Securities and Exchange Commission
                           Washington, D.C.  20549

                                  Form 10-K

(mark one)
[X]   Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the fiscal year ended December 31, 1997

or
[   ]  Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Transition Period
from __________________________ to ___________________________.

Commission file number 0-17267

Mallon Resources Corporation
(Exact name of registrant as specified in its charter)

    Colorado                                 84-1095959
(State or other jurisdiction       (IRS Employer Identification No.)
of incorporation or organization)

 999 18th Street, Suite 1700 Denver, Colorado        80202
 (Address of principal executive offices)            (zip code)

Registrant's telephone number, including area code: (303) 293-2333

Securities registered pursuant to Section 12(b) of the Act:   None

Securities registered pursuant to Section 12(g) of the Act:
   Common Stock, par value $0.01 per share
       (Title of Class)

Indicate by check mark whether the registrant (l) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
[X] Yes     [   ] No

As of the close of business on March 24, 1998, the aggregate
market value of the shares of voting stock held by non-affiliates
of the registrant, based upon the sales price for a share of the
registrant's Common Stock as reported on the Nasdaq National
Market tier of the Nasdaq Stock Market, was approximately
$59,932,000.

As of March 24, 1998, 6,996,200 shares of the registrant's Common
Stock, par value $0.01 per share, were outstanding.

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment hereto.     [X]

Documents Incorporated By Reference:

Portions of the registrant's Proxy Statement relating to its 1998
Annual Meeting of Shareholders are incorporated by reference into
Part III of this Report.

Mallon Resources Corporation

Form 10-K
for the fiscal year ended
December 31, 1997

Table of Contents
PART I                                                     Page

Items 1 and 2 Business and Properties                        1
                General History                              1
                Overview of Oil and Gas Operations           1
                Selected Fields and Areas of Interest        2
                Acreage                                      4
                Proved Reserves                              4
                Drilling Activity                            5
                Productive Wells                             5
                Production and Sales                         6
                Marketing                                    6
                Corporate Offices; Officers, Directors
                   and Key Employees                         6
                Laguna Gold Company                          8
                Cautionary Statement Regarding Forward-
                   Looking Statements                        9
                Special Considerations                       9
Item  3       Legal Proceedings                             13
Item  4       Submission of Matters to a Vote of
                Security Holders                            13
PART II
Item  5       Market for the Registrant's Common Equity
                and Related Stockholder Matters             14
                Price Range of Common Stock                 14
                Holders                                     14
                Dividend Policy                             14
Item  6       Selected Financial Data                       15
Item  7       Management's Discussion and Analysis of
                Financial Condition and Results of
                Operations                                  16
                Overview                                    16
                Liquidity and Capital Resources             16
                Results of Operations                       18
                Hedging Activities                          21
                Miscellaneous                               22
Item  8       Financial Statements and Supplementary Data   22
Item  9       Changes in and Disagreements with Accountants
                on Accounting and Financial Disclosure      22
PART III
Item 10       Directors and Executive Officers of the
                Registrant                                  23
Item 11       Executive Compensation                        23
Item 12       Security Ownership of Certain Beneficial
                Owners and Management                       23
Item 13       Certain Relationships and Related
                Transactions                                23
PART IV
Item 14       Exhibits, Financial Statements and Reports
                on Form 8-K                                 23
SIGNATURES                                                  25
EXHIBIT INDEX                                               26
GLOSSARY OF TERMS                                           27
CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements                 F-1
Report of Independent Public Accountants                   F-2
Report of Independent Accountants                          F-3
Consolidated Balance Sheets                                F-4
Consolidated Statements of Operations                      F-5
Consolidated Statements of Shareholders' Equity            F-6
Consolidated Statements of Cash Flows                      F-7
Notes to Consolidated Financial Statements                 F-9

PART I
ITEMS 1 AND 2:  BUSINESS AND PROPERTIES

General History
Mallon Resources Corporation, a Colorado corporation (the
"Company"), is engaged in the domestic oil and gas development,
exploration and production business through its wholly-owned
subsidiary, Mallon Oil Company ("Mallon Oil").  Substantially all
of the Company's estimated proved reserves are located in the San
Juan and Delaware Basins of New Mexico, where the Company has
been active since 1982.  The Company has accumulated significant
acreage positions in these two basins, where the Company believes
its technical and operational experience and its database of
information enable it to effectively exploit and develop its
properties.  The Company currently has identified in excess of
300 potential drilling and recompletion locations on its acreage
in the San Juan and Delaware Basins.

The Company's common stock is traded on the Nasdaq National
Market tier of the Nasdaq Stock Market under the symbol "MLRC."
The Company's executive offices are at 999 18th Street, Suite
1700, Denver, Colorado  80202 (telephone 303/293-2333).  The
Company's Transfer Agent is Securities Transfer Corporation,
Dallas, Texas.

Overview of Oil and Gas Operations
The Company's oil and gas operations are conducted primarily in
the State of New Mexico.  The Company's activities are focused in
the San Juan Basin of northwest New Mexico where it has been
active since 1984 and in the Delaware Basin of southeast New
Mexico where it has been active since 1982.  Due to its
substantial acreage positions and operating experience in these
areas, the Company intends to continue to concentrate its
operational efforts on these two basins for the foreseeable
future.

The Company's primary business strategy is to increase its proved
oil and gas reserves and its cash flows by means of its drilling
and recompletion activities in the San Juan and Delaware Basins.
The principal components of this strategy are:

- Development of Existing Acreage.  The Company's primary
operating strategy is to increase its proved reserves through
relatively lower-risk activities such as development drilling,
recompletions of existing wells into additional productive
zones, multi-zone completions and enhanced recovery
activities.

- Exploration Through Exploitation.  Numerous potentially
productive geologic formations tend to be stacked atop one
another in the San Juan and Delaware Basins, allowing the
Company to (i) target multiple potential pay zones in most
wells, thus reducing drilling risks, and (ii) conduct
exploration operations in conjunction with its development
drilling.  Wells drilled to one horizon offer opportunities to
examine up-hole zones or can be drilled to deeper prospective
formations for relatively little additional cost.

- Control of Operations.  For the year ended December 31, 1997,
approximately 77% of the Company's production on a BOE basis
was produced from properties operated by the Company.  The
Company believes that this level of operating control,
combined with the Company's operating experience in the San
Juan and Delaware Basins, allows the Company to better control
ongoing operations and costs, field development decisions, and
the timing and nature of capital expenditures.

- Strategic Acquisitions.  The Company also makes acquisitions
of properties located within its core areas of operations.
The Company believes that its knowledge of the San Juan and
Delaware Basins allows the Company to effectively identify and
evaluate valuable acquisition opportunities.  Strategic
acquisitions may include increasing the Company's ownership
interest in fields where the Company has an existing interest
or acquiring additional property interests in the San Juan and
Delaware Basins.

In September 1993, in a significant acquisition, the Company
purchased its core group of Delaware Basin properties from
Pennzoil Exploration and Production Company.  In January 1997, in
an important transaction, the Company acquired additional
interests in some of its key San Juan Basin gas properties and
became operator of those properties.

In October 1996 and December 1997, the Company completed
significant financings in which it sold an aggregate of 4.6
million shares of common stock for combined net proceeds of
approximately $32.8 million.  These financings have enabled the
Company to accelerate the pace of its development and
exploitation of its substantial inventory of oil and gas
properties.

The Company increased its estimated proved reserves from 2.2
MMBOE as of December 31, 1992, to 9.7 MMBOE as of December 31,
1997, a 341% increase.  As of December 31, 1997, the Company's
proved reserves, as estimated by its independent petroleum
engineers, Ryder Scott Company Petroleum Engineers ("Ryder
Scott"), consisted of 1.4 MMBbls of crude oil and 49.872 Bcf of
natural gas, with a Pre-tax SEC 10 Value of $47.9 million.  At
December 31, 1997, the Company owned interests in 243 gross
(91.71 net) producing wells and operated 124, or 51%, of them.

Selected Fields and Areas of Interest
The Company's activities are focused in the San Juan Basin of
northwestern New Mexico and in the Delaware Basin of southeastern
New Mexico.  At December 31, 1997, these areas accounted for
substantially all of the Company's estimated proved reserves,
with 6.7 MMBOE attributable to the Company's San Juan Basin
properties and 3.0 MMBOE attributable to its Delaware Basin
properties.

San Juan Basin, Northwestern New Mexico
The Company has been active in the San Juan Basin since 1984,
where its primary areas of interest are the East Blanco, Gavilan
and Otero areas.  At December 31, 1997, the Company owned
interests in approximately 35,400 gross (23,100 net) acres of oil
and gas leases in the San Juan Basin.  Wells on these leases
produce from a variety of zones in the Ojo Alamo, Pictured
Cliffs, Mesaverde, Mancos and Dakota formations.  The Company has
budgeted capital expenditures of approximately $14.1 million in
the San Juan Basin for 1998.  The actual amount expended in 1998
may vary, possibly substantially, from the budgeted amount due to
circumstances not currently foreseeable, including changes in
plans as drilling results indicate the desirability of increases
or decreases in emphasis on certain properties, new acquisitions,
and other factors.

East Blanco Area, Rio Arriba County, New Mexico.  This area has
been under development by the Company since 1986.  In
transactions completed in 1997, the Company increased its
ownership interest in this area to an average 86% working
interest in a 23,400 acre block and became operator of the
acreage.  All production in the area has been natural gas.  East
Blanco wells typically contain reserves in more than one
productive zone, primarily in the Pictured Cliffs Sandstone at
approximately 4,000 feet and the Ojo Alamo Sandstone at
approximately 3,200 feet.  The wells also penetrate the Fruitland
Coal Formation at approximately 3,800 feet, which is productive
in fields adjacent to East Blanco.  During 1997, the Company
recompleted 11 gas wells in the Ojo Alamo Sandstone.  The Company
has identified approximately 100 potential drilling and
recompletion locations on its East Blanco acreage.  In 1998, the
Company plans to drill or recomplete 41 wells in the Ojo Alamo,
most of which are expected to also test the Pictured Cliffs
Sandstone and Fruitland Coal, and several of which may explore
the Mesaverde Group.  As of December 31, 1997, the Company's
estimated proved reserves in the East Blanco area accounted for
approximately 68% of the Company's total estimated proved
reserves.

Gavilan Field, Rio Arriba County, New Mexico.  The Company owns
and operates seven wells on approximately 1,200 gross (1,150 net)
acres in this field, with an average 34% working interest.
Current production is primarily natural gas from the Mancos Shale
at approximately 6,900 feet and from the Menefee Formation at
approximately 5,400 feet.  In 1997, the Company re-entered one
well and established gas production from the Pictured Cliffs
Sandstone.

Otero Field, Rio Arriba County, New Mexico.  The Company owns and
operates three wells on approximately 4,500 gross (3,900 net)
acres in this field, with an average 90% working interest.  The
wells produce oil from the Mancos Shale at approximately 4,700
feet.  In 1997, the Company drilled and completed an oil well in
a 700 feet-thick interval in the Mancos Shale, and may drill one
well in this field in 1998, which will commingle production from
the Pictured Cliffs, Mesaverde, and Mancos.

Delaware Basin, Southeastern New Mexico
The Delaware Basin has been an area of significant activity for
the Company since 1982, when the Company acquired an interest in
the Brushy Draw Field.  Wells in the Delaware Basin produce from
a variety of formations, the principal of which are the Cherry
Canyon, Brushy Canyon, Bone Spring Limestone, Strawn and Morrow
Formations. These formations each contain multiple potentially
productive zones.  The Cherry Canyon and Brushy Canyon Formations
and the Bone Spring Limestone primarily produce oil at shallow to
medium drilling depths, while the deeper Strawn and Morrow
generally produce natural gas.  The Company's primary properties
in the Delaware Basin are in the White City, Black River, South
Carlsbad, Lea Northeast, and Quail Ridge Fields.  The Company
also continues to assess potential in its Shipp, Lovington
Northeast and Brushy Draw properties.  The Company owns interests
in approximately 24,700 gross (19,400 net) acres of oil and gas
leases in the Delaware Basin.  The Company has budgeted capital
expenditures of approximately $10.6 million in the Delaware Basin
for 1998.  The actual amount expended in 1998 may vary, possibly
substantially, from the budgeted amount due to circumstances not
currently foreseeable, including changes in plans as drilling
results indicate the desirability of increases or decreases in
emphasis on certain properties, new acquisitions, and other
factors.

White City, Black River, and South Carlsbad Fields, Eddy County,
New Mexico.  The Company owns and operates a total of
approximately 11,600 gross (4,400 net) acres in these fields,
with an average working interest of 34%.  These adjacent fields
have been the focus of much of the Company's recompletion and
development activities since 1993.  In 1997, the Company
initiated a multiple-well drilling program to evaluate the
shallow Cherry Canyon and Brushy Canyon Formations, which contain
multiple potential zones between 2,500 and 5,300 feet.  During
1997, the Company drilled or recompleted nine wells in the
program resulting in the discovery of new widespread oil
accumulations within the multiple zones in the Cherry Canyon and
Brushy Canyon Formations.  Evaluation of these oil accumulations
will proceed in 1998.  The Company also continues its Morrow
exploitation program, which began in 1996.  During drilling, a
deep Morrow well tested gas from a Wolfcamp zone at 9,430 feet
and from the uppermost zone in the Morrow Formation at a depth of
11,120 feet.  An additional Morrow well is planned for 1998,
which will also explore for the various up-hole zones with oil
and gas potential in the Cherry Canyon, Brushy Canyon, Wolfcamp,
Canyon, Strawn and Atoka Formations.  As of December 31, 1997,
the Company's estimated proved reserves in these three fields
were 921 MBOE, or approximately 10% of the Company's total
estimated proved reserves.

Lea Northeast Field, Lea County, New Mexico.  The Company owns
and operates approximately 2,400 gross (1,400 net) acres in this
field, with an average working interest of approximately 64%.
The Company continues its active drilling program to develop the
Cherry Canyon play in this field which was begun in 1994.
Additional deeper oil zones were targeted in this program for
drilling in 1997, and during 1997 nine wells were drilled or
recompleted to exploit and explore oil zones in the Cherry
Canyon, Brushy Canyon and Bone Spring.  This drilling resulted in
further extending the productive limits of the Cherry Canyon
between 5,700 and 6,000 feet, extending the productive limits of
the Bone Spring at 10,150 feet, as well as the discovery of a new
Bone Spring oil accumulation at 9,700 feet.  This drilling also
identified oil potential in a new Brushy Canyon zone at 7,300
feet.  For 1998, the Company has planned six wells to continue
the exploitation and exploration of these multiple zones
throughout the Lea Northeast Field and into adjacent Company
acreage.  The Company intends to drill additional wells in Lea
Northeast during 1998 and has delineated 30 additional locations
in the field.  As of December 31, 1997, the Company's estimated
proved reserves in Lea Northeast Field were 575 MBOE or
approximately 6% of the Company's total estimated proved
reserves.

Quail Ridge, Lea County, New Mexico.  Adjacent to Lea Northeast,
the Company controls an approximate 3,400 gross (1,450 net) acre
block on which it operates wells producing from the Bone Spring
and Morrow.  The Quail Ridge Field has primarily produced gas
from the Morrow at depths of approximately 13,500 feet.  The
Company currently has an interest in 11 wells in this area and
operates six of them.  During 1997, the Company drilled five
wells here, including a successful 13,700 foot well to the
Morrow, which has extended the productive limits of the Morrow in
the Quail Ridge Field.  In addition, this well tested oil from
the Strawn while drilling at 12,220 feet, and identified multiple
potential oil zones in the Cherry Canyon and Brushy Canyon
Formations.  For 1998, the Company has planned six wells to
continue the exploration and exploitation of oil and gas in the
Cherry Canyon, Brushy Canyon, Bone Spring, Strawn and Morrow.
The Company controls an approximate 36% working interest in this
acreage.

Shipp and Lovington Northeast Fields, Lea County, New Mexico.
Shipp and Lovington Fields are comprised of a collection of
individual reservoirs, or algal mounds, in a Strawn Formation
interval at depths of approximately 11,500 feet.  The mounds
range in size from 100 to 700 acres.  The Company has interests
in 33 wells and operates 21 wells in these adjacent fields.
During 1996, the Company initiated a low installation cost pilot
waterflood project on one of these mounds.  The Company will
evaluate the success of this secondary recovery project and
determine the feasibility of expanding the project to other
mounds in the fields.  The Company's working interest averages
36% in Lovington Northeast and 53% in Shipp.

Brushy Draw Field, Eddy County, New Mexico.  The Company's
initial drilling and field development began here in 1982.
Current production is from the base of the Cherry Canyon
Formation, at a depth of approximately 5,000 feet.  The Company
operates 14 wells with an average working interest of 64%.  In
1997, the Company drilled and completed one Cherry Canyon
development well in the Brushy Draw Field.

Other Areas
All of the Company's oil and gas operations are currently
conducted on-shore in the United States.  In addition to the
properties described above, the Company has properties in the
states of Colorado, Oklahoma, Wyoming, North Dakota and Alabama.
While the Company intends to continue to produce its existing
wells in those states, it currently does not expect to engage in
any development activities in those areas.

Acreage
The majority of the Company's producing oil and gas properties
are located on leased land held by the Company for as long as
production is maintained.  The Company believes it has
satisfactory title to its oil and gas properties based on
standards prevalent in the oil and gas industry, subject to
exceptions that do not detract materially from the value of the
properties.  The following table summarizes the Company's oil and
gas acreage holdings as of December 31, 1997:

<TABLE>
<CAPTION>
                             Developed           Undeveloped
    Area                     Gross     Net       Gross     Net
<S>                          <C>      <C>        <C>      <C>
San Juan Basin               10,948    4,623     24,452   18,477
Delaware Basin               23,002   18,975      1,760      462
Other                        10,225    3,953      2,931       50

    Total                    44,175   27,551     29,143   18,989
                             ======   ======     ======   ======
</TABLE>

Much of the Delaware Basin developed acreage relates to deeper
natural gas zones as to which larger spacing rules apply. Most of
this developed acreage is undeveloped as to shallower zones.

Proved Reserves

The following table sets forth summary information concerning the
Company's estimated proved oil and gas reserves as of December
31, 1997, based upon a report prepared by Ryder Scott.  All
calculations have been made in accordance with the rules and
regulations of the Securities and Exchange Commission (the
"Commission") and give no effect to federal or state income taxes
otherwise attributable to estimated future net revenues from the
sale of oil and gas.  The present value of estimated future net
revenues has been calculated using a discount factor of 10%.

<TABLE>
<CAPTION>

                                             December 31, 1997
<S>                                                 <C>
Proved Reserves:
   Oil (MBbl)                                        1,381
   Natural gas (MMcf)                               49,872
   Total (MBOE)                                      9,693
Proved Developed Reserves:
   Oil (MBbl)                                        1,110
   Natural gas (MMcf)                               24,709
   Total (MBOE)                                      5,228
Pre-tax SEC 10 Value (in thousands)                $47,890
</TABLE>

Drilling Activity
The following table sets forth, for each of the last three years,
the development drilling activities conducted by the Company:

<TABLE>
<CAPTION>
                   Gross Wells                Net Wells
            Productive   Dry   Total    Productive   Dry   Total
<S>         <C>          <C>   <C>      <C>          <C>   <C>
1995 (1)         8        1       9        4.94     0.68    5.62
1996             4        1       5        2.69     0.34    3.03
1997 (2)        23        3      26       12.99     0.84   13.83
__________
</TABLE>
(1)  Includes one gross (0.3 net) productive exploratory well.
(2)  Includes one gross (0.0225 net) dry exploratory well.
From January 1, 1998 through March 24, 1998, the Company engaged
in the drilling of 13 gross (11.67 net) wells and the
recompleting of 6 gross (4.78 net) wells that are not reflected
in the foregoing table.

Productive Wells
The following table summarizes the Company's gross and net
interests in productive wells at December 31, 1997.  Net
interests represented in the table are net "working interests"
which bear the cost of operations.

<TABLE>
<CAPTION>
                    Gross Wells                 Net Wells
               Oil  Natural Gas  Total    Oil  Natural Gas  Total
<S>            <C>    <C>        <C>      <C>    <C>        <C>
San Juan Basin   4    37         41        4.03   27.96     31.99
Delaware Basin 112    67        179       42.92   14.56     57.48
Other           15     8         23        1.60    0.64      2.24

    Total      131   112        243       48.55   43.16     91.71
               ===   ===        ===       =====   =====     =====
</TABLE>

In addition, the Company owns interests in four waterflood units
in the Delaware Basin, which contain a total of approximately 550
gross wells (8.5 net wells), and 4 gross (2.13 net) salt water
disposal wells.

Production and Sales
The following table sets forth information concerning the
Company's total oil and gas production and sales for each of the
last three fiscal years.

<TABLE>
<CAPTION>

                                         Year Ended December 31,
                                          1997     1996     1995
<S>                                      <C>      <C>      <C>
Net Production:
   Oil (MBbl) (1)                          196      174      173
   Natural gas (MMcf) (1)      	         2,350    1,286    1,238
   Total (MBOE)                            588      388      379

Average Sales Price Realized (2):
   Oil (per Bbl)                        $19.31   $18.05   $16.45
   Natural gas (per Mcf)                $ 2.04   $ 2.11   $ 1.58
   Per BOE                              $14.60   $15.09   $12.66

Average Cost (per BOE):
   Production tax and marketing expense $ 1.91   $ 1.84   $ 1.54
   Lease operating expense              $ 3.25   $ 3.96   $ 3.39
   Depletion                            $ 4.43   $ 4.96   $ 5.70
__________
</TABLE>
(1)  Includes 26 MBbl and 692 MMcf in 1995 delivered
pursuant to the terms of a volumetric production payment
agreement.
(2)  Includes effects of hedging.

Marketing
The Company's oil and liquids are generally sold on the open
market to unaffiliated purchasers, generally pursuant to purchase
contracts that are cancelable on 30 days notice.  The price paid
for this production is generally an established or posted price
that is offered to all producers in the field, plus any
applicable differentials.  Natural gas is generally sold on the
spot market or pursuant to short-term contracts.  Prices paid for
crude oil and natural gas fluctuate substantially.  Because
future prices are difficult to predict, the Company hedges a
portion of its oil and gas sales to protect against market
downturns.  The nature of hedging transactions is such that
producers forego the benefit of some price increases that may
occur after the hedging arrangement is in place.  The Company
nevertheless believes that hedging is prudent in certain
circumstances in order to minimize the risk of falling prices.

Corporate Offices; Officers, Directors and Key Employees
The Company's principal office is located at 999 18th Street,
Suite 1700, Denver, Colorado 80202.  The Company's phone number
is (303) 293-2333.  The Company employs 19 full-time employees
and one part-time employee at this office.  The Company maintains
an oil field operations office in Carlsbad, New Mexico, where it
employs nine individuals.

The following are the members of the Company's Board of Directors
and the Company's executive officers:

     Name              Age  Title(s)

George O. Mallon, Jr.   53   Director, Chairman of the Board and President
Kevin M. Fitzgerald     43   Director and Executive Vice President
Roy K. Ross             47   Director, Executive Vice President,
                             Secretary and General Counsel
Frank Douglass          64   Director
Roger R. Mitchell       65   Director
Francis J. Reinhardt,Jr.68   Director
Peter H. Blum           40   Director
Alfonso R. Lopez        49   Vice President-Finance and Treasurer

The directors serve until the next annual meeting of
shareholders. Following are brief descriptions of the business
experience of the Company's directors and executive officers:

George O. Mallon, Jr. has been the President and Chairman of the
Board of the Company since December 1988.  He formed Mallon Oil
in 1979 and was a co-founder of Laguna Gold Company ("Laguna") in
1980.  He is now a director of Laguna.  Mr. Mallon earned a B.S.
degree in Business from the University of Alabama in 1965 and an
M.B.A. degree from the University of Colorado in 1977.

Kevin M. Fitzgerald has been Executive Vice President of the
Company since June 1990.  He joined Mallon Oil in 1983 as
Petroleum Engineer and served as Vice President of Engineering
from 1987 through December 1988, when he became President of that
company.  Mr. Fitzgerald was Vice President, Oil and Gas
Operations for the Company from 1988 through October 1990, when
he was named Executive Vice President.  Mr. Fitzgerald earned a
B.S. degree in Petroleum Engineering from the University of
Oklahoma in 1978.

Roy K. Ross has been Executive Vice President and General Counsel
of the Company since 1992.  He was named Secretary of the Company
in 1997.  From June 1976 through September 1992, Mr. Ross was an
attorney in private practice with the Denver-based law firm of
Holme Roberts & Owen.  Mr. Ross is also Executive Vice President,
Secretary, General Counsel and a director of Mallon Oil and
Laguna.  He earned his B.A. degree in Economics from Michigan
State University in 1973 and his J.D. degree from Brigham Young
University in 1976.

Frank Douglass has been a director of the Company since 1988.  He
is a Senior Partner in the Texas law firm of Scott, Douglass &
McConnico, LLP, where he has been a partner since 1976.  Mr.
Douglass earned a B.B.A. degree from Southwestern University in
1953 and a L.L.B. degree from the University of Texas School of
Law in 1958.

Roger R. Mitchell has been a director of the Company since 1990.
In December 1992, Mr. Mitchell retired, although he continues to
provide consulting services to various businesses on a part-time
basis.  He earned a B.S. degree in Business from Indiana
University in 1954 and an M.B.A. degree from Indiana University
in 1956.

Francis J. Reinhardt, Jr. has been a director of the Company
since 1994.  He is with the New York investment banking firm of
Carl H. Pforzheimer & Co., where he has been a partner since
1966.  He is a member and past president of the National
Association of Petroleum Investment Analysts.  Mr. Reinhardt is
also a director of The Exploration Company of Louisiana, a public
company engaged in the oil and gas business.  Mr. Reinhardt holds
a B.S. degree from Seton Hall University and an M.B.A. from New
York University.

Peter H. Blum became a director of the Company in January 1998.
He has been an energy investment banker since 1982.  Since 1997,
Mr. Blum has been Senior Managing Director, head of investment
banking, for the investment banking firm Gaines, Berland Inc.
From 1995 to 1997, Mr. Blum held the position of Managing
Director, head of energy banking, with the investment banking
firm Rodman & Renshaw, Inc.  From 1992 to 1995, Mr. Blum held
various positions with the investment banking firm Mabon
Securities, Inc.  Mr. Blum earned a B.B.A. degree in accounting
from the University of Wisconsin in 1979.

Alfonso R. Lopez joined the Company in July 1996 as Vice
President-Finance and Treasurer.  He was Vice President-Finance
for Consolidated Oil & Gas, Inc. (now Hugoton Energy Corporation)
from 1993 to 1995.  Mr. Lopez was a consultant from 1991 to 1992.
From 1981 to 1990, he was Controller for Decalta International
Corporation, a Denver-based exploration and production company.
He served as Controller for Western Crude Oil, Inc. (now Texaco
Trading and Transportation, Inc.) from 1978 to 1981.  Mr. Lopez
is a certified public accountant and was with Arthur Young &
Company (now Ernst & Young) from 1970 to 1978.  Mr. Lopez earned
his B.A. degree in Accounting and Business Administration from
Adams State College in Colorado in 1970.

Key Employees
Employees who are instrumental to the Company's success include
the following individuals:

Ray E. Jones is Vice President-Engineering of Mallon Oil.  Before
joining the Company in January 1994, Mr. Jones spent eight years
with Jerry R. Bergeson & Associates (now GeoQuest), an
independent consulting firm, where he did reservoir engineering,
field studies and reserve evaluations and taught industry courses
in basic reservoir engineering, reservoir simulation and well
testing.  Mr. Jones graduated from Colorado School of Mines in
1979 and is a registered professional engineer.

Randy Stalcup has been the Vice President-Land of Mallon Oil
since April 1994.  Prior to joining the Company, Mr. Stalcup was
employed by Beard Oil Company for 13 years, where he was the
Acquisition and Unitization Manager from 1989.  Mr. Stalcup, a
Certified Professional Landman, earned his B.B.A. degree in
Petroleum Land Management from the University of Oklahoma in
1979.

Wendell A. Bond has been Vice President-Exploration of Mallon Oil
since December 1996.  Prior to joining the Company on a full-time
basis, Mr. Bond was an independent geological consultant to the
Company since July 1994.  Mr. Bond has 24 years of experience in
the petroleum industry, both domestically and internationally.
Prior to joining the Company, he was president of Wendell A.
Bond, Inc., a company specializing in petroleum geological
consulting services that he formed in 1988.  Prior to 1988, Mr.
Bond had been employed in a variety of positions for several
independent and major oil and gas companies, including Project
Geologist for Webb Resources, District Geologist for Sohio
Petroleum and Chief Geologist for Samuel Gary Jr. & Associates.
Mr. Bond earned his B.S. degree in geology from Capital
University, Columbus, Ohio and his M.S. degree in geology from
the University of Colorado.

Donald M. Erickson, Jr. has been Vice President-Operations of
Mallon Oil since February 1997.  Mr. Erickson has more than 21
years of experience in oil field operations.  Prior to joining
the Company, he was Operations Manager for Presidio Exploration,
Inc. (which was merged into Tom Brown Inc.) from December 1988.
Mr. Erickson earned a Heating and Cooling Technical Degree from
Central Technical Community College in Hastings, Nebraska in 1975
and has studied Mechanical Engineering at the University of
Denver.

Duane C. Winkler is Production Superintendent of Mallon Oil,
working out of the Carlsbad, New Mexico office.  Before joining
the Company in October 1993, he was employed by Natural Gas
Processing as Production Superintendent from 1986 to 1993.  Mr.
Winkler, who has 25 years of experience in drilling, completion
and production operations, completed his Associates of
Engineering Certificate from Central Wyoming College in 1996.

Laguna Gold Company
The Company currently owns an approximate 49% interest in Laguna,
a gold mining company whose common shares are listed on The
Toronto Stock Exchange under the trading symbol "LGC."  Laguna is
engaged in the exploration for and development of precious metals
in Costa Rica, where it holds mineral concessions issued by the
Government of Costa Rica.  The concessions contain the Rio
Chiquito Deposit.  Laguna commenced active exploration and
evaluation of Rio Chiquito in March 1984.  In October 1987,
Laguna commenced a small pilot heap leach mining operation at the
Rio Chiquito Deposit.  In July 1989, Laguna concluded that
efficient commercial exploitation of the project would require a
substantially larger operation than the pilot project.
Accordingly, the project was suspended pending additional
development and funding.  The pilot project produced a total of
3,800 ounces of gold and 28,600 ounces of silver.

Further exploration and evaluation of the Rio Chiquito Deposit
has been undertaken since 1989.  Based on the results of a stream
sediment geochemical sampling program, the Rio Chiquito Deposit
was found to be located within an arsenic/gold anomaly
approximately 250 acres in size.  Pit exposures and core drilling
indicate that the mineralization is found in polyphase stockwork
quartz veining and hydrothermal breccias that formed in andesitic
lavas and pyroclastics. Identified mineralization lies in the
area of the pilot project pit and to the south, along a strike
length of approximately 400 meters.

In September 1997,  Laguna reported that the mineralized deposit
at Rio Chiquito consists of an estimated 71.9 million tonnes
grading 0.29 grams per tonne gold and 4.81 grams per tonne
silver.  Laguna also reported that most of the requisite
feasibility work for the commercial development of Rio Chiquito
has been completed, and that it believes the Rio Chiquito Deposit
can be placed on production if sufficient development capital can
be raised.  However, Laguna gives no assurance that any such
funding can be secured, or as to the terms upon which capital may
be available.  Pending receipt of the capital required to develop
Rio Chiquito, Laguna has furloughed workers in Costa Rica and
otherwise curtailed its expenditures in order to conserve its
cash.

Cautionary Statement Regarding Forward-Looking Statements
The discussion in this report contains certain forward-looking
statements that involve risks and uncertainties.  The Company's
actual results could differ significantly from those discussed
herein.  Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in
"Special Considerations," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as
well as those discussed elsewhere in this report.  Statements
contained in this report that are not historical facts are
forward-looking statements that are subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995.

Special Considerations
In evaluating the Company and its Common Stock, readers should
consider carefully, among other things, the following special
considerations.

Oil and Gas Prices; Hedging
The Company's oil and gas revenues and profitability are
substantially affected by prevailing prices for oil and natural
gas. Hydrocarbon prices can be extremely volatile.  In general,
hydrocarbon prices are affected by numerous factors such as
economic, political and regulatory developments.  The unsettled
nature of the energy market, which is sensitive to foreign
political and military events and the unpredictability of the
actions of the Organization of Petroleum Exporting Countries,
makes it particularly difficult to estimate future prices of oil
and natural gas.  Any significant decline in prices of oil or
natural gas for an extended period could have a material adverse
effect on the Company's financial condition, liquidity and
results of operations.  Additionally, the Company's sales of oil
and natural gas are often made in the spot market or pursuant to
contracts based on spot market prices and not pursuant to long-
term fixed price contracts.  With the objective of reducing price
risk, the Company enters into hedging transactions with respect
to a portion of its expected future production.  There can be no
assurance, however, that such hedging transactions will
significantly mitigate the effect of any substantial or extended
decline in oil or natural gas prices.

Marketability of Production
The marketability of the Company's production depends upon the
availability and capacity of pipelines and gas gathering systems,
processing facilities, the effect of federal and state regulation
of such production and transportation, general economic
conditions and changes in demand, all of which could adversely
affect the Company's ability to market its production.  All of
these factors are beyond the control of the Company, and the
Company is limited in its ability to protect its economic
interests from their effect.  The Company conducts substantially
all of its operations in the San Juan and Delaware Basins in the
State of New Mexico and, consequently, is particularly sensitive
to marketing constraints that exist or may arise in the future in
those areas.  Historically, due to the San Juan Basin's
relatively isolated location and the resulting limited access of
its natural gas production to the marketplace, natural gas
produced in the San Juan Basin has tended to command prices that
are lower than natural gas prices that prevail in other areas.

Geographic Concentration of Operations
Substantially all of the Company's operations are currently
located in two geologic basins in New Mexico.  Because of this
geographic concentration, any regional events that increase
costs, reduce availability of equipment or supplies, reduce
demand or limit production, including weather and natural
disasters, may impact the Company more than if its operations
were more geographically diversified.

Uncertainty of Estimates of Reserves and Future Net Revenues
This report contains estimates of the Company's proved oil and
gas reserves and the estimated future net revenues therefrom
based upon a reserve report prepared by independent engineers who
rely upon various assumptions, including assumptions required by
the Commission, as to oil and gas prices, drilling and operating
expenses, capital expenditures, taxes and availability of funds.
The process of estimating oil and gas reserves is complex,
requiring significant decisions and assumptions in the evaluation
of available geological, geophysical, engineering and economic
data for each reservoir.  As a result, such estimates are
inherently imprecise.  Actual future production, oil and gas
prices, revenues, taxes, development expenditures, operating
expenses and quantities of recoverable oil and gas reserves may
vary substantially from those estimated in the reserve report.
Any significant variance in these assumptions could materially
affect the estimated quantity and value of reserves set forth in
this report.  In addition, the Company's reserves may be subject
to downward or upward revision based upon production history,
results of future development and exploration, prevailing oil and
gas prices and other factors, many of which are beyond the
Company's control.  Actual production, revenues, taxes,
development expenditures and operating expenses with respect to
the Company's reserves will likely vary from the estimates used,
and such variances may be material.

Approximately 46% of the Company's total proved reserves at
December 31, 1997 were undeveloped, which are by their nature
less certain.  Recovery of such reserves will require significant
capital expenditures and successful drilling operations.  The
reserve data set forth in the reserve report prepared by Ryder
Scott as of December 31, 1997, assumes, based on the Company's
estimates, that substantial capital expenditures by the Company
will be required to develop such reserves.  Although cost and
reserve estimates attributable to the Company's oil and gas
reserves have been prepared in accordance with industry
standards, no assurance can be given that the estimated costs are
accurate, that development will occur as scheduled or that the
results will be as estimated.

The present value of future net revenues referred to in this
report should not be construed as the current market value of the
estimated oil and gas reserves 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.  Actual future net cash flows also
will be affected by changes in consumption and changes in
governmental regulations or taxation.  The timing of actual
future net cash flows from proved reserves, and thus their actual
present value, will be affected by the timing of both the
production and the incurrence of expenses in connection with
development and production of oil and gas properties.  In
addition, the 10% discount factor, which is required by the
Commission to be used in calculating discounted future net cash
flows for reporting purposes, is not necessarily the most
appropriate discount factor based on interest rates in effect
from time to time and risks associated with the Company or the
oil and gas industry in general.

Replacement of Reserves
The Company's future success will depend upon its ability to
find, develop or acquire additional oil and gas reserves at
prices that permit profitable operations.  Unless the Company
conducts successful exploitation or exploration activities or
acquires properties containing reserves, the proved reserves of
the Company will decline.  There can be no assurance that the
Company's acquisition, exploitation and exploration activities
will result in additional reserves, or that the Company will be
able to drill productive wells at acceptable costs.

Operating Hazards; Uninsured Risks
The oil and gas business involves a variety of operating risks,
including the risk of fire, explosions, blowouts, pipe failure,
casing collapse, abnormally pressured formations and
environmental hazards such as oil spills, gas leaks, ruptures and
discharges of toxic gases, the occurrence of any of which could
result in substantial losses to the Company due to injury and
loss of life, damage to and destruction of property and
equipment, pollution and other environmental damage and related
suspension of operations.  Gathering systems and processing
plants are subject to many of the same hazards, and any
significant problems related to those facilities could adversely
affect the Company's ability to market its production.  Drilling
activities are subject to numerous risks, including the risk that
no commercially productive oil or gas reservoirs will be
encountered or that particular wells will not produce at economic
levels.  The cost of drilling, completing and operating wells may
vary from initial estimates.  Drilling activities may be
curtailed, delayed or canceled as a result of numerous factors
outside the Company's control, including but not limited to title
problems, weather conditions, compliance with governmental
requirements, mechanical difficulties and shortages or delays in
the delivery of drilling rigs or other equipment.  The Company
maintains insurance against some, but not all, potential risks;
however, there can be no assurance that such insurance will be
adequate to cover any losses or exposure for liability.
Furthermore, the Company cannot predict whether insurance will
continue to be available at premium levels that justify its
purchase or whether insurance will be available at all.

Working Capital Requirements
Due to its active development and exploration program, the
Company has substantial working capital requirements.  The
Company's current operating budget for 1998 calls for capital
expenditures of approximately $24.7 million.  The actual amount
expended in 1998 may vary, possibly substantially, from the
budgeted amount due to circumstances not currently foreseeable,
including changes in plans as drilling results indicate the
desirability of increases or decreases in emphasis on certain
properties, new acquisitions, and other factors.  While the
Company believes that the net proceeds from its December 1997
equity offering, cash flow from operations, and funds available
under the Company's credit facility should allow the Company to
successfully implement its present business strategy, additional
financing may be required in the future to fund the Company's
developmental and exploratory drilling.  No assurances can be
given as to the availability or terms of any such additional
financing that may be required.  In the event such capital
resources are not available to the Company, its drilling activity
may be curtailed.  Shareholders' interests may be diluted if
equity financing is used to fund the Company's working capital
requirements.

Competition
The oil and natural gas industry is intensely competitive.
Competition is particularly intense in the acquisition of
prospective oil and natural gas properties and oil and gas
reserves.  The Company's competitive position depends on its
geological, geophysical and engineering expertise, its financial
resources, its ability to develop its properties and its ability
to select, acquire and develop proved reserves.  The Company
competes with a substantial number of other companies having
larger technical staffs and greater financial and operational
resources.  Many such companies not only engage in the
acquisition, exploration, development and production of oil and
natural gas reserves, but also carry on refining operations,
generate electricity and market refined products.  The Company
also competes with major and independent oil and gas companies in
the marketing and sale of oil and gas to transporters,
distributors and end users.  There is also competition between
the oil and natural gas industry and other industries supplying
energy and fuel to industrial, commercial and individual
consumers.  The Company also competes with other oil and natural
gas companies in attempting to secure drilling rigs and other
equipment necessary for drilling and completion of wells.  Such
equipment may be in short supply from time to time.  Finally,
companies not previously investing in oil and natural gas may
choose to acquire reserves to establish a firm supply or simply
as an investment. Such companies will also provide competition
for the Company.  The Company's business is affected not only by
such competition, but also by general economic developments,
governmental regulations and other factors that affect its
ability to market its oil and natural gas production.  The prices
of oil and natural gas realized by the Company are both highly
volatile and generally dependent on world supply and demand.
Declines in crude oil prices or natural gas prices adversely
impact the Company's activities.  The Company's financial
position and resources may also adversely affect the Company's
competitive position.  Lack of available funds or financing
alternatives will prevent the Company from executing its
operating strategy and from deriving the expected benefits
therefrom.

Regulation
Virtually all of the Company's oil and gas activities are subject
to a wide variety of federal, state, local and foreign
governmental regulations, which are changed from time to time in
response to economic or political conditions.  Matters subject to
regulation include, but are not limited to, environmental
matters, discharge permits for drilling operations, drilling and
operating bonds, reports concerning operations, the spacing of
wells, unitization and pooling of properties, allowable rates of
production, restoration of surface areas, plugging and
abandonment of wells, requirements for the operation of wells 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 gas wells below actual production
capacity in order to conserve supplies of oil and gas.  Many
states have raised state taxes on energy sources and additional
increases may occur, although there can be no certainty of the
effect that such increases would have on the Company. Legislation
and new regulations concerning oil and gas exploration and
production operations are constantly being reviewed and proposed.
All of the jurisdictions in which the Company owns and operates
properties have statutes and regulations governing a number of
the matters enumerated above.  Compliance with such laws and
regulations generally increases the Company's cost of doing
business and consequently affects its profitability.  Due to the
frequently changing requirements of laws and regulations, there
can be no assurance that costs of future compliance will not
impose new or substantial burdens on the Company.

Environmental Matters
The discharge of oil, gas or other pollutants into the air, soil
or water may give rise to liabilities to governmental agencies
and third parties, and may require the Company to incur costs to
remedy such discharges.  Oil, natural gas and other pollutants
(including salt water brine) may be discharged in many ways,
including from a well or drilling equipment at a drill site,
leakage from pipelines or other gathering and transportation
facilities, leakage from storage tanks and tailings ponds, and
sudden discharges from damage or explosion at natural gas
facilities, oil and gas wells or other facilities.  Discharged
hydrocarbons and other pollutants may migrate through soil to
water supplies or adjoining property, giving rise to additional
liabilities.  A variety of federal, state and foreign laws and
regulations govern the environmental aspects of oil and natural
gas exploration, production and transportation and may, in
addition to other laws and regulations, impose liability in the
event of discharges (whether or not accidental), failure to
notify the proper authorities of a discharge, and other failures
to comply with those laws and regulations.  Compliance with
environmental quality requirements and reclamation laws imposed
by governmental authorities may necessitate significant capital
outlays, may materially affect the acquisition or operating costs
of a given property, or may cause material changes or delays in
the Company's intended activities.  For example, a Federal court
recently ruled that the Environmental Protection Agency is
required to regulate the injection of materials into existing
wells to stimulate production.  Management of the Company does
not believe that its environmental, health, and safety risks are
materially different from those of comparable companies engaged
in similar businesses.  Nevertheless, new or different
environmental standards imposed in the future may adversely
affect the Company's activities and there can be no assurance
that significant costs for compliance will not be incurred in the
future.  Moreover, no assurance can be given that environmental
laws will not, in the future, result in curtailment of production
or material increases in the cost of exploration, development or
production or otherwise adversely affect the Company's operations
and financial condition.

Reliance on Key Personnel
The Company is dependent upon its executive officers and key
employees.  The unexpected loss of services of one or more of
these individuals could have a detrimental effect on the Company.
The Company does not maintain key man insurance on any of its
executive officers or key employees.  In addition, the continued
growth and expansion of the Company will depend upon, among other
factors, the successful retention of skilled and experienced
management and technical personnel.

Ownership Interest in Laguna; Write-down
At December 31, 1997, the Company owned approximately 46% of the
outstanding common stock of Laguna, a gold mining company whose
common shares are listed on The Toronto Stock Exchange under the
trading symbol "LGC."  Since that date, Laguna has converted a
promissory note payable to the Company into additional shares of
Laguna common stock; as a result, the Company currently owns
approximately 49% of Laguna's outstanding common stock.  As
discussed in Note 3 to the Company's consolidated financial
statements, because the Company's interest in Laguna was reduced
from an approximate 56% interest at the beginning of the year
ended December 31, 1997, to less than a majority interest by the
end of the year, the Company has de-consolidated Laguna from the
Company's financial statements and now accounts for its
investment in Laguna using the equity method of accounting.

Statement of Financial Accounting Standards No. 121 ("SFAS 121")
requires that an impairment loss be recognized in the event that
facts and circumstances indicate that the carrying amount of an
asset may not be recoverable.  Estimated future undiscounted net
cash flow projections developed by Laguna to assess the
recoverability of its properties include consideration of the
following factors, among others: projected mineable resources
based upon third party engineering reports; estimated capital
expenditures required to put the mine on production; projected
rates of gold and silver production; estimated waste handling and
stripping costs; projected mine life; recovery rates for gold and
silver; and estimated gold and silver prices.  The timing of
projected cash flows is based on the estimated mine life and the
estimated cost to bring the mine into production.  The testing
takes into account the type of processing proposed - either a
mill or a heap leach - and the timing of the capital expenditures
required.  The budgeted capital expenditures are varied depending
on the type of process assumed.  Laguna's SFAS 121 impairment
testing at December 31, 1997 concluded that an impairment loss of
approximately $9,319,000 was required to be recognized in fourth
quarter 1997 due to continued depressed gold prices.  The
Company's share of Laguna's 1997 net loss was in excess of the
Company's carrying value of its investment in and advances to
Laguna by approximately $2,733,000.  The Company's share of
Laguna's 1997 losses, up to the carrying amount of its investment
in and advances to Laguna, totaled $3,244,000 and is reflected as
equity in loss of affiliate on the Company's 1997 consolidated
statement of operations.  The Company will not reflect its share
of Laguna's future losses and may only reflect its share of
Laguna's future earnings to the extent that they exceed the
Company's share of Laguna's 1997 and future net losses not
recognized.

Lack of Profitable Operations
The Company recorded net losses for 1993, 1994, 1995, 1996 and
1997 of $1,187,000, $1,631,000, $1,929,000, $1,837,000 and
$3,704,000, respectively.  The Company's ability to continue in
business and maintain its financing arrangements would be
adversely affected by a continued lack of profitability.

Absence of Dividends
The Company has never paid cash dividends on its Common Stock and
does not anticipate paying any cash dividends in the foreseeable
future.  In addition, the Company's revolving line of credit
contains a prohibition on the payment of cash dividends without
the bank's consent.

Anti-Takeover Provisions
In April 1997, the Company's Board of Directors adopted a
Shareholder Rights Plan (the "Rights Plan").  The Rights Plan is
designed to insure that all shareholders of the Company receive
fair value for their Common Stock in the event of any proposed
takeover of the Company and to guard against the use of partial
tender offers or other coercive tactics to gain control of the
Company without offering fair value to the Company's
shareholders.  While the Rights Plan is not intended to prevent
an acquisition of the Company on terms that are favorable and
fair to all shareholders, its existence may discourage potential
purchasers.  The Company is not aware of any plan or intention by
any person to attempt a takeover of the Company.

The Company's Restated Articles of Incorporation impose
restrictions on changes in control of the Company. The existence
of these provisions may discourage a party from making a tender
offer for or otherwise seeking to obtain control of the Company.

Series B Preferred Stock - Right to Elect Directors in Certain
Circumstances
Under the terms of the Company's Series B Preferred Stock, if the
Company has outstanding unpaid cumulative dividends on the Series
B Preferred Stock for three quarterly dividend periods, and until
such cumulative dividends have been paid in full, the holders of
shares of Series B Preferred Stock, voting separately as a class,
have the right to elect two additional members to the Company's
Board of Directors.  While any such directors would not
constitute a majority of the Board of Directors, it is probable
that they would attempt to influence the Board of Directors, as a
whole, to support the satisfaction of the claims of the holders
of the Series B Preferred Stock.

ITEM 3:  LEGAL PROCEEDINGS
None.

ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.

PART II
ITEM 5:  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

Price Range of Common Stock
The Common Stock is traded on the Nasdaq National Market tier of
the Nasdaq Stock Market under the symbol "MLRC."  The following
table sets forth, for the periods indicated, the high and low
sale prices of the Common Stock as reported on the Nasdaq
National Market.  All of the following quotations have been
adjusted to reflect the four-to-one reverse stock split of the
Common Stock that occurred on September 9, 1996.

<TABLE>
<CAPTION>
                                              High       Low
<S>                                         <C>        <C>
Year Ending December 31, 1996:
   First Quarter                           $ 8.2500    $5.5000
   Second Quarter                           11.0000     6.0000
   Third Quarter                             8.5000     5.0000
   Fourth Quarter                            9.6250     6.5000
Year Ending December 31, 1997:
   First Quarter                           $10.5000    $7.1250
   Second Quarter                            9.7500     6.7500
   Third Quarter                            12.3750     7.3750
   Fourth Quarter                           13.0000     7.8125
Year Ending December 31, 1998:
   First Quarter (through March 24)        $ 9.2500    $7.2500
</TABLE>

Holders
As of March 24, 1998, there were approximately 660 shareholders
of record of the Common Stock.

Dividend Policy
The Company does not intend to pay cash dividends on the Common
Stock in the foreseeable future.  The Company instead intends to
retain its earnings to support the growth of the Company.  Any
future cash dividends would depend on future earnings, capital
requirements, the Company's financial condition and other factors
deemed relevant by the Board of Directors.  Under the terms of
the Company's primary credit facility, the Company may not pay
dividends without the consent of the bank.  For a description of
the credit facility, see Item 7.

ITEM 6:  SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial
data for each of the years in the five-year period ended
December 31, 1997.  This information should be read in
conjunction with the Consolidated Financial Statements and
"Management's Discussion of Financial Condition and Results of
Operations," included elsewhere herein.


<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                 1997(1)     1996      1995       1994       1993
                                                        (In thousands, except per share data)
<S>                                              <C>       <C>        <C>        <C>        <C>
Selected Statements of Operations Data:
  Revenues:
    Oil and gas sales                            $ 8,582   $ 5,854    $ 4,800    $ 4,629    $ 2,061
    Other                                             69       512        470        106        129
                                                   8,651     6,366      5,270      4,735      2,190

  Costs and expenses:
    Oil and gas production                         3,037     2,249      1,868      2,024        976
    Mining project expenses                           --     1,014        838        459        390
    Depreciation, depletion and amortization       2,725     2,095      2,340      2,409        937
    Impairment of oil and gas properties              24       264         --         --         --
    Impairment of mining properties                  350        --         --         --         --
    General and administrative                     2,274     1,845      1,467      1,342        825
    Interest and other                               701       842        433        132        249
                                                   9,111     8,309      6,946      6,366      3,377

  Minority interest in loss of consolidated
   subsidiary                                         --       266         --         --         --
  Equity in loss of affiliate                     (3,244)       --         --         --         --
  Loss before extraordinary item                  (3,704)   (1,677)    (1,676)    (1,631)     (1,187)

  Extraordinary loss on early retirement of debt      --      (160)      (253)        --          --
  Net loss                                        (3,704)   (1,837)    (1,929)    (1,631)     (1,187)

  Dividends on preferred stock and accretion        (185)     (376)      (360)      (258)         --
  Preferred stock conversion inducement             (403)       --         --         --          --
  Gain on redemption of preferred stock                --    3,743         --         --          --
  Net income (loss) attributable to common
     shareholders (2)                             $(4,292)  $1,530    $(2,289)   $(1,889)   $ (1,187)
                                                  =======   ======    =======    =======    ========
  Basic loss per share (3):
    Loss attributable to common shareholders
      before extraordinary item                   $ (0.92)  $(0.82)   $ (1.05)   $ (0.99)   $ (0.87)
    Extraordinary loss                                 --    (0.06)     (0.13)        --         --

    Net loss attributable to common
      shareholders (4)                            $ (0.92)  $(0.88)   $ (1.18)   $ (0.99)   $ (0.87)
                                                  =======   ======    =======    =======    =======

  Weighted average shares outstanding               4,682    2,512      1,947      1,916      1,368

Selected Other Data:
  Capital expenditures                             20,169    6,339      3,995      2,379     20,612

Selected Balance Sheet Data:
  Working capital (deficit)                       $ 1,190   $5,365    $  (476)   $(1,764)   $   462
  Total assets                                     51,426   41,400     31,635     28,226     28,773
  Long-term debt (5)                                    1    3,511     10,037         --         20
  Mandatorily redeemable preferred stock            1,317    3,900      3,844      3,804         --
  Shareholders' equity                             40,196   21,904     11,760     13,549     15,029
______________
</TABLE>

(1)   As a result of reducing its ownership interest in Laguna,
the Company accounted for its investment in Laguna as of and for
the year ended December 31, 1997 using the equity method of
accounting.  Pursuant to the rules of the Commission, the Company
may not restate prior year financial information to reflect the
use of the equity method.  Accordingly, the Company's results for
1996, 1995, 1994 and 1993 are consolidated with Laguna's.

(2)   At December 31, 1997, the Company reduced the carrying value
of its investment in and advances to Laguna to zero, due
primarily to Laguna's write-down of its mining assets because of
continued depressed gold prices.  After 1997, Laguna's financial
results will no longer negatively impact the Company's financial
results.  The effect of all Laguna-related transactions in 1997
reduced the Company's earnings by $3,634,000.

(3)   As adjusted for four-to-one reverse stock split.

(4)   The gain on the redemption of the Series A Convertible
Preferred Stock (the "Series A Stock") in 1996 resulted in net
income attributable to common shareholders for the year ended
December 31, 1996 of $1,530,000.  However, because the Series A
Stock is reflected as if converted, the gain on redemption is
deducted from net income attributable to common shareholders for
purposes of calculating per share data, resulting in a net loss
attributable to common shareholders of $2,213,000, or $0.88 per
share, for the year ended December 31, 1996.

(5)   Long-term debt includes long-term debt net of current
maturities, notes payable-other and lease obligations net of
current portion.

ITEM 7:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in understanding
the Company's historical consolidated financial position at
December 31, 1997 and 1996, and results of operations and cash
flows for each of the years ended December 31, 1997, 1996 and
1995.  The Company's historical Consolidated Financial Statements
and notes thereto included elsewhere in this report contain
detailed information that should be referred to in conjunction
with the following discussion.  The financial information
discussed below is consolidated information, which includes the
accounts of Laguna in 1996 and 1995.  As discussed in Note 3 to
the Company's consolidated financial statements, because the
Company's interest in Laguna was reduced from an approximate 56%
interest at the beginning of the year ended December 31, 1997, to
less than a majority interest by the end of the year, the Company
de-consolidated Laguna from the Company's financial statements
and accounted for its investment in Laguna using the equity
method of accounting.  Pursuant to applicable rules of the
Commission, a restatement of prior years to reflect the de-
consolidation is not permitted.

Overview
The Company's revenues, profitability and future rate of growth
will be substantially dependent upon its drilling success in the
San Juan and Delaware Basins, and prevailing prices for oil and
gas, which are in turn dependent upon numerous factors that are
beyond the Company's control, such as economic, political and
regulatory developments and competition from other sources of
energy.  The energy markets have historically been volatile, and
there can be no assurance that oil and gas prices will not be
subject to wide fluctuations in the future.   A substantial or
extended decline in oil or gas prices could have a material
adverse effect on the Company's financial position, results of
operations and access to capital, as well as the quantities of
oil and gas reserves that the Company may economically produce.

Liquidity and Capital Resources
In December 1997, the Company sold 2,300,000 shares of Common
Stock in a public offering.  The Company received proceeds of
approximately $19,589,000.  The Company had working capital
surpluses of $1,190,000 and $5,365,000 at December 31, 1997, and
1996, respectively.

In March 1996, the Company established a revolving line of credit
(the "Facility") with Bank One, Texas, N.A. (the "Bank").  The
borrowing base under the Facility is subject to redetermination
every six months, or at such other times as the Bank may
determine.  The Company is obligated to maintain certain
financial and other covenants, including a minimum current ratio,
minimum net equity, a debt coverage ratio and a total bank debt
ceiling.  The Facility is secured by substantially all of the
Company's oil and gas properties.  The Facility expires March 31,
1999.  At December 31, 1997, the principal amount outstanding
under the Facility was $1,000, and the borrowing base was
$10,490,000, leaving $10,489,000 available under the Facility at
that date.  As of March 31, 1998, the borrowing base was
$9,980,000, of which $9,979,000 was available.  The Company is
currently in compliance with the covenants of the Facility.

Mandatory redemption of the Company's Series B Mandatorily
Redeemable Convertible Preferred Stock (the "Series B Stock") was
to begin in April 1997, when 20% of the outstanding shares, or
80,000 shares, were to be redeemed for $800,000.  In March 1997,
the Company extended an offer to all holders of the Series B
Stock to convert their shares into shares of Common Stock at a
conversion price of $9.00, rather than the $11.31 conversion
price otherwise then in effect.  The market price of a share of
the Common Stock during the term of the offer ranged from $7.88
to $8.50.  Holders of 252,675 shares of Series B Stock elected to
convert their shares into 280,747 shares of Common Stock.  In
addition, the Company redeemed 12,125 shares of Series B Stock at
$10.00 per share.  After these transactions, 135,200 shares of
Series B Stock remain outstanding and the Company has no further
obligation to redeem any shares until April 2000.  The Company
will be required to redeem 55,200 shares in April 2000, and the
remaining 80,000 shares in April 2001.  The Series B Stock is
convertible to Common Stock automatically if the Common Stock
trades at a price in excess of 140% of the then applicable
conversion price for each day in a period of 10 consecutive
trading days.  The conversion price, as adjusted, is currently
$10.33.

Capital expenditures related to the Company's drilling and
development programs totaled $16,101,000 in 1997 and $2,424,000
in 1996.  The Company's current budget for drilling and
development capital expenditures in 1998 is approximately
$24,700,000.  During fiscal 1996, the Company completed four of
the five wells drilled and recompleted one well.  During 1997,
the Company completed 23 of the 25 development wells it drilled.
The Company recompleted 22 wells during 1997.  In addition, the
Company completed a gas sweetening plant in the East Blanco
Field, which will allow acceleration of the Company's Ojo Alamo
recompletion program.  The Company currently plans to drill or
recomplete more than 60 wells in 1998.

The Company believes that, with the net proceeds of the December
1997 common stock sale, borrowings available under the Facility,
and the operating cash flows that are expected to be generated by
the application of such funds to the Company's drilling program,
the Company will have sufficient capital to fund the continued
development of its current properties and to meet the Company's
liquidity requirements through 1998.

Results of Operations

<TABLE>
<CAPTION>
                                        Year Ended December 31,
                                        1997     1996     1995
                             (In thousands, except per unit data)
<S>                                     <C>      <C>      <C>
Operating Results from Oil and Gas Operations:
    Oil and gas revenues                $8,582   $5,854   $4,800
    Production tax and marketing expense 1,122      715      582
    Lease operating expense              1,915    1,534    1,286
    Depletion                            2,604    1,924    2,162
    Depreciation                            21       --       --
Net Production:
    Oil (MBbl) (1)                         196      174      173
    Natural gas (MMcf) (1)               2,350    1,286    1,238
    Total (MBOE)                           588      388      379
Average Sales Price Realized (2):
    Oil (per Bbl)                       $19.31   $18.05   $16.45
    Natural gas (per Mcf)                $2.04    $2.11    $1.58
    Per BOE                             $14.60   $15.09   $12.66
Average Cost Data (per BOE):
    Production tax and marketing expense $1.91    $1.84    $1.54
    Lease operating expense              $3.25    $3.96    $3.39
    Depletion                            $4.43    $4.96    $5.70
__________
</TABLE>
(1)  Includes 26 MBbl and 692 MMcf in 1995 delivered pursuant to
the terms of a volumetric production payment agreement.

(2)  Includes effects of hedging. See "Hedging Activities."

Year Ended December 31, 1997 Compared with Year Ended December 31, 1996

Revenues.  Total revenues for the year ended December 31, 1997
increased 36% to $8,651,000 from $6,366,000 for the year ended
December 31, 1996.  Oil and gas sales for the year ended
December 31, 1997 increased 47% to $8,582,000 from $5,854,000.
The increase was primarily due to higher oil and gas production
and higher oil prices.  Oil production for the year ended
December 31, 1997 increased 13% to 196,000 barrels from 174,000
barrels for the year ended December 31, 1996, and gas production
for the year ended December 31, 1997 increased 83% to 2,350,000
Mcf from 1,286,000 Mcf for the year ended December 31, 1996, due
to the Company's successful drilling and recompletion program in
1997.  Average oil prices for the year ended December 31, 1997
increased 7% to $19.31 per Bbl from $18.05 per Bbl for the year
ended December 31, 1996.  However, average gas prices for the
year ended December 31, 1997 decreased 3% to $2.04 per Mcf from
$2.11 per Mcf for the year ended December 31, 1996.  The Company
recognized a $329,000 gain on the sale of Laguna common stock for
the year ended December 31, 1996.

Oil and Gas Production Expenses.  Oil and gas production expenses
for the year ended December 31, 1997 increased 35% to $3,037,000
from $2,249,000 for the year ended December 31, 1996.  The
increase was primarily attributable to increased operating costs
related to new wells drilled in 1997.  Oil and gas production
expenses per BOE decreased $0.64, or 11%, to $5.16 for the year
ended December 31, 1997 from $5.80 for the year ended
December 31, 1996.  Production tax and marketing expense per BOE
increased $0.07, or 4%, to $1.91 for the year ended December 31,
1997 from $1.84 for the year ended December 31, 1996.  However,
lease operating expense per BOE decreased $0.71, or 18%, to $3.25
for the year ended December 31, 1997 from $3.96 for the year
ended December 31, 1996.

Mining Project Expenses.  As discussed above, the Company de-
consolidated Laguna in fourth quarter 1997.  Because all of the
mining project expenses for the year ended December 31, 1997 were
Laguna's, none are reflected on the Company's consolidated
statement of operations for 1997.  Mining project expenses for
the year ended December 31, 1996 of $1,014,000 reflect Laguna's
drilling program in new exploration areas and business
development expenses related to reviewing other mineral
concessions.

Depreciation, Depletion and Amortization.  Depreciation,
depletion and amortization for the year ended December 31, 1997
increased 30% to $2,725,000 from $2,095,000 for the year ended
December 31, 1996 due to increased oil and gas production.
Depletion per BOE for the year ended December 31, 1997 decreased
11% to $4.43 from $4.96 for the year ended December 31, 1996,
primarily due to an increase in oil and gas reserves.

General and Administrative Expenses.  General and administrative
expenses for the year ended December 31, 1997 increased 23% to
$2,274,000 from $1,845,000 for the year ended December 31, 1996
due primarily to the hiring of additional personnel because of
expanded operations.  During the year ended December 31, 1997,
the Company capitalized $562,000 of general and administrative
expenses directly related to its drilling program.  No such costs
were capitalized during 1996 because general and administrative
expenses directly related to its drilling program were minimal.

Impairment of Oil and Gas Properties.  Impairment of oil and gas
properties was $24,000 during the year ended December 31, 1997
compared to $264,000 for the year ended December 31, 1996.  In
fiscal 1996, the Company acquired a 2.25% working interest in an
exploration venture to drill one or more wells offshore Belize.
As of December 31, 1996, the Company had incurred and capitalized
$264,000 related to this venture.  The joint venture drilled a
dry hole subsequent to December 31, 1996.  Accordingly, the
Company reduced the carrying amount of its capitalized costs by
$264,000.  During 1997, additional costs related to this dry hole
of $24,000 were incurred and impaired.

Impairment of Mining Properties.  In second quarter 1997, the
Company reduced its note receivable from Laguna by $350,000,
including accrued interest, in exchange for an overriding royalty
interest in Laguna's mineral properties.  Due to continued
depressed gold prices, in fourth quarter 1997, the Company
impaired this amount, which is reflected as "impairment of mining
properties" on its 1997 consolidated statement of operations.

Interest and Other Expenses.  Interest and other expenses for the
year ended December 31, 1997 decreased 17% to $701,000 from
$842,000 for the year ended December 31, 1996.  The decrease was
primarily due to lower outstanding borrowings under the Facility
in 1997.

Minority Interest.  Minority interest in loss of consolidated
subsidiary in 1996 of $266,000 represents the minority interest
share in the Laguna loss.

Equity in Loss of Affiliate.  During the latter part of 1996 and
throughout most of 1997, Mallon held approximately 56% of the
common stock of Laguna.  In fourth quarter 1997, Mallon
contributed approximately 2,450,000 shares of its Laguna stock to
induce a new management team to join Laguna.  After this
transaction, Mallon owned approximately 46% of Laguna.  As a
result of reducing its ownership interest in Laguna, Mallon
accounted for its investment in Laguna at December 31, 1997 using
the equity method of accounting.  Pursuant to the rules of the
Commission, Mallon may not restate prior year financial
information to reflect the use of the equity method.
Accordingly, the Company's results for 1996 and 1995 are
consolidated with Laguna's.

In fourth quarter 1997, due to continued depressed gold prices,
Laguna wrote down its mineral assets by approximately $9,319,000.
As a result, Mallon impaired 100% of its investment in and
advances to Laguna.  The Company's share of Laguna's 1997 net
loss was in excess of the carrying value of its investment in and
advances to Laguna by approximately $2,733,000.  The Company's
share of Laguna's 1997 losses, up to the carrying amount of its
investment in and advances to Laguna, totaled $3,244,000, and is
reflected as "equity in loss of affiliate" on the Company's 1997
consolidated statement of operations.  The Company will not
reflect its share of Laguna's future losses and may only reflect
its share of Laguna's future earnings to the extent that they
exceed the Company's share of Laguna's 1997 and future net losses
not recognized.

Income Taxes.  The Company incurred net operating losses ("NOLs")
for U.S. Federal income tax purposes in 1997 and 1996, which can
be carried forward to offset future taxable income.  Statement of
Financial Accounting Standards No. 109 requires that a valuation
allowance be provided if it is more likely than not that some
portion or all of a deferred tax asset will not be realized.  The
Company's ability to realize the benefit of its deferred tax
asset will depend on the generation of future taxable income
through profitable operations and the expansion of the Company's
oil and gas producing activities.  The market and capital risks
associated with achieving the above requirement are considerable,
resulting in the Company's decision to provide a valuation
allowance equal to the net deferred tax asset.  Accordingly, the
Company did not recognize any tax benefit in its consolidated
statement of operations for the years ended December 31, 1997 and
1996.  At December 31, 1997, the Company had an NOL carryforward
for U.S. Federal income tax purposes of approximately
$27,100,000, which will begin to expire in 2005.

Extraordinary Loss.  The Company incurred an extraordinary loss
of $160,000 during the year ended December 31, 1996, as a result
of the refinancing of its credit facility with a new lender.

Net Loss.  Net loss for the year ended December 31, 1997
increased 102% to $3,704,000 from $1,837,000 for the year ended
December 31, 1996 as a result of the factors discussed above.  Of
the net loss for the year ended December 31, 1997, approximately
$3,634,000 relates to Laguna losses and impairments.  As
discussed above, the Company will not reflect its share of
Laguna's losses in the future and may only reflect its share of
Laguna's future earnings to the extent that they exceed the
Company's share of Laguna's 1997 and future losses not
recognized.  The Company paid the 8% dividend of $161,000 and
$320,000 on its $1,317,000 and $4,000,000 face amount Series B
Mandatorily Redeemable Convertible Preferred Stock ("Series B
Preferred Stock") in each of the years ended December 31, 1997
and 1996, respectively, and realized accretion of $24,000 and
$56,000, respectively.  Beginning in April 1997, preferred
dividend payments were reduced as a result of the conversion into
common stock and redemption of Series B Preferred Stock, as
discussed in Note 8 of the consolidated financial statements.
The excess of the fair value of the common stock issued at the
$9.00 conversion price over the fair value of the common stock
that would have been issued at the $11.31 conversion price,
totaling $403,000, has been reflected on the consolidated
statement of operations for the year ended December 31, 1997 as
an increase to the net loss attributable to common shareholders.
Net loss attributable to common shareholders for the year ended
December 31, 1997 was $4,292,000 compared to net income
attributable to common shareholders of $1,530,000 for the year
ended December 31, 1996.  Net income attributable to common
shareholders in 1996 included a $3,743,000 gain on the redemption
of Series A Convertible Preferred Stock in October 1996.

Year Ended December 31, 1996 Compared with Year Ended December 31, 1995

Revenues.  Total revenues for the year ended December 31, 1996
increased 21% to $6,366,000 from $5,270,000 for the year ended
December 31, 1995.  Oil and gas sales for the year ended December
31, 1996 increased 22% to $5,854,000 from $4,800,000 (including
amortization of deferred revenues from a volumetric production
payment in the year ended December 31, 1995).  The increase was
primarily due to higher oil and gas prices.  Average oil prices
for the year ended December 31, 1996 increased 10% to $18.05 per
Bbl from $16.45 per Bbl for the year ended December 31, 1995.
Average gas prices for the year ended December 31, 1996 increased
34% to $2.11 per Mcf from $1.58 per Mcf for the year ended
December 31, 1995.  The $329,000 gain on the sale of Laguna
common stock for the year ended December 31, 1996 compares to the
$355,000 gain on the termination of a volumetric production
payment for the year ended December 31, 1995.  There were no
sales of gold or silver in 1996 or 1995.

Oil and Gas Production Expenses.  Oil and gas production expenses
for the year ended December 31, 1996 increased 20% to $2,249,000
from $1,868,000 for the year ended December 31, 1995.  The
increase was primarily attributable to increased operating costs
related to new wells drilled in 1996 and increased workover
expenses.

Mining Project Expenses.  Mining project expenses for the year
ended December 31, 1996 increased 21% to $1,014,000 from $838,000
for the year ended December 31, 1995.  The increase was primarily
due to Laguna's drilling program in new exploration areas and
business development expenses related to reviewing other mineral
concessions.

Depreciation, Depletion and Amortization.  Depreciation,
depletion and amortization for the year ended December 31, 1996
decreased 11% to $2,095,000 from $2,340,000 for the year ended
December 31, 1995.  Depletion per BOE for the year ended December
31, 1996 decreased 13% to $4.96 from $5.70 for the year ended
December 31, 1995, primarily due to an increase in oil and gas
reserves.

General and Administrative Expenses.  General and administrative
expenses for the year ended December 31, 1996 increased 26% to
$1,845,000 from $1,467,000 for the year ended December 31, 1995
due primarily to increased stock compensation costs.

Impairment of Oil and Gas Properties.  Impairment of oil and gas
properties was $264,000 during the year ended December 31, 1996
compared to $-0- for the year ended December 31, 1995.  In fiscal
1996, the Company acquired a 2.25% working interest in an
exploration venture to drill one or more wells offshore Belize.
As of December 31, 1996, the Company had incurred and capitalized
$264,000 related to this venture.  The joint venture drilled a
dry hole subsequent to December 31, 1996.  Accordingly, the
Company reduced the carrying amount of its capitalized costs by
$264,000. During fiscal 1995, the Company's oil and gas
activities were conducted entirely in the United States.

Interest and Other Expenses.  Interest and other expenses for the
year ended December 31, 1996 increased 95% to $842,000 from
$433,000 for the year ended December 31, 1995.  The increase was
primarily due to higher outstanding borrowings under the
Company's credit facility.

Minority Interest.  Minority interest in loss of consolidated
subsidiary in 1996 of $266,000 represents the minority interest
share in the Laguna loss.

Income Taxes.  The Company incurred NOLs for U.S. Federal income
tax purposes in 1996 and 1995, which can be carried forward to
offset future taxable income.  Statement of Financial Accounting
Standards No. 109 requires that a valuation allowance be provided
if it is more likely than not that some portion or all of a
deferred tax asset will not be realized.  The Company's ability
to realize the benefit of its deferred tax asset will depend on
the generation of future taxable income through profitable
operations and the expansion of the Company's oil and gas
producing activities.  The market and capital risks associated
with achieving the above requirement are considerable, resulting
in the Company's decision to provide a valuation allowance equal
to the net deferred tax asset. Accordingly, the Company did not
recognize any tax benefit in its consolidated statement of
operations for the years ended December 31, 1996 and 1995.  At
December 31, 1996, the Company had an NOL carryforward for U.S.
Federal income tax purposes of approximately $16,100,000, which
will begin to expire in 2005.

Extraordinary Loss.  The Company incurred extraordinary losses of
$160,000 and $253,000 during the years ended December 31, 1996
and 1995, respectively, as a result of the refinancing of its
credit facilities with new lenders.

Net Loss.  Net loss for the year ended December 31, 1996
decreased 5% to $1,837,000 from $1,929,000 for the year ended
December 31, 1995 as a result of the factors discussed above.
The Company paid the 8% dividend of $320,000 on its $4,000,000
face amount Series B Mandatorily Redeemable Convertible Preferred
Stock ("Series B Preferred Stock") in each of the years ended
December 31, 1996 and 1995, and realized accretion of $56,000 and
$40,000, respectively.  Net income attributable to common
shareholders for the year ended December 31, 1996 was $1,530,000
compared to a net loss of $2,289,000 for the year ended December
31, 1995.  This increase was the result of a $3,743,000 gain on
the redemption of the Series A Convertible Preferred Stock in
October 1996.

Hedging Activities
The Company uses hedging instruments to manage commodity price
risks.  The Company has used energy swaps and other financial
arrangements to hedge against the effects of fluctuations in the
sales prices for oil and natural gas. Gains and losses on such
transactions are matched to product sales and charged or credited
to oil and gas sales when that product is sold.  Management
believes that the use of various hedging arrangements can be a
prudent means of protecting the Company's financial interests
from the volatility of oil and gas prices.

The Company recognized hedging gains (losses) of ($615,000),
($490,000) and $34,000 for the years ended December 31, 1997,
1996 and 1995, respectively.  These gains (losses) are included
in oil and gas sales in the Company's consolidated statements of
operations.

At December 31, 1997, the Company had outstanding swap agreements
covering 90,000 MMBtu of gas per month for the period from
January 1998 to August 1998 at fixed prices ranging from $1.77 to
$2.44.  The Company will receive the difference between the fixed
price per unit of production and a price based on an agreed upon
third party index if the index price is lower.  If the index
price is higher, the Company will pay the difference.  The
Company's current swaps are settled monthly.

Miscellaneous
The Company has initiated a review of its internal information
systems for Year 2000 transition problems and, although such
review is still in progress, believes that conversion
requirements will not result in significant disruption of the
Company's business operations or have a material adverse impact
on its future liquidity or results of operations.  The Company
has not extensively investigated the Year 2000 compliance of its
customers, suppliers, and other third parties with whom it has
business relationships, but intends to make selected inquiries.
Compliance by such third parties is voluntary and failures could
occur, in which case there is the possibility of a material
adverse impact on the Company.  However, the nature of the
Company's business and its business relationships are not such
that the Company considers the potential Year 2000 compliance
failure of a third party with whom it has a direct business
relationship likely to have a material adverse impact on the
Company.

The Company's oil and gas operations are significantly affected
by certain provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), that are applicable to the oil and gas
industry.  Current law permits the Company to deduct currently,
rather than capitalize, intangible drilling and development costs
incurred or borne by it.  The Company, as an independent
producer, is also entitled to a deduction for percentage
depletion with respect to the first 1,000 Bbls per day of
domestic crude oil (and/or equivalent units of domestic natural
gas) produced (if such percentage depletion exceeds cost
depletion).  Generally, this deduction is 15% of gross income
from an oil and gas property, without reference to the taxpayer's
basis in the property.  The percentage depletion deduction may
not exceed 100% of the taxable income from a given property.
Further, percentage depletion is limited in the aggregate to 65%
of the Company's taxable income.  Any depletion disallowed under
the 65% limitation, however, may be carried over indefinitely.

Inflation has not historically had a material impact on the
Company's financial statements, and management does not believe
that the Company will be materially more or less sensitive to the
effects of inflation than other companies in the oil and gas
industry.

The Company and its operations are subject to numerous risks and
uncertainties.  Among these are risks related to the oil and gas
business (including operating risks and hazards and the
regulations imposed thereon), risks and uncertainties related to
the volatility of the prices of oil and gas, uncertainties
related to the estimation of reserves of oil and gas and the
value of such reserves, the effects of competition and extensive
environmental regulation, and many other factors, many of which
are necessarily beyond the Company's control.

ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements that constitute
Item 8 follow the text of this Annual Report on Form 10-K.  An
index to the Consolidated Financial Statements appears at page F-
1.

ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

In July 1997, the Company solicited bids for audit work on its
financial statements for the next three years.  As a result of
that process, the Audit Committee of the Company's Board of
Directors selected Arthur Andersen LLP as its independent
certified public accounting firm for such period.  There were no
disagreements with the Company's prior accounting firm, Price
Waterhouse LLP, on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure, and Price Waterhouse LLP's reports did not contain any
adverse or qualified opinions during such accounting firm's
engagement.  The Company had no prior business dealings or
consultations with Arthur Andersen LLP.

PART III

ITEM 10:  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors
The information set forth under the caption "Election of
Directors" in the Company's Proxy Statement for its May 28, 1998
Annual Meeting of Shareholders, which is to be filed with the
Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934, is incorporated herein by reference.

Executive Officers
Information concerning executive officers is set forth in Item 1
of Part I of this report.  Additional information concerning
executive officers set forth in the Company's Proxy Statement for
its May 28, 1998 Annual Meeting of Shareholders, which is to be
filed with the Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, is incorporated herein by
reference.

ITEM 11:  EXECUTIVE COMPENSATION

The information set forth under the caption "Executive
Compensation" in the Company's Proxy Statement for its May 28,
1998 Annual Meeting of Shareholders, which is to be filed with
the Commission, pursuant to Regulation 14A under the Securities
Exchange Act of 1934, is incorporated herein by reference.

ITEM 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information set forth under the caption "Principal
Shareholders" in the Company's Proxy Statement for its May 28,
1998 Annual Meeting of Shareholders, which is to be filed with
the Commission, pursuant to Regulation 14A under the Securities
Exchange Act of 1934, is incorporated herein by reference.

ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption "Certain
Relationships and Related Party Transactions" in the Company's
Proxy Statement for its May 28, 1998 Annual Meeting of
Shareholders, which is to be filed with the Commission, pursuant
to Regulation 14A under the Securities Exchange Act of 1934, is
incorporated herein by reference.

PART IV

ITEM 14:  EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

(a)  The following documents are filed as a part of this report:
     (1)  Financial Statements
See the accompanying "Index to Consolidated Financial Statements"
at page F-1, which lists the documents that are filed as a part
of this report.

     (2)  Financial Statements Schedules
The Financial Statements for the year ended December 31, 1997, of
Laguna Gold Company are filed as financial statement schedules to
this Report.

     (3)  Exhibits
See the Exhibit Index that follows the signature page to this
report and is incorporated herein by this reference.

(b)  Reports on Form 8-K:
Since September 30, 1997, the Company has filed the following
Periodic Reports on Form 8-K:

Date of Report                  Item(s) Reported

October 15, 1997       "Other Events" - Engagement of advisor re:
                                           Laguna Gold Company
November 14, 1997      "Other Events" - Third quarter results
November 24, 1997      "Other Events" - Reserves reported
December 9, 1997       "Other Events" - Discovery well
December 16, 1997      "Other Events" - Public offering effective
December 17, 1997      "Other Events" - 1998 budget
January 9, 1998        "Other Events" - New management at
                                           Laguna Gold Company
January 15, 1998       "Other Events" - New director
March 16, 1998         "Other Events" - Year end results

(c)  Exhibits:
See the Exhibit Index that follows the signature page to this
report and is incorporated herein by this reference.

(d)  Financial statements of 50-percent-or-less-owned persons:
The Financial Statements for the year ended December 31, 1997, of
Laguna Gold Company are filed as financial statement schedules to
this Report.

SIGNATURES

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

                               Mallon Resources Corporation

Date:  March 31, 1998          By:    /s/ George O. Mallon, Jr.
                                   George O. Mallon, Jr.
                                   Principal Executive Officer

Date:  March 31, 1998          By:   /s/ Alfonso R. Lopez
                                   Alfonso R. Lopez
                                   Principal Financial Officer
                                   Principal Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the date
indicated.

Date:  March 31, 1998          By:   /s/ George O. Mallon, Jr.
                                   George O. Mallon, Jr.
                                   Director

Date:  March 31, 1998          By:   /s/ Kevin M. Fitzgerald
                                   Kevin M. Fitzgerald
                                   Director

Date:  March 31, 1998          By:   /s/ Roy K. Ross
                                   Roy K. Ross
                                   Director

Date:  March 31, 1998          By:   /s/ Roger R. Mitchell
                                   Roger R. Mitchell
                                   Director


EXHIBIT INDEX

Exhibit Number      Document Description                 Location
*3.01   Amended and Restated Articles of Incorporation
           of the Company                                    (1)
*3.02   Bylaws of the Company                                (1)
*3.03   Statement of Designations--Series B Preferred Stock  (2)
*3.04   Shareholder Rights Agreement                         (3)
*10.01  Bank One--Loan Agreement dated March 20, 1996        (4)
*10.02  Equity Participation Plan, amended November 2, 1990  (5)
*10.03  Stock Compensation Plan for Outside Directors        (6)
*10.04  1997 Equity Participation Plan                       (7)
*10.05  Employment Contract of George O. Mallon, Jr.         (8)
*10.06  Employment Contract of Kevin M. Fitzgerald           (8)
*10.07  Employment Contract of Roy K. Ross                   (8)
*16.01  Letter re:  Change in Certifying Accountant          (9)
*21.01  Subsidiaries                                        (10)
____________________________
*       These exhibits were filed in previous filings with the
Securities and Exchange Commission identified below.
1. Incorporated by reference from Mallon Resources Corporation
Exhibits to Registration Statement on Form S-4 (SEC File No. 33-
23076) filed on August 15, 1988.
2. Incorporated by reference from Mallon Resources Corporation
(Commission File No. 0-17267) Form 8-K filed on August 24, 1995.
3. Incorporated by reference from Mallon Resources Corporation
(Commission File No. 0-17267) Form 8-K filed on April 22, 1997.
4. Incorporated by reference from Mallon Resources Corporation
(Commission File No. 0-17267) Form 8-K filed on March 20, 1996.
5. Incorporated by reference from Mallon Resources Corporation
(Commission File No. 0-17267) Form 10-K for fiscal year ended
December 31, 1990.
6. Incorporated by reference from Mallon Resources Corporation
Exhibits to Registration Statement on Form S-8 (SEC File No. 33-
39635) filed on March 28, 1991.
7. Incorporated by reference from Mallon Resources Corporation
(Commission File No. 0-17267) definitive proxy statement for
annual meeting of shareholders held June 6, 1997.
8. Incorporated by reference from Mallon Resources Corporation
(Commission File No. 0-17267) Form 8-K filed on April 22, 1997.
9. Incorporated by reference from Mallon Resources Corporation
(Commission File No. 0-17267) Form 8-K filed on August 11, 1997.
10. Incorporated by reference from Mallon Resources Corporation
(Commission File No. 0-17267) Form 10-K for fiscal year ended
December 31, 1990.

GLOSSARY OF TERMS
       Bbl.  One stock tank barrel, or 42 U.S. gallons liquid
volume, used herein in reference to crude oil or other liquid
hydrocarbons.
       Bcf.  Billion cubic feet.
       BOE.  Barrels of oil equivalent, determined using the
ratio of six Mcf of natural gas (including natural gas liquids)
to one Bbl of crude oil or condensate.
       Btu.  British thermal unit, which is the heat required to
raise the temperature of a one-pound mass of water from 58.5 to
59.5 degrees Fahrenheit.
       Development location.  A location on which a development
well can be drilled.
       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 in an attempt to recover proved
undeveloped reserves.
       Dry hole.  A well found to be incapable of producing
either oil or gas in sufficient quantities to justify completion
as an oil or gas well.
       Estimated future net revenues.  Revenues from production
of oil and gas, net of all production-related taxes, lease
operating expenses and capital costs.
       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.  An acre in which a working interest is
owned.
       Gross well.  A well in which a working interest is owned.
       MBbl.  One thousand barrels of crude oil or other liquid
hydrocarbons.
       MBOE.  One thousand barrels of oil equivalent.
       Mcf.  One thousand cubic feet.
       MMBbl.  One million barrels of crude oil or other liquid
hydrocarbons.
       MMBOE.  One million barrels of oil equivalent.
       MMBtu.  One million Btus.
       MMcf.  One million cubic feet.
       Net acres or net wells.  The sum of the fractional working
interests owned in gross acres or gross wells.
       Pre-tax SEC 10 Value or present value of estimated future
net revenues.  Estimated future net revenues discounted by a
factor of 10% per annum, before income taxes and with no price or
cost escalation or de-escalation, in accordance with guidelines
promulgated by the Commission.
       Production costs.  All costs necessary for the production
and sale of oil and gas, including production and ad valorem
taxes.
       Productive well.  A well that is producing oil or gas or
that is capable of production.
       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 crude 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.  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.
       Recompletion.  The completion for production of an
existing wellbore in another formation from that in which the
well has previously been completed.
       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 gas regardless of
whether such acreage contains proved reserves.
       Working interest.  The operating interest which gives the
owner the right to drill, produce and conduct operating
activities on the property and a share of production.

                 Index to Consolidated Financial Statements

                                                           Page

Reports of Independent Public Accountants                   F-2

Consolidated Balance Sheets                                 F-4

Consolidated Statements of Operations                       F-5

Consolidated Statements of Shareholders' Equity             F-6

Consolidated Statements of Cash Flows                       F-7

Notes to Consolidated Financial Statements                  F-9


                 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
Mallon Resources Corporation:

We have audited the accompanying consolidated balance sheet of
Mallon Resources Corporation (a Colorado corporation) and
subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, shareholders' equity and
cash flows for the year then ended.  These consolidated financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Mallon Resources Corporation and its subsidiaries as
of December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with
generally accepted accounting principles.

  /s/ ARTHUR ANDERSEN LLP

Denver, Colorado
March 20, 1998


                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Mallon Resources Corporation


In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of operations, of cash flows
and of shareholders' equity as of and for each of the two years
in the period ended December 31, 1996 present fairly, in all
material respects, the financial position, results of operations
and cash flows of Mallon Resources Corporation and its
subsidiaries as of and for each of the two years in the period
ended December 31, 1996, in conformity with generally accepted
accounting principles.  These financial statements are the
responsibility of the Company's management; our responsibility is
to express an opinion on these financial statements based on our
audits.  We conducted our audits of these statements in
accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed
above.  We have not audited the consolidated financial statements
of Mallon Resources Corporation for any period subsequent to
December 31, 1996.

   /s/  PRICE WATERHOUSE LLP

March 18, 1997
Denver, Colorado


                         MALLON RESOURCES CORPORATION

                         CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share data)

                                   ASSETS
<TABLE>
<CAPTION>
                                                 December 31,
                                               1997      1996
<S>                                            <C>       <C>
Current assets:
  Cash and cash equivalents                    $ 6,741   $ 2,771
  Short-term investments                            --     2,786
  Accounts receivable:
    Oil and gas sales                            1,464     1,879
    Joint interest participants, net of allowance
      of $8 and $8, respectively                 2,406       827
    Related parties                                 72        20
    Other                                            7        45
  Inventories                                      327       251
  Other                                             46       104
         Total current assets                   11,063     8,683

Property and equipment:
  Oil and gas properties, full cost method      63,148    46,175
  Natural gas processing plant                   2,760        --
  Mining properties and equipment                   20    10,114
  Other equipment                                  645       559
                                                66,573    56,848
Less accumulated depreciation, depletion and
  amortization                                 (26,393)  (24,406)
                                                40,180    32,442
Notes receivable-related parties                    18        17
Other, net                                         165       258

Total Assets                                  $ 51,426   $41,400
                                              ========   =======

                    LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Trade accounts payable                      $  6,797   $ 1,614
  Undistributed revenue                            813     1,502
  Current portion of installment obligation,
    less unamortized discount of $22 in 1997       378        --
  Drilling advances                                135       100
  Accrued taxes and expenses                         4        77
  Current portion of lease obligation            1,746        25
         Total current liabilities               9,873     3,318

Long-term debt                                       1     3,269
Notes payable, other                                --       230
Lease obligation, net of current portion            --        12
Drilling advances                                   --       368
Accrued expenses                                    39        41
         Total non-current liabilities              40     3,920
Total liabilities                                9,913     7,238

Commitments and contingencies (Note 7)

Minority interest   -  8,358

Series B Mandatorily Redeemable Convertible
  Preferred Stock, $0.01 par value, 500,000
  shares authorized, 135,200 and 400,000 shares
  issued and outstanding, respectively;
  liquidation preference and mandatory
  redemption of $1,352,000 and $4,000,000,
  respectively                                   1,317     3,900

Shareholders' equity:
  Common Stock, $0.01 par value, 25,000,000
    shares authorized, 6,995,264 and 4,384,562
    shares issued and outstanding, respectively     70        44
  Additional paid-in capital                    73,937    56,707
  Accumulated deficit                          (33,811)  (34,847)
     Total shareholders' equity                 40,196    21,904

Total Liabilities and Shareholders' Equity    $ 51,426  $ 41,400
                                              ========  ========
</TABLE>

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


                         MALLON RESOURCES CORPORATION

                    CONSOLIDATED STATEMENTS OF OPERATIONS
                   (In thousands, except per share amounts)



<TABLE>
<CAPTION>
                                                               For the Years Ended
                                                                     December 31,
                                                              1997       1996       1995
<S>                                                           <C>        <C>        <C>
Revenues:
  Oil and gas sales                                           $ 8,582    $ 5,854    $ 3,380
  Deferred revenue amortization                                    --         --      1,420
  Gain on termination of volumetric production payment             --         --        355
  Gain on sale of subsidiary stock                                 --        329         --
  Interest and other                                               69        183        115
                                                                8,651      6,366      5,270

Costs and expenses:
  Oil and gas production                                        3,037      2,249      1,868
  Mining project expenses                                          --      1,014        838
  Depreciation, depletion and amortization                      2,725      2,095      2,340
  Impairment of oil and gas properties                             24        264         --
  Impairment of mining properties                                 350         --         --
  General and administrative, net                               2,274      1,845      1,467
  Interest and other                                              701        842        433
                                                                9,111      8,309      6,946

Minority interest in loss of consolidated subsidiary               --        266         --
Equity in loss of affiliate                                    (3,244)        --         --
Loss before extraordinary item                                 (3,704)    (1,677)    (1,676)
Extraordinary loss on early retirement of debt                     --       (160)      (253)
Net loss                                                       (3,704)    (1,837)    (1,929)
Dividends on preferred stock and accretion                       (185)      (376)      (360)
Preferred stock conversion inducement                            (403)        --         --
Gain on redemption of preferred stock                              --      3,743         --

Net income (loss) attributable to common shareholders         $(4,292)   $ 1,530    $(2,289)
                                                              =======    =======    =======

Basic loss per share:
  Loss attributable to common shareholders before
    extraordinary item                                        $ (0.92)   $ (0.82)   $ (1.05)
  Extraordinary loss                                               --      (0.06)     (0.13)

Net loss attributable to common shareholders                  $ (0.92)   $ (0.88)   $ (1.18)
                                                              =======    =======    =======

Basic weighted average common shares outstanding                4,682      2,512      1,947
                                                              =======    =======    =======
</TABLE>

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


MALLON RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)


<TABLE>
<CAPTION>
                             Series A                             Additional
                             Preferred Stock     Common Stock     Paid-In  Accumulated
                             Shares     Amount   Shares    Amount Capital  Deficit   Total
<S>                          <C>        <C>      <C>        <C>  <C>      <C>        <C>
Balance, December 31, 1994   1,100,918  $ 5,730  1,918,437  $19  $38,785  $(30,985)  $13,549
  Employee stock options
    exercised                       --       --      1,250   --       --        --        --
  Stock issued to directors         --       --      1,539   --       12        --        12
  Stock issued for property         --       --     14,000   --      112        --       112
  Stock issued for loan fees        --       --     15,000   --      112        --       112
  Employee stock options granted    --       --         --   --       89        --        89
  Issuance of warrants              --       --         --   --      175        --         5
  Dividends on preferred stock      --       --         --   --     (320)       --      (320)
  Accretion of preferred stock      --       --         --   --       --       (40)      (40)
  Net loss                          --       --         --   --       --    (1,929)   (1,929)
Balance, December 31, 1995   1,100,918    5,730  1,950,226   19   38,965   (32,954)   11,760

  Employee stock options
    exercised                       --       --     10,570   --       --         --       --
  Stock issued to directors         --       --      2,016   --       12         --       12
  Stock issued to consultants       --       --    121,750    2      792         --      794
  Employee stock options granted    --       --         --   --      306         --      306
  Issuance of common stock in
    public offering                 --       --  2,300,000   23   13,166         --   13,189
  Purchase of Series A preferred
    stock                   (1,100,918)  (5,730)        --   --    3,743         --   (1,987)
  Other                             --       --         --   --       43         --       43
  Dividends on preferred stock      --       --         --   --     (320)        --     (320)
  Accretion of preferred stock      --       --         --   --       --        (56)     (56)
  Net loss                          --       --         --   --       --     (1,837)  (1,837)
Balance, December 31, 1996          --       --  4,384,562   44   56,707    (34,847)  21,904

  Employee stock options
    exercised                       --       --      3,650   --       --         --       --
  Stock issued to directors         --       --      1,305   --        6         --        6
  Employee stock options granted    --       --         --   --       82         --       82
  Issuance of common stock in
    public offering                 --       --  2,300,000   23   19,566         --   19,589
  De-consolidation of Laguna Gold
     Company                        --       --         --   --   (4,808)     4,764      (44)
  Issuance of restricted common
     stock to officers              --       --     25,000   --       62         --       62
  Issuance of common stock in
     exchange for Series B
     preferred stock                --       --    280,747    3    2,483         --    2,486
  Dividends on preferred stock      --       --         --   --     (161)        --     (161)
  Accretion of preferred stock      --       --         --   --       --        (24)     (24)
  Net loss                          --       --         --   --       --     (3,704)  (3,704)

Balance, December 31, 1997          --  $    --  6,995,264  $70  $73,937   $(33,811) $40,196
                             =========  =======  =========  ===  =======   ========  =======
</TABLE>

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


MALLON RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
              For the Years Ended
      December 31,
                                                            1997        1996        1995
<S>                                                         <C>         <C>         <C>
Cash flows from operating activities:
  Net loss                                                  $ (3,704)   $ (1,837)   $(1,929)
  Adjustments to reconcile net loss to net cash provided by
    (used in) operating activities:
    Amortization of deferred revenues                             --          --    (1,420)
    Depreciation, depletion and amortization                   2,725       2,095     2,340
    Impairment of mining properties                              350          --        --
    Impairment of oil and gas properties                          24         264        --
    Minority interest in loss of consolidated subsidiary          --        (266)       --
    Equity in loss of affiliate                                3,244          --        --
    Gain on sale of subsidiary stock                              --        (329)       --
    Stock compensation expense                                   101         327       101
    Termination of volumetric production payment                  --          --    (5,586)
    Gain on termination of volumetric production payment          --          --      (355)
    Non-cash portion of extraordinary loss                        --         160        90
    Amortization of discount on installment obligation            22          --        --
    Write-off of notes receivable-related parties                 --          46        --
    Other                                                         40          --        (8)
    Changes in operating assets and liabilities:
      Increase in:
        Accounts receivable                                   (1,098)     (1,443)      (328)
        Inventory and other current assets                      (176)       (176)       (77)
      Increase (decrease) in:
        Trade accounts payable and undistributed revenue       4,579         890        183
        Accrued taxes and expenses                               (36)         28         28
        Drilling advances                                       (333)       (118)        64
Net cash provided by (used in) operating activities            5,738        (359)    (6,897)

Cash flows from investing activities:
  Increase in short-term investments                              --      (2,786)        --
  Additions to property and equipment                        (17,251)     (4,109)    (3,820)
  Proceeds from sale of subsidiary stock                          --         372         --
  Purchase of subsidiary stock                                   (55)         --         --
  Increase in notes receivable-related parties                    (1)         --        (20)
  Other                                                          (47)         --         --
Net cash used in investing activities                        (17,354)     (6,523)    (3,840)

Cash flows from financing activities:
  Proceeds from long-term debt                                 6,340      10,570     10,000
  Payments of long-term debt                                  (9,608)    (17,301)        --
  Payment of installment obligation                             (377)         --         --
  Payment of lease obligations                                   (76)        (23)        (3)
  Issuance of preferred stock in subsidiary,
    net of issuance costs                                         --          --      2,275
  Debt issue costs paid                                           --         (83)      (159)
  Issuance of warrants                                            --          --        125
  Net proceeds from sale of common stock in public offering   19,589      13,189         --
  Purchase of Series A preferred stock                            --      (1,987)        --
  Net proceeds from sale of subsidiary special warrants           --       4,339         --
  Payment of preferred dividends                                (161)       (320)      (320)
  Redemption of preferred stock                                 (121)         --         --
Net cash provided by financing activities                     15,586       8,384     11,918

Net increase in cash and cash equivalents                      3,970       1,502      1,181
Cash and cash equivalents, beginning of year                   2,771       1,269         88

Cash and cash equivalents, end of year                      $  6,741    $  2,771    $ 1,269
                                                            ========    ========    =======

Supplemental cash flow information:
  Cash paid for interest                                    $    659    $    837    $   525
                                                            ========    ========    =======

  Non-cash transactions:
    Issuance of common stock in exchange for:
      Property and equipment                                $    --     $     --     $  112
      Loan origination fee                                       --           --        112
      Consultants' accounts payable                              --          794         --
    Issuance of warrants for loan origination fee                --           --         50
    Acquisition of equipment under lease obligations          1,785           --         63
    Acquisition of Red Rock Ventures, Inc. for subsidiary
        common stock and notes payable                           --        2,230         --
    Installment obligation (less unamortized discount) in
        exchange for property and equipment                     733           --         --
    Reduction of note receivable from affiliate in exchange
        for mining properties                                   350           --         --
   Stock compensation capitalized in oil and gas properties      50           --         --

</TABLE>


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


MALLON RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Organization and Nature of Operations:

Mallon Resources Corporation ("Mallon" or the "Company") was
incorporated on July 18, 1988 under the laws of the State of
Colorado. The Company engages in oil and gas exploration and
production through its wholly-owned subsidiary, Mallon Oil
Company ("Mallon Oil"), whose oil and gas operations are
conducted primarily in the State of New Mexico.  The Company also
has an interest in Laguna Gold Company ("Laguna").

Reverse Stock Split:

On September 9, 1996, a four-to-one reverse stock split of the
Company's issued and outstanding shares of common stock was
effected. Common stock, paid-in capital and earnings per share
information have been restated to give retroactive effect to the
reverse stock split.

Principles of Consolidation:

The consolidated financial statements include the accounts of
Mallon Oil, Laguna, and all of their wholly owned subsidiaries
for the years ended December 31, 1996 and 1995.  Prior to
December 1997, the Company owned approximately 56% of Laguna's
common stock and included the accounts of Laguna in its
consolidated financial statements.  In December 1997, the Company
reduced its investment in Laguna to approximately 46%.
Therefore, the Company accounted for its investment in Laguna as
of and for the year ended December 31, 1997 using the equity
method of accounting.  Pursuant to the rules of the Securities
and Exchange Commission ("the Commission"), a restatement of
prior years reflecting the de-consolidation of Laguna is not
allowed.  All significant intercompany transactions and accounts
have been eliminated from the consolidated financial statements.

Cash, Cash Equivalents and Short-term Investments:

Cash and cash equivalents include investments that are readily
convertible into cash and have an original maturity of three
months or less. All short-term investments are held to maturity
and are reported at cost. Short-term investments include U.S.
Treasury bills and notes with maturities greater than ninety
days, but not exceeding one year.

Fair Value of Financial Instruments:

The Company's on-balance sheet financial instruments consist of
cash, cash equivalents, short-term investments, accounts
receivable, inventories, accounts payable, other accrued
liabilities and long-term debt. Except for long-term debt, the
carrying amounts of such financial instruments approximate fair
value due to their short maturities.  At December 31, 1997 and
1996, based on rates available for similar types of debt, the
fair value of long-term debt was not materially different from
its carrying amount. The Company's off-balance sheet financial
instruments consist of derivative instruments which are intended
to manage commodity price risk (see Note 13).

Inventories:

Inventories, which consist of oil and gas lease and well
equipment, and mining materials and supplies, are valued at the
lower of average cost or estimated net realizable value.

Oil and Gas Properties:

Oil and gas properties are accounted for using the full cost
method of accounting.  Under this method, all costs associated
with property acquisition, exploration and development are
capitalized, including general and administrative expenses
directly related to these activities.  All such costs are
accumulated in two cost centers, the continental United States
and offshore Belize.

Proceeds on disposal of properties are ordinarily accounted for
as adjustments of capitalized costs, with no profit or loss
recognized, unless such adjustment would significantly alter the
relationship between capitalized costs and proved oil and gas
reserves. Costs capitalized, net of accumulated depreciation,
depletion and amortization, cannot exceed the estimated future
net revenues, net of the related income tax effects, discounted
at 10%, of the Company's proved reserves.

Depletion is calculated using the units-of-production method
based upon the ratio of current period production to estimated
proved oil and gas reserves expressed in physical units, with oil
and gas converted to a common unit of measure using one barrel of
oil as an equivalent to six thousand cubic feet of natural gas.

Estimated abandonment costs (including plugging, site
restoration, and dismantlement expenditures) are accrued if such
costs exceed estimated salvage values, as determined using
current market values and other information. Abandonment costs
are estimated based primarily on environmental and regulatory
requirements in effect from time to time.  At December 31, 1997
and 1996, in management's opinion, the estimated salvage values
equaled or exceeded estimated abandonment costs.

Mineral Properties and Equipment:

Laguna expenses general prospecting costs and the costs of
acquiring and exploring unevaluated mining properties. When,
based on management's evaluation of geological studies, resource
and reserve reports (both Company reports and reports prepared by
third parties), metallurgical studies, environmental issues,
estimated capital requirements, estimated mining and production
costs, estimated commodity prices, and other matters, it appears
likely that a mineral property can be economically developed, the
costs incurred to develop such property, including costs to
further delineate the ore body, are capitalized. When
commercially profitable ore reserves are developed and operations
commence, deferred costs will be amortized using the units-of-
production method. Upon abandonment or sale of projects, all
capitalized costs relating to the specific project are removed
from the accounts in the year abandoned or sold and any gain or
loss is recognized.

Mining equipment is depreciated using the units-of-production
method, except during suspended operations. When not in
production, this equipment is depreciated at approximately 2% per
year.

Other Property and Equipment:

Other property and equipment is recorded at cost and depreciated
over the estimated useful lives (generally three to seven years)
using the straight-line method.  Costs incurred in 1997 relating
to a gas sweetening plant are being depreciated over twenty-five
years using the straight-line method.  The cost of normal
maintenance and repairs is charged to expense as incurred.
Significant expenditures that increase the life of an asset are
capitalized and depreciated over the estimated useful life of the
asset. Upon retirement or disposition of assets, related gains or
losses are reflected in operations.

Impairment of Long-Lived Assets:

In fourth quarter 1995, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of."  SFAS No. 121 prescribes that an impairment loss
be recognized in the event that facts and circumstances indicate
that the carrying amount of an asset may not be recoverable, and
an estimate of future undiscounted net cash flows is less than
the carrying amount of the asset. Impairment is recorded based on
an estimate of future discounted net cash flows. The adoption of
SFAS No. 121 had no effect on the Company's financial position or
results of operations, initially.  However, as discussed in Note
3, in March 1998 Laguna made a decision to write down its mining
assets, effective December 31, 1997, due to continued depressed
gold prices.  Mallon's share of the write-down is reflected in
equity in loss of affiliate in the 1997 consolidated statement of
operations.  Additionally, Mallon impaired an overriding royalty
interest in Laguna's mining properties.  This amount is reflected
as impairment of mining properties on the Company's 1997
consolidated statement of operations.

Gas Balancing:

The Company uses the entitlements method of accounting for
recording natural gas sales revenues. Under this method, revenue
is recorded based on the Company's net working interest in field
production. Deliveries of natural gas in excess of the Company's
working interest are recorded as liabilities while under-
deliveries are recorded as receivables.

Concentration of Credit Risk:

As an operator of jointly owned oil and gas properties, the
Company sells oil and gas production to numerous oil and gas
purchasers and pays vendors for oil and gas services. The risk of
non-payment by the purchaser is considered minimal and the
Company does not obtain collateral for sales to them. Joint
interest receivables are subject to collection under the terms of
operating agreements which provide lien rights, and the Company
considers the risk of loss likewise to be minimal.

The Company is exposed to credit losses in the event of non-
performance by counterparties to financial instruments, but does
not expect any counterparties to fail to meet their obligations.
The Company generally does not obtain collateral or other
security to support financial instruments subject to credit risk
but does monitor the credit standing of counterparties.

Stock-Based Compensation:

As required, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" in 1996. As permitted under SFAS No.
123, the Company has elected to continue to measure compensation
cost using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees."  The Company has made pro forma disclosures of net
income (loss) and net income (loss) per share as if the fair
value based method of accounting as defined in SFAS No. 123 had
been applied (see Note 11).

General and Administrative Expenses:

General and administrative expenses are reported net of amounts
allocated to working interest owners of the oil and gas
properties operated by the Company, and net of amounts
capitalized pursuant to the full cost method of accounting.

Foreign Currency Translation:

Management has determined that the U.S. dollar is the functional
currency for Laguna's Costa Rican operations. Accordingly, the
assets, liabilities and results of operations of the Costa Rican
subsidiaries are measured in U.S. dollars.  Transaction gains and
losses are not material for any of the periods presented.

Hedging Activities:

The Company's use of derivative financial instruments is limited
to management of commodity price risk. Gains and losses on such
transactions are matched to product sales and charged or credited
to oil and gas sales when the hedged commodity is sold (see Note
13).

Per Share Data:

In fourth quarter 1997, the Company adopted SFAS No. 128,
"Earnings per Share," which establishes new standards for
computing and presenting earnings per share.  The new Statement
is intended to simplify the standard for computing earnings per
share and requires the presentation of basic and diluted earnings
per share on the face of the income statement, including a
restatement of all prior periods presented.  Under the provisions
of SFAS No. 128, basic earnings per share is computed by dividing
income available to common shareholders by the weighted average
number of common shares outstanding for the period.  Diluted
earnings per share reflects the potential dilution that could
occur if the Company's outstanding stock options and warrants
were exercised (calculated using the treasury stock method) or if
the Company's Series B Convertible Preferred Stock were converted
to common stock.  The adoption of SFAS 128 had no effect on the
Company's prior period earnings per share data.  The consolidated
statement of operations for 1997, 1996 and 1995 reflect only
basic earnings per share because the Company was in a loss
position for all years presented and all common stock equivalents
are anti-dilutive.

The gain on the redemption of the Series A Convertible Preferred
Stock (the "Series A Stock") in fourth quarter 1996 resulted in
net income attributable to common shareholders for the quarter
and the year ended December 31, 1996. Consequently, the Series A
Stock, which is a common stock equivalent, is included in the per
share calculation as if converted on October 1, 1996 and
outstanding through the redemption date. However, because the
Series A Stock is reflected as if converted, the gain on
redemption is deducted from net income attributable to common
shareholders for purposes of calculating per share data,
resulting in a net loss attributable to common shareholders of
$2,213,000 for the year ended December 31, 1996.

Use of Estimates and Significant Risks:

The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make significant estimates and assumptions that
affect the amounts reported in these financial statements and
accompanying notes. The more significant areas requiring the use
of estimates relate to oil and gas and mineral reserves, fair
value of financial instruments, future cash flows associated with
long-lived assets, valuation allowance for deferred tax assets,
and useful lives for purposes of calculating depreciation,
depletion and amortization. Actual results could differ from
those estimates.

The Company and its operations are subject to numerous risks and
uncertainties. Among these are risks related to the oil and gas
business (including operating risks and hazards and the
regulations imposed thereon), risks and uncertainties related to
the volatility of the prices of oil and gas, uncertainties
related to the estimation of reserves of oil and gas and the
value of such reserves, the effects of competition and extensive
environmental regulation, the uncertainties related to foreign
operations, and many other factors, many of which are necessarily
out of the Company's control. The nature of oil and gas drilling
operations is such that the expenditure of substantial drilling
and completion costs are required well in advance of the receipt
of revenues from the production developed by the operations.
Thus, it will require more than several quarters for the
financial success of that strategy to be demonstrated. Drilling
activities are subject to numerous risks, including the risk that
no commercially productive oil or gas reservoirs will be
encountered.

Reclassifications:

Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the presentation
used in 1997.

NOTE 2. OIL AND GAS PROPERTIES

In January 1997, the Company acquired certain oil and gas
properties for consideration of $1,300,000 in cash and conveyance
of its interest in certain other oil and gas properties.  Cash
consideration of $500,000 was paid at closing in January 1997.
An installment obligation payment of $400,000 was made on
December 31, 1997, and another payment of $400,000 will be due on
January 1, 1999.  The installment obligations include an imputed
interest rate of 6%.  There was no gain or loss relative to the
conveyance of the interest in the oil and gas properties.

During 1995, the Company's oil and gas activities were conducted
entirely in the United States. In 1996, Mallon Oil acquired a
2.25% working interest in an exploration venture to drill one or
more wells offshore Belize. As of December 31, 1996, the Company
had capitalized costs relating to the Belize venture of
approximately $264,000. Subsequent to December 31, 1996, the
joint venture drilled a dry hole. Accordingly, the Company
reduced the carrying amount of its capitalized costs by $264,000
at December 31, 1996.  During 1997, additional costs related to
this dry hole of $24,000 were incurred and impaired.  These
amounts are reflected as impairment of oil and gas properties in
the Company's consolidated statements of operations.

NOTE 3. LAGUNA GOLD COMPANY

Laguna's principal precious metals property is the Rio Chiquito
project located in Guanacaste Province, Costa Rica, where it
holds exploration and exploitation concessions.

At December 31, 1995, the Company owned all of the issued and
outstanding shares of Laguna's common stock. In June 1995, Laguna
privately placed 25,000 shares of Series A Convertible Preferred
Stock (the "Laguna Series A Stock") for net proceeds of
$2,275,000. After the Laguna Series A Stock placement, the
Company's share of Laguna was reduced from 100% to 80%.

In May 1996, Laguna sold 5,000,000 Special Warrants for $1.00 per
Warrant in a private placement for proceeds of $4,339,000, net of
offering costs of $661,000.  As discussed below, in September
1996, the Special Warrants were registered with the Ontario
(Canada) Securities Commission.

In June 1996, Laguna acquired Red Rock Ventures, Inc. ("Red
Rock") for 2,000,000 shares of Laguna's common stock, valued at
$1.00 per share, and Convertible Secured Promissory Notes in the
aggregate principal amount of $230,000, for a total consideration
of $2,230,000. The notes bear interest at 5% per annum. Principal
and accrued interest are due December 31, 2000. The notes are
convertible into shares of Laguna's common stock, at the holder's
option.  The note is collateralized by a general security
agreement encumbering all of the assets of Laguna. Red Rock's
sole asset at the time of the merger was a 10% interest in the
Rio Chiquito gold project, in which Laguna held a 90% interest
and now holds 100%. After the issue of the 2,000,000 shares of
Laguna's common stock to Red Rock, the Company's share of Laguna
was reduced from 80% to 72%. The acquisition was accounted for as
a purchase.

In September 1996, Laguna completed the registration of the
Special Warrants with the Ontario (Canada) Securities Commission.
The completion of this registration caused the conversion of all
of the 25,000 outstanding shares of the Laguna Series A Stock
into 3,600,000 shares of common stock. (By its original terms,
each share of Laguna's Series A Stock was convertible into 100
shares of Laguna common stock. After giving effect to the March
1996 1.44-for-1 split of Laguna's common stock, each share of
Laguna's Series A Stock became convertible into 144 shares of
Laguna common stock).  Also in September 1996, the Company sold
400,000 of its shares of Laguna common stock and realized a gain
of $329,000. After the conversion of the Special Warrants into
Laguna common stock and the sale by the Company of Laguna common
stock, the Company owned 14,000,000 of Laguna's 25,000,000 shares
of issued and outstanding common stock, or 56%.  Laguna's common
stock is listed on The Toronto Stock Exchange.

As discussed above, during the latter part of 1996 and throughout
most of 1997, Mallon held approximately 56% of the common stock
of Laguna.  In fourth quarter 1997, in order to induce a new
management team to join Laguna, Mallon contributed the following:
(1) 2,450,000 shares of its Laguna common stock; (2) options for
three years to purchase from Mallon 1,000,000 shares of its
Laguna common stock for a purchase price of $1.00 per share; and
(3) a commitment to grant up to 975,000 of additional shares of
its Laguna common stock upon the occurrence of certain events.
For the year ended December 31, 1997, Laguna reflected $210,000
of stock compensation expense for the items discussed above.  The
Company reflects 100% of these items on its 1997 consolidated
statement of operations ($170,000 is included as part of the
equity in loss of affiliate and $40,000 is included in interest
and other expense).  After this transaction, Mallon held
approximately 46% of Laguna's outstanding common stock.  In March
1998, Laguna converted its note payable to Mallon (see below),
and issued approximately 1,750,000 shares of Laguna common stock
to Mallon.  After this transaction, Mallon holds approximately
49% of Laguna's outstanding common stock.  Because Mallon
impaired 100% of its investment in and advances to Laguna at
December 31, 1997, the conversion of the note will have no future
negative impact on Mallon's earnings, as discussed above.

As a result of reducing its ownership interest in Laguna, Mallon
accounted for its investment in Laguna as of and for the year
ended December 31, 1997 using the equity method of accounting.
Pursuant to the rules of the Commission, Mallon may not restate
prior year financial information to reflect the use of the equity
method.  Accordingly, the Company's results for 1996 and 1995 are
consolidated with Laguna's.

A summary of the results of operations and assets, liabilities
and shareholders' equity of Laguna follows:

<TABLE>
<CAPTION>
                                   1997        1996       1995
                                          (In thousands)
<S>                                <C>         <C>        <C>
Results of operations:
   Revenues                        $     91    $   130    $   41
   Net loss                         (10,702)    (1,102)     (986)
Assets, liabilities and
shareholders' equity (end of period):
   Current assets                       485      2,942     1,215
   Other assets                         999      9,394     5,609
      Total assets                    1,484     12,336     6,824
   Current liabilities                   62        160       361
   Other liabilities                    248      2,410     2,070
   Shareholders' equity               1,174      9,766     4,393
</TABLE>

In March 1998, Laguna's new management team wrote down its
mineral assets, effective December 31, 1997, by approximately
$9,319,000, due to continued depressed gold prices.  As a result,
Mallon impaired 100% of its note receivable from Laguna totaling
$1,919,000, including accrued interest.  The Company's share of
Laguna's 1997 net loss was in excess of the carrying value of its
investment in and advances to Laguna by approximately $2,733,000.
The Company's share of Laguna's 1997 losses, up to the carrying
amount of its investment in and advances to Laguna, totaled
$3,244,000 and is reflected as "equity in loss of affiliate" on
the Company's 1997 consolidated statement of operations.  The
Company will not reflect its share of Laguna's future losses and
may only reflect its share of Laguna's future earnings to the
extent that they exceed the Company's share of Laguna's 1997 and
future net losses not recognized.

In second quarter 1997, the Company reduced its note receivable
from Laguna by $350,000, including accrued interest, in exchange
for an overriding royalty interest in Laguna's mineral
properties.  Due to depressed gold prices, in fourth quarter 1997
the Company impaired this amount, which is reflected as
"impairment of mining properties" on its 1997 consolidated
statement of operations.

NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT

In March 1996, the Company established a $35,000,000 credit
facility (the "Facility") with Bank One, Texas, N.A. (the
"Bank"). The significant terms of the Facility, as it has been
amended, are as follows:

- The Facility established two separate lines of credit: a
primary revolving line of credit (the "Revolver") and a line
of credit which was to be used for development drilling
approved by the Bank (the "Drilling Line").  The Company can
no longer borrow against the Drilling Line, as discussed
below.

- The borrowing base under the Revolver is subject to
redetermination every six months, at June 30 and December 31,
or at such other times as the Bank may determine.

- The interest rate on amounts drawn under the Revolver is, at
the Company's election, either the Bank's base rate plus
0.75%, or LIBOR plus 2.5% (9.25% and 7.875% as of December 31,
1997 and 1996, respectively). Amounts outstanding under the
Drilling Line bore interest at the greater of 12.5% or the
Bank's base rate plus 4%.

- A monthly reduction in the commitment under the Revolver,
subject to borrowing base redeterminations, is required.
However, debt service payments equal to the amount of the
monthly reduction are not required unless the balance
outstanding under the Facility exceeds the reduced commitment
amount.

- Amounts drawn under the Drilling Line were repayable from 100%
of the net revenues generated by wells drilled with such
funds. If the borrowing base under the Revolver had increased,
such additional amounts were to be drawn and used to reduce
amounts outstanding under the Drilling Line. Once repaid,
amounts drawn under the Drilling Line could not be reborrowed.
As discussed below, the Company borrowed $2,000,000 under the
Drilling Line in 1996 and repaid it in full.

- The Company paid the bank a $50,000 fee in connection with the
Facility and must pay a fee of 0.375% per annum on the daily
average of the unused amount of the borrowing base. If the
borrowing base is increased, the Company will pay a fee of
0.50% per annum of the amount of such increase over the
previously established borrowing base. A commitment fee of
0.75% per annum was payable on the unused portion of the
Drilling Line.

- The Facility is collateralized by substantially all of the
Company's oil and gas properties.

- The Company is obligated to maintain certain financial and
other covenants, including a minimum current ratio, minimum
net equity, a debt coverage ratio and a total bank debt
ceiling. The Company is restricted with respect to additional
debt, payment of cash dividends on common stock, loans or
advances to others, certain investments, sale or discount of
receivables, hedging transactions, sale of assets and
transactions with affiliates.

- The Facility expires on March 31, 1999.

Initial amounts drawn under the Revolver were used to retire the
Company's prior line of credit and related accrued interest. The
remaining $160,000 balance of unamortized loan origination fees
on the prior line of credit was written off and is reflected as
extraordinary loss on early retirement of debt for the year ended
December 31, 1996. The initial borrowing base under the Revolver
was $10,500,000. At June 30, 1996, the borrowing base was
redetermined and reduced to $8,820,000. At the time of this
redetermination, the amount outstanding under the Revolver was
$10,231,000, or $1,411,000 in excess of the redetermined
borrowing base. Under the terms of the Facility, as amended, the
Company drew $2,000,000 under the Drilling Line and applied it to
reduce amounts outstanding under the Revolver to an amount less
than the redetermined borrowing base. The $2,000,000 drawn under
the Drilling Line and $5,301,000 under the Revolver were repaid
in October 1996 upon the completion of the Company's October 1996
common stock sale (see Note 9). The outstanding balance under the
Facility at December 31, 1996 was $3,269,000.

Effective October 1997, the borrowing base was increased to
$10,830,000 and the reduction in the commitment under the
Revolver was established at $170,000 per month, beginning in
November 1997.  The Company repaid $9,608,000 of the outstanding
balance under the Facility in December 1997 with the proceeds
from the Company's December 1997 common stock sale (see Note 9).
The outstanding balance under the Facility at December 31, 1997
was $1,000. The available borrowing base at December 31, 1997 was
$10,490,000.  At December 31, 1997, the Company was in compliance
with the covenants of the Facility.

NOTE 5. DRILLING ADVANCES

In 1988 the Company sold a portion of its working interest in
certain gas properties located in the East Blanco Field to a
group of investors. In conjunction with the sale, investors
prepaid to the Company their share of future drilling and
completion costs. The Company has not yet expended all of the
prepaid funds, which are included in drilling advances at
December 31, 1997 and 1996. The Company recompleted eight
existing wells and installed a gas sweetening plant in 1997,
which reduced the balance of prepaid funds.  The Company plans to
use the remaining balance, included in current liabilities at
December 31, 1997, to drill and complete additional wells in the
East Blanco Field in 1998.  Most of the advances were included in
non-current liabilities at December 31, 1996.

NOTE 6. DEFERRED REVENUE

In connection with its September 1993 acquisition of producing
oil and gas properties, the Company sold a volumetric production
payment burdening the Company's interest in the acquired
properties for net proceeds of $10,000,000. The proceeds received
were recorded as deferred revenue. The production payment covered
approximately 4,354,000 MMBtu of natural gas at an indicated
average price of $1.65 and 215 MBbls barrels of oil at an
indicated average price of $13.01 per barrel to be delivered over
eight years. The Company was responsible for production costs
associated with operating the properties subject to the
production payment agreement. In August 1995, the volumetric
production payment was terminated and the Company paid a
settlement of $5,586,000 to Enron Reserve Acquisition Corp. This
settlement resulted in a $355,000 gain to the Company for the
year ended December 31, 1995.

NOTE 7. COMMITMENTS AND CONTINGENCIES

Operating Leases:

The Company leases office space, vehicles and software under non-
cancelable leases which expire in 2002. Rental expense is
recognized on a straight-line basis over the terms of the leases.
The total minimum rental commitments at December 31, 1997 are as
follows:

<TABLE>
<CAPTION>
                                              (In thousands)
<S>                                           <C>
1998                                          $198
1999                                           159
2000                                           144
2001                                           141
2002                                            23
Thereafter                                       -

                                              $665
                                              ====
</TABLE>

Rent expense was $99,000, $125,000 and $83,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.

Lease Obligations:

The Company is the lessee of certain equipment under lease
obligations expiring in 1998.  Included in with the natural gas
processing plant at December 31, 1997 are $1,785,000 of assets
under lease and related accumulated depreciation of $18,000.
Future minimum lease payments, all due in 1998, total $326,000,
of which $235,000 represents interest and $91,000 represents the
present value of future minimum lease payments.

NOTE 8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

In April 1994, the Company completed the private placement of
400,000 shares of Series B Mandatorily Redeemable Convertible
Preferred Stock, $0.01 par value per share (the "Series B
Stock"). The Series B Stock bears an 8% dividend payable
quarterly, and is convertible into shares of the Company's common
stock at a current adjusted conversion price of $10.33 per share.
Proceeds from the placement were $3,774,000, net of stock issue
costs of $226,000. In connection with the Series B Stock,
dividends of $161,000, $320,000 and $320,000 were paid in 1997,
1996 and 1995, respectively. Accretion of preferred stock issue
costs was $24,000, $56,000 and $40,000 in 1997, 1996 and 1995,
respectively.

Mandatory redemption of the Company's Series B Stock was to begin
in April 1997, when 20% of the outstanding shares, or 80,000
shares, were to be redeemed for $800,000. The Company extended an
offer to all holders of the Series B Stock to convert their
shares into shares of the Company's common stock at a conversion
price of $9.00, rather than the $11.31 conversion price otherwise
then in effect. In April 1997, holders of 252,675 shares of
Series B Stock elected to convert their shares into 280,747
shares of the Company's common stock. The excess of the fair
value of the common stock issued at the $9.00 conversion price
over the fair value of the common stock that would have been
issued at the $11.31 conversion price, totaling $403,000, has
been reflected on the statement of operations for the year ended
December 31, 1997 as an increase to the net loss attributable to
common shareholders for preferred stock conversion inducement. In
addition, the Company redeemed 12,125 shares of Series B Stock at
$10.00 per share. After these transactions, 135,200 shares of
Series B Stock remain outstanding and the Company has no further
obligation to redeem any shares until April 2000.  The Company
will be required to redeem 55,200 shares in April 2000 and the
remaining 80,000 shares in April 2001.  The Series B Stock is
convertible to common stock automatically if the common stock
trades at a price in excess of 140% of the then applicable
conversion price for each day in a period of 10 consecutive
trading days.

NOTE 9. CAPITAL

Preferred Stock:

The Board of Directors is authorized to issue up to 10,000,000
shares of preferred stock having a par value of $.01 per share,
to establish the number of shares to be included in each series,
and to fix the designation, rights, preferences and limitations
of the shares of each series.

In October 1996, the Company purchased all of the 1,100,918
shares outstanding at December 31, 1995 of the Company's Series A
Convertible Preferred Stock (the "Series A Stock") from Bank of
America National Savings and Trust Association for a purchase
price of approximately $1,886,000. In connection with the
purchase, the Company also paid fees and expenses of $101,000.
The difference between the carrying value of the Series A Stock
and the purchase price was credited to additional paid-in
capital.

Common Stock:

The Company has reserved approximately 130,880 shares, as
adjusted, of common stock for issuance upon possible conversion
of the remaining Series B Stock.

In December 1997, the Company sold 2,300,000 shares of its common
stock in a public offering at $9.25 per share.  The Company
received proceeds of approximately $19,589,000, net of offering
costs of $1,686,000.  The net proceeds will be used primarily to
finance the drilling and development of the Company's New Mexico
oil and gas properties.

In October 1996, the Company sold 2,300,000 shares of its common
stock in a public offering at $6.50 per share. The Company
received proceeds of approximately $13,189,000, net of offering
costs of $1,761,000. The net proceeds were used primarily to
finance the drilling and development of the Company's New Mexico
oil and gas properties and a portion was used to retire all
outstanding shares of its Series A Stock (see above).

Warrants:

The Company has outstanding warrants to purchase an aggregate of
269,559 shares of common stock, as described below.

Warrants to purchase an aggregate of 77,735 shares of the
Company's common stock at an adjusted exercise price of $8.04 per
share were issued in June 1995 to the holders of Laguna's Series
A Preferred Stock in connection with the private placement of
that stock.  The warrants expire June 30, 2000.

In August 1995, the Company issued warrants to purchase an
aggregate of 31,824 shares of common stock at an adjusted
exercise price of $7.86 per share to an affiliate of Midland Bank
plc, New York Branch, as an "equity kicker" in connection with
the establishment of a now terminated line of credit with that
bank.  The warrants expire on August 24, 2000.

In October 1996, in connection with its offering of common stock,
the Company issued warrants to purchase 160,000 shares of common
stock to the managing underwriter, with an exercise price of
$7.80 per share.  The warrants expire on October 16, 1999.

NOTE 10. SHAREHOLDER RIGHTS PLAN

In April 1997, the Company's Board of Directors declared a
dividend on its shares of common stock (the "Common Shares") of
preferred share purchase rights (the "Rights") as part of a
Shareholder Rights Plan (the "Plan"). The Plan is designed to
insure that all shareholders of the Company receive fair value
for their Common Shares in the event of a proposed takeover of
the Company and to guard against the use of partial tender offers
or other coercive tactics to gain control of the Company without
offering fair value to the Company's shareholders. At the present
time, the Company knows of no proposed or threatened takeover,
tender offer or other effort to gain control of the Company.
Under the terms of the Plan, the Rights will be distributed as a
dividend at the rate of one Right for each Common Share held.
Shareholders will not actually receive certificates for the
Rights at this time, but the Rights will become part of each
Common Share. All Rights expire on April 22, 2001.

Each Right will entitle the holder to buy shares of common stock
at an exercise price of $40.00. The Rights will be exercisable
and will trade separately from the Common Shares only if a person
or group acquires beneficial ownership of 20% or more of the
Company's Common Shares or commences a tender or exchange offer
that would result in such a person or group owning 20% or more of
the Common Shares. Only when one or more of these events occur
will shareholders receive certificates for the Rights.

If any person actually acquires 20% or more of Common Shares -
other than through a tender or exchange offer for all Common
Shares that provides a fair price and other terms for such shares
- or if a 20% or more shareholder engages in certain "self-
dealing" transactions or engages in a merger or other business
combination in which the Company survives and its Common Shares
remain outstanding, the other shareholders will be able to
exercise the Rights and buy Common Shares of the Company having
twice the value of the exercise price of the Rights. In other
words, payment of the $40.00 per Right exercise price will
entitle the holder to acquire $80.00 worth of Common Shares.
Additionally, if the Company is involved in certain other mergers
where its shares are exchanged, or certain major sales of assets
occur, shareholders will be able to purchase the other party's
common shares in an amount equal to twice the value of the
exercise price of the Rights.

The Company will be entitled to redeem the Rights at $.01 per
Right at any time until the tenth day following public
announcement that a person has acquired a 20% ownership position
in Common Shares of the Company. The Company in its discretion
may extend the period during which it can redeem the Rights.

NOTE 11. STOCK COMPENSATION

At December 31, 1997, the Company had two stock-based
compensation plans.  In addition, stock compensation information
for 1996 and 1995 includes Laguna's plan.  As discussed in Note
3, the Company de-consolidated Laguna in the fourth quarter of
1997.  Therefore, no stock compensation information is presented
for 1997 related to Laguna's plan.  As permitted under SFAS No.
123, the Company has elected to continue to measure compensation
costs using the intrinsic value method of accounting prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to
Employees."  Under that method, the difference between the
exercise price and the estimated market value of the shares at
the date of grant is charged to compensation expense, ratably
over the vesting period, with a corresponding increase in
shareholders' equity. Compensation costs charged against income
for all plans were $38,000, $327,000 and $101,000 for 1997, 1996
and 1995, respectively.

Under the Mallon Resources Corporation 1988 Equity Participation
Plan (the "1988 Equity Plan"), 250,000 shares of common stock
have been reserved in order to provide for incentive compensation
and awards to employees and consultants. The 1988 Equity Plan
provides that a three-member committee may grant stock options,
awards, stock appreciation rights, and other forms of stock-based
compensation in accordance with the provisions of the 1988 Equity
Plan. The options vest over a period of up to four years and
expire over a maximum of 10 years from the date of grant.

In June 1997, the shareholders approved the Mallon Resources
Corporation 1997 Equity Participation Plan (the "1997 Plan")
under which shares of common stock have been reserved to provide
employees, consultants and directors of the Company with
incentive compensation.  The 1997 Plan is administered by a
Committee of the Board of Directors who may, in its sole
discretion, select the participants, and determine the number of
shares of common stock to be subject to incentive stock options,
non-qualified options, stock appreciation rights and other stock
awards in accordance with the provisions of the 1997 Plan.  The
aggregate number of shares of common stock that may be issued
under the 1997 Plan is equal to 11% of the number of outstanding
shares of common stock from time to time.  This authorization may
be increased from time to time by approval of the Board of
Directors and by the ratification of the shareholders of the
Company.  In 1997, the Committee approved the grant of 498,850
stock options of which 478,850 were granted at fair market value
and 20,000 were granted with an exercise price of $0.01 each.
The options vest over a period of up to five years and expire
over a maximum of 10 years from the date of grant.

Under the Laguna Gold Company Equity Participation Plan (the
"Laguna Equity Plan"), shares of Laguna common stock have been
reserved for issuance in order to provide for incentive
compensation and awards to employees and consultants. The number
of shares reserved is the lesser of 10% of the number of shares
of Laguna common stock outstanding from time to time, or
8,000,000 shares. The Laguna Equity Plan provides that stock
options, stock bonuses, stock appreciation rights and other forms
of stock-based compensation may be granted in accordance with the
provisions of the Laguna Equity Plan.  The options vest over a
period of up to four years, and expire over a maximum of ten
years from the date of grant.  If, though not expressly approved
by a majority of the members of Laguna's Board of Directors, a
controlling interest in Laguna or substantially all of its assets
are sold, or if Laguna is merged into another company, or if
control of Laguna's Board of Directors is obtained, the options
vest in full.

The following table summarizes activity with respect to the
outstanding stock options under the 1988 Equity Plan, the 1997
Plan and the Laguna Equity Plan (for periods consolidated):

<TABLE>
<CAPTION>
                           Company             Laguna
                                   Weighted            Weighted
                                   Average             Average
                                   Exercise            Exercise
                           Shares   Price      Shares   Price
<S>                         <C>      <C>        <C>        <C>

Outstanding at December 31,
1994                        61,095   $0.04            --   $ --
  Granted                       --      --     1,620,000   0.01
  Exercised                 (1,250)   0.04            --     --
  Forfeited                     --      --            --     --
Outstanding at December 31,
1995                        59,845    0.04     1,620,000  0.01
  Granted                   21,944    0.04       880,000  1.00
  Exercised                (10,570)   0.04            --    --
  Forfeited                 (1,643)   0.04            --    --
Outstanding at December 31,
1996                        69,576    0.04     2,500,000  $0.36
                                               =========  =====

  Granted                  498,850    8.04
  Exercised                 (3,650)   0.04
  Forfeited                (19,500)   0.04

Outstanding at December 31,
1997                       545,276   $7.36
                           =======   =====

                           Company             Laguna
                                    Weighted            Weighted
                                    Average             Average
                                    Exercise            Exercise
                           Shares   Price      Shares   Price

Options exercisable:
  December 31, 1995         30,595  $0.04      1,035,000   $0.01
  December 31, 1996         45,326  $0.04      1,845,000   $0.35
  December 31, 1997        157,277  $5.89
</TABLE>

The weighted average remaining contractual life of the options
outstanding under both the 1988 Equity Plan and 1997 Plan at
December 31, 1997 is approximately 9 years.

In 1992, the Company granted to a consultant options to purchase
12,500 of the Company's common shares at $26.00 per share,
exercisable from November 1993 through October 1997. In 1994, the
Company granted this individual an additional 6,250 options to
purchase the Company's shares at $16.00 per share, exercisable
from January 1995 to December 1998.  The 6,250 options granted in
1994 are outstanding at December 31, 1997.  These options are not
part of either the 1988 Equity Plan or the 1997 Plan.

The Stock Compensation Plan for Outside Directors provides that
the Company's outside directors will be compensated by
periodically granting them shares of the Company's $0.01 par
value common stock worth $1,000 for each board meeting, but no
less than $4,000 per year, for each outside director. The Company
expensed $6,000, $12,000 and $12,000 for the years 1997, 1996 and
1995, respectively, in relation to the Stock Compensation Plan.
In July 1997, the Company started compensating the outside
directors in cash and discontinued the stock grants under this
plan.

In April 1997, the Company granted a total of 25,000 shares of
restricted common stock to three of its officers as an inducement
to continue in its employ.  The fair market value of the shares
at the date of grant will be charged ratably over the vesting
period of three years.  The Company charged $63,000 against
income in 1997 related to this grant.  The grant of restricted
stock is not a part of the Company's equity plans.

Had compensation expense for the Company's 1997, 1996 and 1995
grants of stock-based compensation been determined consistent
with the fair value based method under SFAS No. 123, the
Company's net loss, net loss attributable to common shareholders,
and the net loss per share attributable to common shareholders
would approximate the pro forma amounts below:


<TABLE>
<CAPTION>
                                  1997                1996                1995
                                  As        Pro       As        Pro       As        Pro
                                  Reported  Forma     Reported  Forma     Reported  Forma
<S>                               <C>       <C>       <C>       <C>       <C>       <C>

Net loss                          $(3,704)  $(4,048)  $(1,837)  $(1,869)  $(1,929)  $(1,840)
Net income (loss) attributable to
  common shareholders (See Note 1) (4,292)   (4,636)    1,530     1,498    (2,289)   (2,200)
Net loss per share attributable to
   common shareholders              (0.92)    (0.99)    (0.88)    (0.89)    (1.18)    (1.13)
</TABLE>


The fair value of each option is estimated as of the grant date,
using the Black-Scholes option-pricing model, with the following
assumptions:

<TABLE>
<CAPTION>
                        1997           1996           1995
                        Company Laguna Company Laguna Company Laguna
<S>                     <C>    <C>     <C>    <C>      <C>   <C>
Risk-free interest rate  6.0%   N/A    5.8%   6.5%     N/A   7.6%
Expected life (in years)   4    N/A      4      4      N/A     4
Expected volatility     59.0%   N/A   61.0%  76.0%     N/A   0.0%
Expected dividends       0.0%   N/A    0.0%   0.0%     N/A   0.0%

Weighted average fair
  value of options
  granted             $4.49    N/A  $1.66  $0.52      N/A  $0.11
</TABLE>

NOTE 12. BENEFIT PLANS

Effective January 1, 1989, the Company and its affiliates
established the Mallon Resources Corporation 401(k) Profit
Sharing Plan (the "401(k) Plan"). The Company and its affiliates
match contributions to the 401(k) Plan in an amount up to 25% of
each employee's monthly contributions. The Company may also
contribute additional amounts at the discretion of the
Compensation Committee of the Board of Directors, contingent upon
realization of earnings by the Company which, at the sole
discretion of the Compensation Committee, are adequate to justify
a corporate contribution. For the years ended December 31, 1997,
1996 and 1995, the Company made matching contributions of
$22,000, $16,000 and $13,000, respectively. No discretionary
contributions were made during any of the three years ended
December 31, 1997.

The Company maintains a program which provides bonus compensation
to employees from oil and gas revenues which are included in a
pool to be distributed at the discretion of the Chairman of the
Board. For the years ended December 31, 1997, 1996 and 1995, a
total of $89,000, $74,000 and $69,000, respectively, was
distributed to employees.

NOTE 13. HEDGING ACTIVITIES

The Company periodically enters into commodity derivative
contracts and fixed-price physical contracts to manage its
exposure to oil and gas price volatility.  Commodity derivatives
contracts, which are generally placed with major financial
institutions or with counterparties of high credit quality that
the Company believes are minimal credit risks, may take the form
of futures contracts, swaps or options.  The oil and gas
reference prices of these commodity derivatives contracts are
based upon crude oil and natural gas futures which have a high
degree of historical correlation with actual prices received by
the Company.  The Company accounts for its commodity derivatives
contracts using the hedge (deferral) method of accounting.  Under
this method, realized gains and losses from the Company's price
risk management activities are recognized in oil and gas revenue
when the associated production occurs and the resulting cash
flows are reported as cash flows from operating activities.
Gains and losses from commodity derivatives contracts that are
closed before the hedged production occurs are deferred until the
production month originally hedged.  In the event of a loss of
correlation between changes in oil and gas reference prices under
a commodity derivatives contract and actual oil and gas prices, a
gain or loss would be recognized currently to the extent the
commodity derivatives contract did not offset changes in actual
oil and gas prices.

The following table indicates the Company's outstanding energy
swaps at December 31, 1997:

<TABLE>
<CAPTION
                                                Market Price
Product   Production    Fixed Price   Duration  Reference
<S>  <C>                 <C>         <C>        <C>
Gas  30,000 MMBtu/month  $1.77-2.44  1/98-8/98  El Paso Natural
                                                 Gas (Permian)
Gas  60,000 MMBtu/month  $1.77-2.42  1/98-8/98  El Paso Natural
                                                 Gas (San Juan)
</TABLE>

For the years ended December 31, 1997, 1996 and 1995, the
Company's gains (losses) under its swap agreements were
$(615,000), $(490,000) and $34,000, respectively, and are
included in oil and gas sales in the Company's consolidated
statements of operations.  At December 31, 1997, the estimated
net amount the Company would have had to pay to terminate the
agreements was approximately $77,000.

NOTE 14. MAJOR CUSTOMERS

Sales to customers in excess of 10% of total revenues for the
years ended December 31, 1997, 1996 and 1995 were:

<TABLE>
<CAPTION>
                             1997       1996       1995
                                   (In thousands)
<S>                          <C>        <C>        <C>
Customer A                   $   --     $   --     $2,213
Customer B                    1,887         --         --
Customer C                       --         --      1,319
Customer D                       --      1,750         --
Customer E                    1,335      1,513         --
</TABLE>

NOTE 15. INCOME TAXES

The Company incurred a loss for book and tax purposes in all
periods presented. There is no income tax benefit or expense for
the years ended December 31, 1997, 1996 or 1995.

Deferred tax assets (liabilities) are comprised of the following
as of December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                              1997      1996
                                              (In thousands)
<S>                                           <C>       <C>
Deferred Tax Assets (Liabilities):
  Net operating loss carryforward             $10,096   $ 6,019
  Mining properties basis differences             130        --
  Other                                            42       308
         Total deferred tax assets             10,268     6,327
  Mining properties basis differences              --    (1,686)
  Oil, gas and other properties basis
     differences                               (5,527)   (1,285)
       Total deferred tax liabilities          (5,527)   (2,971)
  Net deferred tax assets                       4,741     3,356
  Less valuation allowance                     (4,741)   (3,356)

       Net deferred tax assets (liabilities)   $   --   $    --
                                               ======   =======
</TABLE>

At December 31, 1997, for Federal income tax purposes, the
Company had a net operating loss ("NOL") carryforward of
approximately $27,100,000, which expires in varying amounts
between 2005 and 2012.

NOTE 16. SEGMENT INFORMATION

The Company operates in two business segments: oil and gas
exploration and production primarily in the United States, and
gold and silver mining primarily in Costa Rica. Information
regarding total assets by business segment and geographic
location for the Company as of December 31, 1997, 1996, and 1995
is as follows:

<TABLE>
<CAPTION>
                                   1997       1996       1995
                                         (In thousands)
<S>                                <C>        <C>        <C>
Total assets:
  Oil and gas                      $51,405    $29,044    $24,791
  Mining                                21     12,356      6,844

                                   $51,426    $41,400    $31,635
                                   =======    =======    =======

  United States                    $51,281    $31,824    $25,867
  Costa Rica and other                 145      9,576      5,768

                                   $51,426    $41,400    $31,635
                                   =======    =======    =======
</TABLE>

The following tables summarize the Company's revenues, operating
income (loss), depreciation, depletion and amortization and
capital expenditures by business segment for the years ended
December 31, 1997, 1996, and 1995:

<TABLE>
<CAPTON>
                                   1997       1996       1995
                                         (In thousands)
<S>                                <C>       <C>        <C>
Revenues:
  Oil and gas                      $8,651    $ 6,236    $ 5,270
  Mining                               --        130         --

                                   $8,651    $ 6,366    $ 5,270
                                   ======    =======    =======

Operating income (loss):
  Oil and gas                      $  592    $  (304)   $(1,176)
  Mining                             (390)    (1,130)      (500)

                                   $  202    $(1,434)   $(1,676)
                                   ======    =======    =======

Depreciation, depletion and amortization:
  Oil and gas                      $ 2,725   $ 2,016    $ 2,288
  Mining                                --        79         52

                                   $ 2,725   $ 2,095    $ 2,340
                                   =======   =======    =======

Capital expenditures:
  Oil and gas                      $19,819   $ 2,473  $ 2,736
  Mining                               350     3,866    1,259

                                   $20,169   $ 6,339  $ 3,995
                                   =======   =======  =======
</TABLE>

The following tables summarize the Company's revenues and net
loss by geographic area for the years ended December 31, 1997,
1996 and 1995:

<TABLE>
<CAPTION>
                                   1997       1996       1995
                                         (In thousands)
<S>                                <C>        <C>        <C>
Revenues:
  United States                    $8,648     $6,366     $5,270
  Costa Rica and other                  3         --         --

                                   $8,651     $6,366     $5,270
                                   ======     ======     ======

Net loss:
  United States                    $  (49)    $ (702)   $(1,800)
  Costa Rica and other             (3,655)    (1,135)      (129)

                                  $(3,704)   $(1,837)   $(1,929)
                                  =======    =======    =======
</TABLE>

NOTE 17. RELATED PARTY TRANSACTIONS

The accounts receivable from related parties consists primarily
of joint interest billings to directors, officers, shareholders,
employees and affiliated entities for drilling and operating
costs incurred on oil and gas properties in which these related
parties participate with Mallon Oil as working interest owners.
These amounts will generally be settled in the ordinary course of
business, without interest.

During the years ended December 31, 1997, 1996 and 1995, the
Company paid legal fees of $4,000, $2,000 and $31,000,
respectively, to a law firm of which a director of the Company is
a senior partner.  Additionally, in 1995, 14,000 shares valued at
$112,000 were issued to a member of the same firm and $32,000
were paid to the same individual for services rendered to the
Company.

In 1997, the Company paid $72,500 of fees to two investment
banking firms in which one of the Company's current directors was
a principal.  In addition, one of these investment banking firms
earned commissions and other fees of approximately $388,000 in
connection with the Company's December 1997 public stock sale.
At the time such amounts were paid or earned, the individual was
not a director of the Company.

The Company had a consulting agreement with an investment banking
firm in which a director is a partner for investment banking
services of $240,000 in 1995, of which $90,000 was payable at
December 31, 1995 and paid in 1996. In addition, in 1996, the
Company paid the firm a commission and other expenses of $101,000
in connection with the Company's purchase of its Series A Stock.

NOTE 18. SUPPLEMENTARY INFORMATION ON OIL AND GAS OPERATIONS

Certain historical costs and operating information relating to
the Company's oil and gas producing activities for the years
ended December 31, 1997, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                   1997       1996       1995
                                         (In thousands)
<S>                                <C>        <C>        <C>
Capitalized Costs Relating to Oil and Gas Activities:
  Oil and gas properties (2)       $63,148    $46,175   $43,751
  Natural gas processing plant       2,760         --        --
  Accumulated depreciation,
    depletion and amortization     (26,011)   (23,361)  (21,173)

                                   $39,897    $22,814   $22,578
                                   =======    =======   =======

Costs Incurred in Oil and Gas Producing Activities:
  Property acquisition costs       $ 1,847    $    60   $   131
  Termination of volumetric
    production payment                  --         --     5,586
  Exploration costs                     59 (1)    264(1)    180
  Development costs                 17,827      2,138     2,379
  Full cost pool credits                --        (38)      (66)

                                   $19,733    $ 2,424   $ 8,210
                                   =======    =======   =======

Results of Operations from Oil and Gas Producing Activities:
  Oil and gas sales                $ 8,582    $ 5,854   $ 3,380
  Deferred revenue amortization         --         --     1,420
  Lease operating expense           (3,037)    (2,249)   (1,868)
  Depletion and depreciation        (2,625)    (1,924)   (2,162)
  Impairment of oil and gas
     properties                        (24)(1)   (264)(1)    --
  Results of operations from oil
    and gas producing activities   $ 2,896    $ 1,417   $   770
                                   =======    =======   =======
</TABLE>

Estimated Quantities of Proved Oil and Gas Reserves (unaudited):

Set forth below is a summary of the changes in the net quantities
of the Company's proved crude oil and natural gas reserves
estimated by independent consulting petroleum engineering firms
for the years ended December 31, 1997, 1996 and 1995.  All of the
Company's reserves are located in the continental United States.

<TABLE>
<CAPTION>
                                                 Oil      Gas
                                                 (MBbls)  (MMcf)
<S>                                               <C>      <C>
Proved Reserves
  Reserves, December 31, 1994                     1,544    6,294
    Acquisition of reserves in place                136    2,246
    Extensions, discoveries and additions           163    1,129
    Production                                     (147)    (546)
    Revisions                                       117      798
  Reserves, December 31, 1995                     1,813   19,921
    Extensions, discoveries and additions            75      667
    Production                                     (174)  (1,286)
    Revisions                                        (7)   4,983
  Reserves, December 31, 1996                     1,707   24,285
    Acquisitions of reserves in place                --    3,968
    Extensions, discoveries and additions           340   29,858
    Production                                     (196)  (2,350)
    Revisions                                      (470)  (5,889)

  Reserves, December 31, 1997                     1,381   49,872
                                                  =====   ======

  Pro forma reserves at December 31, 1996(3)      1,707   28,388
                                                  =====   ======

Proved Developed Reserves
  December 31, 1995                               1,238   14,702
                                                  =====   ======
  December 31, 1996                               1,225   18,403
                                                  =====   ======
  December 31, 1997                               1,110   24,709
                                                  =====   ======
  Pro forma at December 31, 1996 (3)              1,225   20,521
                                                  =====   ======
</TABLE>

Standardized Measure of Discounted Future Net Cash Flows and
Changes Therein Relating to Proved Oil and Gas Reserves
(unaudited):

The following summary sets forth the Company's unaudited future
net cash flows relating to proved oil and gas reserves, based on
the standardized measure prescribed in Statement of Financial
Accounting Standards No. 69, for the years ended December 31,
1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                 1997        1996        1995
                                        (In thousands)
<S>                              <C>         <C>         <C>
Future cash in-flows             $119,335    $129,963   $ 66,178
Future production and development
  costs                           (40,008)    (46,374)   (30,522)
Future income taxes               (11,140)    (18,150)        --
Future net cash flows              68,187      65,439     35,656
Discount at 10%                   (27,022)    (29,428)   (14,618)

Standardized measure of
  discounted future net cash flows,
  end of year                    $ 41,165    $ 36,011   $ 21,038
                                 ========    ========   ========
Pro forma standardized measure
  of discounted future net cash
  flows, end of year(3)          $ 38,320
                                 ========
</TABLE>

Future net cash flows were computed using yearend prices and
yearend statutory income tax rates (adjusted for permanent
differences, operating loss carryforwards and tax credits) that
relate to existing proved oil and gas reserves in which the
Company has an interest. The Company's oil and gas hedging
agreements at December 31, 1997, described in Note 13, do not
have a material effect on the determination of future oil and gas
sales. In 1995, the tax basis of the oil and gas properties plus
the NOL carryforward exceeded future net revenues. Consequently,
no income taxes were provided for in that year.

The following are the principal sources of changes in the
standardized measure of discounted future net cash flows for the
years ended December 31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                 1997        1996        1995
                                        (In thousands)
<S>                              <C>         <C>         <C>
Standardized measure,
  beginning of year             $36,011     $21,038     $13,758
Net revisions to previous
  quantity estimates and other    2,022       3,266      (1,852)
Extensions, discoveries,
  additions, and changes in
  timing of production,
   net of related costs          27,642       2,204       1,631
Purchase of reserves in place     1,720          --       5,701
Net change in future development
  costs                            (793)        580        (127)
Sales of oil and gas produced,
  net of production costs        (5,545)     (3,605)     (1,512)
Net change in prices and
  production costs              (23,496)     20,487       2,063
Accretion of discount               341       2,029       1,376
Net change in income taxes        3,263      (9,988)         --

Standardized measure,
  end of year                   $41,165     $36,011     $21,038
                                =======     =======     =======

Pro forma standardized measure,
  end of year(3)                            $38,320
                                            =======
</TABLE>
__________

(1)  Offshore Belize - all other items relate to U.S.
operations.

(2)  At December 31, 1997 and 1996, the net present value of the
underlying reserves exceeded the net book value of the Company's
oil and gas properties.  At December 31, 1995, the net book value
of the Company's oil and gas properties exceeded the net present
value of the underlying reserves by $1,540,000.  However, oil and
gas prices increased substantially subsequent to yearend.
Applying these increased prices to yearend oil and gas reserves
indicates that the oil and gas properties were not, in fact,
impaired.  Accordingly, the $1,540,000 impairment was not charged
to expense during the year ended December 31, 1995.

(3)      In December 1996, the Company entered into a purchase
and sale agreement to acquire certain oil and gas properties for
cash consideration of $1,300,000. The Company assumed operations
of those properties on December 31, 1996 and the ownership
changed on January 1, 1997. Pro forma proved reserves include
4,103 Mmcf and pro forma proved developed reserves include 2,118
Mmcf, and pro forma standardized measure includes $2,309,000, as
if the ownership had changed on December 31, 1996.

There are numerous uncertainties inherent in estimating
quantities of proved oil and gas reserves and in projecting the
future rates of production, particularly as to natural gas, and
timing of development expenditures. Such estimates may not be
realized due to curtailment, shut-in conditions and other factors
which cannot be accurately determined. The above information
represents estimates only and should not be construed as the
current market value of the Company's oil and gas reserves or the
costs that would be incurred to obtain equivalent reserves.

                          LAGUNA GOLD COMPANY

                           FINANCIAL SECTION
            Expressed in U.S. Dollars, unless otherwise stated.

                                                           PAGE

REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS                    2

CONSOLIDATED BALANCE SHEETS -
December 31, 1997 and 1996                                   4

CONSOLIDATED STATEMENTS OF OPERATIONS -
For the Years Ended December 31, 1997, 1996 and 1995         5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -
For the Years Ended December 31, 1997, 1996 and 1995         6

CONSOLIDATED STATEMENTS OF CASH FLOWS  -
For the Years Ended December 31, 1997, 1996 and 1995         7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   8


LAGUNA GOLD COMPANY
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Laguna Gold Company:

We have audited the accompanying consolidated balance sheet of
Laguna Gold Company (a Colorado corporation) and subsidiaries as
of December 31, 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the
year then ended.  These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility
is to express an opinion on these consolidated financial
statements based on our audit.

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

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Laguna Gold Company and subsidiaries as of December 31, 1997,
and the results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting
principles.

The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern.  As discussed in Note 3 to the consolidated financial
statements, the Company has suffered recurring losses and
negative cash flow from operations that raise substantial doubt
about its ability to continue as a going concern.  Management's
plans in regard to these matters are also described in Note 3.
The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.

   /s/ Arthur Andersen LLP

Denver, Colorado
March 20, 1998




LAGUNA GOLD COMPANY
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
Laguna Gold Company

In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of operations, of cash flows
and of stockholders' equity as of and for each of the two years
in the period ended December 31, 1996 present fairly, in all
material respects, the financial position, results of operations
and cash flows of Laguna Gold Company and its subsidiaries as of
and for each of the two years in the period ended December 31,
1996, in conformity with generally accepted accounting
principles.  These financial statements are the responsibility of
the Company's management' our responsibility is to express an
opinion on these financial statements based on our audits.  We
conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed
above.  We have not audited the consolidated financial statements
of Laguna Gold Company for any period subsequent to December 31,
1996.

   /s/ Price Waterhouse LLP

March 17, 1997
Denver, Colorado


                            LAGUNA GOLD COMPANY

                         CONSOLIDATED BALANCE SHEETS
                         At December 31, 1997 and 1996
                        (In thousands of U.S. dollars,
                      except share and per share amounts)

<TABLE>
<CAPTION>
                                             1997        1996

                                ASSETS
<S>                                          <C>         <C>
Current assets:
Cash and cash equivalents                    $    435    $    47
Short-term investments                             --      2,786
Accounts receivable                                19         55
Inventories                                        12         18
Other                                              19         36
Total current assets                              485      2,942

Mineral properties                                254      8,371
Mining equipment                                  737      1,722
Less accumulated depreciation, depletion
   and amortization                                --       (728)
                                                  991      9,365

Other assets                                        8         29

Total Assets                                 $  1,484    $12,336
                                             ========    =======

            LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable and accrued liabilities     $     62    $   160

Convertible note payable to affiliate           1,856      2,070
Other convertible notes payable                   230        230
Accrued interest                                   81        110
                                                2,167      2,410

Commitments and contingencies (Note 9)

Stockholders' equity (deficit):
Series A Convertible Preferred Stock, $0.01
   par value, 25,000 shares authorized,
   no shares issued and outstanding                --         --
Common Stock, $0.01 par value, 200,000,000
   shares authorized; 25,000,000 shares
   issued and outstanding                         250        250
Additional paid-in capital                     14,736     14,545
Accumulated deficit                           (15,731)    (5,029)
Total stockholders' equity (deficit)             (745)     9,766

Total Liabilities and Stockholders'
Equity (Deficit)                             $  1,484    $12,336
                                             ========    =======
</TABLE>

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

                         LAGUNA GOLD COMPANY

                  CONSOLIDATED STATEMENTS OF OPERATIONS
           For the Years Ended December 31, 1997, 1996 and 1995
         (In thousands of U.S. dollars, except per share amounts)

<TABLE>
<CAPTION>
                                 1997        1996       1995
<S>                              <C>         <C>        <C>
Revenues:
Interest and other               $     91    $   130    $    41

Costs and expenses:
Write down of mining assets         9,319         --         --
General and administrative            985        624        961
Exploration                           234        410         --
Depreciation and amortization         139         78         51
Interest and other                    116        120         15
                                   10,793      1,232      1,027

Net loss                         $(10,702)   $(1,102)   $  (986)
                                 ========    =======    =======

Net loss per common share        $  (0.43)   $ (0.06)   $ (0.07)
                                 ========    =======    =======

Weighted average common shares
   outstanding (000's)             25,000     18,590     14,400
                                 ========    =======    =======
</TABLE>

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

                           LAGUNA GOLD COMPANY

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
            (In thousands of U.S. dollars, except share amounts)


<TABLE>
<CAPTION>
                                                                                Total
                                                           Additional           Stockholders'
                           Preferred Stock  Common Stock   Paid-in  Accumulated Equity
                           Shares   Amount  Shares  Amount Capital  Deficit    (Deficit)
<S>                        <C>       <C>    <C>       <C>  <C>      <C>        <C>
Balance, December 31, 1994      --   $ --         100 $ 1  $ 2,213  $(2,941)   $   (727)

100,000-for-one common stock
  split                         --     --   9,999,900  99      (99)      --          --
Issuance of convertible
  preferred stock           25,000      1          --  --    2,399       --       2,400
Capital contribution by Mallon
  Resources Corporation         --     --          --  --    3,569       --       3,569
Stock option compensation
  expense                       --     --          --  --      137       --         137
Net loss                        --     --          --  --       --     (986)       (986)

Balance, December 31, 1995  25,000      1  10,000,000 100    8,219   (3,927)      4,393

1.44-for-one common stock
  split                         --     --   4,400,000  44      (44)      --          --

Adjusted balance,
  December 31, 1995         25,000      1  14,400,000 144    8,175   (3,927)      4,393

Capital contribution by Mallon
  Resources Corporation         --     --          --  --      111       --         111
Stock option compensation
  expense                       --     --          --  --       25       --          25
Sale of Special Warrants        --     --          --  --    4,339       --       4,339
Issuance of common stock        --     --   2,000,000  20    1,980       --       2,000
Conversion of Series A Preferred
  Stock to common stock    (25,000)    (1)  3,600,000  36      (35)      --          --
Issuance of common stock for
  Special Warrants              --     --   5,000,000  50      (50)      --          --
Net loss                        --     --          --  --       --   (1,102)     (1,102)

Balance, December 31, 1996      --     --  25,000,000 250   14,545   (5,029)      9,766

Stock option compensation
  expense                       --     --          --  --      191       --         191
Net loss                        --     --          --  --       --  (10,702)    (10,702)

Balance, December 31, 1997      --   $--   25,000,000 $250 $14,736 $(15,731)   $  (745)
                           =======   ===   ========== ==== ======= ========    =======

</TABLE>

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

                             LAGUNA GOLD COMPANY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             For the Years Ended December 31, 1997, 1996 and 1995
                         (In thousands of U.S. dollars)

<TABLE>
<CAPTION>
                                                              1997        1996       1995
<S>                                                           <C>         <C>        <C>
Cash flows from operating activities:
Net loss                                                      $(10,702)   $(1,102)   $  (986)
Adjustments to reconcile net loss to net cash used in operations:
Write down of mining assets                                      9,319         --         --
Depreciation and amortization                                      139         78         51
Gain on sale of assets                                             (12)        --         --
Allocated general and administrative expenses                       --        111        390
Stock option compensation expense                                  191         25        137
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable                                                 36        (49)         5
Inventories                                                          6         12        (25)
Other assets                                                        38        (25)        --
Increase (decrease) in:
Accounts payable and accrued liabilities                           (98)      (102)       221
Exploration advances                                                --        (99)        99
Accrued interest                                                   108        110         --
Net cash used in operating activities                             (975)    (1,041)      (108)

Cash flows from investing activities:
Decrease (increase) in short-term investments                    2,786     (2,786)        --
Additions to property and equipment                             (1,439)    (1,635)    (1,238)
Proceeds from sale of assets                                        16         --         --
Net cash provided by (used in) investing activities              1,363     (4,421)    (1,238)

Cash flows from financing activities:
Proceeds from sale of special warrants                              --      4,339         --
Proceeds from sale of convertible preferred stock                   --         --      2,400
Increase in payable to affiliate                                    --         --        104
Net cash provided by financing activities                           --      4,339      2,504

Net increase (decrease) in cash and cash equivalents               388     (1,123)     1,158

Cash and cash equivalents, beginning of year                        47      1,170         12

Cash and cash equivalents, end of year                        $    435    $    47    $ 1,170
                                                              ========    =======    =======

Supplemental non-cash transactions:
Sale of 1% net smelter return royalty by forgiveness of a
  portion of the principal amount of a convertible note payable
  and accrued interest to Mallon Resources Corporation        $    350    $    --    $   --
                                                              ========    =====      ======

Acquisition of Red Rock Ventures, Inc. for common stock
 and notes payable                                            $     --    $ 2,230    $   --
                                                              ========    =======    ======

Capital contribution by Mallon Resources Corporation
 by forgiveness of account payable                            $     --    $   111    $3,569
                                                              ========    =======    ======

Conversion of payable of Mallon Resources Corporation
 to note payable                                              $     --    $    --    $2,070
                                                              ========    =======    ======
</TABLE>

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


                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.   ORGANIZATION

Laguna Gold Company (the "Company" or "Laguna") is a Denver based
company engaged in the exploration for and development of
precious metal mines in Costa Rica and Panama.  The Company was
incorporated under the laws of the State of Colorado on
October 15, 1980.  In December 1988, the Company became a wholly-
owned subsidiary of Mallon Resources Corporation ("Mallon").  At
December 31, 1997, Mallon owned approximately 46.4% of the
Company's outstanding common stock.

Note 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Laguna Costa Rica
Corp., a Colorado corporation, Corporacion de Minerales Mallon,
S.A., a Costa Rica corporation, and Industrial Platoro, S.A., a
Costa Rica corporation.  All significant intercompany
transactions and accounts have been eliminated in consolidation.

Cash, Cash Equivalents and Short-Term Investments:
Cash and cash equivalents include investments which are readily
convertible into cash and have an original maturity of three
months or less.  All short-term investments are held to maturity
and are reported at cost.  Short-term investments include U.S.
Treasury bills and notes with maturities greater than ninety
days, but not exceeding one year.

Fair Value of Financial Instruments:
The Company's on-balance sheet financial instruments consist of
cash and cash equivalents, short-term investments, accounts
receivable and accounts payable and long-term debt. Except for
long-term debt, the carrying amounts of such financial
instruments approximate fair value due to their short maturities.
At December 31, 1997 and 1996, based on rates available for
similar types of debt, the fair value of long-term debt was not
materially different from its carrying amount.

Inventories:
Inventories, which consist of mining materials and supplies, are
valued at the lower of average cost or estimated net realizable
value.

Property and Equipment:
The Company expenses general prospecting costs and the costs of
acquiring and exploring unevaluated mining properties.  When,
based on management's evaluation of geological studies, resource
and reserve reports (both Company reports and reports prepared by
third parties), metallurgical studies, environmental issues,
estimated capital requirements, estimated mining and production
costs, estimated commodity prices, and other matters, it appears
likely that a mineral property can be economically developed, the
costs incurred to develop such property, including costs to
further delineate the ore body, are capitalized.  When
commercially profitable ore reserves are developed and operations
commence, deferred costs will be amortized using the units-of-
production method.  Upon abandonment or sale of projects, all
capitalized costs relating to the specific project are removed
from the accounts in the year abandoned or sold and any gain or
loss is recognized.

Mining equipment is depreciated using the units-of-production
method, except during suspended operations.  When not in
production, this equipment is depreciated at approximately 2% per
year.  Other property and equipment is recorded at cost, and
depreciated over their estimated useful lives (five to seven
years) using the straight-line method.

The cost of normal maintenance and repairs is charged to expense
as incurred.  Significant expenditures that increase the life of
an asset are capitalized and depreciated over the estimated
useful life of the asset.  Upon retirement or disposition of
assets, related gains or losses are reflected in operations.

The Company analyzes the realizability of its long-lived assets
in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."  SFAS No.
121 prescribes that an impairment loss is recognized in the event
that facts and circumstances indicate that the carrying amount of
an asset may not be recoverable, and an estimate of future
undiscounted cash flows is less than the carrying amount of the
asset.  Impairment is recorded based on an estimate of future
discounted cash flows. (See Note 4.)

Income Taxes:
Income taxes are calculated in accordance with the provisions set
forth in SFAS No. 109, "Accounting for Income Taxes."  Under SFAS
No. 109, deferred income taxes are determined using an asset and
liability approach.  This method gives consideration to the
future tax consequences associated with differences between the
financial accounting and the tax basis of assets and liabilities,
as determined through income tax filings by the Company with
relevant tax authorities, and gives immediate effect to changes
in income tax laws.

Stock-Based Compensation:
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," in 1996.  As permitted under SFAS No. 123, the
Company has elected to continue to measure compensation cost
using the intrinsic value based method of accounting prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to
Employees."  The Company has made pro forma disclosures of net
loss and loss per share as if the fair value based method of
accounting as defined in SFAS No. 123 had been applied.  (See
Note 10.)

Foreign Currency Translation:
Management has determined that the U.S. dollar is the functional
currency for Costa Rican operations.  Accordingly, the assets,
liabilities and results of operations of the Costa Rica
subsidiaries are measured in U.S. dollars.  Transaction gains and
losses are not material for any of the periods presented.

Per Share Data:
The Company adopted SFAS 128, "Earnings Per Share" beginning with
the fourth quarter of 1997.  All prior period earnings per share
have been restated to conform to the provisions of the statement.
Basic earnings per share is computed based on the weighted
average number of common shares outstanding.  Diluted earnings
per share is computed based on the weighted average number of
common shares outstanding adjusted for the incremental shares
attributed to outstanding options to purchase common stock.  All
options to purchase common shares were excluded from the
computation of diluted earnings per share in all years presented
because they were anti-dilutive as a result of the Company's net
loss in those years.

Use of Estimates and Significant Risks:
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make significant estimates and assumptions that
affect the amounts reported in these financial statements and
accompanying notes.  The more significant areas requiring the use
of estimates relate to mineral reserves, fair value of financial
instruments, future cash flows associated with  long-lived
assets, valuation allowance for deferred tax assets, and useful
lives for depreciation and amortization.  Actual results could
differ from those estimates.

The Company and its operations are subject to numerous risks and
uncertainties.  Among these are risks related to the mining
business (including operating risks and hazards and the
regulations imposed thereon), risks and uncertainties related to
the volatility of the prices of metals, uncertainties related to
the estimation of reserves of minerals and the value of such
reserves, the effects of competition and extensive environmental
regulation, the uncertainties related to foreign operations, and
many other factors, many of which are necessarily out of the
Company's control.  Exploration activities are subject to
numerous risks, including the risk that no ore bodies will be
encountered.

Reporting Comprehensive Income:
SFAS No. 130 "Reporting Comprehensive Income" which was issued in
June 1997 established standards for reporting and displaying
comprehensive income and its components in a full set of general
purpose financial statements.  In addition to net income,
comprehensive income includes all changes in equity during a
period, except those resulting from investments by and
distributions to owners.  The Company will adopt SFAS 130, which
is effective for fiscal years beginning after December 15, 1997,
in the first quarter of 1998.

In June 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was issued.  This statement
establishes standards for reporting information about operating
segments in annual and interim financial statements.  SFAS 131
also establishes standards for related disclosures about products
and services, geographic areas and major customers.  SFAS 131 is
effective for fiscal years beginning after December 15, 1997 and
will be adopted by the Company in 1998.

Note 3.   FINANCIAL CONDITION

The Company has experienced recurring losses and negative cash
flow from operations that raise serious doubt about its ability
to continue as a going concern.  The Company's cash position at
December 31, 1997 was approximately $400,000, which at its
current monthly expenditure rate will be exhausted within five
months subsequent to year end.  In order to meet its financial
needs during 1998, the Company must obtain some form of debt or
equity financing or combination thereof, or complete a sale of
assets, a merger or other transaction.  Presently, management is
attempting to raise funds to put its Rio Chiquito Gold Project
back into production.  The Company is actively pursuing debt
financing through the form of a private placement.  However,
there is no assurance that the Company will be successful in its
fund raising efforts.  In conjunction with attempts to secure
financing, the Company may need to initiate further reductions in
its workforce and other areas of costs to reduce future financial
requirements.  If the current weak gold market continues and gold
prices remain depressed, the Company's operations in Costa Rica
may be put on standby status for an indefinite period.

Note 4.   WRITE-DOWN OF MINING ASSETS

The Company evaluates its long-lived assets for write-down when
events or changes in circumstances indicate that the related
carrying amount may not be recoverable.  If the sum of estimated
future cash flows on an undiscounted basis is less than the
carrying amount of the related asset, an asset write-down is
considered necessary.  The related write-down is measured by
comparing estimated future cash flows on a discounted basis to
the carrying amount of the assets.  Effective December 31, 1997,
the Company's Board of Directors approved a write-down for a
portion of its long-lived assets based upon an analysis completed
in March 1998.  The Company recognized a write-down of $8.8
million and $0.5 million affecting its mineral properties and
mining equipment, respectively.  The write-down was required
primarily as a result of the current depressed gold price.

Note 5.   MINERAL PROPERTIES

The Company's principal precious metals property is the Rio
Chiquito project located in Guanacaste Province, Costa Rica,
where the Company holds 18 exploration concessions and one
exploitation concession covering 277 square kilometers.  The
Company believes that it has valid rights to the Rio Chiquito
concessions, and that all necessary exploration work has been
performed to retain title to the concessions.  The project was
initially owned 90% by the Company and 10% by Red Rock Ventures,
Inc. ("Red Rock").  As discussed in Note 6, the Company purchased
Red Rock in 1996 and now owns 100% of the project.

In August 1996, the Company purchased a 5% Net Operating Profits
Interest in the Rio Chiquito deposit held by Sunshine
International Exploration Company for $195,000.

Note 6.   SHARE CAPITAL

The Company's authorized capital consists of 200,000,000 shares
of $.01 par value common stock and 1,000,000 shares of preferred
stock, par value $.01 per share, with designations, rights,
preferences and limitations as may be determined by the Company's
Board of Directors.  In June 1995, the Company privately placed
25,000 shares of its Series A Convertible Preferred Stock for
$2,400,000.  The shares of Series A Convertible Preferred Stock
were convertible into 3,600,000 shares of the Company's common
stock and this conversion occurred automatically upon the
Company's successful initial public offering in September 1996,
as discussed below.  Each share of Series A Convertible Preferred
Stock included detachable warrants to purchase shares of Mallon's
common stock at an adjusted exercise price of $8.04 per share.
The warrants expire in June 2000.

In May 1996, the Company sold 5,000,000 Special Warrants for
$1.00 per Warrant.  The Company received proceeds of $4,339,000,
net of offering costs of $661,000.  In September 1996, the
Company completed the registration of the Special Warrants with
The Ontario Securities Commission.  Upon exercise, each Special
Warrant is convertible into one share of the Company's common
stock and one Common Share Purchase Warrant.  Each Common Share
Purchase Warrant entitled the holder to purchase one share of
common stock for $1.50 (subject to adjustment) on or before
November 24, 1997.  In connection with the sale of the Special
Warrants, the Company issued to the underwriters non-assignable
warrants that entitle the holders to purchase 500,000 shares of
the Company's common stock on or before November 24, 1997 at
$1.00 per share.  As of November 24, 1997, none of the Common
Share Purchase Warrants nor the Special Warrants were exercised
and subsequently all the warrants expired.

Until June 1996, the Company owned a 90% interest in the Rio
Chiquito concessions, and Red Rock, a private company, owned a
10% interest.  In June 1996, the Company acquired Red Rock for
2,000,000 shares of the Company's common stock, valued at $1.00
per share, and convertible secured promissory notes in the
aggregate principal amount of $230,000, for a total consideration
of $2,230,000.  The notes bear interest at 5% per annum.
Principal and accrued interest are due December 31, 2000.  The
notes are convertible into shares of the Company's common stock,
at the holder's option.  The initial conversion price, which is
subject to anti-dilution adjustments, is $1.10.  The notes are
collateralized by a general security agreement encumbering all of
the assets of the Company.  Red Rock's sole asset at the time of
the merger was a 10% interest in the Rio Chiquito concessions.
After the acquisition, the Company owns a 100% interest in the
concessions.  The acquisition was accounted for as a purchase.

Note 7.   INCOME TAXES

The Company incurred a loss for book and tax purposes in all
periods presented.  There is no income tax benefit or expense for
the years ended December 31, 1997, 1996 and 1995.

Deferred tax assets consisted of the following as of December 31,
1997 and 1996 (In thousands of U.S. dollars):

<TABLE>
<CAPTION>
                                               1997       1996
<S>                                         <C>         <C>
Net operating loss carryforward              $ 1,070    $   521
Mining properties basis differences            4,903      1,253
                                               5,973      1,774

Less valuation allowance                      (5,973)    (1,774)

                                             $    --    $    --
                                             =======    =======
</TABLE>


At December 31, 1997, for U.S. Federal income tax purposes, the
Company had a net operating loss ("NOL")  carryforward of
approximately $2,900,000, which expires in varying amounts
between 2005 and 2012.

Under the U.S. Internal Revenue Code of 1986 (the "Code"), as
amended, the Company generally would be entitled to reduce its
future Federal income tax liabilities by carrying the unused NOL
forward for a period of 15 years to offset its future income
taxes.  The Company's ability to utilize any NOL in future years
will be restricted to approximately $1,500,000 per year because
the Company has experienced an "ownership change" as defined in
the Code.

Note 8.  RELATED PARTY TRANSACTIONS

In June 1997, Mallon discontinued its allocation of G&A to the
Company since Laguna was no longer sharing office space, expenses
or employees.  The G&A allocation from Mallon to the Company for
1997, 1996 and 1995 was $58,000, $297,000 and $390,000,
respectively.  During 1997, none of the G&A allocation was
recorded as a capital contribution by Mallon, however, during
1996 a G&A allocation of $111,000 was recorded as a capital
contribution by Mallon.  As of December 31, 1997, approximately
$10,000 was due from Mallon.  As of December 31, 1997 and 1996,
$1,700 and $50,000 were payable to Mallon, respectively.
Subsequent to year end, the intercompany receivable and payable
have been collected and paid, respectively.

In December 1995, the Company exchanged its intercompany payable
to Mallon of $5,639,000 for a $2,070,000 Convertible Secured
Promissory Note ("Note") to Mallon.  The difference of $3,569,000
was recorded as a capital contribution by Mallon.  The Note
accrued interest at 5% per annum, and principal and accrued
interest was due December 31, 2000.  The Note was convertible
into shares of the Company's common stock, at either the
Company's or Mallon's option.  The conversion price, which was
subject to anti-dilution adjustments, was $1.10.  The Note was
collateralized by a general security agreement encumbering all of
the assets of the Company.  The intercompany payable to Mallon
arose principally through the purchase of mineral properties and
the allocation of common expenses.  Mallon did not charge
interest on the intercompany payable prior to the exchange noted
above.  In March 1998, the Company exercised its option under the
terms of the Note to pay off all of the principal and accrued
interest due under the Note as of December 31, 1997 with shares
of its $0.01 par value per share common stock.  The total
principal and accrued interest due under the Note as of
December 31, 1997, was $1,919,173.  Accordingly, the Company
authorized 1,744,703 shares of its common stock to be issued to
Mallon in full satisfaction of all of its obligations under the
Note.

In April 1997, the Company sold to Mallon a 1% net smelter return
royalty burdening the Rio Chiquito concessions in exchange for
the forgiveness by Mallon of a portion of the principal amount of
the Note and accrued interest.  Total consideration was $350,000,
of which approximately $214,000 was principal and $136,000 was
accrued interest.

In January 1998, the Company entered into a sublease agreement
with Mallon.  (See Note 12.)

Note 9.   COMMITMENTS AND CONTINGENCIES

In October 1996, the Company entered into a new lease for its
corporate office.  The lease expires in February 2002.  The lease
agreement provides for a base rent of $3,361 per month for the
entire term of the lease and the payment of the Company's
proportionate share of the real estate taxes and operating
expenses.  Future minimum lease payments are as follows (In
thousands of U.S. dollars):

<TABLE>
<CAPTION>
Year                 Amount
<S>                   <C>
1998                  $ 47
1999                    44
2000                    41
2001                    40
2002                     7

                      $179
                      ====
</TABLE>

For the year ended December 31, 1997, the Company's rent expense
was $29,600.  For the years ended December 31, 1996 and 1995, the
Company's rent expense was included in the general and
administrative expense allocated from Mallon.  Effective
January 1, 1998, the Company began subletting approximately one-
third of the Company's office space to Mallon for a period of 12
months at a rate of $1,227 per month.  (See Note 12.)

Under the terms of the Costa Rican Labor Code, the Company may be
obligated to make certain payments in the event of the death or
dismissal of Costa Rican employees.  No estimate of this
liability can be made at this time.  It is the policy of the
Company to expense any such payments as incurred.

Presently, the Company has no future environmental or reclamation
commitments or liabilities related to its current operations,
however, if the Company undertakes an advanced exploration or
drilling program or goes into production, the Company may incur
future commitments and liabilities related to those activities.

Note 10.   STOCK BASED COMPENSATION

Under the Laguna Gold Company Equity Participation Plan (the
"Equity Plan"), shares of common stock have been reserved for
issuance in order to provide for incentive compensation and
awards to employees and consultants.  The number of shares
reserved is the lesser of 10% of the number of shares of Common
Stock outstanding from time to time, or 8,000,000 shares.  The
Equity Plan provides that stock options, stock bonuses and stock
appreciation rights and other forms of stock-based compensation
may be granted in accordance with the provisions of the Equity
Plan.  Effective January 1, 1995, options to purchase a total of
1,620,000 shares of the Company's common stock were granted to
four officers of the Company, exercisable at a price of $0.01 per
share.  Of these options, 718,750 vested immediately.  The
remainder of the options vest over a period of up to four years.
The maximum term for the options is ten years from the date of
grant.  The options vest in full if controlling interest in the
Company or substantially all of its assets are sold, or if the
Company is merged into another company, or if control of the
Company's Board is obtained by a person or persons not expressly
approved by a majority of the members of the Board.  As permitted
under SFAS No. 123, the Company has elected to continue to
measure compensation expense using the intrinsic value method of
accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees."  Under that method, the difference
between the exercise price and the estimated fair value of the
shares at the date of grant is charged to compensation expense,
ratably over the vesting period. As of December 31, 1997, none of
these options have been exercised.

In July and August 1996, under the Equity Plan, options to
purchase a total of 880,000 shares of the Company's common stock
were granted to officers and directors of the Company,
exercisable at a price of $1.00 per share.  Of these options,
630,000 vested immediately.  The remainder of the options vest
over periods of up to four years.  To date, none of these options
have been exercised.

In August 1997, under the Equity Plan, options to purchase
225,000 shares of the Company's common stock with an exercise
price of $0.01 per share were forfeited.

In September 1997, under the Equity Plan, options to purchase
160,000 shares of the Company's common stock were granted to
officers of the Company, exercisable at a price of $0.16 per
share.  Of these options, 40,000 vested immediately.  The
remainder of the options vest over periods of up to three years.
To date, none of these options have been exercised.

Changes during 1997, 1996 and 1995 in options outstanding under
the Equity Plan were as follows:

<TABLE>
<CAPTION>
Option Price

                                            Shares   Per Share
                                                 (000's)
<S>                                         <C>      <C>
Outstanding at December 31, 1994               --    $        --
Granted                                     1,620           0.01
Exercised                                      --             --
Forfeited                                      --             --

Outstanding at December 31, 1995            1,620           0.01
Granted                                       880           1.00
Exercised                                      --             --
Forfeited                                      --             --

Outstanding at December 31, 1996            2,500    $0.01-$1.00
Granted                                       160           0.16
Exercised                                      --             --
Forfeited                                     225           0.01

Outstanding at December 31, 1997            2,435   $0.01 - 1.00


Options exercisable:
December 31, 1996                           1,845   $0.01 -$1.00
December 31, 1997                           2,203   $0.01 - 1.00

</TABLE>

The weighted average remaining contractual life of the options
under the Equity Plan is 8.5 years.

Had compensation expense for the Company's 1997, 1996 and 1995
grants of stock options been determined consistent with the fair
value method under SFAS No. 123, the Company's net loss and loss
per common share would approximate the pro forma amounts below
(in thousands of U.S. dollars, except per share amounts):


<TABLE>
<CAPTION>
                                1997                    1996                   1995
                      As Reported  Pro Forma  As Reported  Pro Forma  As Reported  Pro Forma
<S>                    <C>         <C>          <C>        <C>          <C>          <C>
Net loss               $(10,702)   $(10,752)    $(1,102)   $(1,399)     $ (986)      $(963)
Net loss per
   common share        $  (0.43)   $  (0.43)    $ (0.06)   $ (0.08)     $(0.07)      $(0.07)
</TABLE>

The fair value of each option is estimated as of the grant date
using the Black-Scholes option-pricing model with the following
assumptions.  The options granted in 1995 have an expected price
volatility of zero since the Company was non-public at the date
of grant.

<TABLE>
<CAPTION>
                                           1997     1996    1995
<S>                                        <C>      <C>     <C>
Risk-free interest rate                    5.88%    6.50%   7.60%
Expected life (in years)                      4        4       4
Expected volatility                      133.28%   75.50%   0.00%
Expected dividend yield                    0.00%    0.00%   0.00%
Weighted average fair value of
   options granted                         $0.16    $0.52   $0.11
</TABLE>

In December 1997, Mallon granted to new management an option for
three years to purchase from Mallon 1.0 million shares of Laguna
common stock owned by Mallon ("Mallon's Laguna Common Stock") for
a purchase price of US$1.00 per share (see below).  The grant of
the 1.0 million options to new management from  Mallon is not
reflected in the SFAS 123 disclosures above.

In December 1997, the Company engaged a new management team.
Part of management's compensation package was stock compensation
effective December 30, 1997.  The compensation package provided
the following:  (1) a grant of 2.4 million shares of Mallon's
Laguna Common Stock; (2) a grant to new management of an option
for three years to purchase from Mallon 1.0 million shares of
Mallon's Laguna Common Stock for a purchase price of US$1.00 per
share; and (3) a grant of 975,000 shares of Mallon's Laguna
Common Stock to new management upon the occurrence of certain
events.  For the year ended December 31, 1997, the Company's
statement of operations reflects stock compensation expense of
approximately $210,000 for items (1) and (2) discussed above.  As
of December 31, 1997, none of the events discussed in item (3)
above have occurred, therefore, no stock compensation expense
related to the performance options was recorded in the Company's
1997 financial statements.  However, as these events occur in the
future, the Company will record the appropriate stock
compensation expense in the Company's financial statements.

Note 11.   DIFFERENCE BETWEEN UNITED STATES AND CANADIAN
           GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States which differ in certain respects from those
principles and practices that the Company would have followed had
its consolidated financial statements been prepared in accordance
with accounting principles generally accepted in Canada.  Except
for the convertible note payable to affiliate (see Note 8), which
would require classification as equity under Canadian generally
accepted accounting principles, there are no other differences
that have a significant effect on earnings, or overall financial
statement presentation.

Note 12.  SUBSEQUENT EVENTS

In January 1998, the Company entered into a sublease agreement
with Mallon whereby the Company will sublet approximately one-
third of its office space to Mallon for a period of 12 months
ending December 31, 1998.  The sublease rate is $1,227 per month
and is based on the current market office lease rates.

In January 1998, the Company's Board of Directors granted to
employees of the Company options to purchase 919,999 shares of
the Company's common stock at an exercise price of $0.045.  These
grants are subject to stockholder ratification, and the options
vest at various times or upon the occurrence of various events.

In March 1998, the Company's Board of Directors approved, subject
to stockholder ratification at the Company's June 1998 annual
meeting, an increase in the  number of shares available for
issuance under the Company's Equity Plan from 2.5 million shares
to 5.0 million shares.  In addition, the Board of Directors
approved, subject to stockholder ratification, that the exercise
price of all options held by current employees and directors of
the Company be reduced to US$0.045 per share.