(546,382)
Per Share Amounts:
Net Loss as Previously Reported............................................................                 $(.44)
Adjustment for Effect of Change in Accounting Principle that is Applied Retroactively......                 $(.17)
Net Loss as Adjusted.......................................................................                 $(.27)
Common Shares Used in Per Share Calculation................................................              4,166,822

</TABLE>


                                      F-13

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


<TABLE>
<CAPTION>
<S>                                                                                  <C>                 <C>
                                                                                     Year Ended December 31,
                                                                                     -----------------------
                                                                                         1995            1994
                                                                                         ----            ----
                                                                     
Statement of Accumulated Deficit:
Balance at Beginning of Period as Previously Reported...........................      $(4,166,058)    $(2,327,925)
Add Adjustment for the Cumulative Effect on Prior Years of Applying
  Retroactively the Full Cost Method............................................           506,651       (205,775)
                                                                                 -----------------    -------------                 
Balance at Beginning of Period, as Adjusted.....................................       (3,659,407)     (2,533,700)
Net Loss........................................................................         (968,272)       (546,382)
Preferred Dividends.............................................................         (617,220)       (579,325)
                                                                                 -----------------    --------------                
Balance at End of Year..........................................................      $(5,244,899)    $(3,659,407)
                                                                                 =================    ==============
</TABLE>


         The effect on 1995 operations of changing the accounting  method was to
increase net loss and net loss per share by $307,000 and $.05, respectively.

NOTE 3-ACQUISITIONS AND DISPOSITIONS

         During the year ended  December 31, 1994,  the Company  acquired  three
properties  through the issuance of both cash and common stock. One property was
acquired  for  $888,000,  for which the Company  paid  $200,000  cash and issued
343,000  shares  of its  common  stock,  based on a value of $2.00  per share or
$686,000.  Two other  properties  were acquired for a total of $692,500.  In one
transaction,  150,000  shares were issued at $1.25 per share for $187,500 and in
the  other  transaction,  120,000  shares  were  issued  at $3.00  per share for
$360,000.   In  the  latter  transaction,   the  Company  committed  to  file  a
registration  statement  relating  to 40,000  shares,  and has agreed to pay all
costs relating to the registration of these shares.

         During 1994,  the Company  sold a 20% working  interest in unproved oil
and gas  mineral  leases in which the  Company has  acquired  an  interest.  The
Company  received  cash and 22,220  shares of common stock of a publicly  traded
corporation.

         During March 1995,  the Company  acquired an  additional  fifty percent
(50%)  working  interest  (for a total  of 100%  working  interest)  in a proved
undeveloped  oil and gas property on which one well is located.  The acquisition
cost of this  additional  interest was $410,000,  of which  $130,000 was paid in
cash and 80,000 shares of the Company's restricted common stock, valued at $3.50
per share,  were  issued.  During  April  1995,  the  Company  also  acquired an
additional  40 percent (40%)  working  interest  (for a total of ninety  percent
(90%) working  interest) in a proved  undeveloped  property on which one well is
located. The acquisition cost of this additional interest was $480,000, of which
$20,000 was paid in cash and 125,000 shares of the Company's  restricted  common
stock were issued,  valued at $3.50 per share,  and the  transfer of  securities
held by the Company as an investment in equity securities at December 31, 1994.

         In October 1995, the Company issued 85,131 shares of restricted  common
stock,  valued at $3.52  per  share,  in an  acquisition  completed  by a Hunter
subsidiary for the remaining  stock  ownership  interest in a limited  liability
company.  Also, in October 1995,  the Company issued 64,176 shares of restricted
common  stock,  valued  at $4.00 per  share,  in an  acquisition  of oil and gas
properties  completed  by a Hunter  subsidiary.  In December  1995,  the Company
issued 32,308 shares of restricted  common stock,  valued at $3.25 per share, in
an acquisition of a proven undeveloped property by a Hunter subsidiary.



                                      F-14

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

         The Company executed a definitive agreement on July 21, 1995 to acquire
all of the assets, subject to the existing liabilities of Hunter Resources, Inc.
("Hunter").   Pursuant  to  the  agreement,   the  Company  issued,  subject  to
shareholder approval,  2,750,000 shares of its restricted common stock to Hunter
in exchange for the assets acquired.  In addition,  575,000 shares of restricted
common  stock  were  issued  to a  third  party  as an  additional  cost  of the
acquisition.  The third party  distributed a total of 250,000 of the shares to a
former  director  and a former  officer of the Company for their  assistance  in
completing the acquisition.

         On December 19, 1995 to be effective December 22, 1995, the Company and
Hunter  entered  into an amended  agreement.  Under the terms of the  amendment,
which was executed by Hunter shareholders  representing over fifty percent (50%)
of the common stock of Hunter,  an  additional  2,335,077  shares of  restricted
common  stock and  111,825  shares of Series C  preferred  stock were  issued to
Hunter.  The acquisition was recorded under the "purchase method" of accounting,
based  upon the  estimated  value  of the  shares  issued  of  $12,495,005.  The
operations of Hunter have been  consolidated with those of the Company beginning
on December 31, 1995.

         On June 28,  1996,  the  Company  purchased  469  natural gas wells and
approximately  427 miles of a gas gathering  pipeline  system for a net purchase
price of  $34,652,395.  The properties are located in the Panhandle of Texas and
Western Oklahoma and are referred to as the "Panoma Properties." As the purchase
was not completed until the end of the second quarter of 1996, the  consolidated
financial  statements  for 1996  include  the  operating  results  of the Panoma
Properties for only the last six months of the year.

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

         The  following  summary,  prepared on a pro forma  basis,  presents the
results of operations  for the years ended December 31, 1996 and 1995, as if the
acquisitions occurred as of the beginning of the respective years. The pro forma
information  includes  the  effects of  adjustments  for  increased  general and
administrative  expense,  interest expense,  depreciation,  depletion and income
taxes:


                                                       1996               1995
                                                       ----               ----
                                                             (Unaudited)

Revenue......................................... $20,653,000        $12,515,000
Net Income (Loss) Applicable to Common Stock....    (304,000)        (4,403,000)
Net Income (Loss) Per Common Share..............       $(.02)             $(.79)
Average shares outstanding......................  12,485,893          5,606,669

NOTE 4-NOTES RECEIVABLE

         During July of 1994, the Company  received an interest bearing note due
on May 1, 1995,  in exchange for $319,206  paid by the Company.  Interest in the
amount of $3,000 per month  accrued  through  February  28, 1995 and was paid in
March 1995.  For the remaining two months,  interest in the amount of $4,500 per
month was accrued which,  along with the principal  amount,  was paid during May
1995. The note was collateralized by securities,  the fair market value of which
was less than the amount of the note.

         On July 28,  1995,  the Company  received a  non-interest  bearing note
receivable  in the amount of $223,500 in exchange for its interest in an oil and
gas  property.  Interest at 10 percent was  imputed on the note  resulting  in a
discount of $28,366.  The note  provides  for payments of $7,000 per month which
were received timely in 1996. As of December 31, 1996, the unpaid  balance,  net
of discount, is $112,288.


                                      F-15

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

         On November 4, 1996, the Company  received an interest bearing note due
on November 1, 1999,  in exchange  for its  interest in oil and gas  properties.
Interest is at the rate of 12% per annum. The note is collateralized by stock in
an American Stock Exchange  listed company and the oil and gas properties  sold.
As of December 31, 1996, the unpaid balance is $1,627,534.

NOTE 5-RELATED PARTY TRANSACTIONS

         During June of 1993,  the  Company  sold  250,000  shares of its common
stock at $2.00 per share for a total of $500,000. The purchasers made a 10% down
payment of $50,000  and  executed  notes for  $450,000,  payable in one year and
bearing interest at 6% per annum. During June of 1994, the Company  renegotiated
the notes and entered into a verbal  agreement with another  individual  whereby
$27,000 of interest  due on the previous  notes was accrued and a new  principal
amount of $289,500,  being a reduction of $160,500 from the original notes,  was
agreed upon as the amount due to the  Company.  Additionally,  the Company  sold
this individual  40,000 shares of the Company's  common stock at $1.25 per share
for net proceeds of $50,000.  The full amount of the reduced  purchase price was
paid  during the third  quarter of 1994;  however,  no  interest  was paid.  The
Company does not intend to pursue the collection of the unpaid interest from any
of the parties involved.  The net effect of the above  transactions was that the
Company sold 300,000 shares of its common stock for $350,000,  or  approximately
$1.17 per share.

         During June of 1994,  the Company  also  issued  110,000  shares of its
common stock  pursuant to an agreement to pay the Company within one year of the
issuance of the shares, $137,500 and interest at the rate of 5% per annum, which
is  equivalent to $1.25 per share.  Prior to December 31, 1994,  the Company had
collected $75,000 and subsequently the balance of the note was paid. The Company
did not collect any  interest  due on the Note and does not intend to pursue the
collection thereof.

         In conjunction  with the  acquisition of Hunter,  the Company assumed a
note receivable with a balance of $178,527 and $120,758 at December 31, 1996 and
1995 respectively, from an owner in an affiliated limited liability company. The
note  provides  for  interest  at ten  percent and has a due date of January 31,
1997.

         In connection  with the  acquisition of Hunter,  the Company  assumed a
note receivable  from a company  affiliated with the President of the Company in
the amount of $54,615 at December 31, 1996 and 1995. This note bears interest at
ten percent and is due on demand.  Additionally,  trade accounts receivable from
this affiliated  company were $30,761 and $51,346 at December 31, 1996 and 1995,
respectively.

         In  connection  with the  acquisition  of Hunter,  the Company  assumed
unsecured  accounts  receivable  from the President  personally in the amount of
$10,000 as of December 31, 1995, which amount has been subsequently repaid.

         A company  owned by two  former  directors  of the  Company  previously
operated several of the wells in which the Company owned an interest.  Operating
fees paid this company were $35,519 in 1995.  The operations of these wells were
transferred  to a subsidiary  of Hunter  during 1995.  In addition,  the related
company  received  a  commission  of  $25,000  from  the  sale of an oil and gas
property to the Company in 1995.

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

NOTE 6-LONG-TERM DEBT

         Long-term  debt  at  December  31,  1996  and  1995  consisted  of  the
following:


                                      F-16

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
<S>                                                                             <C>                 <C>
                                                                                 1996                  1995
                                                                                ---------------    ----------------              ---
Banks
Revolving   promissory  note,   collateralized  by  pipeline  and  oil  and  gas
   properties, due June 30, 2001, interest at LIBOR + 2.25% (total of
   7.625% at December 31, 1996)(1).......................................        $38,700,000        $    -
Promissory note, collateralized by pipelines and oil and gas properties,
   payable in monthly installments for 1996 of $174,000 through October 1, 1996,
   then $171,000  thereafter  plus interest at prime plus one percent  (total of
   9.75% at December 31, 1995), assumed in
   Hunter acquisition(2).................................................                  -          9,555,000
Note payable, payable in monthly installments of $498 through
   July 1996 plus interest at 7.25 percent, collateralized by truck......                  -              3,000
Note payable to bank collateralized by vehicle payable in monthly
   installments of $1,031 including interest at 8.5% through
   February 1999.........................................................             24,000                  -
Other
Notes payable,  non-interest  bearing and  uncollateralized,  payable in monthly
   installments of $1,000 through July 1, 2000, assumed in
   Hunter acquisition....................................................             42,000             54,000


                                                                                ----------------   ----------------
Total Long-Term Debt.....................................................         38,766,000          9,612,000
Less Current Portion.....................................................             22,000          2,014,000


                                                                                ----------------   ----------------
Long-Term Debt...........................................................        $38,744,000         $7,598,000
                                                                                ================    ===============

</TABLE>
NOTE 6-LONG-TERM DEBT

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


1997...........................................................   $      22,000
1998...........................................................          24,000
1999...........................................................          14,000
2000...........................................................           6,000
2001...........................................................      38,700,000
                                                                ----------------
                                                                  $  38,766,000
                                                                ================
- -----------

(1)      The  revolving  promissory  note to the  banks is a  borrowing  under a
         $100,000,000  line of credit on which there existed a borrowing base of
         $55,000,000  at December 31, 1996.  The level of the borrowing  base is
         dependent on the valuation of the assets pledged, primarily oil and gas
         reserve  values.  The  line of  credit  includes  covenants,  the  most
         restrictive of which require  maintenance of a current ratio,  interest
         coverage  ratio,  and  tangible  net worth,  as  specified  in the loan
         agreement.  The bank group must  approve all  dividends  paid on common
         stock.

(2)      The promissory note to bank was a borrowing under a $20,000,000 line of
         credit on which there existed a borrowing  base of  approximately  $8.7
         million at December 31, 1995. The balance at December 31, 1995 included
         $1,125,000  due to the seller of certain oil and gas  properties  which
         was refinanced in February,


                                      F-17

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

         1996 under the line of credit.  The final principal  payments under the
         line of credit were due June 1, 2000. The amount that could be borrowed
         under the line of credit was based upon a designated  percentage of oil
         and gas reserve values. The line of credit included covenants, the most
         restrictive  of  which  require  maintenance  of a  current  ratio  and
         tangible net worth, as specifically defined in the loan agreement.

NOTE 7-PRODUCTION PAYMENT LIABILITY

         As a result of the merger with Hunter in 1995,  the Company  assumed an
obligation under a production payment conveyance.  The conveyance provides for a
royalty payment equal to 50% of the monthly net revenue proceeds received by the
Company in certain oil and gas properties. The balance owed under the conveyance
bears interest at 15% per annum and is non-recourse to the Company.  The balance
owed under this  conveyance  was  $210,000 and $288,000 at December 31, 1996 and
1995, respectively.

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

NOTE 8-INCOME TAXES

         The Company  accounts for income taxes in accordance  with Statement of
Financial  Accounting  Standards No. 109,  Accounting  for Income  Taxes,  which
requires the recognition of a liability or asset, net of a valuation  allowance,
for the deferred tax consequences of all temporary  differences  between the tax
bases and the  reported  amounts of assets and  liabilities,  and for the future
benefit of operating loss  carryforwards.  The following is a reconciliation  of
income tax expense reported in the statement of operations:


                                                                    1996
                                                               ------------
Tax expense at statutory rates............................       $279,000
State taxes...............................................         24,000
Other.....................................................          9,000
                                                               ------------
      Total...............................................       $312,000
                                                               ============     


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

<TABLE>
<CAPTION>
                                                                           December 31,
                                                      ---------------------------------------------------------
<S>                                                    <C>                 <C>                 <C>
                                                            1996               1995                1994
                                                            ----               ----                ----
Property and equipment, including intangible
   drilling costs...................................     $(6,381,000)       $(5,890,000)          $(218,000)
Annualized gain on investment.......................         (32,000)                -                   -
                                                     ------------------  ------------------  ------------------
Total deferred tax liability........................      (6,413,000)        (5,890,000)           (218,000)
                                                     -----------------   ------------------  ------------------
Allowance for doubtful accounts.....................          49,000             50,000                   -
Depletion carryforwards.............................         361,000            365,000                   -
Operating loss carryforwards........................       2,534,000          2,350,000           1,135,000
                                                     -----------------   ------------------  ------------------
Total deferred tax assets...........................       2,944,000          2,765,000           1,135,000
                                                     -----------------   ------------------  ------------------
Valuation allowance.................................          -                  -                 (917,000)
                                                     -----------------   ------------------  ------------------
Net Deferred Tax Liability..........................    $(3,469,000)       $(3,125,000)          $     -
                                                     =================   ==================  ===================

</TABLE>




                                      F-18

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

         The Company and its subsidiaries have net operating loss  carryforwards
(NOL) of approximately $6,900,000 that expire, if unused, in years through 2011,
none in 1997.  Approximately  $1,700,000  of the NOL  carries  a  limitation  of
approximately  $200,000  per  year.  In  addition,  the  Company  has  depletion
carryforwards of approximately $1,000,000.

NOTE 9-STOCKHOLDERS' EQUITY

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

         Holders  of the  Series A  Preferred  Stock  are  entitled  to  receive
dividends  only to the extent  that  funds are  available  from the West  Dilley
Prospect.  Such  dividends  are  limited to $7.50 per share,  in the  aggregate.
Dividend  payments  to Series A  preferred  shareholders  will be based on fifty
percent  (50%) of the net  operating  revenue  received by the working  interest
owners of the West Dilley Prospect. Due to a decline in production from the well
located on this  prospect,  the  Company  has shut this well in and is no longer
producing the property.  The Series A dividends  are not  cumulative  except for
unpaid  amounts due from this  calculation.  No dividends  have been paid on the
Series A preferred stock. There is no aggregate annual dividend  requirement for
the Series A preferred stock.

         The Series B Preferred  Stock was issued as a unit,  comprised of 1,000
shares of Series B Preferred Stock and two production certificates. The Series B
preferred  stockholders  are entitled to receive  cumulative  dividends of $0.35
annually per share, payable quarterly.  The holders of the units are entitled to
receive $10,000 per unit in dividends and in production payments. The production
payments were derived from 50% of the  Company's net revenue from  production of
oil and gas. The Board of Directors declared dividends on the Series B preferred
stock of $21,893  and $25,172  for the years  ended  December  31, 1995 and 1994
respectively.  Beginning  June 15, 1994,  the Company  offered to exchange  (the
"Exchange  Offer")  1,250  shares of common  stock for each Series B  production
certificate.  During 1994,  141.1  production  certificates  were  exchanged for
176,375 shares of common stock and the Series B preferred shareholders agreed to
convert  their Series B preferred  shares into common stock at December 31, 1995
if all dividends  were paid through that date.  All of the shares were converted
to common stock during 1996.

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

         The  Series C  preferred  stock was  convertible  at the  option of the
holder at any time into three  shares of common  stock and,  after  November 12,
1994,  would  automatically  convert into common  stock  anytime the closing bid
price of the  common  stock  equals  or  exceeds  $5.00  per  share  for  twenty
consecutive trading days. The Series C


                                      F-19

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

preferred  stock was redeemable by the Company  beginning  November 12, 1995, at
$10.50 per share plus accrued and unpaid dividends.  If declared by the Board of
Directors,  dividends  accrue  at the  annual  rate  of  $1.10  per  share,  are
cumulative  from the date of first  issuance and are paid  quarterly in arrears.
The Board of Directors  declared  dividends  on the Series C preferred  stock of
$554,153,  $595,327,  and $339,827 for the years ended December 31, 1994,  1995,
and 1996,  respectively.  During  1994,  40,025  Series C preferred  shares were
converted  into  120,075  shares of common  stock and 24,250  shares of Series C
preferred  stock were issued upon  exercise of  representatives'  warrants.  The
aggregate  annual  dividend  requirements  for the  625,000  shares  of Series C
preferred  stock  outstanding  at December 31, 1995 and 1996 amounts to $687,500
and none,  respectively.  As of December 31, 1996, all Series C preferred  stock
had been redeemed or converted to common stock.

         On December 6, 1996,  the Company  entered  into an  agreement to issue
1,000,000  shares of new Series A  preferred  stock,  known as the 1996 Series A
Convertible  Preferred Stock, in a private  placement.  The shares have a stated
and  liquidation  value  of $10 per  share  and pay a  fixed  annual  cumulative
dividend  of eight and three  quarters  percent  (8.75%)  payable  quarterly  in
arrears  beginning  December 31, 1996. The shares are convertible into shares of
common  stock at a conversion  price of $5.875 per share.  Beginning in December
1998,  the  Company  has an  option  to  exchange  the  stock  into  convertible
subordinated  debentures  of  equivalent  value.  The  purpose  of  the  private
placement was to fund the capital cost  necessary to drill  certain  development
projects  and to fund  the  capital  costs  of  several  West  Texas  waterflood
projects. Proceeds from the offering were initially used to reduce the Company's
existing  bank  indebtedness.   Certain  capital  expenditure  requirements  for
developmental  drilling and waterflood projects are required under the agreement
whereby  this stock was issued.  In addition,  under the terms of the  preferred
stock,  the  Company  is  required  to  raise an  aggregate  of $15  million  of
additional equity by March 31, 1998 or the Company is required to redeem on June
30 of each of the years 2006, 2007, and 2008, 333,333 shares of preferred stock.
On December 23, 1996, the 1996 Series A Convertible  Preferred Stock was issued,
resulting in net proceeds to the Company  after  offering  costs of  $9,787,000.
Dividends of $22,000 were declared in 1996 and paid subsequent to year end.

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

         The Series C preferred stock was originally  issued as a unit comprised
of one share of Series C preferred  stock and  warrants  to  purchase  three (3)
shares of common  stock.  A total of  1,687,500  warrants  were  issued  and are
exercisable at $5.50 per share through  November 12, 1998.  The Company  offered
the holders of the warrants a discount period  commencing  November 15, 1994 and
ending  February 16, 1995 during  which time the warrants  could be exercised at
$4.00.  During this time,  warrants were  exercised for 833,324 shares of common
stock. The exercise of these warrants resulted in cash proceeds of $3,333,298 to
the Company.  The warrants  are  redeemable  by the Company at $0.02 per warrant
upon 30 day notice at any time after November 12, 1995 or earlier if the closing
bid price of the  common  stock  equals or  exceeds  $6.75 for five  consecutive
trading  days.  At  December  31,  1995,   854,176  of  the  warrants   remained
outstanding.

         The Company  granted an unrelated  company the right to acquire 100,000
shares of common  stock under the terms of a  consulting  agreement.  The rights
became  exercisable at the rate of 3,325 shares in November  1994,  8,335 shares
per month from December  1994 through  October 1995 and 4,990 shares in November
1995. The rights are exercisable at $4.125 per share.  The rights expire in June
1997.



                                      F-20

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

         In October  1995,  in  connection  with an  acquisition  of oil and gas
properties,  the Company issued 25,000  warrants with an exercise price of $4.00
per share,  and 25,000  warrants with an exercise  price of $4.50 per share with
each such warrant  expiring in October 1997. In December 1995 the Company issued
37,500 warrants at an exercise price of $3.00 per share to an unaffiliated third
party for services rendered. The warrants expire in December 1997.

         During 1995, 20,750 representatives'  warrants were exercised at $12.00
per warrant  resulting  in $249,000 of  proceeds to the  Company.  Each  warrant
entitles  the holder to receive one share of Series C preferred  stock and three
(3) common stock warrants  exercisable at $4.00 per share through  February 1995
and $5.50 thereafter.  9,300 shares of Series C preferred stock and 2,000 shares
of Series B  preferred  stock have also been  converted  into  28,900  shares of
common stock.  The Company issued 5,000 shares of common stock,  valued at $3.50
per share to its directors, which resulted in $17,500 of compensation expense in
1995.  Also,  22,222 shares of common stock with a value of $3.80 per share were
issued for services rendered in 1995.

         In January,  1996,  60,000 warrants were issued at an exercise price of
$3.375 per share and expiring in January 1999.  At December 31, 1996,  45,000 of
these warrants had been earned.  In connection  with the receipt of a production
payment,  in October 1996 the Company  issued  25,000  warrants with an exercise
price of $5.18 expiring October 1999,  25,000 warrants with an exercise price of
$5.65 expiring  October 2000 and 25,000 warrants with an exercise price of $6.13
expiring October 2001. No warrants were exercised in 1996.

         At December 31, 1996, the Company had 1,176,676 total warrants  issued,
including the publicly traded warrants. Additionally, in 1996, 610,170 shares of
the Company's  common stock that had been held as  collateral  were returned and
held in the treasury, 12,258 shares of common stock were issued upon exercise of
employees  stock options,  239,710  shares of common stock,  valued at $939,000,
were issued to acquire oil and gas properties, and 36,538 shares of common stock
were issued as dividends on the Company's Series C Preferred Stock.

NOTE 10-SUPPLEMENTAL CASH FLOW INFORMATION

         During 1994,  the Company  purchased oil and gas  properties by issuing
613,000  shares of common  stock  valued at  $1,233,500  along  with cash in the
amount of  $200,000.  The Company  issued  176,375  shares of its common  stock,
valued at $584,016,  in exchange for the  production  payment  interests held by
production certificate holders. Shareholders converted 10,500 shares of Series B
preferred  stock and 40,250  shares of Series C  preferred  stock into 5,250 and
120,075 shares of common stock, respectively. A vehicle with a carrying value of
$10,923  was sold to an  officer  of the  Company  with the  officer  assuming a
related  note  payable in the amount of  $10,923.  The Company  received  equity
securities  with a fair  value of $66,660  as  partial  payment  for the sale of
property  interests.  The Company granted  shareholders a $187,500 adjustment to
the price of common stock  previously sold by reducing notes receivable from the
shareholders by that amount.  Also in 1994, the Company issued 150,000 shares of
common stock in exchange for notes  receivable from the purchasing  shareholders
in the amount of $187,500.

         During  1995,  as more fully  described  in Note 3, the Company  issued
common stock and preferred stock valued at $12,495,005 in the acquisition of the
assets from Hunter  Resources,  Inc.  Oil and gas  properties  were  acquired by
issuing  $1,379,204  of  common  stock and  $22,220  of  marketable  securities;
preferred  stock was  converted  to common  stock;  and common stock was issued,
creating a receivable from a shareholder of $250. In addition  $17,500 of common
stock was issued as  compensation  to directors  and $84,444 of common stock was
issued for services rendered in 1995.

         During 1996,  the Company  purchased oil and gas  properties by issuing
239,710 shares of its common stock,  valued at $938,444.  The Company  converted
658,934 shares of Series B and Series C preferred stock into 1,821,638 shares of
common  stock.  36,538  shares of common stock valued at $121,700 were issued in
lieu of cash dividends


                                      F-21

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

on preferred stock. The Company received equity  securities with a fair value of
$150,000 as partial payment for the sale of property interests. Interest paid in
1996 was $2,344,308.

NOTE 11-ENVIRONMENTAL ISSUES

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

NOTE 12-COMMITMENTS AND CONTINGENCIES

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


Year Ended December 31:
1997............................................................       $183,046
1998............................................................        173,168
1999............................................................        169,815
2000............................................................        173,711
2001............................................................        159,235
Thereafter......................................................              0
                                                                    ------------
Total Minimum Payments Required.................................       $858,975
                                                                    ============


         Rental  expense was $129,169,  $61,191 and $21,283 for 1996,  1995, and
1994 respectively.

         At December 31, 1996, the Company is involved in litigation proceedings
arising in the normal course of business.  The Company has accrued $87,750 as of
December 31, 1996 for  potential  expenses to be incurred in  settlement  of the
litigation.  In the opinion of management,  any additional liabilities resulting
from such litigation would not have a material effect on the Company's financial
condition, cash flows or results of operations.

NOTE 13-FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

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


                                      F-22

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

against the  participant's  share of production from the related  property.  The
Company believes the allowance for doubtful accounts at December 31, 1996, 1995,
and 1994 is adequate.

         Management  estimates the market values of notes receivable and payable
based on  expected  cash flows and  believes  those  market  values  approximate
carrying  values at December  31, 1996,  1995,  and 1994.  The market  values of
equity investments are based upon quoted prices (see Note 1).

NOTE 14-COMMODITY DERIVATIVES AND HEDGING ACTIVITIES

         Periodically,  the  Company  enters  into  futures,  options,  and swap
contracts  to reduce the  effects of  fluctuations  in crude oil and natural gas
prices.  At December  31,  1996,  the Company had open  contracts  for oil price
collars on 12,000  barrels of oil per month (with cap and floor prices of $22.20
and $18.00,  respectively)  through  February 1997 and 15,000 barrels of oil per
month (with cap and floor prices of $25.10 and $20.00,  respectively) from March
1997 through August,  1997. At December 31, 1996, the Company had open contracts
for gas prices swaps of 302,000 Mmbtu of gas per month at $2.16 per Mmbtu during
January  1997,  100,000 Mmbtu of gas per month at $1.905 per Mmbtu from February
1997 through  January 1998 and another  100,000  Mmbtu of gas per month at $1.77
per Mmbtu from  February  1997 through  January  1998.  These  contracts  expire
monthly  as  indicated  above.  The  gains or losses  on the  Company's  hedging
transactions  are determined as the difference  between the contract price and a
reference  price,   generally   closing  prices  on  the  NYMEX.  The  resulting
transaction  gains and losses are  determined  monthly  and are  included in the
period the hedged  production or inventory is sold. Net losses relating to these
derivatives for the years ended December 31, 1996, 1995, and 1994 were $272,000,
none, and none, respectively.

NOTE 15-STOCK COMPENSATION PLAN

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

 ESOP

         The  Company  established  an ESOP and a related  trust as a  long-term
benefit for its employees.  Under terms of the plan,  eligible  participants may
elect to make elective  deferred  contributions of not less than 1% of more than
15% of their annual compensation, limited in combination with the 401(k) plan to
the maximum  allowable  per year by the  Internal  Revenue  Code.  The plan also
allows for the Company to make  Discretionary  Contributions to the ESOP, but it
is not the intent of the  Company to do so. It is also the  Company's  intent to
invest all contributions in Employer Stock. In this regard, on October 11, 1996,
the Plan  purchased  22,556 shares of the  Company's  common stock for $3.75 per
share from a third party. To fund this purchase,  the Plan borrowed $84,585 from
a bank.  Participant  contributions  will be used to acquire shares at the price
stated above by retiring the principal and interest of this debt. As of December
31, 1996, no Participant contributions had been made to the ESOP.




 



                                      F-23

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1996 Incentive Stock Option Plan

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

         Prior  to  1995,  Hunter  had  granted  certain  of its  employees  and
directors  options to purchase its common shares. In connection with the merger,
the Company has  substituted  the Hunter options with 264,558  options under the
Plan, 239,022 of which have an exercise price of $.73425 per share and 25,536 of
which have an exercise  price of $1.65 per share.  During 1996,  12,258 of these
options  were  exercised.  In  addition,  during  1996,  the Board  granted  the
remaining  935,442  options to employees and  directors at an exercise  price of
$4.50 per share.

         The following is a summary of stock option activity under the Plan:
<TABLE>
<CAPTION>
<S>                                     <C>                 <C>                 <C>            <C>


                                                            Weighted Average                    Weighted Average
                                               Shares         Exercise Price        Shares        Exercise Price
                                       ---------------   --------------------   ------------   -----------------
Outstanding-Beginning of Year.........         264,558                 $0.82       264,558           $0.82
Granted...............................         935,442                  4.50             -               -
Exercised.............................         (12,258)                  .73             -               -
Cancelled.............................               -                     -             -               -
                                       ---------------   --------------------   ------------   -----------------  
Outstanding-End of Year...............       1,187,742                 $3.72       264,558           $0.82
                                       ===============   ====================   ============   =================
</TABLE>



         The  following  is a  summary  of plan  stock  options  outstanding  at
December 31, 1996:
<TABLE>
<CAPTION>
<S>                      <C>                <C>                           <C>

                           Number of
                            Options         Weighted Average Remaining
    Exercise Price        Outstanding        Contractual Life (Years)     Number of Exercisable Options
    --------------     ----------------    ---------------------------    ---------------------------
        $ .73               226,764                  1.0                          35,242
         1.65                25,536                  3.0                            -
         4.50               935,442                  4.3                         935,442
                       ----------------                                   ---------------------------
                          1,187,742                                              970,684
                       ================                                   ===========================

</TABLE>


     The Company  adopted  the  disclosures  only  portion of SFAS No. 123 as it
continued to follow the  provisions of APB No. 25, which is the intrinsic  value
method of accounting for stock-based compensation.

     On a pro forma  basis,  the  effect  of stock  based  compensation  had the
Company adopted Statement No. 123 is as follows:


                                                                          1996
                                                                       ---------
Net Income (Loss):                       As reported                   $103,000
                                          Pro Forma                  (1,540,000)
Primary Earnings per Share:              As reported                        .01
                                          Pro Forma                        (.12)
Fully Diluted Earnings per Share:        As reported                        .01
                                          Pro Forma                        (.12)



                                      F-24

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

         The weighted average grant date fair value of options granted was $2.56
and of  warrants  granted  was $1.09  during  1996.  Fair value of  options  and
warrants was calculated by using the  Black-Scholes  options pricing model using
the following weighted average assumptions for 1996 activity: risk free interest
rate of 5.74%,  expected life of 4.28 years, expected volatility of 60.8% and no
dividend yield.

NOTE 16-SUBSEQUENT EVENTS

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

         On April 30, 1997, the Company acquired from a subsidiary of Burlington
Resources,  Inc., effective as of January 1, 1997, the Permian Basin Properties,
consisting  of 25 field areas in west Texas and 22 field areas in southeast  New
Mexico,  for a net purchase price of $133.0  million after  adjustments of $10.5
million for  production  cash flow from  January 1, 1997 to the closing date and
other minor adjustments.

         The Company  financed the  acquisition of the Permian Basin  Properties
with a new $130.0  million  credit  facility (the "New Credit  Facility")  and a
senior subordinated credit facility of $60.0 million (the "Term Loan Facility").
Borrowings  of $119.5  million  under the New Credit  Facility and $60.0 million
under the Term Loan Facility were used to pay the $123.0 million  balance of the
$133.0 million net purchase price for the Permian Basin Properties, to repay the
$53.7  million  in  outstanding  indebtedness  as of April  30,  1997  under the
Company's   previous  $100.0  million  credit  facility  (the  "Previous  Credit
Facility") and to pay the costs  associated  with the Permian Basin  Acquisition
and the related financings.  The New Credit Facility currently bears interest at
9.0% per annum.  After repayment of the Term Loan Facility using the proceeds of
a $125 million  offering of Senior  Subordinated  Notes due 2007, the New Credit
Facility will initially bear interest at LIBOR plus 1.75% per annum, which would
be 7.6% based on the LIBOR rate at April 30, 1997. The unpaid  principal  amount
under the New Credit Facility  matures on April 30, 2002. At April 30, 1997, the
interest  rate on the Term Loan  Facility  was 11.5%  per  annum.  The Term Loan
Facility  initially matures on April 30, 1998, at which time the Company has the
option to extend such facility for an additional five years.

         In the event that the borrowings  under the New Credit Facility are not
less than $75.0  million on July 15,  1997,  the Company is obligated to pay the
lenders an  additional  fee.  In  addition,  if  borrowings  under the Term Loan
Facility have not been repaid beginning August 28, 1997, the Company, at various
dates  thereafter  within the initial  one-year term,  will incur an increase in
interest  rates and be  obligated  to pay the  lenders  additional  fees  and/or
warrants  to  purchase  common  stock of the  Company.  More  specifically,  the
interest  rate under the Term Loan  Facility  increases by 1.0% on each of three
specified dates with a maximum  interest rate of 15.5%.  The Company may also be
obligated  to issue  equity  securities  up to a  maximum  of 5.0% of the  fully
diluted common equity of the Company.

         In April 1997,  the terms of the  Company's  1996 Series A  Convertible
Preferred  Stock were  amended to require  the  Company to raise $15  million of
additional  equity by December  31, 1997 rather than March 31, 1998 as described
in Note 9.

NOTE 17-EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS

     Mr. Gary C. Evans and Mr. Matthew C. Lutz have  employment  agreements with
Magnum Hunter Resources,  Inc. Mr. Evans' agreement terminates December 31, 1997
and continues thereafter on a year to year basis


                                      F-25

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and  provides  for a base salary of $200,000  per annum.  Mr.  Lutz's  agreement
terminates  September 30, 1997 and continues  thereafter on a year to year basis
and provides for a base salary of $100,000 per annum.  Both  agreements  provide
that the same benefits supplied to other Company employees shall be available to
the  employee.  The  employment  agreements  also  contain,  among other things,
covenants  by the  employee  that in the  event  of  termination,  he  will  not
associate  with a business  that  competes  with the Company for a period of one
year after cessation of employment.  The Company also has key man life insurance
on Mr. Evans in the amount of $1,000,000.


                                      F-26

<PAGE>


                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

          SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES

                                   (UNAUDITED)

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

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

         Estimated quantities of proved oil and gas reserves of the Company were
as follows:
<TABLE>
<CAPTION>
<S>                                                                             <C>                 <C>

                                                                                                     Natural Gas
                                                                                                      (Thousand
                                                                                 Oil (Barrels)       Cubic Feet)
                                                                                ---------------     --------------
December 31, 1996
   Proved reserves...........................................................      5,338,255         90,565,997
   Proved developed reserves.................................................      1,962,184         71,275,141
December 31, 1995
   Proved reserves...........................................................      3,767,739         14,071,916
   Proved developed reserves.................................................      1,681,841          8,796,748
December 31, 1994
   Proved reserves...........................................................      1,260,520          4,914,207
   Proved developed reserves.................................................        239,795            394,872

         The changes in proved  reserves  for the years ended  December 31, 1996
and 1995 were as follows:

                                                                                                     Natural Gas
                                                                                                      (Thousand
                                                                                  Oil (Barrels)      Cubic Feet)
                                                                                ---------------   ----------------
Reserves at December 31, 1994..................................................      1,260,520          4,914,207
Purchase of minerals-in-place..................................................      3,122,382         10,973,298
Extensions and discoveries.....................................................         38,498            564,247
Production.....................................................................        (29,972)          (102,056)
Revisions of estimates.........................................................       (623,689)        (2,277,780)
                                                                                ---------------   ----------------
Reserves at December 31, 1995..................................................      3,767,739         14,071,916
Purchase of minerals-in-place..................................................      2,678,579         81,943,557
Sale of minerals-in-place......................................................       (214,381)        (1,318,164)
Extensions and discoveries.....................................................                           151,606
Production.....................................................................       (191,203)        (2,674,793)
Revisions of estimates.........................................................       (702,479)        (1,608,125)
                                                                                ---------------   ----------------
Reserves at December 31, 1996..................................................      5,338,255         90,565,997
                                                                                ===============   ================
               
</TABLE>
                                      F-27

<PAGE>
                                                                                

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

          SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES

                                   (UNAUDITED)

   The aggregate  amounts of capitalized costs relating to oil and gas producing
activities and the related accumulated depreciation, depletion and impairment as
of December 31, 1996, 1995, and 1994 were as follows:
<TABLE>
<CAPTION>
<S>                                                    <C>                     <C>             <C>

                                                                1996              1995               1994
                                                                ----              ----               ----
Unproved oil and gas properties.......................     $    459,254          $842,889            $700,344
Proved properties.....................................       70,574,890        36,256,428           7,932,496
                                                       ----------------   ----------------  ------------------
Gross Capitalized Costs...............................       71,034,144        37,099,317           8,632,840
Accumulated depreciation, depletion and
   impairment.........................................       (4,513,541)       (1,914,602)         (1,499,095)
                                                       ----------------   ----------------  ------------------
Net Capitalized Costs.................................      $66,520,603       $35,184,715          $7,133,745
                                                       ================   ================  ==================

</TABLE>
         Costs incurred in oil and gas producing  activities,  both  capitalized
and expensed,  during the years ended December 31, 1996,  1995, and 1994 were as
follows:
<TABLE>
<CAPTION>
<S>                                                              <C>            <C>                 <C>
                                                                 1996              1995              1994
                                                                 ----              ----              ----
Property acquisition costs
   Proved properties.....................................     $31,982,821       $27,983,521       $1,737,543
   Unproved properties...................................               -           142,545                -
Exploration costs........................................       1,114,733           340,411                -
Development costs........................................         837,273                 -          791,144
                                                            ---------------     -------------    ---------------
Total Costs Incurred.....................................     $33,934,827       $28,466,477       $2,528,687
                                                            ===============     =============    ===============
</TABLE>


         Results of  operations  from oil and gas producing  activities  for the
years ended December 31, 1996, 1995, and 1994 were as follows:
<TABLE>
<CAPTION>
<S>                                                         <C>                    <C>              <C>

                                                                  1996              1995             1994
                                                                  ----              ----             ----
Oil and gas production revenue............................     $10,247,688         $616,596         $729,478
Disposal services revenue.................................          20,487           31,978           15,704
Production costs..........................................      (4,389,465)        (267,647)        (324,392)
Depreciation and depletion................................      (2,598,939)        (421,101)        (243,180)
                                                           ----------------   ---------------  ---------------
Results of Operations for Producing
Activities................................................      $3,279,771        $ (40,174)         $177,610
                                                           ================   ===============  ===============
</TABLE>


         The standardized  measure of discounted estimated future net cash flows
related to proved oil and gas reserves at December 31, 1996, 1995, and 1994 were
as follows:
<TABLE>
<CAPTION>
<S>                                                    <C>                    <C>                  <C>
                                                        1996                  1995                 1994
                                                        ----                  ----                 ----
Future cash inflows...........................      $492,157,062          $95,068,694          $25,900,669
Future development and production costs.......      (138,614,804)         (37,746,877)         (10,011,434)
                                               ---------------------  -------------------  -------------------
Future net cash flows, before income tax......       353,542,258           57,321,817           15,889,235
Future income taxes...........................      (102,341,098)         (11,381,779)          (3,679,963)
                                               ---------------------  -------------------  -------------------
Future Net Cash Flows.........................       251,201,160           45,940,038           12,209,272
10% annual discount...........................      (134,116,299)         (16,120,359)          (5,974,156)
                                               ---------------------  -------------------  -------------------
Standardized Measure of Discounted Future
   Net Cash Flows.............................      $117,084,861          $29,819,679           $6,235,116
                                               =====================   ==================  ====================
</TABLE>


                                      F-28

<PAGE>


                
                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

          SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES

                                   (UNAUDITED)

         The primary changes in the standardized measure of discounted estimated
future net cash flows for the years ended December 31, 1996, 1995, and 1994 were
as follows:
<TABLE>
<CAPTION>
<S>                                                         <C>                 <C>                 <C>


                                                                  1996               1995               1994
                                                                  ----               ----               ----
Purchases of minerals-in-place.......................        $129,544,769       $30,507,745         $2,736,310
Sales of minerals-in-place...........................          (2,195,780)                -                  -
Extensions, discoveries and improved recovery,
   less related costs................................             302,785           582,001            162,944
Sales of oil and gas produced, net of production
   costs.............................................          (5,858,223)         (350,083)          (300,517)
Development costs incurred during the period.........                -                 -               467,192
Revision of prior estimates:
   Net change in prices and costs....................          14,993,539         4,864,688         (1,074,222)
   Change in quantity estimates......................         (10,107,737)       (7,637,000)        (2,981,078)
Accretion of discount................................           2,981,968           623,512          1,289,466
Net change in income taxes...........................         (42,396,139)       (5,006,300)          (594,905)
                                                         ------------------  ----------------  ------------------
Net Change...........................................         $87,265,182       $23,584,563          $(294,810)
                                                        =================== ================= ==================
</TABLE>

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

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



                                      F-29

<PAGE>

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                  (UNAUDITED)
                                 (in thousands)
<TABLE>
<CAPTION>
<S>                                                                             <C>                 
                                                                                         June 30,
                                                                                         1997
                                                                                ----------------------

                                               ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                                  $        1,571
     Securities available for sale                                                         360
     Accounts receivable
       Trade, net of allowance of $134,158                                              10,541
       Due from affiliates                                                                 101
     Notes receivable from affiliate                                                       382
     Current portion of long-term note receivable                                          129
     Prepaid and other                                                                     384
                                                                                ----------------------
          TOTAL CURRENT ASSETS                                                          13,468
                                                                                ----------------------
     PROPERTY, PLANT AND EQUIPMENT                                                     
     Oil and gas properties, full cost method   
          Unproved                                                                         460                                      
          Proved                                                                       208,871
     Pipelines                                                                           9,824
     Other property                                                                        571
                                                                                ---------------------                               
          TOTAL PROPERTY, PLANT AND EQUIPMENT                                          219,726              
     Accumulated depreciation, depletion and impairment                                 (9,329)
                                                                                ---------------------                         
          NET PROPERTY, PLANT AND EQUIPMENT                                            210,397
                                                                                ---------------------                               
                                                                                                    
OTHER ASSETS
     Deposits and other assets                                                           6,140                                      
     Long-term notes receivable, net of imputed interest                                 1,665
                                                                                ---------------------                             
                                                                                                  
                                            TOTAL ASSETS                        $      231,670
                                                                                =====================
 
                                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
    Trade payables and accrued liabilities                                      $        5,524 
    Dividends payable                                                                      219
    Suspended revenue payable                                                              834
    Current maturities of long-term debt                                                    22
    Notes payable                                                                        2,699
                                                                                ---------------------
          TOTAL CURRENT LIABILITIES                                                      9,298
                                                                                ---------------------                               
LONG-TERM LIABILITIES                                                                                                  
   Long-term debt, less current maturities                                             187,033                                      
   Production payment liability                                                            831
   Deferred income taxes                                                                 2,215                                      
   Minority interest                                                                        40                          
                                                                                                                          
COMMITMENTS AND CONTINGENCIES                                                                                          
                                                                                                                          
STOCKHOLDERS' EQUITY
   Preferred stock - $.001 par value; 10,000,000 shares authorized,
         216,000  designated as Series A; 80,000 shares issued and  outstanding,
         liquidation  amount  $0                                                            -
   1,000,000  shares  designated  as  1996  Series  A Convertible;
         1,000,000 issued and outstanding, liquidation amount $10,000,000                    1                                      
   Common stock - $.002 par value; 50,000,000 shares authorized,
         14,263,037 shares issued and outstanding                                           29                                    
   Additional paid-in capital                                                           39,782                       
   Accumulated deficit                                                                  (7,688)                                 
   Unrealized gain (loss) on investments                                                   130
                                                                                --------------------
                                                                                        32,254                                    
   Treasury stock (654,939 shares of common stock)                                          (1)
                                                                                --------------------
   TOTAL STOCKHOLDERS' EQUITY                                                           32,253
                                                                                --------------------  
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $      231,670
                                                                                ====================                           

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

                                      F-30

<PAGE>

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

             (in thousands of dollars, except for per share amounts)

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

<S>                                                                   <C>               <C>                 <C>           <C>

                                                                           Three Months Ended                 Six Months Ended
                                                                               June 30,                          June 30,           
                                                                      --------------------------------------------------------------
                                                                             1997         1996              1997           1996
                                                                      --------------------------------------------------------------

Operating Revenues:
     Oil and gas sales                                                $    8,528     $   1,441            $ 11,791      $ 2,821
     Gas gathering,  marketing and processing                              1,391           771               5,283        1,528
     Oil field services and international sales                              135            99               3,606          201
                                                                      --------------------------------------------------------------

Total Operating Revenues                                                  10,054         2,311              20,680        4,550
                                                                      --------------------------------------------------------------

Operating Costs and Expenses
     Oil and gas production                                                3,143           561               4,740        1,126
     Gas gathering, marketing and processing                                 978           670               3,938        1,314
     Oil field services and international sales                               86           160               3,424          327
     Depreciation and depletion                                            3,379           578               4,460        1,084
     General and administrative                                              429           221                 651          443
                                                                      --------------------------------------------------------------

Total Operating Costs and Expenses                                         8,015         2,190              17,213        4,294
                                                                      --------------------------------------------------------------

Operating Profit (Loss)                                                    2,039           121               3,467          256

     Other income                                                             83           160                 155          186
     Interest expense                                                     (3,690)         (245)             (4,758)        (499)
                                                                      --------------------------------------------------------------

Net Income (Loss) before income tax and minority interest                 (1,568)           36              (1,136)         (57)

     Benefit (Provision) for deferred income tax                             596            -                  432            -
                                                                      --------------------------------------------------------------

Net Income (Loss) before minority interest                                  (972)           36                (704)         (57)

     Minority interest in subsidiary earnings                                 (2)           -                  (20)           -
                                                                      --------------------------------------------------------------

Net Income (Loss) Before Extraordinary Loss                                 (974)           36                (724)         (57)

Extraordinary Loss From Early Extinguishment of Debt                      (1,384)           -               (1,384)           -
                                                                      --------------------------------------------------------------

Net Income (Loss)                                                         (2,358)           36              (2,108)         (57)

     Dividends Applicable to Preferred Stock                                (219)         (168)               (438)        (340)
                                                                      --------------------------------------------------------------

Loss Applicable to Common Shares                                      $   (2,577)    $    (132)           $ (2,546)     $  (397)
                                                                      ==============================================================

Loss Before Extraordinary Loss per Common Share                       $    (0.09)    $   (0.01)           $  (0.09)     $ (0.03)
                                                                      

Extraordinary Loss per Common Share                                   $    (0.10)    $     -              $  (0.10)     $    -
                                                                      --------------------------------------------------------------

Loss per Common Share                                                 $    (0.19)    $   (0.01)           $  (0.19)     $ (0.03)
                                                                      ==============================================================

Common Shares Used In Per Share Calculation                           13,602,940     11,710,065          13,644,884     11,658,958
                                                                      ==============================================================

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

</TABLE>

                                      F-31

<PAGE>



                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (UNAUDITED)
                                 (in thousands)
<TABLE>
<CAPTION>
<S>                                                                              <C>                  <C>


                                                                                          Six Months Ended
                                                                                               June 30,
                                                                                ----------------------------------

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

CASH FLOWS FROM OPERATING ACTIVITIES
       Net income (loss)                                                        $    (2,108)          $   (57)
       Adjustments to reconcile net income (loss) to cash provided by
       (used for) operating activities:
          Extraordinary loss                                                          1,384               -
          Depreciation and depletion                                                  4,460             1,084
          Amortization of financing fees                                                153               -
          Deferred income taxes                                                        (432)              -
          Minority interest                                                              20               -
          (Gain) Loss on sale of assets                                                  -               (143)
          Other                                                                          51               -
          Change in certain assets and liabilities
              Accounts and notes receivables                                         (6,029)             (479)
              Other current assets                                                     (332)              (82)
              Deposits and other assets                                                  -               (401)
              Accounts payable and accrued liabilities                                1,634               351
                                                                                ----------------------------------
NET CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES                             $    (1,198)          $   273
                                                                                ----------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Proceeds from the sale of assets                                                   463               188
     Additions to property and equipment                                           (141,667)          (37,301)
     Loan made for promissory note receivable                                          (145)             -
     Payments received on promissory note receivable                                    164              -
                                                                                ----------------------------------
NET CASH USED BY INVESTING ACTIVITIES                                              (141,185)          (37,113)
                                                                                ----------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from issuance of long-term debt and production payment                335,000            54,313
     Fees paid related to financing activities                                       (7,881)             -
     Proceeds from short-term notes payable                                           2,699              -
     Payments of principal on long-term debt and production payment                (186,817)          (15,890)
     Payment of fees on issuance of preferred stock                                    (505)             -
     Proceeds from issuance of common and preferred stock,
          net of offering costs                                                          12              -
     Dividends paid                                                                    (241)             (349)
                                                                                ----------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                           142,267            38,074

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   (116)            1,234                      
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      1,687             1,544
                                                                                ---------------------------------
 
 CASH AND CASH EQUIVALENTS, END OF PERIOD                                       $     1,571           $ 2,778
                                                                                =================================
      

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

</TABLE>


                                      F-32

<PAGE>

                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  June 30, 1997
                                   (Unaudited)

                                 
NOTE 1 - MANAGEMENT'S REPRESENTATION

     The  consolidated  balance  sheet as of June  30,  1997,  the  consolidated
statements  of operations  for the six months ended June 30, 1997 and 1996,  and
the  consolidated  statements of cash flows for the six month periods then ended
are unaudited.  In the opinion of management,  all necessary  adjustments (which
include only normal recurring  adjustments) have been made to present fairly the
financial  position,  results of  operations  and  changes in cash flows.

     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting  principles
have been condensed or omitted.  It is suggested that these condensed  financial
statements  be read in  conjunction  with the  financial  statements  and  notes
thereto  included in the December 31, 1996 annual  report on Form 10-KSB for the
Company. The results of operations for the six month period ended June 30, 1997,
are not necessarily indicative of the operating results for the full year.

     The accompanying  consolidated financial statements include the accounts of
the Company and its  wholly-owned  subsidiaries.  All  significant  intercompany
transactions and balances have been eliminated in  consolidation.  Certain items
have been reclassified to conform with the current presentation.

NOTE 2 - RECENT EVENTS

     In February,  1997,  the Company  entered into a definitive  agreement with
Burlington  Resources,  Inc. to acquire for $143.5  million,  subject to certain
purchase  price  adjustments,  effective  January 1,  1997,  the  Permian  Basin
Properties  consisting  of 25 field  areas in West  Texas and 22 field  areas in
Southeast New Mexico  containing  1,852  producing oil and natural gas wells. In
accordance  with  the  definitive  acquisition  agreement,  the  Company  made a
performance deposit of $10 million against the purchase price.

     On April 30, 1997,  the Company closed on the purchase of the Permian Basin
Properties for a net purchase price of  approximately  $133 million,  including,
but not limited to, certain adjustments for a January 1, 1997 effective date.

     The Company financed the acquisition of the Permian Basin Properties with a
new $130.0  million  credit  facility (the "New Credit  Facility")  and a senior
subordinated  credit  facility of $60.0  million (the  "Bridge Loan  Facility").
Borrowings  of $119.5  million  under the New Credit  Facility and $60.0 million
under the Bridge Loan  Facility were used to pay the $123.0  million  balance of
the $133.0 million net purchase price for the Permian Basin Properties, to repay
the $53.7  million in  outstanding  indebtedness  as of April 30, 1997 under the
Company's  previous  $100.0  million  credit  facility  and  to  pay  the  costs
associated with the Permian Basin acquisition and the

                                      F-33
<PAGE>


related financings.

     On May  28,  1997,  the  Company  completed  an  offering  of  $140,000,000
aggregate  principal  amount of its 10%  Senior  Notes  due 2007 (the  "Notes").
Interest on the Notes will accrue from their date of original  issuance and will
be  payable  semi-annually  in  arrears  on June 1 and  December 1 of each year,
commencing on December 1, 1997, at the rate of 10% per annum.  The Notes will be
redeemable,  in whole or in part,  at the option of the Company on or after June
1, 2002, at the redemption prices set forth herein, plus accrued interest to the
date of  redemption.  The Notes will be  general  unsecured  obligations  of the
Company  and will rank pari passu with any  unsubordinated  indebtedness  of the
Company and will rank senior in right of payment to all subordinated obligations
of the Company.  The net proceeds  from the offering were  approximately  $135.5
million after  deducting  estimated fees and expenses of $4.5 million payable by
the Company. The Company utilized the net proceeds to repay the $60.0 million of
outstanding   indebtedness   under  the  Bridge  Loan  Facility  and  to  reduce
indebtedness under the New Credit Facility by approximately $75.5 million. As of
June 30, 1997, the Company had approximately $47 million of secured indebtedness
outstanding  (excluding  unused  commitments of $13 million under the New Credit
Facility).


                                      F-34

<PAGE>



                          INDEPENDENT AUDITORS' REPORT

Board of Directors
Magnum Hunter Resources, Inc.
Irving, Texas

         We have audited the  accompanying  historical  summaries of revenue and
direct  operating  expenses of  properties  to be  acquired  April 30, 1997 (the
"Permian Basin  Properties"),  for the years ended  December 31, 1996,  1995 and
1994.  The  historical   summaries  are  the  responsibility  of  the  Company's
management.  Our  responsibility  is to express  an  opinion  on the  historical
summaries 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 historical summaries are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and  disclosures in the historical  summary.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall historical summary  presentation.
We believe that our audit provides a reasonable basis for our opinion.

     The  accompanying  historical  summaries  were  prepared for the purpose of
complying  with  the  rules  and  regulations  of the  Securities  and  Exchange
Commission (for inclusion in the Form S-4 of Magnum Hunter  Resources,  Inc.) as
described  in Note 1 and are not intended to be a complete  presentation  of the
properties' revenues and expenses.

         In our opinion,  the  historical  summaries  referred to above  present
fairly, in all material  respects,  the revenue and direct operating expenses of
the  properties  to be acquired  April 30, 1997, in  conformity  with  generally
accepted accounting principles.


        
HEIN + ASSOCIATES LLP



April 23, 1997
Dallas, Texas




                                      F-35

<PAGE>



                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                            PERMIAN BASIN PROPERTIES
         HISTORICAL SUMMARIES OF REVENUES AND DIRECT OPERATING EXPENSES
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
             AND FOR THE FOUR MONTH PERIODS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
<S>                                                        <C>                  <C>                <C>        

                                                           Year Ended 1996     Year Ended 1995     Year Ended 1994
                                                           ---------------     ---------------     ---------------
OIL AND GAS SALES.......................................    $39,433,000         $30,098,000          $33,605,000
DIRECT OPERATING EXPENSES...............................    (11,646,000)        (11,711,000)         (12,314,000)
                                                         ------------------  ------------------  -------------------
NET REVENUE.............................................    $27,787,000         $18,387,000          $21,291,000
                                                         ==================  ==================  ===================
</TABLE>


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


                                                       Four Months ended      Four Months Ended
                                                         April 30, 1997         April 30, 1996
                                                           (Unaudited)             (Unaudited)
                                                     ------------------      ------------------
OIL AND GAS SALES...................................     $12,627,000           $12,323,000
DIRECT OPERATING EXPENSES                                 (3,039,000)           (3,891,000)
                                                     ------------------      ------------------
NET REVENUE                                              $ 9,588,000           $ 8,432,000
                                                     ==================      ==================
</TABLE>



See Notes to Historical  Summaries of Revenues and Direct Operating Expenses for
the Years Ended December 31, 1996, 1995 and 1994 and for the Four Month Periods
Ended April 30, 1997 and 1996.


                                      F-36

<PAGE>



                 MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
                            PERMIAN BASIN PROPERTIES
     NOTES TO HISTORICAL SUMMARIES OF REVENUES AND DIRECT OPERATING EXPENSES
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
             AND FOR THE FOUR MONTH PERIODS ENDED APRIL 30, 1997 AND 1996

NOTE 1-BASIS OF PREPARATION

         The accompanying  historical summaries of revenues and direct operating
expenses  relate to the  operations of the oil and gas properties to be acquired
by  Magnum  Hunter  Resources,  Inc.  (the  "Company")  on April  30,  1997 from
Burlington Resources Oil and Gas Company (Burlington).  The properties are to be
acquired for approximately $133,000,000, net of purchase adjustments.

         Revenues are recorded  when the  Company's  share of oil or natural gas
and related liquids are sold.  Direct  operating  expenses are recorded when the
related liability is incurred. Direct operating expenses include lease operating
expenses,  ad valorem taxes and production taxes.  Depreciation and amortization
of oil and gas properties,  general and administrative expenses and income taxes
have been  excluded  from  operating  expenses  in the  accompanying  historical
summaries  because the amounts would not be comparable to those  resulting  from
proposed  future  operations.  Sales of natural gas and oil (until  August 1996)
have generally been made to an affiliated entity of Burlington.
   
     The historical summaries presented herein were prepared for the purposes of
complying with the financial statement requirements of a business acquisition to
be  filed  on Form  S-4 as  promulgated  by  Regulation  S-B  Item  3-10 of the
Securities Exchange Act of 1934.
    
 Unaudited Information

     The  historical  summaries for the four month periods ended April 30, 1997
and 1996 were taken from Burlington's books and records without audit.  However,
in  the  opinion  of  management,  such  information  includes  all  adjustments
(consisting only of normal  recurring  accruals) which are necessary to properly
reflect the historical  summaries of the Permian Basin  Properties for the four
month periods ended April 30, 1997 and 1996.

NOTE 2-CONTINGENCIES

         The properties to be acquired are subject to several  lawsuits  against
Burlington that have arisen from the ordinary  course of operations.  Burlington
has  indemnified  the Company in the  Purchase  and Sale  Agreement  against any
liability from those claims.

         In the Purchase and Sale Agreement,  Burlington agreed to indemnify the
Company against  environmental  claims  relating to the acquired  properties and
arising prior to January 1, 1997 provided that the Company  notifies  Burlington
of such claims by December 31,  1997.  Burlington  will provide  indemnification
against such claims up to $10,762,500  and share the next  $21,525,000 of claims
with the Company on an equal basis.  Burlington  represented in the Purchase and
Sale Agreement that no material environmental claims have been asserted; however
certain of these properties require remediation which, in the Company's opinion,
will not result in material costs.

NOTE 3-SUPPLEMENTAL INFORMATION ON OIL AND GAS RESERVES (UNAUDITED)

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

         The  following   estimates  of  proved   reserves  have  been  made  by
independent engineers.  The estimated net interests in proved reserves are based
upon  subjective  engineering  judgments and may be affected by the  limitations
inherent in such  estimation.  The process of estimating  reserves is subject to
continual  revision as additional  information  becomes available as a result of
drilling,  testing,  reservoir studies and production  history.  There can be no
assurance  that such  estimates  will not be  materially  revised in  subsequent
periods.



                                      F-37

<PAGE>



         Estimated  quantities of proved oil and gas reserves of the  properties
to be acquired April 30, 1997 are as follows:
<TABLE>
<CAPTION>
<S>                                                                   <C>                <C>

                                                                                         Natural Gas (Thousand
                                                                      Oil (Barrels)           Cubic Feet)
December 31, 1996
   Proved reserves...............................................      15,291,000             99,876,000
                                                                      =============          =============  

   Proved developed reserves.....................................       8,968,000             77,373,000
                                                                      =============          =============

December 31, 1995
   Proved reserves...............................................      16,176,000           108,476,000
                                                                      =============         ==============

   Proved developed reserves.....................................       9,853,000            85,973,000
                                                                      =============         ==============

December 31, 1994
   Proved reserves...............................................      17,121,000           118,076,000
                                                                      =============         ==============


   Proved developed reserves.....................................      10,798,000            95,573,000
                                                                      =============         ==============
</TABLE>


         The changes in proved  reserves for the years ended  December 31, 1996,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
<S>                                                                        <C>                 <C>

                                                                                            Natural Gas (Thousand
                                                                            Oil (Barrels)           Cubic Feet)
Reserves at January 1, 1994......................................             18,120,000           128,066,000
Revisions and other..............................................                 55,000             1,417,000
Production.......................................................            (1,054,000)          (11,407,000)
                                                                  ---------------------  ---------------------
Reserves at December 31, 1994....................................             17,121,000           118,076,000
Revisions and other..............................................                 73,000               730,000
Production.......................................................            (1,018,000)          (10,330,000)
                                                                  ---------------------  ---------------------
Reserves at December 31, 1995....................................             16,176,000           108,476,000
Revisions and other..............................................                 29,000               808,000
Production.......................................................              (914,000)           (9,408,000)
                                                                  ---------------------  ---------------------
Reserves at December 31, 1996....................................             15,291,000            99,876,000
                                                                  ====================== =====================
</TABLE>

                                      F-38

<PAGE>

         The standardized  measure of discounted estimated future net cash flows
related to proved oil and gas reserves at December 31, 1996,  1995 and 1994 were
as follows:
<TABLE>
<CAPTION>
<S>                                             <C>                      <C>


                                                     1996                   1995                  1994
                                                     ----                   ----                  ----
Future cash inflows........................           $769,681,000      $410,721,000          $423,775,000
Future development and production costs....          (300,868,000)      (275,252,000)         (285,124,000)
                                            ---------------------  ---------------------  ---------------------
Future net cash flows, before income tax...            468,813,000       135,469,000           138,651,000
Future income taxes........................          (116,660,000)                 -           (1,103,000)
                                            ---------------------  ---------------------  ---------------------
Future Net Cash Flows......................            352,153,000       135,469,000           137,548,000
10% annual discount........................          (169,385,000)       (60,181,000)          (59,395,000)
                                            ---------------------  ---------------------  ---------------------
Standardized Measure of Discounted
   Future
Net Cash Flows.............................           $182,768,000       $75,288,000           $78,153,000
                                            ======================  ====================== ====================

</TABLE>

         The primary changes in the standardized measure of discounted estimated
future net cash flows for the years ended December 31, 1996,  1995 and 1994 were
as follows:
<TABLE>
<CAPTION>
<S>                                               <C>                      <C>                 <C>

                                                            1996                 1995                  1994
                                                            ----                 ----                  ----
Beginning of year...............................        $75,288,000           $78,153,000           $95,678,000
Sales of oil and gas produced, net of
   production costs.............................        (27,787,000)          (18,387,000)          (21,291,000)
Net change in price and costs...................        182,919,000             6,800,000           (13,600,000)
Change in quantity estimates and other..........            933,000               432,000               611,000
Accretion of discount...........................          7,528,000             7,800,000             9,568,000
Net change in income taxes......................        (56,113,000)              490,000             7,187,000
                                                   -----------------    -------------------   ------------------
End of year.....................................       $182,768,000           $75,288,000           $78,153,000
                                                   =================    ===================   ==================
</TABLE>


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

          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-39

<PAGE>





     No dealer,  salesperson,  or other person has been  authorized  to give any
information  or to  make  any  representations  in  connection  with  the  offer
contained herein other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or the Initial  Purchasers.  This  Prospectus does not
constitute an offer to sell or the solicitation of any offer to buy any security
other than those to which it relates,  nor does it  constitute an offer to sell,
or the  solicitation  of an offer to buy, to any person in any  jurisdiction  in
which  such  offer or  solicitation  is not  authorized,  or in which the person
making such offer or solicitation is not qualified to do so, or to any person to
whom it is unlawful to make such offer or solicitation.  Neither the delivery of
this  Prospectus nor any sale made  hereunder  shall,  under any  circumstances,
create  any  implication  that  there has been no change in the  affairs  of the
Company  since the date  hereof  nor that the  information  contained  herein is
correct as of any time subsequent to the date hereof. 

                                   ---------

                                TABLE OF CONTENTS

                                                                            Page
Prospectus Summary..........................................................  7
Risk Factors................................................................ 20
Use of Proceeds............................................................. 29
The Exchange Offer.......................................................... 30
Capitalization.............................................................. 41
Unaudited Pro Forma Combined
  Financial Data............................................................ 42
Selected Consolidated Financial Data........................................ 48
Management's Discussion and Analysis of
  Financial Condition and Results
  of Operations............................................................. 50
Business and Properties..................................................... 61
Management.................................................................. 80
Principal Stockholders and Share
  Ownership of Management................................................... 83
Certain Transactions........................................................ 83
Description of New Credit Facility.......................................... 84
Description of the Exchange Notes........................................... 85
Description of the Outstanding Notes........................................115 
Certain Federal Income Tax Considerations...................................115
Book-Entry; Delivery and Form...............................................119
Plan of Distribution........................................................121
Legal Matters...............................................................123
Experts.....................................................................123
Available Information.......................................................124
Incorporation of Certain Documents
   by Reference.............................................................125
Glossary....................................................................126
Index to Consolidated Financial Statements..................................F-1

<PAGE>
   
                        -------------------------------

                                   PROSPECTUS

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





                                  $140,000,000




                                     [LOGO]





                            MAGNUM HUNTER RESOURCES,
                                      INC.





                           10% Senior Notes due 2007



                                October 24, 1997
    
<PAGE>



                                   P A R T II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20.  Indemnification of Directors and Officers.

         The  General  Corporation  Law  of  Nevada  permits  provisions  in the
articles,  by-laws or resolutions approved by shareholders which limit liability
of directors for breach of fiduciary  duty in certain  specified  circumstances.
The Articles of Incorporation,  with certain exceptions,  eliminate any personal
liability of a director to the Company or its  shareholders for monetary damages
for the breach of a director's  fiduciary  duty, and therefore a director cannot
be held  liable  for  damages  to the  Company  or its  shareholders  for  gross
negligence  or lack of due  care in  carrying  out  his  fiduciary  duties  as a
director.  Nevada law permits  indemnification  if a director or officer acts in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the  corporation.  A director or officer must be  indemnified as to
any  matter  in  which  he  successfully  defends  himself.  Indemnification  is
prohibited as to any matter in which the director or officer is adjudged  liable
to the corporation.

Item 21(a).  Exhibits.

         The  information  required by this Item 21(a) is set forth in the Index
to Exhibits accompanying this Registration  Statement and is incorporated herein
by reference.

Item 22.  Undertakings.

         Insofar as indemnification for liabilities arising under the Securities
Act may be  permitted to  directors,  officers  and  controlling  persons of the
registrant  pursuant  to the  provisions  described  under  Item  20  above,  or
otherwise, the registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.

         The undersigned registrant hereby undertakes to respond to requests for
information  that is incorporated  by reference into the prospectus  pursuant to
Items 4, 10(b),  11, or 13 of this Form,  within one  business day of receipt of
such  request,  and to send the  incorporated  documents  by first class mail or
other equally prompt means. This includes information contained in the documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.

         The undersigned  registrant  hereby  undertakes to supply by means of a
post-effective  amendment  all  information  concerning a  transaction,  and the
company  being  acquired  involved  therein,  that  was not the  subject  of and
included in the Registration Statement when it became effective.


                                      II-1

<PAGE>

   

                                   SIGNATURES

     Pursuant to the  requirements  of the Securities  Act of 1933,  each of the
registrants has duly caused this Amendment No. 1 to the  Registration  Statement
to be signed on its behalf by the  undersigned,  thereunto duly  authorized,  in
Irving, Texas, on the 23th day of October, 1997.

                                        MAGNUM HUNTER RESOURCES, INC.

                                          /s/ Gary C. Evans   
                                      By:-----------------------------------
                                         Gary C. Evans
                                         President and Chief Executive Officer


                                        MAGNUM HUNTER PRODUCTION, INC.

                                          /s/ Gary C. Evans
                                      By:-----------------------------------
                                         Gary C. Evans
                                         Chief Executive Officer

 
                                        HUNTER GAS GATHERING, INC.

                                         /s/ Gary C. Evans    
                                      By:-----------------------------------
                                          Gary C. Evans
                                          Chief Executive Officer


                                        GRUY PETROLEUM MANAGEMENT CO.


                                           /s/ Gary C. Evans
                                       By:---------------------------------
                                           Gary C. Evans
                                           Chief Executive Officer


                                        CONMAG ENERGY CORPORATION


                                            /s/ Gary C. Evans
                                        By:--------------------------------
                                           Gary C. Evans
                                           Chief Executive Officer


                                        RAMPART PETROLEUM, INC.


                                            /s/ Gary C. Evans
                                        By:--------------------------------
                                           Gary C. Evans
                                           Chief Executive Officer



                                      II-2

<PAGE>



                          MAGNUM HUNTER RESOURCES, INC.
                                POWER OF ATTORNEY

     Pursuant to the  requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration  Statement has been signed by the following persons in
the capacities and on the dates indicated.


Signature                               Title                         Date

 /s/ Gary C. Evans        
-------------------------     Director, President and Chief     October 23, 1997
Gary C. Evans                 Executive Officer 

Matthew C. Lutz      *                                                      
--------------------------    Director, Chairman of the Board   October 23, 1997
Matthew C. Lutz               and Executive Vice President of
                              Exploration and Business
                              Development

/s/ Chris Tong
--------------------------    Senior Vice President and         October 23 1997
Chris Tong                    Chief Financial Officer

David S. Krueger     *
--------------------------    Vice President and Chief
David S. Krueger              Accounting Officer (principal     October 23, 1997
                              accounting officer)

Gerald W. Bolfing    * 
--------------------------    Director                          October 23, 1997
Gerald W. Bolfing

Oscar C. Lindemann   *                                   
-------------------------     Director                          October 23, 1997
Oscar C. Lindemann   

John H. Trescot, Jr. *
-------------------------     Director                          October 23, 1997
John H. Trescot, Jr.

James E. Upfield     *                                   
--------------------------    Director                          October 23, 1997
James E. Upfield


*By: /s/ Gary C. Evans
--------------------------
Attorney-in-fact

    
                                      II-3

<PAGE>


   
                         MAGNUM HUNTER PRODUCTION, INC.
                                POWER OF ATTORNEY

     Pursuant to the  requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration  Statement has been signed by the following persons in
the capacities and on the dates indicated.



Signature                            Title                             Date


Richard R. Frazier    *                                                         
- ------------------------- Director, President and Chief    October 23, 1997 
Richard R. Frazier          Operating Officer 


/s/ Gary C. Evans                                                     
- ------------------------- Director and Chief Executive     October 23, 1997
Gary C. Evans               Officer(principal
                            executive officer)

/s/ Chris Tong
--------------------------  Senior Vice President and         October 23, 1997 
Chris Tong                  Chief Financial Officer


David S. Krueger      *                                                  
- ------------------------- Vice President and Chief         October 23, 1997
 David S. Krueger           Accounting Officer
                            

Matthew C. Lutz       *                                               
- ------------------------- Director                         October 23, 1997
Matthew C. Lutz


*By: /s/ Gary C. Evans
--------------------------
Attorney-in-fact

    
                                      II-4

<PAGE>

   

                           HUNTER GAS GATHERING, INC.
                                POWER OF ATTORNEY

     Pursuant to the  requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration  Statement has been signed by the following persons in
the capacities and on the dates indicated.



Signature                             Title                             Date

R. Renn Rothrock, Jr.  * 
--------------------------- Director and President            October 23, 1997
R. Renn Rothrock, Jr.

/s/  Gary C. Evans                                                         
--------------------------- Director and Chief Executive      October 23, 1997
Gary C. Evans               Officer (principal executive
                            officer)

/s/ Chris Tong
--------------------------  Senior Vice President and         October 23, 1997  
Chris Tong                  Chief Financial Officer

David S. Krueger  *                                                       
--------------------------- Vice President and Chief          October 23, 1997
David S. Krueger            Accounting Officer
                            

Matthew C. Lutz   *
--------------------------- Director                          October 23, 1997
Matthew C. Lutz


*By: /s/ Gary C. Evans
--------------------------
Attorney-in-fact
    

                                      II-5

<PAGE>
   


                          GRUY PETROLEUM MANAGEMENT CO.
                                POWER OF ATTORNEY

     Pursuant to the  requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration  Statement has been signed by the following persons in
the capacities and on the dates indicated.



Signature                           Title                             Date


Richard R. Frazier     *                                                   
------------------------   Director and Chief Operating      October 23, 1997
Richard R. Frazier          Officer

/s/ Gary C. Evans                                                           
-------------------------  Director and Chief Executive      October 23, 1997
Gary C. Evans               Officer (principal executive
                            officer)

R. Renn Rothrock, Jr.  *
-------------------------  Director and President            October 23, 1997
R. Renn Rothrock, Jr.

/s/ Chris Tong
-------------------------- Senior Vice President and         October 23, 1997   
Chris Tong                  Chief Financial Officer

David S. Krueger       *                                                        
-------------------------  Vice President and Chief          October 23, 1997
David S. Krueger            Accounting Officer
                            

Matthew C. Lutz        *
-------------------------  Director                          October 23, 1997
Matthew C. Lutz


*By: /s/ Gary C. Evans
--------------------------
Attorney-in-fact
    
                                      II-6

<PAGE>

   

                               CONMAG ENERGY, INC.
                                POWER OF ATTORNEY

       


     Pursuant to the  requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration  Statement has been signed by the following persons in
the capacities and on the dates indicated.



Signature                         Title                             Date


/s/ Richard R. Frazier                                                        
--------------------------- Director, President and Chief     October 23, 1997
Richard R. Frazier          Operating Officer


Gary C. Evans           *                                                     
--------------------------- Director and Chief Executive      October 23, 1997
Gary C. Evans               Officer (principal executive
                            officer)

David S. Krueger        *                                                
--------------------------  Vice President and Chief          October 23, 1997
David S. Krueger            Accounting Officer
                            

/s/ Chris Tong
--------------------------  Senior Vice President and         October 23, 1997  
Chris Tong                  Chief Financial Officer


Matthew C. Lutz         *
--------------------------  Director                          October 23, 1997
Matthew C. Lutz



*By: /s/ Gary C. Evans
--------------------------
Attorney-in-fact
    
                                      II-7

<PAGE>

   

                             RAMPART PETROLEUM, INC.
                                POWER OF ATTORNEY

       
     Pursuant to the  requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration  Statement has been signed by the following persons in
the capacities and on the dates indicated.



Signature                         Title                             Date

/s/ Richard R. Frazier                                                        
------------------------    Director, President and Chief    October 23, 1997
Richard R. Frazier           Operating Officer

Gary C. Evans         *                                                   
-------------------------   Director and Chief Executive     October 23, 1997
Gary C. Evans                Officer (principal executive
                             officer)
/s/ Chris Tong
-------------------------   Senior Vice President and        October 23, 1997  
Chris Tong                   Chief Financial Officer

David S. Krueger       *                                                 
------------------------    Vice President and Chief         October 23, 1997
David S. Krueger             Accounting Officer
                             

Matthew C. Lutz         *
------------------------    Director                         October 23, 1997
Matthew C. Lutz


*By: /s/ Gary C. Evans
--------------------------
Attorney-in-fact
    
                                      II-8

<PAGE>
   


                                INDEX TO EXHIBITS

Exhibit
Number                     Description of Exhibit

3.1 & 4.1                  Articles of Incorporation  (Incorporated by reference
                           to  Registration  Statement  on  Form  S-18, File No.
                           33-30298-D)
3.2 & 4.2                  Articles  of  Amendment to Articles of  Incorporation
                           (Incorporated by reference to Form  10-K for the year
                           ended December 31, 1990)
3.3 & 4.3                  Articles  of  Amendment  to Articles of Incorporation
                           (Incorporated by reference to  Registration Statement
                           on Form SB-2, File No. 33-66190)
3.4 & 4.4                  Articles of Amendment  to Articles  of  Incorporation
                           (Incorporated by reference to  Registration Statement
                           on Form S-3, File No. 333-30453)
3.5 & 4.5                  By-Laws,  as  Amended  (Incorporated by  reference to
                           Registration Statement on Form SB-2File No. 33-66190)
3.6 & 4.6                  Certificate of Designation of 1996 Series A Preferred
                           Stock (Incorporated  by  reference to  Form 8-K dated
                           December 26, 1996, filed January 3, 1997)
3.7 & 4.7                  Amendment to Certificate  of  Designations  for  1996
                           Series A Convertible Preferred Stock (Incorporated by
                           reference to Registration Statement on Form S-3, File
                           No. 333-30453)
4.8                        Indenture  dated May 29, 1997 between  Magnum  Hunter
                           Resources,  the subsidiary  guarantors  named therein
                           and First Union National Bank of North  Carolina,  as
                           Trustee (Incorporated by Reference to Registration 
                           Statement on Form S-4 File No. 333- 31149)
4.9                        Form of 10% Senior Note due 2007 (Incorporated by
                           Reference to Registration Statement on Form S-4 File
                           No. 333- 31149)
5                          Opinion of Thompson & Knight, a Professional 
                           Corporation(Incorporated by Reference to Registration
                           Statement on Form S-4 File No. 333- 31149)
10.1                       Amended and Restated Credit Agreement,dated April 30,
                           1997,  between  Magnum  Hunter  Resources,  Inc.  and
                           Bankers Trust Company, et al. (Incorporated by 
                           Reference to Registration Statement on Form S-4 File
                           No. 333- 31149)
10.2                       First  Amendment  to  Amended  and  Restated   Credit
                           Agreement, dated April 30, 1997,between Magnum Hunter
                           Resources, Inc. and Bankers Trust Company, et al.
                           (Incorporated by Reference to Registration Statement
                           on Form S-4 File No. 333- 31149)
10.3                       Employment Agreement for Gary C. Evans  (Incorporated
                           by reference to Registration
                           Statement on Form S-4, File No. 333-2290)
10.4                       Employment Agreement for Matthew C. Lutz Incorporated
                           by reference to Registration   Statement on Form S-4,
                           File No. 333-2290)
10.5                       Stock  Purchase   Agreement   among   Magnum   Hunter
                           Resources, Inc. and Trust Company of the West and TCW
                           Asset Management Company, in the capacities described
                           herein,TCW Debt and Royalty Fund IVB and TCW Debt and
                           Royalty  Fund  IVC,  dated  as  of  December  6, 1996
                           (Incorporated by reference to Form 8-K dated December
                           26, 1996, filed January 3, 1997)
10.6                       Registration Rights  Agreement,  dated May  29, 1997,
                           between  Magnum  Hunter Resources, Inc. and   Bankers
                           Trust Company, et al. (Incorporated by Reference to 
                           Registration Statement on Form S-4 File No.333-31149)
10.7                       Purchase  and Sale  Agreement,  dated  May   17, 1996
                           between  Meridian  Oil,  Inc.  and   ConMag   Energy 
                           Corporation (Incorporated by  reference  to Form 8-K,
                           dated June 28, 1996, filed July 12, 1996)
10.8                       Purchase and Sale Agreement,  dated February 27, 1997
                           among  Burlington  Resources  Oil  and  Gas  Company,
                           Glacier Park Company and Magnum Hunter Production,Inc
                           (Incorporated by reference to  Form 8-K, dated  April
                           30, 1997, filed May 12, 1997)
21                         Subsidiaries of the Registrant (Incorporated by 
                           Reference to Registration Statement on Form S-4 
                           File No. 333- 31149)
23.1                       Consent  of   Thompson  &   Knight,   a  Professional
                           Corporation   (contained  in  its  opinion  filed  as
                           Exhibit 5)
23.2**                     Consent of Deloitte & Touche LLP
23.3**                     Consent of Hein + Associates LLP
23.4                       Consent of Ryder Scott Co. (Incorporated by Reference
                           to Registration Statement on Form S-4 File  No.  333-
                           31149)

<PAGE>


23.5                       Consent of Gaffney, Cline & Associates Inc.
                           (Incorporated by Reference to Registration Statement
                           on Form S-4 File No. 333- 31149)
23.6                       Consent of Glenn Harrison Petroleum Consultants, Inc.
                           (Incorporated by Reference to Registration Statement
                           on Form S-4 File No. 333- 31149)
23.7                       Consent of James J. Weisman, Jr.
                           (Incorporated by Reference to Registration Statement
                           on Form S-4 File No. 333- 31149)
23.8                       Consent of Hensley Consultants, Inc.
                           (Incorporated by Reference to Registration Statement
                           on Form S-4 File No. 333- 31149)
25                         Statement of Eligibility of First Union National Bank
                           of North Carolina, as Trustee (Incorporated by 
                           Reference to Registration Statement
                           on Form S-4 File No. 333- 31149)


    **   Filed herewith.