<PAGE>
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
                                  FORM 10-K/A
 
                               ----------------
 
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
   ACT OF 1934
 
                    FOR THE FISCAL YEAR ENDED JUNE 30, 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 0-9498
 
                        BELLWETHER EXPLORATION COMPANY
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                                                       76-0437769
              DELAWARE                              (I.R.S. EMPLOYER
   (STATE OR OTHER JURISDICTION OF                 IDENTIFICATION NO.)
   INCORPORATION OR ORGANIZATION)
 
 
                                                          77010
  1331 LAMAR, SUITE 1455, HOUSTON,                     (ZIP CODE)
                TEXAS
   (ADDRESS OF PRINCIPAL EXECUTIVE
              OFFICES)
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 650-1025
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
<TABLE>
<CAPTION>
            TITLE OF EACH CLASS              NAME OF EACH EXCHANGE ON WHICH REGISTERED
            -------------------              -----------------------------------------
<S>                                         <C>
       Common Stock, $.01 par value                         NASDAQ/NMS
10 7/8% Senior Subordinated Notes due 2007                     None
</TABLE>
 
                               ----------------
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.    Yes   X    No
 
  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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this 10-K or any amendment
to this Form 10-K. [_]
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant at September 24, 1997, was approximately $166,635,856.
 
  As of September 24, 1997, the number of outstanding shares of the
registrant's common stock was 13,869,965.
 
  Documents Incorporated by Reference: Portions of the registrant's annual
proxy statement, to be filed within 120 days after June 30, 1997, are
incorporated by reference into Part III.
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
                          ANNUAL REPORT ON FORM 10-K/A
                    FOR THE FISCAL YEAR ENDED JUNE 30, 1997
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                         NUMBER
                                                                         ------
 <C>         <S>                                                         <C>
 PART I
    Item 1.  Business.................................................      3
    Item 2.  Properties...............................................      9
    Item 3.  Legal Proceedings........................................     16
    Item 4.  Submission of Matters to a Vote of Security Holders......     16
 PART II
             Market for the Registrant's Common Equity and Related
    Item 5.  Stockholder Matters......................................     17
    Item 6.  Selected Financial Data..................................     17
    Item 7.  Management's Discussion and Analysis of Financial
              Condition and Results of Operations.....................     18
    Item 8.  Financial Statements and Supplementary Data..............     24
    Item 9.  Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure.....................     50
 PART III
    Item 10. Directors and Executive Officers of the Registrant.......     50
    Item 11. Executive Compensation...................................     50
             Security Ownership of Certain Beneficial Owners and
    Item 12. Management...............................................     50
    Item 13. Certain Relationships and Related Transactions...........     50
 PART IV
             Exhibits, Financial Statement Schedules and Reports on
    Item 14. Form 8-K.................................................     50
             Signatures...............................................     53
</TABLE>
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
                                    PART I
 
ITEM 1. BUSINESS
 
  This annual report on Form 10-K includes "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934
("Exchange Act"). All statements other than statements of historical fact
included herein regarding the Company's financial position, estimated
quantities and net present values of reserves, business strategy, plans and
objectives for future operations and covenant compliance, are forward-looking
statements. Although the Company believes that the assumptions upon which such
forward-looking statements are based are reasonable, it can give no assurances
that such assumptions will prove to have been correct. Important factors that
could cause actual results to differ materially from the Company's
expectations ("cautionary statements") are disclosed under Risk Factors and
elsewhere herein. All subsequent written and oral forward-looking statements
attributable to the company or persons acting on its behalf are expressly
qualified by the cautionary statements.
 
GENERAL
 
  Bellwether Exploration Company ("Bellwether" or the "Company") is an
independent energy company engaged in the acquisition, exploitation,
development, exploration and production of oil and gas properties and
gathering and processing of natural gas. The Company's principal properties
are located in Texas, Louisiana, Alabama, offshore California and the Gulf of
Mexico. At June 30, 1997, the Company's estimated net proved reserves totaled
12.0 MMBbl of oil, 4.0 MMBbl of natural gas liquids ("NGL"), and 127.9 Bcf of
natural gas for a total of 37,353 barrels of oil equivalent ("BOE"). On a BOE
basis, approximately 57% of the Company's estimated net proved reserves were
natural gas at such date. In addition, the Company has interests in natural
gas processing plants in California and West Texas and owns a gas gathering
system in North Louisiana.
 
  The Company was formed as a Delaware corporation in 1994 to succeed to the
business and properties of its predecessor company pursuant to a merger, the
primary purpose of which was to change the predecessor company's state of
incorporation from Colorado to Delaware. The predecessor company was formed in
1980 from the consolidation of the business and properties of related oil and
gas limited partnerships. References to Bellwether or the Company include the
predecessor company, unless the context requires otherwise.
 
OIL AND GAS ACTIVITIES
 
  In 1987 and 1988, the Company merged with two independent oil and gas
companies owned by institutional investors and managed by Torch Energy
Advisors Incorporated ("Torch"). Since those mergers, the Company has operated
under management agreements, pursuant to which Torch administers business
activities of the Company.
 
  In August 1994, Bellwether acquired by merger certain of the assets,
liabilities and properties of Odyssey Partners, Ltd. ("Odyssey"), an
exploration company specializing in 3-D seismic and computer-aided exploration
("CAEX") technology, in exchange for 0.9 million shares of Common Stock and
$5.6 million in cash. The Odyssey merger provided the Company with significant
expertise in 3-D seismic and CAEX technology.
 
  On February 28, 1995, Bellwether acquired Hampton Resources Corporation
("Hampton") by merger for $17.0 million in cash and approximately 1.0 million
shares of Common Stock. Hampton was a publicly held oil and gas company based
in Houston, Texas.
 
  In April 1997, the Company purchased properties from affiliates of Torch
("Partnership Transactions") and $18.0 million of working capital for $188.3
million, plus a contingent payment of $3.4 million, the amount of which was
based on 1997 gas prices. The effective date of the acquisition was July 1,
1996 and the net adjusted
 
                                       3
<PAGE>
 
purchase price at the April 9, 1997 closing date was $141.8 million plus the
contingent payment. The Company financed the cash portion of the Partnership
Transactions and related fees, aggregating $167.4 million, including repayment
of $22.2 million of existing indebtedness, with $34.1 million the net of
proceeds of a Common Stock offering and $100.0 million, of 10 7/8% Senior
Subordinated Notes due 2007 (the "Offerings") and $33.3 million from a new
credit facility ("New Credit Facility"). In addition, Torch was issued 150,000
shares of the Company's common stock and a warrant to purchase 100,000 shares
at $9.90 for advisory services rendered in connection with the Partnership
Transactions. The warrant and shares were valued at $1.5 million and recorded
as a cost of the Partnership Transactions.
 
  The Company identified for divestiture non-core properties representing
approximately 10% of the estimated net proved reserves attributable to the
Partnership Transactions as of June 30, 1997. These properties are primarily
small working interests in geographically diverse locations, with generally
low production during fiscal 1997. Such properties were sold in May and June
1997 for $16.9 million. The net proceeds from these divestitures were used to
repay indebtedness.
 
GAS PLANT ACTIVITIES
 
  In July 1993, the Company acquired an interest in the Snyder and Diamond M--
Sharon Ridge Gas Processing Plants, the operations of which were subsequently
consolidated (collectively, the "Gas Plant"), for $8.45 million. In December
1993, the Company acquired Associated Gas Resources, Inc. ("AGRI"), a
corporation managed by Torch, for the issuance of approximately 1.4 million
shares of its common stock ("Common Stock") and $0.2 million in cash. AGRI's
assets included additional interests in the Gas Plant. AGRI's assets also
included a Louisiana gathering system, a related long-term gas sales contract,
and interests in oil and gas properties in Louisiana. The Gas Plant
acquisition and AGRI acquisition diversified the Company's asset base and its
sources of cash flow. In March 1996, the Company assumed the purchase
obligation of the long-term gas sales contract and was paid $9.9 million. As a
result of this transaction, the Company recorded a liability to cover
estimated future losses under the contract. Gas gathering operations and net
losses from the purchase and resale of gas produced by third parties are
charged to the liability as incurred.
 
BUSINESS STRATEGY
 
  Bellwether's strategy is to maximize long-term shareholder value through
aggressive growth in reserves and cash flow using advanced technologies,
implementation of a low cost structure and maintenance of a capital structure
supportive of growth. Key elements of this strategy are:
 
    Opportunistic Acquisitions. Bellwether seeks to acquire properties that
  have produced significant quantities of oil and gas and have upside
  potential which can be exploited using 3-D seismic, CAEX techniques,
  horizontal drilling, workovers and other enhanced recovery techniques.
 
    Exploitation and Development of Properties. The Company actively pursues
  the exploitation of its properties through recompletions, waterfloods and
  development wells, including horizontal drilling.
 
    Exploration Activities. The Company's exploration activities focus on
  projects with potential for substantial reserve increases.
 
    Advanced Technology. The Company seeks to improve the efficiency and
  reduce the risks associated with its exploration and exploitation
  activities using advanced technologies. These advanced technologies include
  3-D seismic, CAEX techniques and horizontal drilling.
 
    Torch Relationship. The Company operates under an administrative services
  agreement with Torch. Torch has a staff of 39 geologists, geophysicists,
  reservoir engineers and landmen and 59 financial personnel and
  professionals. The Company believes that its relationship with Torch
  provides it with access to acquisition opportunities and financial and
  technical expertise that are generally only available to significantly
  larger companies. In addition, the fees payable to Torch tend to decrease
  on a barrel of oil equivalent basis as the Company's asset base and
  production grow.
 
    Low Cost Structure. The Company seeks to maintain a low-cost structure.
 
                                       4
<PAGE>
 
INDUSTRY SEGMENT INFORMATION
 
  For industry segment data, see Note 10 of the Notes to Consolidated
Financial Statements.
 
MARKETS
 
  Bellwether's ability to market oil and gas from the Company's wells depends
upon numerous factors beyond the Company's control, including the extent of
domestic production and imports of oil and gas, the proximity of the gas
production to gas pipelines, the availability of capacity in such pipelines,
the demand for oil and gas by utilities and other end users, the availability
of alternate fuel sources, the effects of inclement weather, state and federal
regulation of oil and gas production and federal regulation of gas sold or
transported in interstate commerce. No assurances can be given that Bellwether
will be able to market all of the oil or gas produced by the Company or that
favorable prices can be obtained for the oil and gas Bellwether produces.
 
  In view of the many uncertainties affecting the supply of and demand for
oil, gas and refined petroleum products, the Company is unable to predict
future oil and gas prices and demand or the overall effect such prices and
demand will have on the Company. The marketing of oil and gas by Bellwether
can be affected by a number of factors which are beyond the Company's control,
the exact effects of which cannot be accurately predicted.
 
  Sales to Valero Industrial Gas, L.P. accounted for 18.0% of the Company's
1997 revenues. In 1996, sales to Texas Gas Transmission Corporation, Warren
Petroleum Corporation and Koch Industries Inc. accounted for 32.9% of 1996
revenues. Sales to Texas Gas Transmission Corporation and Warren Petroleum
Corporation accounted for 42% of 1995 revenues. Management of the Company does
not believe that the loss of any single customer or contract would materially
affect the Company's business. There are no other significant delivery
commitments and substantially all of the Company's oil and gas production is
sold at market responsive pricing through a marketing affiliate of Torch. The
Company from time to time may enter into crude oil and natural gas price swaps
or other similar hedge transactions to reduce its exposure to price
fluctuations.
 
REGULATION
 
 Federal Regulations
 
  Sales of Gas. Effective January 1, 1993, the Natural Gas Wellhead Decontrol
Act deregulated prices for all "first sales" of gas. Thus, all sales of gas by
the Company may be made at market prices, subject to applicable contract
provisions.
 
  Transportation of Gas. The Company's sales of natural gas are affected by
the availability, terms and cost of transportation. The rates, terms and
conditions applicable to the interstate transportation of gas by pipelines are
regulated by the Federal Energy Regulatory Commission ("FERC") under the
Natural Gas Act ("NGA"), as well as under section 311 of the Natural Gas
Policy Act ("NGPA"). Since 1985, the FERC has implemented regulations intended
to increase competition within the gas industry by making gas transportation
more accessible to gas buyers and sellers on an open-access, non-
discriminatory basis.
 
  Most recently, in Order No. 636, et seq., the FERC promulgated an extensive
set of new regulations requiring all interstate pipelines to "restructure"
their services. The most significant provisions of Order No. 636 require that
interstate pipelines provide firm and interruptible transportation solely on
an "unbundled" basis, separate from their sales service, and convert each
pipeline's bundled firm city-gate sales service into unbundled firm
transportation service and require that pipelines provide firm and
interruptible transportation service on a basis that is equal in quality for
all gas supplies, whether purchased from the pipeline or elsewhere. The order
also recognized that the elimination of city-gate sales service and the
implementation of unbundled transportation service would result in
considerable costs being incurred by the pipelines. Therefore, Order No. 636
provided mechanisms for the recovery by pipelines from present, former and
future customers of certain types of "transition" costs likely to occur due to
these new regulations.
 
                                       5
<PAGE>
 
  In subsequent orders, the FERC and the appellate court have substantially
upheld the requirements imposed by Order No. 636, although numerous court
appeals in which parties have sought review of separate FERC orders
implementing Order No. 636 on individual pipeline systems are still pending.
In many instances, the result of Order No. 636 and related initiatives has
been to substantially reduce or eliminate the interstate pipelines'
traditional role as wholesalers of natural gas in favor of providing only
storage and transportation services.
 
  The FERC has announced several important transportation-related policy
statements and proposed rule changes, including a statement of policy and
request for comments concerning alternatives to its traditional cost-of-
service ratemaking methodology to establish the rates interstate pipelines may
charge for their services. A number of pipelines have obtained FERC
authorization to charge negotiated rates as one such alternative. While the
changes being considered would affect the Company only indirectly, they are
intended to further enhance competition in natural gas markets. The Company
cannot predict what further action the FERC will take on these matters;
however, the Company does not believe that it will be affected by any action
taken materially differently than other natural gas producers.
 
  Sales and Transportation of Oil. Sales of oil and condensate can be made by
the Company at market prices not subject at this time to price controls. The
price that the Company receives from the sale of these products will be
affected by the cost of transporting the products to market. As required by
the Energy Policy Act of 1992, the FERC has revised its regulations governing
the rates that may be charged by oil pipelines. The new rules, which were
effective January 1, 1995, provide a simplified, generally applicable method
of regulating such rates by use of an indexing system for setting
transportation rate ceilings. In certain circumstances, the new rules permit
oil pipelines to establish rates using traditional cost of service and other
methods of rate making. The effect that these new rules may have on the cost
of moving the Company's products to market cannot yet be determined.
 
  Legislative Proposals. In the past, Congress has been very active in the
area of gas regulation. There are legislative proposals pending in the state
legislatures of various states, which, if enacted, could significantly affect
the petroleum industry. At the present time it is impossible to predict what
proposals, if any, might actually be enacted by Congress or the various state
legislatures and what effect, if any, such proposals might have on the
Company's operations.
 
  Federal, State or Indian Leases. In the event the Company conducts
operations on federal, state or Indian oil and gas leases, such operations
must comply with numerous regulatory restrictions, including various
nondiscrimination statutes, and certain of such operations must be conducted
pursuant to certain on-site security regulations and other appropriate permits
issued by the Bureau of Land Management ("BLM") or, in the case of the
Company's OCS leases in federal waters, Minerals Management Service ("MMS") or
other appropriate federal or state agencies. The Company's OCS leases in
federal waters are administered by the MMS and require compliance with
detailed MMS regulations and orders. The MMS has promulgated regulations
implementing restrictions on various production-related activities, including
restricting the flaring or venting of natural gas. In addition, the MMS has
proposed to amend its regulations to prohibit the flaring of liquid
hydrocarbons and oil without prior authorization. Under certain circumstances,
the MMS may require any Company operations on federal leases to be suspended
or terminated. Any such suspension or termination could materially and
adversely affect the Company's financial condition and operations. The MMS has
issued a notice of proposed rule making in which it proposes to amend its
regulations governing the calculation of royalties and the valuation of crude
oil produced from federal leases. Among other matters, this proposed rule
would amend the valuation procedure for the sale of federal royalty oil. The
Company cannot predict what action the MMS will take on this matter, nor can
it predict at this stage of the proceeding how the Company might be affected
by this proposed amendment to the MMS' royalty regulations.
 
  The Mineral Leasing Act of 1920 (the "Mineral Act") prohibits direct or
indirect ownership of any interest in federal onshore oil and gas leases by a
foreign citizen of a country that denies "similar or like privileges" to
citizens of the United States. Such restrictions on citizens of a "non-
reciprocal" country include ownership or holding or controlling stock in a
corporation that holds a federal onshore oil and gas lease. If this
restriction is
 
                                       6
<PAGE>
 
violated, the corporation's lease can be canceled in a proceeding instituted
by the United States Attorney General. Although the regulations of the BLM
(which administers the Mineral Act) provide for agency designations of non-
reciprocal countries, there are presently no such designations in effect. The
Company owns interests in numerous federal onshore oil and gas leases. It is
possible that the Common Stock will be acquired by citizens of foreign
countries, which at some time in the future might be determined to be non-
reciprocal under the Mineral Act.
 
 State Regulations
 
  Most states regulate the production and sale of oil and gas, including
requirements for obtaining drilling permits, the method of developing new
fields, the spacing and operation of wells and the prevention of waste of oil
and gas resources. The rate of production may be regulated and the maximum
daily production allowable from both oil and gas wells may be established on a
market demand or conservation basis or both.
 
  The Company owns certain natural gas pipeline facilities that it believes
meet the traditional tests the FERC has used to establish a pipeline's status
as a gatherer not subject to FERC jurisdiction under the NGA. State regulation
of gathering facilities generally includes various safety, environmental, and
in some circumstances, nondiscriminatory take requirements, but does not
generally entail rate regulation. Natural gas gathering may receive greater
regulatory scrutiny at both state and federal levels in the post-Order No. 636
environment.
 
  The Company may enter into agreements relating to the construction or
operation of a pipeline system for the transportation of gas. To the extent
that such gas is produced, transported and consumed wholly within one state,
such operations may, in certain instances, be subject to the jurisdiction of
such state's administrative authority charged with the responsibility of
regulating intrastate pipelines. In such event, the rates which the Company
could charge for gas, the transportation of gas, and the construction and
operation of such pipeline would be subject to the rules and regulations
governing such matters, if any, of such administrative authority.
 
 Environmental Regulations
 
  General. The Company's activities are subject to existing federal, state and
local laws and regulations governing environmental quality and pollution
control. Activities of the Company with respect to gas facilities, including
the operation and construction of pipelines, plants and other facilities for
transporting, processing, treating or storing gas and other products, are also
subject to stringent environmental regulation by state and federal authorities
including the Environmental Protection Agency ("EPA"). Risks are inherent in
oil and gas exploration and production operations, and no assurance can be
given that significant costs and liabilities will not be incurred in
connection with environmental compliance issues. The Company cannot predict
what effect future regulation or legislation, enforcement policies issued
thereunder, and claims for damages to property, employees, other persons and
the environment resulting from the Company's operations could have on its
activities.
 
  Solid and Hazardous Waste. The Company currently owns or leases, and has in
the past owned or leased, numerous properties that for many years have been
used for the exploration and production of oil and gas. Although the Company
believes it has utilized operating and waste disposal practices that were
standard in the industry at the time, hydrocarbons or other solid wastes may
have been disposed or released on or under the properties owned or leased by
the Company or on or under locations where such wastes have been taken for
disposal. In addition, many of these properties have been owned or operated by
third parties. The Company had no control over such parties' treatment of
hydrocarbons or other solid wastes and the manner in which such substances may
have been disposed or released. State and federal laws applicable to oil and
gas wastes and properties have gradually become stricter over time. Under
these new laws, the Company could be required to remove or remediate
previously disposed wastes (including wastes disposed or released by prior
owners or operators) or property contamination (including groundwater
contamination by prior owners or operators) or to perform remedial plugging
operations to prevent future contamination.
 
                                       7
<PAGE>
 
  The Company generates wastes, including hazardous wastes, that are subject
to the federal Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes. The EPA and various state agencies have limited the approved
methods of disposal for certain hazardous and nonhazardous wastes.
Furthermore, it is possible that certain wastes generated by the Company's oil
and gas operations that are currently exempt from treatment as "hazardous
wastes" may in the future be designated as "hazardous wastes" under RCRA or
other applicable statutes, and therefore be subject to more rigorous and
costly operating and disposal requirements.
 
  Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, imposes
liability, without regard to fault or the legality of the original conduct, on
certain classes of persons with respect to the release of a "hazardous
substance" into the environment. These persons include the owner and operator
of a disposal site where a release occurred and any company that disposed or
arranged for the disposal of the hazardous substance released at the site.
CERCLA also authorizes the EPA and, in some cases, third parties, to take
actions in response to threats to the public health or the environment and to
seek to recover from the responsible classes of persons the costs of such
action. In the course of its operations, the Company has generated and will
generate wastes that may fall within CERCLA's definition of "hazardous
substances." The Company may also be an owner of sites on which "hazardous
substances" have been released. The Company may be responsible under CERCLA
for all or part of the costs to clean up sites at which such wastes have been
disposed.
 
  Oil Pollution Act. The Oil Pollution Act of 1990 (the "OPA") and regulations
thereunder impose a variety of regulations on "responsible parties" related to
the prevention of oil spills and liability for damages resulting from such
spills in United States waters. A "responsible party" includes the owner or
operator of an onshore facility, vessel or pipeline, or the lessee or
permittee of the area in which an offshore facility is located. The OPA
assigns liability to each responsible party for oil removal costs and a
variety of public and private damages. While liability limits apply in some
circumstances, a party cannot take advantage of liability limits if the spill
was caused by gross negligence or willful misconduct or resulted from
violation of a federal safety, construction or operating regulation. If the
party fails to report a spill or to cooperate fully in the cleanup, liability
limits also do not apply. Few defenses exist to the liability imposed by the
OPA. The failure to comply with OPA requirements may subject a responsible
party to civil or even criminal liability.
 
  The OPA also imposes ongoing requirements on a responsible party, including
proof of financial responsibility to cover at least some costs in a potential
spill. Certain amendments to the OPA that were enacted in 1996 require owners
and operators of offshore facilities that have a worst case oil spill
potential of more than 1,000 barrels to demonstrate financial responsibility
in amounts ranging from $10 million in specified state waters to $35 million
in federal OCS waters, with higher amounts, up to $150 million in certain
limited circumstances, where the MMS believes such a level is justified by the
risks posed by the quantity or quality of oil that is handled by the facility.
On March 25, 1997, the MMS promulgated a proposed rule implementing these OPA
financial responsibility requirements. The Company believes that it currently
has established adequate proof of financial responsibility for its offshore
facilities. However, the Company cannot predict whether the financial
responsibility requirements under the OPA amendments or the proposed rule will
result in the imposition of substantial additional annual costs to the Company
in the future or otherwise materially adversely affect the Company. The impact
of the financial responsibility requirements is not expected to be any more
burdensome to the Company than it will be to other similarly or less
capitalized owners or operators in the Gulf of Mexico.
 
  Air Emissions. The operations of the Company are subject to local, state and
federal laws and regulations for the control of emissions from sources of air
pollution. Administrative enforcement actions for failure to comply strictly
with air regulations or permits may result in the payment of civil penalties
and, in extreme cases, the shutdown of air emission sources.
 
  OSHA and other Regulations. The Company is subject to the requirements of
the federal Occupational Safety and Health Act ("OSHA") and comparable state
statutes. The OSHA hazard communication standard, the EPA community right-to-
know regulations under Title III of CERCLA and similar state statutes require
the
 
                                       8
<PAGE>
 
Company to organize and/or disclose information about hazardous materials used
or produced in the Company's operations. The Company believes that it is in
substantial compliance with these applicable requirements.
 
COMPETITION
 
  The oil and gas industry is highly competitive in all of its phases.
Bellwether encounters competition from other oil and gas companies in all
areas of the Company's operations, including the acquisition of reserves and
producing properties and the marketing of oil and gas. Many of these companies
possess greater financial and other resources than the Company. Competition
for producing properties is affected by the amount of funds available to the
Company, information about a producing property available to the Company and
any standards established by the Company for the minimum projected return on
investment. Because gathering systems and related facilities are the only
practical method for the intermediate transportation of gas, competition for
gas delivery is presented by other pipelines and gas gathering systems.
Competition may also be presented by alternate fuel sources.
 
ITEM 2. PROPERTIES
 
RESERVES, PRODUCTIVE WELLS, ACREAGE AND PRODUCTION
 
  The Company holds interests in oil and gas properties, all of which are
located in the United States. The Company's principal developed properties are
located in Texas, Louisiana, Alabama and offshore California and the Gulf of
Mexico. Estimated net proved oil and gas reserves at June 30, 1997 increased
approximately 409% over June 30, 1996, primarily as a result of acquisitions
of producing properties. (See Note 3 of the Notes to Consolidated Financial
Statements). The Company has not filed oil or gas reserve information with any
foreign government or Federal authority or agency.
 
  The following table sets forth certain information, as of June 30, 1997,
which relates to the Company's principal oil and gas properties:
 
<TABLE>
<CAPTION>
                                                 NET PROVED         1997 NET
                                                  RESERVES        PRODUCTION*
                                              ----------------- ----------------
                                              OIL & NGL   GAS   OIL & NGL  GAS
                   FIELD                       (MBBLS)  (MMCF)   (MBBLS)  (MMCF)
                   -----                      --------- ------- --------- ------
<S>                                           <C>       <C>     <C>       <C>
Waddell Ranch field, TX.....................    6,522     8,245     90       175
Point Pedernales field, CA..................    3,487     3,252    168        --
Blue Creek field, AL........................       --    11,911     --       249
Ship Shoal Blocks 208/230/239, Gulf of Mexi-
 co.........................................      962     5,191     65       368
High Island Block A-334 field, Gulf of Mexi-
 co.........................................      220     7,467     12       517
Cove field, TX..............................       14     7,661      9     3,000
Giddings field, TX..........................      317     4,685     58       614
Reddell field, LA...........................       81     4,393      3       136
South Marsh Island Block 269................      290     3,514      5        57
Porters Creek field, TX.....................       64     4,614      2       149
La Rica field, TX...........................        4     7,985     --       162
West Chalkley field, LA.....................       20     3,743      1       157
East Cameron Block 17, LA...................       29     4,044      2       292
Robinson's Bend field, AL...................       --     5,724     --        85
Fort Trinidad field, TX.....................      627       999     35       162
Others......................................    3,393    44,512    404     4,429
                                               ------   -------    ---    ------
                                               16,030   127,940    854    10,552
                                               ======   =======    ===    ======
</TABLE>
--------
* Includes net production from the Partnership Transactions from April 1, 1997
to June 30, 1997.
 
                                       9
<PAGE>
 
  In general, estimates of economically recoverable oil and natural gas
reserves and of the future net cash flows therefrom are based upon a number of
variable factors and assumptions, such as historical production from the
properties, assumptions concerning future oil and natural gas prices and
future operating costs and the assumed effects of regulation by governmental
agencies, all of which may vary considerably from actual results. All such
estimates are to some degree speculative, and classifications of reserves are
only attempts to define the degree of speculation involved. Estimates of the
economically recoverable oil and natural gas reserves attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery and estimates of future net cash flows expected therefrom,
prepared by different engineers or by the same engineers at different times,
may vary substantially. The Company's actual production, revenues, severance
and excise taxes and development and operating expenditures with respect to
its reserves will vary from such estimates, and such variances could be
material.
 
  Estimates with respect to proved reserves that may be developed and produced
in the future are often based upon volumetric calculations and upon analogy to
similar types of reserves rather than actual production history. Estimates
based on these methods are generally less reliable than those based on actual
production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves.
 
  In accordance with applicable requirements of the Securities and Exchange
Comission ("SEC"), the estimated discounted future net cash flows from
estimated proved reserves are based on prices and costs as of the date of the
estimate unless such prices or costs are contractually determined at such
date. Actual future prices and costs may be materially higher or lower. Actual
future net cash flows also will be affected by factors such as actual
production, supply and demand for oil and natural gas, curtailments or
increases in consumption by natural gas purchasers, changes in governmental
regulations or taxation and the impact of inflation on costs.
 
ACREAGE
 
  The following table sets forth the acres of developed and undeveloped oil
and gas properties in which the Company held an interest as of June 30, 1997.
Undeveloped acreage is considered to be those leased acres 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 or not such
acreage contains proved reserves. A gross acre in the following table refers
to the number of acres in which a working interest is owned directly by the
Company. The number of net acres is the sum of the fractional ownership of
working interests owned directly by the Company in the gross acres expressed
as a whole number and percentages thereof. A net acre is deemed to exist when
the sum of fractional ownership of working interests in gross acres equals
one.
 
<TABLE>
<CAPTION>
                                                                  GROSS    NET
                                                                 ------- -------
   <S>                                                           <C>     <C>
   Developed Acreage............................................ 512,431 115,753
   Undeveloped Acreage..........................................  41,694  11,726
                                                                 ------- -------
     Total...................................................... 554,125 127,479
                                                                 ======= =======
</TABLE>
 
  Bellwether believes that the title to its oil and gas properties is good and
defensible in accordance with standards generally accepted in the oil and gas
industry, subject to such exceptions which, in the opinion of the Company, are
not so material as to detract substantially from the use or value of such
properties. The Company's properties are typically subject, in one degree or
another, to one or more of the following: royalties and other burdens and
obligations, express or implied, under oil and gas leases; overriding
royalties and other burdens created by the Company or its predecessors in
title; a variety of contractual obligations (including, in some cases,
development obligations) arising under operating agreements, farmout
agreements, production sales contracts and other agreements that may affect
the properties or their titles; back-ins and reversionary interests arising
under purchase agreements and leasehold assignments; liens that arise in the
normal course of operations, such as those for unpaid taxes, statutory liens
securing obligations to unpaid suppliers and contractors and contractual liens
under operating agreements; pooling, unitization and communitization
agreements, declarations and orders; and
 
                                      10
<PAGE>
 
easements, restrictions, rights-of-way and other matters that commonly affect
oil and gas producing property. To the extent that such burdens and
obligations affect the Company's rights to production revenues, they have been
taken into account in calculating the Company's net revenue interests and in
estimating the size and value of the Company's reserves. Bellwether believes
that the burdens and obligations affecting the Company's properties are
conventional in the industry for properties of the kind owned by the Company.
 
PRODUCTIVE WELLS
 
  The following table sets forth Bellwether's gross and net interests in
productive oil and gas wells as of June 30, 1997. Productive wells are
producing wells and wells capable of production.
 
<TABLE>
<CAPTION>
                                                                  GROSS    NET
                                                                 -------- ------
<S>                                                              <C>      <C>
Oil Wells.......................................................   531.00  93.69
Gas Wells....................................................... 1,454.00 159.15
                                                                 -------- ------
  Total......................................................... 1,985.00 252.84
                                                                 ======== ======
</TABLE>
 
PRODUCTION
 
  The Company's principal production volumes during the year ended June 30,
1997 were from the states of Louisiana and Texas, offshore California in
federal waters and from the Gulf of Mexico in federal and state waters.
 
  Data relating to production volumes, average sales prices, average unit
production costs and oil and gas reserve information appear in Note 13 of the
Notes to Consolidated Financial Statements.
 
DRILLING ACTIVITY AND PRESENT ACTIVITIES
 
  During the three-year period ended June 30, 1997, the Company's principal
drilling activities occurred in the continental United States and offshore
Texas, Louisiana and California in federal and state waters.
 
  The Company had ten gross (0.81 net) wells drilling at June 30, 1997. The
following table sets forth the results of drilling activity by the Company,
net to its interest, for the last three fiscal years. Gross wells, as it
applies to wells in the following tables, refers to the number of wells in
which a working interest is owned directly by the Company. A "net well" is
deemed to exist when the sum of fractional ownership working interests in
gross wells equals one. The number of net wells is the sum of the fractional
ownership of working interests owned directly by the Company in gross wells
expressed as whole numbers and percentages thereof.
 
                               EXPLORATORY WELLS
 
<TABLE>
<CAPTION>
                    GROSS                                   NET
        ------------------------------------   ------------------------------------
        PRODUCTIVE     DRY HOLES     TOTAL     PRODUCTIVE     DRY HOLES     TOTAL
        ----------     ---------     -----     ----------     ---------     -----
<S>     <C>            <C>           <C>       <C>            <C>           <C>
1995       3              4(/1/)      7           .27            .65         .92
1996       1              3           4           .06            .24         .30
1997       3              4           7           .75            .74        1.49
</TABLE>
 
                               DEVELOPMENT WELLS
 
<TABLE>
<CAPTION>
                    GROSS                                   NET
        ------------------------------------   ------------------------------------
        PRODUCTIVE     DRY HOLES     TOTAL     PRODUCTIVE     DRY HOLES     TOTAL
        ----------     ---------     -----     ----------     ---------     -----
<S>     <C>            <C>           <C>       <C>            <C>           <C>
1995        1             2            3           .30           .18         .48
1996       21             1           22          1.66           .90        2.56
1997       52             2           54          5.34           .63        5.97
</TABLE>
--------
(1) Includes well drilled on the Serj Permit in Tunisia.
 
                                      11
<PAGE>
 
GAS PLANT AND GAS GATHERING FACILITIES
 
  As of June 30, 1997 the Company owned interests in the following gas plant
and gas gathering systems:
 
<TABLE>
<CAPTION>
                                                                       1997
                                                           ----------------------------------
                                                           CAPACITY    THROUGHPUT   OWNERSHIP
        FACILITY         STATE          OPERATOR            MMCFD        MMCFD      INTEREST
        --------         ----- --------------------------- --------    ----------   ---------
<S>                      <C>   <C>                         <C>         <C>          <C>
Snyder Gas Plant........   TX  Torch Energy Marketing Inc.    60           18         11.98%
Diamond M-Sharon Ridge
 Gas Plant(/1/).........   TX  Exxon Company, U.S.A.            (/1/)        (/1/)         (/1/)
Monroe Gas Gathering       LA  West Monroe Gas Gathering        (/2/)        (/2/)      100%
 System(/2/)............        Corp., a subsidiary of the
                                Company
</TABLE>
--------
(1) The Company has a 35.78% interest in the operations of the former Diamond
    M-Sharon Ridge Gas Plant. This plant was dismantled in December 1993, and
    the gas is being processed by Snyder Gas Plant pursuant to a processing
    agreement.
(2) The Company owns a gas gathering system in Union Parish, Louisiana. In
    March 1996, the liability for a gas purchase contract covering natural gas
    owned by the Company and others was assumed by the Company. All operations
    from that date are recorded as a reduction to the liability.
 
RISK FACTORS
 
 Volatility of Oil and Gas Prices and Markets
 
  The Company's financial condition, operating results, future growth and the
carrying value of its oil and gas properties are substantially dependent on
prevailing prices of oil and gas. The Company's ability to maintain or
increase its borrowing capacity and to obtain additional capital on attractive
terms is also substantially dependent upon oil and gas prices. Prices for oil
and gas are subject to large fluctuations in response to relatively minor
changes in the supply of and demand for oil and gas, market uncertainty and a
variety of additional factors beyond the control of the Company. These factors
include weather conditions in the United States, the condition of the United
States economy, the actions of the Organization of Petroleum Exporting
Countries, governmental regulation, political stability in the Middle East and
elsewhere, the foreign supply of oil and gas, the price of foreign imports and
the availability of alternate fuel sources. Any substantial and extended
decline in the price of oil or gas would have an adverse effect on the
Company's carrying value of its proved reserves, its borrowing capacity, its
ability to obtain additional capital, and its revenues, profitability and cash
flows.
 
  Volatile oil and gas prices make it difficult to estimate the value of
producing properties in connection with acquisitions and often cause
disruption in the market for oil and gas producing properties, as buyers and
sellers have difficulty agreeing on such value. Price volatility also makes it
difficult to budget for and project the return on acquisitions and
exploitation, development and exploration projects.
 
  The availability of a ready market for the Company's oil and natural gas
production also depends on a number of factors, including the demand for and
supply of oil and natural gas and the proximity of reserves to, and the
capacity of, oil and natural gas gathering systems, pipelines or trucking and
terminal facilities. Wells may temporarily be shut-in for lack of a market or
due to inadequacy or unavailability of pipeline or gathering system capacity.
 
 Ability to Replace Reserves
 
  The Company's future performance depends upon its ability to find, develop
and acquire additional oil and gas reserves that are economically recoverable.
The Company must locate and develop or acquire new oil and gas reserves to
replace those being depleted by production. Because the Company's reserves are
characterized by relatively rapid decline rates, without successful
exploration, development or acquisition activities, the
 
                                      12
<PAGE>
 
Company's revenues will decline rapidly. No assurances can be given that the
Company will be able to find and develop or acquire additional reserves at an
acceptable cost.
 
 Acquisition Risks
 
  The Company's rapid growth in recent years has been attributable in
significant part to acquisitions of oil and gas properties. The Company
expects to continue to evaluate and, where appropriate, pursue acquisition
opportunities on terms management considers favorable to the Company. There
can be no assurance that suitable acquisition candidates will be identified in
the future, or that the Company will be able to finance such acquisitions on
favorable terms. In addition, the Company competes against other companies for
acquisitions, and there can be no assurances that the Company will be
successful in the acquisition of any material property interests. Further,
there can be no assurances that any future acquisitions made by the Company
will be integrated successfully into the Company's operations or will achieve
desired profitability objectives.
 
  The successful acquisition of producing properties requires an assessment of
recoverable reserves, exploration and exploitation potential, future oil and
natural gas prices, operating costs, potential environmental and other
liabilities and other factors beyond the Company's control. In connection with
such an assessment, the Company performs a review of the properties that it
believes to be generally consistent with industry practices. Nonetheless, the
resulting assessments are necessarily inexact and their accuracy inherently
uncertain, and such a review may not reveal all existing or potential
problems, nor will it necessarily permit the Company to become sufficiently
familiar with the properties to fully assess their merits and deficiencies.
Inspections may not always be performed on every well, and structural and
environmental problems are not necessarily observable even when an inspection
is undertaken. In addition, sellers of properties may be unwilling or
financially unable to indemnify the Company for known liabilities at the time
of an acquisition.
 
  Additionally, significant acquisitions can change the nature of the
operations and business of the Company depending upon the character of the
acquired properties, which may be substantially different in operating and
geologic characteristics or geographic location than existing properties.
While the Company's operations are focused in Texas, Louisiana, Alabama,
offshore California and the Gulf of Mexico, there is no assurance that the
Company will not pursue acquisitions or properties located in other geographic
areas.
 
  In connection with the Partnership Transactions, Bellwether assumed or
otherwise became liable for all obligations with respect to operations of the
properties acquired in such transactions, including environmental and
operational liabilities, unknown liabilities, and liabilities arising prior to
the closing date.
 
 Drilling Risks
 
  Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that new wells drilled by the Company will be productive or that the
Company will recover all or any portion of its investment. Drilling for oil
and natural gas may involve unprofitable efforts, not only from dry wells, but
from wells that are productive but do not produce sufficient net revenues to
return a profit after drilling, operating and other costs. The cost of
drilling, completing and operating wells is often uncertain and cost overruns
are common. The Company's drilling operations may be curtailed, delayed or
canceled as a result of numerous factors, many of which are beyond the
Company's control, including title problems, weather conditions, compliance
with governmental requirements and shortages or delays in the delivery of
equipment and services.
 
 Substantial Capital Requirements
 
  The Company makes, and will continue to make, substantial capital
expenditures for the exploitation, exploration, acquisition and production of
oil and gas reserves. Historically, the Company has financed these
expenditures primarily with cash generated by operations, proceeds from bank
borrowings and sales of its Common Stock. The Company believes that it will
have sufficient cash flows provided by operating activities,
 
                                      13
<PAGE>
 
the proceeds of the equity offerings and borrowings under the Senior Credit
Facility to fund such planned capital expenditures. If revenues or the
Company's borrowing base decrease as a result of lower oil and gas prices,
operating difficulties or declines in reserves, the Company may have limited
ability to expend the capital necessary to undertake or complete future
drilling programs. There can be no assurance that additional debt or equity
financing or cash generated by operations will be available to meet these
requirements.
 
 Significant Leverage and Debt Service
 
  The Company's level of indebtedness has several important effects on its
future operations, including (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) covenants
contained in the Company's debt obligations require the Company to meet
certain financial tests, and other restrictions limit its ability to borrow
additional funds or to dispose of assets and may affect the Company's
flexibility in planning for, and reacting to, changes in its business,
including possible acquisition activities and (iii) the Company's ability to
obtain financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired.
The Company's ability to meet its debt service obligations and to reduce its
total indebtedness will be dependent upon the Company's future performance,
which will be subject to general economic conditions and to financial,
business and other factors affecting the operations of the Company, many of
which are beyond its control. There can be no assurance that the Company's
future performance will not be adversely affected by such economic conditions
and financial, business and other factors.
 
 Administrative Services Agreement; Reliance on Torch
 
  The Company currently has eight employees. The Company is party to an
Administrative Services Agreement with Torch, pursuant to which Torch performs
certain administrative and technical functions for the Company, including
financial, accounting, legal, geological, engineering and technical support.
The Company believes that its relationship with Torch provides the Company
with access to professional, technical and administrative personnel not
otherwise available to a company of its size. Bellwether believes that if the
Administrative Services Agreement were terminated Bellwether could, over time,
hire experienced personnel and acquire the accounting and reporting systems
and other assets necessary to replace Torch. However, the unanticipated
termination of the Administrative Services Agreement could have a material
adverse effect upon the Company. The Administrative Services Agreement may be
terminated by Bellwether upon one year's prior notice and may not be
terminated by Torch prior to December 31, 1999.
 
 Conflicts of Interest
 
  Torch also renders administrative services to Nuevo Energy Company, a
publicly traded independent oil and gas company ("Nuevo"), and may manage or
render management or administrative services for other energy companies in the
future. These services may include the review and recommendation of potential
acquisitions. It is possible that conflicts may occur between Nuevo and
Bellwether in connection with possible acquisitions or otherwise in connection
with the services rendered by Torch. Although the Administrative Services
Agreement provides for procedures to reconcile conflicts of interest between
Nuevo and the Company, no assurances can be made that such procedures will
fully protect the Company from losses which may occur if a conflict between
the Company and Nuevo arises. In addition, Nuevo and the Company have a common
director.
 
 Estimates of Oil and Gas Reserves
 
  This document contains estimates of oil and gas reserves owned by the
Company, and the future net cash flows attributable to those reserves. There
are numerous uncertainties inherent in estimating quantities of proved
reserves and cash flows attributable to such reserves, including factors
beyond the control of the Company and the reserve engineers. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact manner. The accuracy of an
estimate of quantities of reserves, or of cash flows attributable to such
reserves, is a function of the available data, assumptions regarding future
oil
 
                                      14
<PAGE>
 
and gas prices and expenditures for future development and exploitation
activities, and of engineering and geological interpretation and judgment.
Additionally, reserves and future cash flows may be subject to material
downward or upward revisions based upon production history, development and
exploitation activities and prices of oil and gas. Actual future production,
revenue, taxes, development expenditures, operating expenses, quantities of
recoverable reserves and the value of cash flows from such reserves may vary
significantly from the assumptions and estimates set forth herein. In
addition, reserve engineers may make different estimates of reserves and cash
flows based on the same available data. In calculating reserves on an oil
equivalent basis, gas was converted to oil equivalent at the ratio of six Mcf
of gas to one Bbl of oil. While this ratio approximates the energy equivalency
of gas to oil on a Btu basis, it may not represent the relative prices
received by the Company on the sale of its oil and gas production.
 
  The estimated quantities of proved reserves and the discounted present value
of future net cash flows attributable to estimated proved reserves set forth
herein were prepared in accordance with the rules of the SEC, and are not
intended to represent the fair market value of such reserves.
 
 Hedging of Production
 
  Part of the Company's business strategy is to reduce its exposure to the
volatility of oil and gas prices by hedging a portion of its production. In a
typical hedge transaction, the Company will have the right to receive from the
counterparty to the hedge, the excess of the fixed price specified in the
hedge over a floating price based on a market index, multiplied by the
quantity hedged. If the floating price exceeds the fixed price, the Company is
required to pay the counterparty this difference multiplied by the quantity
hedged. In such case, the Company is required to pay the difference regardless
of whether the Company has sufficient production to cover the quantities
specified in the hedge. Significant reductions in production at times when the
floating price exceeds the fixed price could require the Company to make
payments under the hedge agreements even though such payments are not offset
by sales of production. Hedging will also prevent the Company from receiving
the full advantage of increases in oil or gas prices above the fixed amount
specified in the hedge.
 
 Operating Hazards, Offshore Operations and Uninsured Risks
 
  Bellwether's operations are subject to risks inherent in the oil and gas
industry, such as blowouts, cratering, explosions, uncontrollable flows of
oil, gas or well fluids, fires, pollution, earthquakes and environmental
risks. These risks could result in substantial losses to the Company due to
injury and loss of life, severe damage to and destruction of property and
equipment, pollution and other environmental damage and suspension of
operations. Moreover, a portion of the Company's operations are offshore and
therefore are subject to a variety of operating risks peculiar to the marine
environment, such as hurricanes or other adverse weather conditions, to more
extensive governmental regulation, including regulations that may, in certain
circumstances, impose strict liability for pollution damage, and to
interruption or termination of operations by governmental authorities based on
environmental or other considerations.
 
  The Company's operations could result in liability for personal injuries,
property damage, oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages. The Company could be liable
for environmental damages caused by previous property owners. As a result,
substantial liabilities to third parties or governmental entities may be
incurred, the payment of which could have a material adverse effect on the
Company's financial condition and results of operations. The Company maintains
insurance coverage for its operations, including limited coverage for sudden
environmental damages, but does not believe that insurance coverage for
environmental damages that occur over time is available at a reasonable cost.
Moreover, the Company does not believe that insurance coverage for the full
potential liability that could be caused by sudden environmental damages is
available at a reasonable cost. Accordingly, the Company may be subject to
liability or may lose substantial portions of its properties in the event of
certain environmental damages.
 
                                      15
<PAGE>
 
 Environmental and Other Regulation
 
  The Company's operations are subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise
relating to environmental protection. These laws and regulations require the
acquisition of a permit before drilling commences, restrict the types,
quantities and concentration of various substances that can be released into
the environment in connection with drilling and production activities, limit
or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for
pollution resulting from the Company's operations. Moreover, the recent trend
toward stricter standards in environmental legislation and regulation is
likely to continue. For instance, legislation has been proposed in Congress
from time to time that would reclassify certain oil and gas exploration and
production wastes as "hazardous wastes" which would make the reclassified
wastes subject to much more stringent handling, disposal and clean-up
requirements. If such legislation were to be enacted, it could have a
significant impact on the operating costs of the Company, as well as the oil
and gas industry in general. Initiatives to further regulate the disposal of
oil and gas wastes are also pending in certain states, and these various
initiatives could have a similar impact on the Company. Management believes
that the Company is in substantial compliance with current applicable
environmental laws and regulations.
 
  The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution
Act of 1990, could have a material adverse impact on the Company.
 
 Competition
 
  The Company operates in the highly competitive areas of oil and gas
exploration, development and production. The Company's competitors include
major integrated oil and gas companies and substantial independent energy
companies, many of which possess greater financial and other resources than
the Company.
 
 Shortages of Rigs, Equipment, Supplies and Personnel
 
  There is a general shortage of drilling rigs, equipment and supplies which
the Company believes may intensify. The costs and delivery times of rigs,
equipment and supplies are substantially greater than in prior periods and are
currently escalating. Shortages of drilling rigs, equipment or supplies could
delay and adversely affect the Company's exploration and development
operations, which could have a material adverse effect on its financial
condition and results of operation.
 
  The demand for, and wage rates of, qualified rig crews have begun to rise in
the drilling industry in response to the increasing number of active rigs in
service. Such shortages have in the past occurred in the industry in times of
increasing demand for drilling services. If the number of active drilling rigs
continues to increase, the oil and gas industry may experience shortages of
qualified personnel to operate drilling rigs, which could delay the Company's
drilling operations and adversely effect the Company's financial condition and
results of operations.
 
ITEM 3. LEGAL PROCEEDINGS
 
  Neither the Company nor its subsidiaries is a party to any material pending
legal proceedings.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1997.
 
  In July, 1997 in a special meeting of stockholders of the Company, the
Company's Certificate of Incorporation was amended to increase the number of
authorized shares of common stock from 15,000,000 to 30,000,000.
 
                                      16
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
 
  The Company's common stock is traded on the NASDAQ National Market System
(NMS) (Symbol: BELW). There were approximately 1,126 stockholders of record as
of September 24, 1997. The Company has not paid dividends on its common stock
and does not anticipate the payment of cash dividends in the immediate future
as it contemplates that cash flows will be used for continued growth in
Company operations. In addition, certain covenants contained in the Company's
financing arrangements restrict the payment of dividends (See Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financing Activities and Note 8 of the Notes to Consolidated Financial
Statements). The following table sets forth the range of the high and low
sales prices, as reported by the NASDAQ for Bellwether common stock for the
periods indicated.
 
<TABLE>
<CAPTION>
                                                                    SALES PRICE
                                                                    ------------
                                                                     HIGH   LOW
                                                                    ------ -----
   <S>                                                              <C>    <C>
   Quarter Ended:
     September 30, 1995............................................ $ 6.25 $5.00
     December 31, 1995............................................. $ 6.13 $4.06
     March 31, 1996................................................ $ 7.00 $5.00
     June 30, 1996................................................. $ 8.00 $5.50
     September 30, 1996............................................ $ 6.88 $4.38
     December 31, 1996............................................. $ 9.00 $6.25
     March 31, 1997................................................ $11.50 $7.88
     June 30, 1997................................................. $10.25 $7.25
</TABLE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The following selected financial data with respect to the Company should be
read in conjunction with the Consolidated Financial Statements and
supplementary information included in Item 8 (amounts in thousands, except per
share data).
 
<TABLE>
<CAPTION>
                                AT AND FOR THE YEARS ENDED JUNE 30,
                              ---------------------------------------------------
                                1997(/3/)  1996    1995(/1/)   1994(/2/)   1993
                              --------    ------- -------     -------     -------
<S>                           <C>         <C>     <C>         <C>         <C>
Gas revenues................. $ 24,202    $ 9,856 $ 4,864     $ 2,620     $ 1,807
Oil revenues.................   14,865      5,810   3,643       1,086       1,708
Gas plant and gas gathering
 revenues....................    6,652      8,719  10,705       6,930          23
Interest and other income....      365        116      97          63         116
                              --------    ------- -------     -------     -------
  Total revenues.............   46,084     24,501  19,309      10,699       3,654
Total expenses (including
 income taxes)...............   41,439     23,519  18,368       9,885       3,613
                              --------    ------- -------     -------     -------
Net income................... $  4,645    $   982 $   941     $   814     $    41
                              ========    ======= =======     =======     =======
Earnings per common and
 common equivalent share-
 fully diluted(/4/)(/5/)..... $   0.43    $  0.11 $  0.12     $  0.27     $  0.02
Total assets................. $222,648    $67,225 $74,650     $35,870     $12,480
Long-term debt, net of
 current maturities.......... $115,300    $13,048 $18,525     $12,797     $ 1,000
</TABLE>
--------
(1)Reflects operations from Odyssey and Hampton mergers beginning August 1994
   and February 1995, respectively.
(2)Includes operations of the Gas Plant and AGRI from dates of acquisition in
   July and December 1993, respectively.
(3)Includes operations of the Partnership Transactions from April 1 to June
   30, 1997.
(4)Restated to reflect a 1-for-8 reverse stock split in 1994.
(5) At present, there is no plan to pay dividends. The Company maintains a
    policy of reinvesting its discretionary cash flows for continued growth in
    company operations (See Note 6 to Notes to Consolidated Financial
    Statements).
 
                                      17
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
  Bellwether is an independent energy company engaged in the acquisition,
exploitation, development, exploration and production of oil and gas
properties. The Company has grown and diversified its operations primarily
through the acquisition of oil and gas properties and the subsequent
exploration and development of these properties. The Company's results of
operations have been significantly affected by its success in acquiring oil
and gas properties and its ability to maintain or increase production through
its exploitation activities.
 
  In April 1997, the Company purchased oil and gas properties and $13.9
million of working capital from affiliates of Torch for an adjusted purchase
price at closing of $141.8 million, plus a contingent payment of $3.4 million,
the amount of which was based on 1997 gas prices. The acquisition was recorded
effective April 1, 1997 and the operations of the Company include the
Partnership Transactions from that date. The Partnership Transactions were
financed with $34.1 million the net of proceeds of a Common Stock offering,
the $97.0 million net proceeds of 10 7/8% Senior Subordinated Notes due 2007
(the "Offerings") and borrowings under a new credit facility ("New Credit
Facility"). In addition, Torch was issued 150,000 shares of the Company's
common stock and a warrant to purchase 100,000 shares at $9.90 for advisory
services rendered in connection with the Partnership Transactions. The warrant
and shares were valued at $1.5 million and recorded as a cost of the
Partnership Transactions.
 
  On February 28, 1995, Bellwether acquired Hampton Resources Corporation
("Hampton") by merger for $17.0 million in cash and approximately 1.0 million
shares of Common Stock.
 
  In August 1994, Bellwether acquired by merger certain of the assets,
liabilities and properties of Odyssey Partners, Ltd. ("Odyssey"), in exchange
for 0.9 million shares of Common Stock and $5.6 million in cash.
 
  The following table sets forth Bellwether's oil and gas production, average
oil and gas prices and certain unit cost information of the Company for the
periods presented.
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED JUNE 30,
                                                            --------------------
                                                             1997   1996   1995
                                                            ------ ------ ------
<S>                                                         <C>    <C>    <C>
Production
  Oil and condensate (MBBLS)..............................     854    334    216
  Natural gas (MMCF)......................................  10,552  5,099  2,932
Average sales price(/1/)
  Oil and condensate (per barrel).........................  $17.41 $17.81 $16.89
  Natural gas (per MCF)...................................  $ 2.29 $ 2.02 $ 1.66
Average unit production cost per equivalent Barrel (6 MCF
   equal 1 barrel)........................................  $ 4.38 $ 4.49 $ 4.05
Average unit general and administrative Expense per equiv-
   alent barrel(/2/) (6 MCF equal 1 barrel)...............  $ 1.38 $ 2.04 $ 2.49
Average unit depletion rate per equivalent Barrel (6 MCF
   equal 1 barrel)........................................  $ 5.62 $ 5.86 $ 5.52
</TABLE>
--------
(1)Average sales price is exclusive of the effect of natural gas and crude oil
   price hedges.
(2)Exclusive of general and administrative expenses allocated to gas plants
   and gas gathering facilities.
 
                                      18
<PAGE>
 
  Operations of the Gas Plant and the Gathering System are summarized as
follows:
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED JUNE 30,
                                                      -------------------------
                                                       1997   1996        1995
                                                      ------ ------      ------
<S>                                                   <C>    <C>         <C>
Plant product sales volume (MBBLS)...................    319    321         382
Average product sales price per barrel............... $16.77 $13.01      $11.96
Gathering system throughput (MMCF per day)...........     --    4.0(/1/)    4.1
</TABLE>
--------
(1) Represents operations from July 1995 through February 1996. Subsequent to
    February 1996, the Company ceased recognition of such operations following
    the Company's assumption of a gas purchase contract and receipt of $9.9
    million. (See Note 2 of Notes to Consolidated Financial Statements. See
    Note 10 for industry segment information).
 
  The Company uses the full cost method of accounting for its investment in
oil and gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are
capitalized in a "full cost pool" as incurred. Oil and gas properties in the
pool, plus estimated future expenditures to develop proved reserves and future
abandonment, site reclamation and dismantlement costs, are depleted and
charged to operations using the unit of production method based on the ratio
of current production to total proved recoverable oil and gas reserves. To the
extent that such capitalized costs (net of depreciation, depletion and
amortization) exceed the discounted future net revenues on an after-tax basis
of estimated proved oil and gas reserves, such excess costs are charged to
operations. Once incurred, the writedown of oil and gas properties is not
reversible at a later date even if oil and gas prices increase. Sharp declines
in oil and gas prices may cause companies who report on the full cost method,
such as Bellwether, to write down their oil and gas properties, thereby
decreasing earnings during such period.
 
  The Company periodically uses derivative financial instruments to manage oil
and gas price risk. Settlements of gains and losses on price swap contracts
are generally based upon the difference between the contract price and the
average closing NYMEX or other floating index price and are reported as a
component of oil and gas revenue. Gains or losses attributable to the
termination of swap contracts are deferred and recognized in revenue when the
hedged oil and gas is sold.
 
 Financing Activities
 
  The Company's outstanding indebtedness totals $115.3 million at June 30,
1997 with maturities of $15.3 million in 2002 and $100 million in 2007.
Components of long-term debt are set out below (in thousands):
 
<TABLE>
      <S>                                                              <C>
      Bank Credit Facility............................................ $ 15,300
      10 7/8% Senior Subordinated Notes...............................  100,000
                                                                       --------
                                                                       $115,300
                                                                       ========
</TABLE>
 
  In April 1997, the Company entered into a senior revolving unsecured credit
facility ("Senior Credit Facility") in an amount up to $90.0 million, with an
initial borrowing base of $90.0 million, and a maturity date of March 31,
2002. Bellwether may elect an interest rate based either on a margin plus
LIBOR or the higher of the prime rate or the sum of 1/2 of 1% plus the Federal
Funds Rate. For LIBOR borrowings, the interest rate will vary from LIBOR plus
0.875% to LIBOR plus 1.25% based upon the borrowing base usage. In connection
with the acquisition of oil and gas properties, $33.3 million was drawn under
this facility. As of June 30, 1997, borrowings of $15.3 million were
outstanding under the Senior Credit Facility with an average interest rate of
6.6%. The Senior Credit Facility contains various covenants including certain
required financial measurements for current ratio, consolidated tangible net
worth and interest coverage ratio. In addition, the Senior Credit Facility
includes certain limitations on restricted payments, dividends, incurrence of
additional funded indebtedness and asset sales.
 
                                      19
<PAGE>
 
  In October 1996, the Company entered into a syndicated credit facility in an
amount up to $50.0 million with an initial borrowing base of $27.0 million, to
be re-determined semi-annually. This credit facility was unsecured and was
retired in April 1997. In February 1995, the Company entered into a credit
facility with a commercial bank providing an initial borrowing base of $29.8
million. The borrowings under the credit facility were secured by the
Company's interests in oil and gas properties, a gathering system and two gas
plants. The Credit Facility was retired in October 1996.
 
  In April 1997, the Company issued $100.0 million of 10 7/8% senior
subordinated notes ("Notes") that mature April 1, 2007. Interest on the Notes
is payable semi-annually on April 1 and October 1 commencing on October 1,
1997. The Notes contain certain covenants, including limitations on
indebtedness by subsidiaries, dividends and other payment restrictions
affecting restricted subsidiaries, issuance and sales of restricted subsidiary
stock, dispositions of proceeds of asset sales and restrictions on mergers,
and consolidations or sales of assets.
 
  In April 1997, the Company issued 4.4 million common shares in a public
offering. The net proceeds of the offering were $34.1 million.
 
  The net proceeds from the issuance of the Notes and the common stock and
advances under the Senior Credit Facility of $33.3 million were used to
finance the acquisition of oil and gas properties in the amount of $145.2
million and to retire $22.0 million of the Company's existing debt.
 
 Liquidity and Capital Resources
 
  The Company's principal sources of capital for the last three years have
been the sale of the Notes, borrowings under bank credit facilities, the
public sale of common stock and cash flow from operations. The Company sold
$100 million in Notes in fiscal 1997. Borrowings from banks were $57.3 million
and $26.8 million for the years ended June 30, 1997 and 1995, respectively.
The Company issued 4.4 million shares of common stock in a public offering in
April 1997 for total net proceeds of $ 34.1 million and 3.4 million shares in
a public offering in fiscal 1995 to total net proceeds of $17.2 million. Cash
flow from operations before changes in assets and liabilities totaled $23.3
million, $9.1 million and $6.4 million for the fiscal years 1997, 1996 and
1995, respectively. The increase in cash flow from operations before changes
in assets and liabilities resulted primarily from acquisitions made since
1994. In addition, during March 1996, the Company agreed to assume the
purchase obligation under a gas contract in the West Monroe field in Louisiana
in exchange for a cash payment of $9.9 million. In May and June 1997, the
Company divested non-core assets representing approximately 10% of the
estimated net proved reserves attributable to the Partnership Transaction for
$16.9 million.
 
  The Company's primary uses of capital have been to fund acquisitions and to
fund its exploration and development projects. Acquisitions, net of working
capital acquired, totaled $140 million and $38.3 million in fiscal 1997 and
fiscal 1995, respectively. The Company's expenditures for exploration and
development of its oil and gas properties totaled $15.6 million, $6.4 million
and $3.4 million for the years ended June 30, 1997, 1996 and 1995,
respectively.
 
 Outlook
 
  The Company has adopted a $20.6 million capital budget for the six months
ending December 31, 1997, primarily for development and exploratory drilling
activities. The Company believes its working capital and net cash flows
provided by operating activities are sufficient to meet these capital
commitments. Additionally, the Company currently has a $90.0 million borrowing
base under its Senior Credit Facility with outstanding borrowings at June 30,
1997 of $15.3 million. The Company is reviewing several acquisitions, any one
of which could materially exceed the planned capital expenditure levels. It is
anticipated that such acquisitions, if consummated, would be funded through
additional borrowings and/or the issuance of securities.
 
  The Company's results of operations and cash flow are affected by changing
oil and gas prices. Increases in oil and gas prices often result in increased
drilling activity, which in turn increases the demand for and cost of
 
                                      20
<PAGE>
 
exploration and development. Thus, increased prices may generate increased
revenue without necessarily increasing profitability. These industry market
conditions have been far more significant determinants of Company earnings
than have macroeconomic factors such as inflation, which has had only minimal
impact on Company activities in recent years. While it is impossible to
predict the precise effect of changing prices and inflation on future Company
operations, the short-lived nature of the Company's gas reserves makes it more
possible to match development costs with predictable revenue streams than
would long-lived reserves. No assurance can be given as to the Company's
future success at reducing the impact of price changes in the Company's
operation results.
 
RESULTS OF OPERATIONS
 
 Revenues:
 
  Oil and gas revenues were $39.1 million in fiscal 1997, an increase of 149%
over the fiscal year ended June 30, 1996. This increase is largely
attributable to a 120.6% increase in equivalent production in 1997 resulting
primarily from the Partnership Transactions completed in the fourth quarter of
fiscal 1997.
 
  Oil and gas revenues for fiscal 1996 were $15.7 million, or 85% higher than
fiscal 1995 oil and gas revenues of $8.5 million. Higher equivalent production
of 68% in 1996 was principally responsible for the increase. The increased
production was attributable to the Company's mergers with Odyssey and Hampton
completed during fiscal 1995.
 
  During the three year period, the volatility of oil and gas prices also
directly impacted revenues. Most significantly, natural gas prices increased
in fiscal 1997 to $2.29 per MCF from $2.02 per MCF in fiscal 1996 and $1.66 in
fiscal 1995. During fiscal 1997 and 1996, the Company utilized various hedging
transactions to manage a portion of the risks associated with natural gas and
crude oil price volatility. As a result of these hedges, oil and gas revenues
were reduced by $18,000 in fiscal 1997 and by $560,000 in fiscal 1996.
 
  Gas plant revenues were $6.7 million in fiscal 1997, an increase of 26% over
prior year revenues of $5.3 million. Contributing to this increase were
increases in plant liquids prices of 29% over the prior year. Gas plant
revenues were $5.3 million in fiscal 1996, or 7% lower than fiscal 1995
revenues of $5.7 million due primarily to decreased throughput, partially
offset by a 7% increase in natural gas liquids prices.
 
  Gas gathering revenues decreased to $3.4 million in fiscal 1996, or 32%
under fiscal 1995 revenues of $5.0 million due to the Company's agreement in
February 1996 to assume payment obligations under a gas purchase contract and
its decision to cease recognition of income from gas gathering operations.
 
 Expenses:
 
  Production expenses for fiscal 1997 totaled $11.4 million, as compared to
$5.3 million in fiscal 1996 and $2.9 million in fiscal 1995. The 115% increase
in production expenses in fiscal 1997 as compared to fiscal 1996 was
attributable to increased production from the Partnership Transactions. The
83% increase in fiscal 1996 over fiscal 1995 was attributable primarily to the
Odyssey and Hampton mergers. Such mergers were included in operations for only
ten and four months, respectively, in fiscal 1995.
 
  Gas plant expenses increased 18% during fiscal 1997 to $3.3 million from
$2.8 million in fiscal 1996, primarily due to increased costs of natural gas
purchases. Gas plant expenses were $2.8 million or 7% lower in fiscal 1996
than in fiscal 1995 as a result of decreased throughput, offset partially by
higher costs for natural gas.
 
  Gas gathering expenses in fiscal 1996 of $2.4 million were 23% under the
prior year total of $3.1 million, due to the Company's agreement in February
1996 to assume payment obligations under a gas purchase contract and its
decision to cease gas gathering operations.
 
  Depreciation, depletion and amortization increased 93% to $15.6 million in
fiscal 1997 versus $8.1 million in fiscal 1996. Such increase was attributable
to higher production from the Partnership Transactions, offset by a 4%
decrease in the depletion rate per net equivalent barrel as a result of the
Partnership Transactions.
 
                                      21
<PAGE>
 
  Depreciation, depletion and amortization of $8.1 million reflected an
increase of 53% for fiscal 1996 over $5.3 million in fiscal 1995. Such
increase reflects a full year of production volumes from the Odyssey and
Hampton mergers and a 6% increase in the depletion rate per net equivalent
barrel due to additional costs associated with dry holes drilled in Fausse
Pointe and Cove fields.
 
  General and administrative expenses totaled $4.0 million, $3.0 million and
$2.7 million for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively. The fees under the Administrative Services Agreement with Torch
accounted for $0.8 million of the increase in 1997 over 1996 and $0.3 million
of the increase in 1996 over 1995 due to the growth of assets and cash flows
experienced by the Company.
 
  Interest expense increased to $4.5 million in fiscal 1997 from $1.7 million
in fiscal 1996 and $1.2 million in fiscal 1995. Such increases are due to the
increase in debt which financed a portion of the Partnership Transactions and
the Hampton merger.
 
  The Company recorded a provision for income taxes of $2.6 million in fiscal
1997. Actual payments of $197,000, $126,000, and $9,000 in fiscal years 1997,
1996, and 1995, respectively, relate to alternative minimum tax and state
taxes. In 1996 and 1995, net operating loss carry forwards contributed to the
low effective tax rates. Upon merging with Hampton, the Company was required
to record a deferred tax liability of $2.4 million. The Partnership
Transaction required the recording of a $120,000 deferred tax liability.
 
NET INCOME
 
  Net income of $4.6 million was generated in fiscal 1997, as compared to $1.0
million and $0.9 million in fiscal 1996 and fiscal 1995, respectively.
 
OTHER MATTERS
 
 Dividends
 
  At present, there is no plan to pay dividends on common stock. The Company
maintains a policy of reinvesting its discretionary cash flows for the
continued growth of Company operations.
 
 Gas Balancing Positions
 
  It is customary in the industry for various working interest partners to
sell more or less than their entitled share of natural gas. The settlement or
disposition of gas balancing positions as of June 30, 1997 is not anticipated
to adversely impact the financial condition of the Company.
 
 Derivative Financial Instruments
 
  The Company periodically uses derivative financial instruments to manage oil
and gas price risk. At June 30, 1997, the Company has entered into contracts
to hedge 300 barrels of oil per day at a price of $22.17 per barrel, and
31,000 MMBTU of natural gas per day at prices ranging from $1.98 to $2.69 per
MCF for July to October 1997.
 
 Financial Accounting Standards Board Statement No. 123
 
  The Company follows the intrinsic value method for stock options granted to
employees. In October 1995, the FASB issued Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation." The Company did
not adopt the fair value method for stock-based compensation plans, but has
provided the pro forma effects on net income and earnings per share that would
have been recognized if the fair value method was used.
 
                                      22
<PAGE>
 
 Financial Accounting Standards Board Statement No. 128
 
  Effective December 1997, the Company will be required to adopt Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 introduces the concept of basic earnings per share, which represents
net income divided by the weighted average common shares outstanding--without
the dilutive effects of common stock equivalents (options, warrants, etc.).
Diluted earnings per share, giving effect for common stock equivalents, will
be reported when SFAS 128 is adopted in the quarter ending December 1997. The
impact of adopting SFAS 128 is anticipated to be immaterial.
 
 Financial Accounting Standards Board Statement No. 129
 
  Effective December 1997, the Company will be required to adopt Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" ("SFAS 129"). SFAS 129 requires that all entities disclose
in summary form within the financial statements the pertinent rights and
privileges of the various securities outstanding. An entity is to disclose
within the financial statements the number of shares issued upon conversion,
exercise, or satisfaction of required conditions during at least the most
recent annual fiscal period and any subsequent interim period presented. Other
special provisions apply to prefered and redeemable stock. The Company's
adoption of SFAS 129 in the quarter ending December 1997 is not expected to
have a material impact on reported results.
 
 Financial Accounting Standards Board Statement No. 130
 
  In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components. The components of comprehensive
income refer to revenues, expenses, gains and losses that are excluded from
net income under current accounting standards, including unrecognized foreign
currency translation items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity
securities. SFAS 130 requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement displayed in equal prominence with other financial
statements; the total of other comprehensive income for a period is required
to be transferred to a component of equity that is separately displayed in a
statement of financial position at the end of an accounting period. SFAS 130
is effective for both interim and annual periods beginning after December 15,
1997, at which time the Company will adopt the provisions. The Company does
not expect SFAS 130 to have a material effect on reported results.
 
 Financial Accounting Standards Board Statement No. 131
 
  In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way public enterprises
are to report information about operating segments in annual financial
statements and requires the reporting of selected information about operating
segments in interim financial reports issued to shareholders. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for periods
beginning after December 15, 1997, at which time the Company will adopt the
provisions. The Company does not expect SFAS 131 to have a material effect on
its reported results.
 
                                      23
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                         NUMBER
                                                                         ------
<S>                                                                      <C>
Independent Auditors' Report............................................   25
Financial Statements:
  Consolidated Balance Sheets as of June 30, 1997 and 1996..............   26
  Consolidated Statements of Operations for the Years Ended June 30,
   1997, 1996 and 1995..................................................   28
  Consolidated Statements of Changes in Stockholders' Equity for the
   Years Ended June 30, 1997, 1996 and 1995.............................   29
  Consolidated Statements of Cash Flows for the Years Ended June 30,
   1997, 1996 and 1995..................................................   30
  Notes to Consolidated Financial Statements............................   31
</TABLE>
 
                                       24
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Stockholders of
Bellwether Exploration Company and Subsidiaries:
 
  We have audited the accompanying consolidated balance sheets of Bellwether
Exploration Company and subsidiaries as of June 30, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended June 30,
1997. These 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 audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material 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 audits provide a reasonable basis
for our opinion.
 
  In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Bellwether Exploration
Company and subsidiaries as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
 
KPMG PEAT MARWICK LLP
 
Houston, Texas
September 29, 1997
 
                                      25
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                            JUNE 30,  JUNE 30,
                                                              1997      1996
                                                            --------  --------
<S>                                                         <C>       <C>
CURRENT ASSETS:
  Cash and cash equivalents................................ $ 15,341  $    783
  Accounts receivable and accrued revenues.................   16,795     5,990
  Accounts receivable--related parties.....................    1,836     1,417
  Prepaid expenses.........................................    1,759       314
                                                            --------  --------
    Total current assets...................................   35,731     8,504
                                                            --------  --------
PROPERTY, PLANT AND EQUIPMENT, at cost:
  Oil and gas properties (full cost method) including
   $4,500 and $13,453 of unproved properties which are
   excluded from amortization in 1997 and 1996,
   respectively............................................  233,175    76,043
  Gas plant facilities.....................................   12,924    12,840
                                                            --------  --------
                                                             246,099    88,883
  Less accumulated depreciation, depletion and
   amortization............................................  (65,097)  (30,748)
                                                            --------  --------
                                                             181,002    58,135
                                                            --------  --------
OTHER ASSETS...............................................    5,915       586
                                                            --------  --------
                                                            $222,648  $ 67,225
                                                            ========  ========
</TABLE>
 
 
 
                See Notes to Consolidated Financial Statements.
 
                                       26
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                (AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
 
<TABLE>
<CAPTION>
                                                                         JUNE
                                                               JUNE 30,   30,
                                                                 1997    1996
                                                               -------- -------
<S>                                                            <C>      <C>
CURRENT LIABILITIES:
  Accounts payable and accrued liabilities.................... $ 12,739 $ 2,634
  Accounts payable--related parties...........................      209     702
                                                               -------- -------
    Total current liabilities.................................   12,948   3,336
                                                               -------- -------
LONG-TERM DEBT................................................  115,300  13,048
DEFERRED INCOME TAXES.........................................    5,521   2,861
OTHER LIABILITIES.............................................      955   1,383
CONTINGENCIES.................................................       --      --
STOCKHOLDERS' EQUITY:
  Preferred stock, $0.01 par value, 1,000,000 shares
   authorized, none issued or outstanding.....................       --      --
  Common stock, $0.01 par value, 15,000,000 shares authorized,
   13,844,965 and 9,075,479 shares issued and outstanding at
   June 30, 1997 and 1996, respectively.......................      139      91
  Additional paid-in capital..................................   78,273  41,639
  Retained earnings...........................................    9,512   4,867
                                                               -------- -------
    Total stockholders' equity................................   87,924  46,597
                                                               -------- -------
                                                               $222,648 $67,225
                                                               ======== =======
</TABLE>
 
 
 
                See Notes to Consolidated Financial Statements.
 
                                       27
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED JUNE 30,
                                                         -----------------------
                                                          1997    1996    1995
                                                         ------- ------- -------
<S>                                                      <C>     <C>     <C>
REVENUES:
  Gas revenues.......................................... $24,202 $ 9,856 $ 4,864
  Oil revenues..........................................  14,865   5,810   3,643
  Gas plant revenues....................................   6,652   5,345   5,678
  Gas gathering revenues................................      --   3,374   5,027
  Interest and other income.............................     365     116      97
                                                         ------- ------- -------
                                                          46,084  24,501  19,309
                                                         ------- ------- -------
COSTS AND EXPENSES:
  Production expenses...................................  11,437   5,317   2,856
  Gas plant expenses....................................   3,322   2,768   3,004
  Gas gathering expenses................................      --   2,417   3,074
  General and administrative expenses...................   4,042   3,013   2,739
  Depreciation, depletion and amortization..............  15,574   8,148   5,269
  Interest expense......................................   4,477   1,657   1,245
  Other expenses........................................       2     153      --
                                                         ------- ------- -------
                                                          38,854  23,473  18,187
                                                         ------- ------- -------
Income before income taxes and minority interest........   7,230   1,028   1,122
Provision for income taxes..............................   2,585      46       9
Minority interest in gas plant ventures.................      --      --     172
                                                         ------- ------- -------
Net income.............................................. $ 4,645 $   982 $   941
                                                         ======= ======= =======
Net income per share--primary........................... $  0.44 $  0.11 $  0.12
                                                         ======= ======= =======
Net income per share--fully diluted..................... $  0.43 $  0.11 $  0.12
                                                         ======= ======= =======
Weighted average common and common equivalent shares
 outstanding--primary...................................  10,592   9,052   7,713
                                                         ======= ======= =======
Weighted average common and common equivalent shares
 outstanding--fully diluted.............................  10,700   9,052   7,713
                                                         ======= ======= =======
</TABLE>
 
 
                See Notes to Consolidated Financial Statements.
 
                                       28
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                TREASURY
                          COMMON STOCK   PREFERRED STOCK  ADDITIONAL              STOCK
                          -------------- ----------------  PAID-IN   RETAINED -------------
                          SHARES  AMOUNT SHARES   AMOUNT   CAPITAL   EARNINGS SHARES AMOUNT  TOTAL
                          ------  ------ ------- -------- ---------- -------- ------ ------ -------
<S>                       <C>     <C>    <C>     <C>      <C>        <C>      <C>    <C>    <C>
Balance June 30, 1994...   3,737   $ 37       -- $     --  $15,490    $2,944     15   $(99) $18,372
Shares issued in public
 stock offering, net of
 offering costs.........   3,400     34       --       --   17,204        --     --     --   17,238
Cancellation of treasury
 stock..................     (15)    --       --       --       --        --    (15)    99       99
Shares issued in merger
 with Odyssey Partners,
 Ltd....................     917      9       --       --    3,944        --     --     --    3,953
Shares issued in merger
 with Hampton Resources
 Corporation............   1,006     10       --       --    4,834        --     --     --    4,844
Net earnings............      --     --       --       --       --       941     --     --      941
                          ------   ----  ------- --------  -------    ------   ----   ----  -------
Balance June 30, 1995...   9,045     90       --       --   41,472     3,885     --     --   45,447
Stock options exercised.      30      1       --       --      167        --     --     --      168
Net earnings............      --     --       --       --       --       982     --     --      982
                          ------   ----  ------- --------  -------    ------   ----   ----  -------
Balance June 30, 1996...   9,075     91       --       --   41,639     4,867     --     --   46,597
Shares issued in public
 stock offering, net of
 offering costs.........   4,687     47       --       --   36,169        --     --     --   36,216
Stock options exercised.      83      1       --       --      465        --     --     --      466
Net earnings............      --     --       --       --       --     4,645     --     --    4,645
                          ------   ----  ------- --------  -------    ------   ----   ----  -------
Balance June 30, 1997...  13,845   $139       -- $     --  $78,273    $9,512     --   $ --  $87,924
                          ======   ====  ======= ========  =======    ======   ====   ====  =======
</TABLE>
 
 
 
                See Notes to Consolidated Financial Statements.
 
                                       29
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED JUNE 30,
                                                 -----------------------------
                                                   1997       1996      1995
                                                 ---------  --------  --------
<S>                                              <C>        <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income.................................... $   4,645  $    982  $    941
  Adjustments to reconcile net income to net
   cash provided by operating activities:
    Depreciation, depletion and amortization....    16,044     8,273     5,382
    Minority interest in gas plant ventures.....        --        --       120
    Deferred taxes..............................     2,562      (183)       --
                                                 ---------  --------  --------
                                                    23,251     9,072     6,443
  Change in assets and liabilities, net of
   acquisition effects:
    Accounts receivable and accrued revenues....     2,941      (668)    1,548
    Prepaid expenses............................      (638)       25       117
    Accounts payable and accrued expenses.......     4,438        84    (2,047)
    Due (to) from affiliates....................     5,738      (791)     (633)
    Other.......................................    (6,447)     (237)     (145)
                                                 ---------  --------  --------
NET CASH FLOWS PROVIDED BY OPERATING
 ACTIVITIES.....................................    29,283     7,485     5,283
                                                 ---------  --------  --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisitions of oil and gas properties,
   including working capital accounts:
    --Partnership Transactions..................  (149,914)       --        --
    --Odyssey Petroleum.........................        --        --    (5,374)
    --Hampton Resources.........................        --        --   (18,168)
  Additions to oil and gas properties...........   (20,811)   (6,934)   (3,497)
  Proceeds from sales of properties.............    18,775       644       265
  Additions to gas plant facilities.............       (84)      (44)      (87)
  Additions to gas gathering system.............        --       (21)     (138)
  Proceeds from gas contract assignment.........        --     9,875        --
  Other.........................................       (88)       22      (290)
                                                 ---------  --------  --------
NET CASH FLOWS PROVIDED BY (USED IN)
 INVESTING ACTIVITIES...........................  (152,122)    3,542   (27,289)
                                                 ---------  --------  --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from borrowings...................... $ 157,300  $     --  $ 26,773
  Net proceeds from issuance of common stock....    35,145       168    17,238
  Payments of long-term debt....................   (55,048)  (11,500)  (22,369)
                                                 ---------  --------  --------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING
 ACTIVITIES.....................................   137,397   (11,332)   21,642
                                                 ---------  --------  --------
  Net increase (decrease) in cash and cash
   equivalents..................................    14,558      (305)     (364)
  Cash and cash equivalents at beginning of
   year.........................................       783     1,088     1,452
                                                 ---------  --------  --------
    Cash and cash equivalents at end of year.... $  15,341  $    783  $  1,088
                                                 =========  ========  ========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       30
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. ORGANIZATION
 
  Bellwether Exploration Company ("the Company") was formed as a Delaware
corporation in 1994 to succeed to the business and properties of its
predecessor company pursuant to a merger, the primary purpose of which was to
change the predecessor company's state of incorporation from Colorado to
Delaware. The predecessor company was formed in 1980 from the consolidation of
the business and properties of related oil and gas limited partnerships.
References to Bellwether or the Company include the predecessor company,
unless the context requires otherwise.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles of Consolidation
 
  The consolidated financial statements include the accounts of Bellwether
Exploration Company and its wholly-owned subsidiaries. Snyder Gas Plant
Venture and NGL/Torch Gas Plant Venture and their 11.98% and 35.78%
investments in the Snyder and Diamond M-Sharon Ridge Gas Plants have been pro
rata consolidated. Minority interests have been deducted from results of
operations and stockholders' equity in the appropriate period. All significant
intercompany accounts and transactions have been eliminated in consolidation.
 
 Oil and Gas Properties
 
  The Company utilizes the full cost method to account for its investment in
oil and gas properties. Under this method, all costs of acquisition,
exploration and development of oil and gas reserves (including such costs as
leasehold acquisition costs, geological expenditures, dry hole costs, tangible
and intangible development costs and direct internal costs) are capitalized as
incurred. Oil and gas properties, the estimated future expenditures to develop
proved reserves, and estimated future abandonment, site remediation and
dismantlement costs are depleted and charged to operations using the unit-of-
production method based on the ratio of current production to proved oil and
gas reserves as estimated by independent engineering consultants. Costs
directly associated with the acquisition and evaluation of unproved properties
are excluded from the amortization computation until it is determined whether
or not proved reserves can be assigned to the properties or whether impairment
has occurred. Depletion expense per equivalent barrel of production was
approximately $5.62 in 1997, $5.86 in 1996 and $5.52 in 1995. Dispositions of
oil and gas properties are recorded as adjustments to capitalized costs, with
no gain or loss recognized unless such adjustments would significantly alter
the relationship between capitalized costs and proved reserves of oil and gas.
To the extent that capitalized costs of oil and gas properties, net of
accumulated depreciation, depletion and amortization, exceed the discounted
future net revenues of proved oil and gas reserves net of deferred taxes, such
excess capitalized costs would be charged to operations. No such write-down in
book value was required in 1997, 1996 or 1995.
 
  Any reference to oil and gas reserve information in the Notes to
Consolidated Financial Statements is unaudited.
 
 Gas Plants and Gas Gathering System
 
  Gas plant facilities include the costs to acquire certain gas plants and to
secure rights-of-way. Capitalized costs associated with gas plant facilities
are amortized primarily over the estimated useful lives of the various
components of the facilities utilizing the straight-line method. The estimated
useful lives of such assets range from four to fifteen years.
 
  The Company's gas gathering subsidiary and certain third parties were the
beneficiaries of an agreement whereby another party had an obligation to
purchase, until May 31, 1999, the gas produced by the Company and
 
                                      31
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
such third parties from the West Monroe field in Union Parish, Louisiana at a
price of $4.50 per MMBTU. Bellwether owned a large majority of the gas
produced and sold pursuant to the Purchase Agreement. In March 1996, in
exchange for Bellwether's agreement to assume the purchase obligations under
the gas purchase contract, Bellwether was paid $9.9 million. As a result of
this transaction, the Company has written off the remaining book value of the
gas gathering system and has recorded a liability to cover the estimated
future losses under the contract. Gas gathering operations of the subsidiary
and payments to third parties are charged to the liability as incurred. From
the proceeds, $9.5 million was paid on the Company's credit facility.
 
 Gas Imbalances
 
  The Company uses the sales method of accounting for gas imbalances. Under
this method, gas sales are recorded when revenue checks are received or are
receivable on the accrual basis. The Company had a net imbalance liability at
fair value of $596,000 at June 30, 1997. The Company's net imbalance was
immaterial at June 30, 1996 and 1995.
 
 Financial Accounting Standards Board Statement No. 121
 
  In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121 is effective
beginning July 1, 1996 and establishes guidelines for determining and
measuring asset impairment and the required timing of asset impairment
evaluations. The impact of implementing SFAS 121 during fiscal 1997 was
immaterial.
 
 Financial Accounting Standards Board Statement No. 123
 
  In October 1995, the FASB issued Statement No. 123 ("SFAS 123") "Accounting
for Stock-Based Compensation" which is effective for the Company beginning
July 1, 1996. SFAS 123 permits, but does not require, a fair-value-based
method of accounting for employee stock option plans which results in
compensation expense being recognized in the results of operations when stock
options are granted. The Company plans to continue to use the current
intrinsic-value-based method of accounting for such plans where no
compensation expense is recognized. However, as required by SFAS 123, the
Company has provided pro forma disclosure of net income and earnings per share
in the notes to the consolidated financial statements as if the fair-value-
based method of accounting had been applied.
 
 Natural Gas and Crude Oil Hedging
 
  Commodity derivatives utilized as hedges include swap contracts. In order to
qualify as a hedge, price movements in the underlying commodity derivative
must be sufficiently correlated with the hedged commodity. Settlement of gains
and losses on price swap contracts are realized monthly, generally based upon
the difference between the contract price and the average closing New York
Mercantile Exchange ("NYMEX") price and are reported as a component of oil and
gas revenues and operating cash flows in the period realized. Gains and losses
attributable to the termination of a swap contract are deferred on the balance
sheet and recognized in revenue when the hedged crude oil and natural gas is
sold. There were no such deferred gains or losses at June 30, 1997, 1996 or
1995.
 
  Oil and gas revenues were decreased by $18,000 in 1997 and decreased by
$560,000 in 1996 as a result of such hedging activity. There was no hedging in
1995.
 
 Earnings Per Share
 
  Earnings per share calculations are based on the weighted average number of
common shares and common share equivalents and net income. Common share
equivalents include dilutive common stock options. Such options do not have a
material effect in the calculations of earnings per share.
 
                                      32
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Income Taxes
 
  Deferred income taxes are accounted for under the asset and liability method
of accounting for income taxes. Under this method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period the change occurs.
 
 Statements of Cash Flows
 
  For cash flow presentation purposes, the Company considers all highly liquid
debt instruments purchased with an original maturity of three months or less
to be cash equivalents. Interest paid in cash for 1997, 1996 and 1995 was $1.5
million, $1.6 million and $1.2 million, respectively. Income taxes paid in
cash for 1997, 1996 and 1995 were $198,000, $126,000 and $9,000, respectively.
In 1997, a portion of the purchase price of the Partnership Transactions
included the issuance to Torch of 150,000 shares of the Company's common stock
valued at $1.2 million. Also, Torch was issued a warrant to purchase 100,000
shares at $9.90 per share of the Company's common stock for advisory services
rendered in connection with the Partnership Transactions; the warrant was
valued at $300,000 and was recorded as a cost of the Partnership Transactions.
During 1995, a portion of the mergers, Odyssey Partners, Ltd. ("Odyssey") and
Hampton Resources Corporation ("Hampton"), collectively the "Mergers", was
financed by assumption of debt of $1.4 million for Odyssey and $4.1 million
for Hampton. Common stock with a value of $4.0 million and $4.8 million,
respectively, was issued as part of the costs of the Odyssey and Hampton
mergers in 1995.
 
 Use of estimates
 
  Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities, as well as reserve information which
affects the depletion calculation and the computation of the full cost ceiling
limitation, to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
 
 Reclassifications
 
  Certain reclassifications of prior period statements have been made to
conform with current reporting practices.
 
3. ACQUISITIONS AND MERGERS
 
  During the last three years, the Company has completed the following mergers
and acquisitions, all of which were recorded using the purchase method of
accounting:
 
    In April 1997, the Company closed acquisitions of oil and gas properties,
  totaling $145.2 million, from certain partnerships and other entities
  managed or sponsored by Torch Energy Advisors Incorporated ("Torch"). The
  acquisitions were financed by the sale of 4.4 million shares of common
  stock, the sale of $100.0 million of 10 7/8% Senior Subordinated Notes due
  in 2007 and the use of $33.3 million of a new $90.0 million senior
  unsecured credit facility (including the repayment of $22.0 million on a
  then existing credit facility).
 
    On February 28, 1995 the Company acquired Hampton in exchange for $17.0
  million in cash and 1,006,458 shares of the Company's common stock. The
  Company had paid previous to the merger $2.7 million to acquire common and
  preferred stock of Hampton and incurred $1.4 million in expenses in
 
                                      33
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
  arranging the merger. The total cost of the Hampton acquisition was $25.9
  million, consisting of $21.1 million in cash and $4.8 million in common
  stock. Hampton was an energy company engaged in the exploration,
  acquisition and production of oil and natural gas, primarily in the onshore
  Gulf Coast region and offshore in Texas state waters.
 
    On August 26, 1994 the Company acquired Odyssey in exchange for $5.6
  million in cash (funded from a common stock offering which closed on the
  same date) and 916,665 shares of the Company's common stock, for a total
  cost of $9.6 million. Odyssey is an exploration company which assembles,
  exploits and operates oil and gas properties using state-of-the-art 3-D
  seismic and computer-aided exploration technology. Odyssey's primary areas
  of operation have been the onshore Gulf Coast region and the Permian Basin
  area of West Texas and Southeast New Mexico.
 
    The following table presents the unaudited pro forma results of
  operations as if the Partnership Transactions had occurred on July 1, 1995
  and July 1, 1996. The Partnership Transactions were accounted for as
  purchases, and their results of operations are included in the Company's
  results of operations from the date of acquisition. The Company's pro forma
  results are based on assumptions and estimates and are not necessarilly
  indicative of the Company's results of operations had the transaction
  occurred as of July 1, 1995, or those in the future (in thousands, except
  earnings per share).
 
<TABLE>
<CAPTION>
                                                                 (UNAUDITED)
                                                              -----------------
                                                               YEAR ENDED JUNE
                                                                     30,
                                                              -----------------
                                                                1997     1996
                                                              -------- --------
      <S>                                                     <C>      <C>
      Revenues............................................... $120,384 $140,969
      Expenses...............................................   90,024  104,629
                                                              -------- --------
      Earnings before income taxes...........................   30,360   36,340
      Income taxes...........................................   11,143   13,112
                                                              -------- --------
      Net earnings........................................... $ 19,217 $ 23,228
                                                              ======== ========
      Net earnings per weighted average common and common
       equivalent share, fully diluted....................... $   1.38 $   1.71
                                                              ======== ========
</TABLE>
 
                                      34
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
4. GUARANTOR FINANCIAL STATEMENTS
 
  Consolidating financial statements of the Company and the Guarantor
Subsidiaries (Odyssey Petroleum Company, Black Hawk Oil Company, and 1989-I
TEAI Limited Partnership), as guarantors of the Company's 10 7/8% Senior
Subordinate Notes due 2007, are presented as follows:
 
               CONDENSED CONSOLIDATING BALANCE SHEETS--UNAUDITED
                              AS OF JUNE 30, 1997
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                      GUARANTOR   NONGUARANTOR
                          BELLWETHER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                          ---------- ------------ ------------ ------------ ------------
<S>                       <C>        <C>          <C>          <C>          <C>
Total current assets....   $ 30,446    $ 2,069      $ 1,380      $  1,836     $ 35,731
Net property, plant and
 equipment..............    158,407     20,800       25,087       (23,292)     181,002
Total other assets......     20,780        346           39       (15,250)       5,915
                           --------    -------      -------      --------     --------
Total assets............   $209,633    $23,215      $26,506      $(36,706)    $222,648
                           ========    =======      =======      ========     ========
Total current liabili-
 ties...................   $ 12,003    $ 2,383      $(3,927)     $  2,489     $ 12,948
Long-term debt..........    115,300         --           --            --      115,300
Deferred taxes..........      5,127        363           31            --        5,521
Other long-term liabili-
 ties...................      1,910         --           --          (955)         955
Total stockholders' eq-
 uity...................     75,293     20,469       30,402       (38,240)      87,924
                           --------    -------      -------      --------     --------
Total liabilities and
 stockholders' equity...   $209,633    $23,215      $26,506      $(36,706)    $222,648
                           ========    =======      =======      ========     ========
</TABLE>
 
 
 
              CONDENSED CONSOLIDATING INCOME STATEMENTS--UNAUDITED
                        FOR THE YEAR ENDED JUNE 30, 1997
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                     GUARANTOR   NONGUARANTOR
                         BELLWETHER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                         ---------- ------------ ------------ ------------ ------------
<S>                      <C>        <C>          <C>          <C>          <C>
Revenues................  $32,539     $ 5,260       $9,290      $(1,005)     $46,084
Expenses................   26,153       6,979        7,086       (1,364)      38,854
                          -------     -------       ------      -------      -------
Net earnings (loss) be-
 fore income taxes......    6,386      (1,719)       2,204          359        7,230
Income taxes............    2,610         (57)           8           24        2,585
                          -------     -------       ------      -------      -------
Net earnings (loss).....  $ 3,776     $(1,662)      $2,196      $   335      $ 4,645
                          =======     =======       ======      =======      =======
</TABLE>
 
                                       35
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS --UNAUDITED
                        FOR THE YEAR ENDED JUNE 30, 1997
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                       GUARANTOR   NONGUARANTOR
                          BELLWETHER  SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                          ----------  ------------ ------------ ------------ ------------
<S>                       <C>         <C>          <C>          <C>          <C>
Cash flows from
 operating activities:
  Net income (loss).....  $   3,776     $(1,662)     $ 2,196       $ 335      $   4,645
  Non-cash adjustments..     12,527       4,732        1,565        (218)        18,606
  Changes in assets and
   liabilities..........      6,064       2,400       (2,315)       (117)         6,032
                          ---------     -------      -------       -----      ---------
  Net cash provided by
   operating activities.     22,367       5,470        1,446          --         29,283
                          ---------     -------      -------       -----      ---------
Cash flows from invest-
 ing activities:
  Additions to oil and
   gas properties.......    (11,946)     (7,894)        (971)         --        (20,811)
  Acquisitions of oil
   and gas properties...   (149,914)         --           --          --       (149,914)
  Proceeds from sales of
   properties...........     15,408       3,071          296          --         18,775
  Additions to
   properties and other.       (137)         --          (35)         --           (172)
                          ---------     -------      -------       -----      ---------
  Net cash used in
   investing activities.   (146,589)     (4,823)        (710)         --       (152,122)
                          ---------     -------      -------       -----      ---------
Cash flows from financ-
 ing activities:
  Proceeds from
   borrowings...........    157,300          --           --          --        157,300
  Payments of long-term
   debt.................    (55,048)         --           --          --        (55,048)
  Net proceeds from
   issuance of common
   stock................     35,145          --           --          --         35,145
                          ---------     -------      -------       -----      ---------
  Net cash provided by
   financing activities.    137,397          --           --          --        137,397
                          ---------     -------      -------       -----      ---------
Net increase in cash and
 cash equivalents.......     13,175         647          736          --         14,558
Cash and cash
 equivalents at
 beginning of year......        588         191            4          --            783
                          ---------     -------      -------       -----      ---------
Cash and cash
 equivalents at end of
 year...................  $  13,763     $   838      $   740       $  --      $  15,341
                          =========     =======      =======       =====      =========
</TABLE>
 
                                       36
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
               CONDENSED CONSOLIDATING BALANCE SHEETS--UNAUDITED
                              AS OF JUNE 30, 1996
                                (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                      GUARANTOR   NONGUARANTOR
                          BELLWETHER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                          ---------- ------------ ------------ ------------ ------------
<S>                       <C>        <C>          <C>          <C>          <C>
Total current assets....   $ 6,118     $   887      $   924      $    575     $ 8,504
Net property, plant and
 equipment..............    39,317      11,004       15,050        (7,236)     58,135
Total other assets......    29,872          25           37       (29,348)        586
                           -------     -------      -------      --------     -------
Total assets............   $75,307     $11,916      $16,011      $(36,009)    $67,225
                           =======     =======      =======      ========     =======
Total current liabili-
 ties...................   $ 2,160     $ 1,044      $(1,207)     $  1,339     $ 3,336
Long-term debt..........    13,048          --           --            --      13,048
Deferred taxes..........     5,096         407           --        (2,642)      2,861
Other long-term liabili-
 ties...................     2,115          --           --          (732)      1,383
Total stockholders' eq-
 uity...................    52,888      10,465       17,218       (33,974)     46,597
                           -------     -------      -------      --------     -------
Total liabilities and
 stockholders' equity...   $75,307     $11,916      $16,011      $(36,009)    $67,225
                           =======     =======      =======      ========     =======
</TABLE>
 
 
             CONDENSED CONSOLIDATING INCOME STATEMENTS--UNAUDITED
                       FOR THE YEAR ENDED JUNE 30, 1996
                                (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                     GUARANTOR   NONGUARANTOR
                         BELLWETHER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                         ---------- ------------ ------------ ------------ ------------
<S>                      <C>        <C>          <C>          <C>          <C>
Revenues................  $10,984      $3,600       $9,485       $ 432       $24,501
Expenses................   11,187       2,830        8,671         785        23,473
Net earnings (loss) be-
 fore income taxes......     (203)        770          814        (353)        1,028
Income taxes............     (404)        285          141          24            46
                          -------      ------       ------       -----       -------
Net earnings (loss).....  $   201      $  485       $  673       $(377)      $   982
                          =======      ======       ======       =====       =======
</TABLE>
 
                                      37
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS --UNAUDITED
                        FOR THE YEAR ENDED JUNE 30, 1996
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                     GUARANTOR   NONGUARANTOR
                         BELLWETHER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                         ---------- ------------ ------------ ------------ ------------
<S>                      <C>        <C>          <C>          <C>          <C>
Cash flows from
 operating activities:
  Net income (loss).....  $   201     $   485      $   673      $  (377)     $   982
  Non-cash adjustments..    4,851       1,506        1,314          419        8,090
  Changes in assets and
   liabilities..........      896        (244)         159       (2,398)      (1,587)
                          -------     -------      -------      -------      -------
  Net cash provided by
   (used in) operating
   activities...........    5,948       1,747        2,146       (2,356)       7,485
                          -------     -------      -------      -------      -------
Cash flows from invest-
 ing activities:
  Additions to oil and
   gas properties.......   (5,432)     (1,567)          --           --       (6,999)
  Proceeds from sales of
   properties...........      644          --           --           --          644
  Proceeds from gas
   contract assignment..    9,875          --           --           --        9,875
  Additions to
   properties and other.     (165)         --          187           --           22
                          -------     -------      -------      -------      -------
  Net cash provided by
   (used in) investing
   activities...........    4,922      (1,567)         187           --        3,542
                          -------     -------      -------      -------      -------
Cash flows from financ-
 ing activities:
  Payments of long-term
   debt.................  (11,500)         --           --           --      (11,500)
  Equity contributions..       --          --       (2,356)       2,356           --
  Net proceeds from
   issuance of common
   stock................      168          --           --           --          168
                          -------     -------      -------      -------      -------
  Net cash provided by
   (used in) financing
   activities...........  (11,332)         --       (2,356)       2,356      (11,332)
                          -------     -------      -------      -------      -------
Net increase (decrease)
 in cash and cash
 equivalents............     (462)        180          (23)          --         (305)
Cash and cash
 equivalents at
 beginning of year......    1,050          11           27           --        1,088
                          -------     -------      -------      -------      -------
Cash and cash
 equivalents at end of
 year...................  $   588     $   191      $     4      $    --      $   783
                          =======     =======      =======      =======      =======
</TABLE>
 
                                       38
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
5. RELATED PARTY TRANSACTIONS
 
  The Company is a party to an administrative services agreement which
requires Torch to administer the business activities of the Company for a
monthly fee equal to the sum of one-twelfth of 2% of the average of the book
value of the Company's total assets, excluding cash, plus reimbursement of
certain costs incurred on behalf of the Company for the management of its oil
and gas properties, plus 2% of annual operating cash flows (as defined) during
the period in which the services are rendered. The initial term of this
agreement, effective January 1, 1994, was six years. Thereafter, the agreement
renews automatically for successive one-year periods until terminated by
either party in accordance with the applicable provisions of the agreement.
For the years ended June 30, 1997, 1996 and 1995, related fees paid to Torch
amounted to $2.3 million, $1.5 million and $1.2 million, respectively.
Additionally, in the ordinary course of business, the Company incurs
intercompany balances resulting from the payment of costs and expenses by
affiliated entities on behalf of the Company. Torch may charge interest on any
unpaid balances within 30 days, however, no such interest has been charged by
Torch since the inception of the agreement.
 
  In April 1997, Torch was issued 150,000 shares of the Company's common stock
and a warrant to purchase 100,000 shares at $9.90 per share for advisory
services rendered in connection with the Partnership Transactions. The
Company's stock was valued at $1.2 million, and the warrant was valued at
$300,000. In December 1993, Torch was issued a warrant to purchase 187,500
shares of the Company's common stock at a price of $6.40 per share for its
advisory services in identifying and negotiating a merger. In September 1996,
the warrant was transferred to a subsidiary of Torchmark Corporation. Such
warrants were exercised in connection with the Partnership Transactions with
total proceeds to the Company of $684,000.
 
  Torch was also a selling partner in the Partnership Transactions through its
ownership of general partnership and working interests in the partnership
programs. As a result, Torch was paid $18.4 million for such interests. Two of
the Company's officers are officers of Torch and have an equity interest in
Torch. A director of the Company holds significant options to purchase stock
in Torch, which if exercised would constitute a substantial equity interest in
Torch. Two of the directors of the Company were formerly officers of Odyssey.
 
  A subsidiary of Torch markets oil and natural gas production from certain
oil and gas properties in which the Company owns an interest. The Company
generally pays fees of 2% of revenues for such marketing services. Such
charges were $646,000, $114,000 and $12,000 in 1997, 1996 and 1995,
respectively.
 
  Costs of the evaluation of potential property acquisitions and due diligence
conducted in conjunction with acquisitions closed are incurred by Torch at the
Company's request. The Company was charged $650,000, $74,000 and $193,000 for
these costs in 1997, 1996 and 1995, respectively.
 
  Torch operates certain oil and gas interests owned by the Company. The
Company is charged, on the same basis as other third parties, for all
customary expenses and cost reimbursements associated with these activities.
Operator's overhead charged for these activities for the years ended June 30,
1997, 1996 and 1995 was $729,000, $367,000 and $164,000, respectively.
 
  Torch became the operator of the Gas Plant on December 1, 1993. In fiscal
1997, 1996 and 1995, the fees paid by the Company to Torch were $49,000,
$83,000 and $71,000, respectively.
 
6. STOCKHOLDERS' EQUITY
 
 Common and Preferred Stock
 
  The Certificate of Incorporation of the Company authorizes the issuance of
up to 15,000,000 shares of common stock and 1,000,000 shares of preferred
stock, the terms, preferences, rights and restrictions of which
 
                                      39
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
are established by the Board of Directors of the Company. Certain restrictions
contained in the Company's loan agreements limit the amount of dividends which
may be declared. There is no present plan to pay dividends on common stock as
the Company intends to reinvest its cash flows for continued growth of the
Company.
 
  In July 1997, in a special meeting of Stockholders of the Company, the
Company's Certificate of Incorporation was amended to increase the number of
authorized shares of Common Stock from 15,000,000 to 30,000,000.
 
  In April 1997, the Company issued 4.4 million shares of common stock for net
proceeds to the Company of $34.1 million. Such proceeds were used in financing
the Partnership Transactions. Also included in the April Offering were 719,264
shares sold by certain shareholders. Additional shares issued during fiscal
1997 included 125,000 shares issued upon exercise of a warrant and 150,000
shares issued to Torch for advisory services rendered in connection with the
Partnership Transactions.
 
  During the first quarter of fiscal 1995, the Company consummated the sale of
3,650,000 shares of common stock. The net proceeds to the Company were $17.3
million which were used for the Odyssey and Hampton mergers and general
corporate purposes. Of the shares sold, 3,400,000 were newly-issued by the
Company and 250,000 were sold by certain stockholders.
 
 Stock Incentive Plans
 
  The Company has stock option plans that provide for granting of options for
the purchase of common stock to directors, officers and key employees of the
Company and Torch. These stock options may be granted subject to terms ranging
from 6 to 10 years at a price equal to the fair market value of the stock at
the date of grant. At June 30, 1997, options under the plans available for
future grants were 158,500.
 
  A summary of activity in the stock option plans is set forth below:
 
<TABLE>
<CAPTION>
                                                    NUMBER          OPTION
                                                   OF SHARES     PRICE RANGE
                                                   ---------  ------------------
<S>                                                <C>        <C>
Balance at June 30, 1994..........................   471,325  $3.00  -- $ 7.00
  Granted.........................................   450,000  $5.56  -- $ 5.94
                                                   ---------  ------------------
Balance at June 30, 1995..........................   921,325  $3.00  -- $ 7.00
  Granted.........................................    27,000  $4.375 -- $ 6.375
  Surrendered.....................................   (10,000) $5.75
  Exercised.......................................   (30,000) $5.625
                                                   ---------  ------------------
Balance at June 30, 1996..........................   908,325  $3.00  -- $ 7.00
  Granted.........................................   378,500  $6.25  -- $10.1875
  Surrendered.....................................   (12,000) $7.625
  Exercised.......................................   (82,500) $5.625 -- $ 5.75
                                                   ---------  ------------------
Balance at June 30, 1997.......................... 1,192,325  $3.00  -- $10.875
                                                   =========  ==================
Exercisable at June 30, 1997...................... 1,090,435  $3.00  -- $ 7.75
                                                   =========  ==================
</TABLE>
 
                                      40
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Detail of stock options outstanding and options exercisable at June 30, 1997
follows:
 
<TABLE>
<CAPTION>
                                        OUTSTANDING              EXERCISABLE
                               ----------------------------- -------------------
                                         WEIGHTED
                                          AVERAGE  WEIGHTED-           WEIGHTED-
                                         REMAINING  AVERAGE             AVERAGE
                                           LIFE    EXERCISE            EXERCISE
   RANGE OF EXERCISE PRICES     NUMBER    (YEARS)    PRICE    NUMBER     PRICE
   ------------------------    --------- --------- --------- --------- ---------
<S>                            <C>       <C>       <C>       <C>       <C>
1988 Plan $3.00 to $ 7.00.....   131,325   0.74      $4.79     108,435   $4.78
1994 Plan $4.38 to $ 6.38.....   705,500   7.28       5.70     705,500    5.70
1996 Plan $6.25 to $10.19.....   355,500   9.41       7.76     276,500    7.25
                               ---------                     ---------
  Total....................... 1,192,325                     1,090,435
                               =========                     =========
</TABLE>
 
  The estimated weighted average fair value per share of options granted
during 1997 and 1996 was $3.26 and $2.39, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions: 1997 and 1996
expected stock price volatility of 35%; risk free interest rate of 6%; and an
average expected option life of 5 years. Had compensation expense for stock-
based compensation been determined based on the fair value at the date of
grant, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below (in thousands except share
information):
 
<TABLE>
<CAPTION>
                                                                    1997  1996
                                                                   ------ -----
      <S>                                                          <C>    <C>
      Net income
        As reported............................................... $4,645 $ 982
        Pro forma................................................. $3,853 $ 921
      Primary earnings per
        As reported............................................... $ 0.44 $0.11
        Pro forma................................................. $ 0.36 $0.10
      Fully diluted earnings per share
        As reported............................................... $ 0.43 $0.11
        Pro forma................................................. $ 0.36 $0.10
</TABLE>
 
7. DERIVATIVE FINANCIAL INSTRUMENTS
 
  The Company periodically uses derivative financial instruments to manage oil
and gas price risk. While swaps are intended to reduce the Company's exposure
to declines in the market price of oil and gas, they may limit the Company's
gain from increases in the market price. The oil and gas price swaps qualify
as hedges, and as long as they correlate with production based on engineering
estimates, any gains and losses will be recorded when the related production
has been delivered. Should the price swaps cease to be recognized as a hedge,
subsequent changes in value will be recorded in the statement of operations.
As of June 30, 1997, the Company was a party to oil and gas swap price
agreements for July through October, 1997 for 36,900 barrels of crude oil with
a price of $22.17 per barrel and 3,813 MMCF of gas at prices ranging from
$1.98 to $2.69 per MCF. These contracts are accounted for as hedges for
financial reporting purposes and, accordingly, gains and losses are deferred
and are recorded as adjustments to oil and gas revenue as the sales are made.
 
  These energy swap agreements expose the Company to counterparty credit risk
to the extent the counterparty is unable to meet its monthly settlement
commitment to the Company.
 
                                      41
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Determination of Fair Values of Financial Instruments
 
  Fair value for cash, short-term investments, receivables and payables
approximates carrying value. The following table details the carrying values
and approximate fair values of the Company's other investments, derivative
financial instruments and long-term debt at June 30, 1997 and 1996 (in
thousands).
 
<TABLE>
<CAPTION>
                                               1997                 1996
                                       -------------------- --------------------
                                       CARRYING APPROXIMATE CARRYING APPROXIMATE
                                        VALUE   FAIR VALUE   VALUE   FAIR VALUE
                                       -------- ----------- -------- -----------
<S>                                    <C>      <C>         <C>      <C>
Swap agreements....................... $    --   $(994,000)  $   --   $(27,900)
Long-term debt (See Note 8)........... 115,300     120,580   13,048     13,048
</TABLE>
 
8. LONG-TERM DEBT
 
  Long-term debt is comprised of the following at June 30, 1997 and 1996 (in
thousands):
 
<TABLE>
<CAPTION>
                                                                 1997    1996
                                                               -------- -------
<S>                                                            <C>      <C>
Bank credit facility.......................................... $ 15,300 $13,048
10 7/8% Senior Subordinated Notes.............................  100,000      --
Less current maturities.......................................       --      --
                                                               -------- -------
Long-term debt................................................ $115,300 $13,048
                                                               ======== =======
</TABLE>
 
  Debt maturities by fiscal year are as follows (amounts in thousands):
 
<TABLE>
           <S>                                       <C>
           1998..................................... $     --
           1999.....................................       --
           2000.....................................       --
           2001.....................................       --
           2002.....................................   15,300
           Thereafter...............................  100,000
                                                     --------
                                                     $115,300
                                                     ========
</TABLE>
 
  On February 28, 1995, the Company entered into a credit facility ("Credit
Facility") with a commercial bank providing an initial borrowing base of $29.8
million. The borrowings under the Credit Facility were secured by the
Company's interests in oil and gas properties, a gathering system and two gas
plants. The maturity date, as modified in the second quarter of fiscal 1996,
was March 31, 2001 and the borrowing base was $20.1 million. The Credit
Facility was retired in October 1996.
 
  In October 1996, the Company entered into a syndicated credit facility
("Existing Credit Facility") in an amount up to $50.0 million with an initial
borrowing base of $27.0 million, to be re-determined semi-annually. At
Bellwether's option, the interest rate varied, based upon borrowing base
usage, from LIBOR plus 7/8% to LIBOR plus 1 1/4%, or the greater of the prime
rate or Federal Funds rate plus 1/2%. The Existing Credit Facility was
unsecured with respect to oil and gas assets and was retired in April 1997.
 
  In April 1997, the Company entered into a senior revolving unsecured credit
facility ("Senior Credit Facility") in an amount up to $90.0 million, with an
initial borrowing base of $90.0 million to be re-determined semi-annually, and
a maturity date of March 31, 2002. Bellwether may elect an interest rate based
either on a margin plus LIBOR or the higher of the prime rate or the sum of
1/2 of 1% plus the Federal Funds Rate. For LIBOR borrowings, the interest rate
will vary from LIBOR plus 0.875% to LIBOR plus 1.25% based upon borrowing
 
                                      42
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
base usage. In connection with the acquisition of oil and gas properties,
$33.3 million was drawn under this facility; at June 30, 1997, $15.3 million
was outstanding.
 
  The Senior Credit Facility contains various covenants including certain
required financial measurements for a current ratio, consolidated tangible net
worth and interest coverage ratio. In addition, the Senior Credit Facility
includes certain limitations on restricted payments, dividends, incurrence of
additional funded indebtedness and asset sales.
 
  In April 1997, the Company issued $100.0 million of 10 7/8% Senior
Subordinated Notes ("Notes") that mature April 1, 2007. Interest on the Notes
is payable semi-annually on April 1 and October 1 commencing on October 1,
1997. The Notes will be redeemable, in whole or in part, at the option of the
Company at any time on or after April 1, 2002 at 105.44% which decreases
annually to 100.00% on April 1, 2005 and thereafter, plus accrued and unpaid
interest. In the event of change of control of the Company, each holder of the
Notes will have the right to require the Company to repurchase all or part of
such holder's Notes at an offer price in cash equal to 100.0% of the aggregate
principal amount thereof, plus accrued and unpaid interest to the date of
purchase. The Notes are guaranteed by the Company and its wholly owned
subsidiaries, Odyssey Petroleum Company, Black Hawk Oil Company and 1989-I
TEAI Limited Partnership. The Notes contain certain covenants, including
limitations on indebtedness, restricted payments, transactions with
affiliates, liens, guarantees of indebtedness by subsidiaries, dividends and
other payment restrictions affecting restricted subsidiaries, issuance and
sales of restricted subsidiary stock, disposition of proceeds of asset sales,
and restrictions on mergers and consolidations or sales of assets.
 
9. INCOME TAXES (IN THOUSANDS)
 
  Income tax expense is summarized as follows:
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED JUNE
                                                                    30,
                                                             -------------------
                                                              1997   1996   1995
                                                             ------  -----  ----
<S>                                                          <C>     <C>    <C>
Current Federal............................................. $  (12) $ 126  $ 9
  State.....................................................     35    103   --
  Deferred--Federal and State...............................  2,562   (183)  --
                                                             ------  -----  ---
    Total income tax expense................................ $2,585  $  46  $ 9
                                                             ======  =====  ===
</TABLE>
 
  The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at June 30, 1997 and 1996
is as follows:
 
<TABLE>
<CAPTION>
                                                               AT JUNE 30,
                                                             -----------------
                                                               1997     1996
                                                             --------  -------
<S>                                                          <C>       <C>
Net operating loss Carryforwards............................ $  8,668  $ 8,922
Percentage depletion Carryforwards..........................      271      271
Alternative minimum tax credit carryforwards................      114      126
                                                             --------  -------
  Total deferred income tax assets..........................    9,053    9,319
                                                             --------  -------
Plant, property and equipment...............................  (11,019)  (8,840)
State income taxes..........................................     (661)    (446)
                                                             --------  -------
Total deferred income tax liabilities.......................  (11,680)  (9,286)
Valuat8ion allowances.......................................   (2,894)  (2,894)
                                                             --------  -------
Net deferred income tax liability........................... $ (5,521) $(2,861)
                                                             ========  =======
</TABLE>
 
 
                                      43
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The Company files a consolidated federal income tax return. Deferred income
taxes are provided for transactions which are recognized in different periods
for financial and tax reporting purposes. Such temporary differences arise
primarily from the deduction for tax purposes of certain oil and gas
development costs which are capitalized for financial statement purposes.
Management believes it is more likely than not that the deferred tax assets,
net of the valuation allowance, will be recovered.
 
  Total income tax differs from the amount computed by applying the Federal
income tax rate to income before income taxes and minority interest. The
reasons for the differences are as follows:
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED JUNE 30,
                                                          --------------------
                                                          1997   1996    1995
                                                          ----- ------  ------
<S>                                                       <C>   <C>     <C>
Statutory Federal income tax rate........................ 34.0%  34.0%   34.0%
Increase (Decrease) in tax rate resulting from:
  State income taxes, net of federal benefit.............  1.3%   7.0%      --
Non-deductable travel and entertainment..................  0.5%   0.3%    1.2%
Reduction of valuation allowance due to utilization of
 net operating loss carryforwards........................    -- (36.8%) (34.4%)
                                                          ----- ------  ------
                                                          35.8%   4.5%    0.8%
                                                          ===== ======  ======
</TABLE>
 
  The Company issued 3,400,000 shares of its common stock on July 20, 1994. As
a result of the common stock issuance, the Company has undergone an ownership
change. Therefore, the Company's ability to use its net operating loss
carryforwards for federal income tax purposes is subject to significant
restrictions.
 
  Section 382 of the Internal Revenue Code significantly limits the amount of
NOL and investment tax credit carryforwards that are available to offset
future taxable income and related tax liability when a change in ownership
occurs after December 31, 1986.
 
  At June 30, 1997, the Company had net operating loss carryforwards of
approximately $25.5 million which will expire in future years beginning in
1997. Due to provisions of Section 382, the Company is limited to
approximately $4.6 million utilization of NOL per year.
 
                                      44
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
10. SEGMENT INFORMATION
 
  The Company's operations are concentrated in two segments. The results of
operations of these business segments are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED JUNE 30,
                                                     --------------------------
                                                       1997     1996     1995
                                                     --------  -------  -------
<S>                                                  <C>       <C>      <C>
Revenues:
  Oil............................................... $ 14,865  $ 5,810  $ 3,643
  Gas...............................................   24,202    9,856    4,864
  Gas plants and gas gathering......................    6,652    8,719   10,705
  Other revenues....................................      365      116       97
                                                     --------  -------  -------
    Total revenues.................................. $ 46,084  $24,501  $19,309
                                                     ========  =======  =======
Operating profit before income
  Tax:
  Oil and gas....................................... $  9,342  $ 1,006  $     5
  Gas plants and gas gathering......................    2,002    1,716    2,265
                                                     --------  -------  -------
                                                       11,344    2,722    2,270
Unallocated corporate (income) expense..............     (363)    (116)      75
Other expenses......................................       --      153       --
Interest expense....................................    4,477    1,657    1,245
                                                     --------  -------  -------
Income before income taxes.......................... $  7,230  $ 1,028  $   950
                                                     ========  =======  =======
Identifiable assets:
  Oil and gas....................................... $171,392  $47,727  $50,442
  Gas plants and gas gathering......................    9,610   10,408   16,753
                                                     --------  -------  -------
                                                      181,002   58,135   67,195
Corporate assets....................................   41,646    9,090    7,455
                                                     --------  -------  -------
    Total assets.................................... $222,648  $67,225  $74,650
                                                     ========  =======  =======
Capital expenditures:
  Oil and gas....................................... $155,594  $ 6,934  $41,676
  Gas plants and gas gathering......................       84       65      225
                                                     --------  -------  -------
    Total capital expenditures...................... $155,678  $ 6,999  $41,901
                                                     ========  =======  =======
Depreciation, depletion and
amortization:
  Oil and gas....................................... $ 14,691  $ 6,933  $ 3,893
  Gas plants and gas gathering......................      883    1,215    1,376
                                                     --------  -------  -------
    Total depreciation, depletion
     and amortization............................... $ 15,574  $ 8,148  $ 5,269
                                                     ========  =======  =======
</TABLE>
 
  In 1997, 1996 and 1995, the Company had one customer which accounted for 18%
of its revenues, three customers which accounted for 33% of its revenues and
two customers which accounted for 42% of its revenues, respectively.
 
                                      45
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
11. CONTINGENCIES
 
  The Company has been named as a defendant in certain lawsuits incidental to
its business. Management does not believe that the outcome of such litigation
will have a material adverse impact on the Company.
 
12. SELECT QUARTERLY FINANCIAL DATA (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA) (Unaudited):
 
<TABLE>
<CAPTION>
                                                  QUARTER ENDED
                                   --------------------------------------------
                                                                         JUNE
                                   SEPTEMBER 30, DECEMBER 31, MARCH 31,   30,
                                       1996          1996       1997     1997
                                   ------------- ------------ --------- -------
<S>                                <C>           <C>          <C>       <C>
Revenues..........................    $6,211        $7,567     $8,111   $24,195
Operating Income..................    $  981        $1,771     $2,303   $ 2,175
Net Income........................    $  618        $1,116     $1,462   $ 1,449
Earnings per common equivalent
 share............................    $ 0.07        $ 0.12     $ 0.16   $  0.09
<CAPTION>
                                                                         JUNE
                                   SEPTEMBER 30, DECEMBER 31, MARCH 31,   30,
                                       1995          1995       1996     1996
                                   ------------- ------------ --------- -------
<S>                                <C>           <C>          <C>       <C>
Revenues..........................    $5,678        $6,444     $6,338   $ 6,041
Operating Income..................    $   38        $   95     $  542   $   353
Net Income (loss).................    $   13        $  (12)    $  557   $   424
Earnings per common equivalent
 share............................    $ 0.00        $ 0.00     $ 0.06   $  0.05
</TABLE>
 
13. SUPPLEMENTAL INFORMATION--(UNAUDITED)
 
 Oil and Gas Producing Activities:
 
  Included herein is information with respect to oil and gas acquisition,
exploration, development and production activities, which is based on
estimates of year-end oil and gas reserve quantities and estimates of future
development costs and production schedules. Reserve quantities and future
production are based primarily upon reserve reports prepared by the
independent petroleum engineering firms of Williamson Petroleum Consultants,
Inc., for fiscal 1996 and 1995, R.T. Garcia & Co. Inc. for fiscal 1995, and
Ryder Scott Company for fiscal 1997. These estimates are inherently imprecise
and subject to substantial revision.
 
  Estimates of future net cash flows from proved reserves of gas, oil,
condensate and natural gas liquids were made in accordance with Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas
Producing Activities." The estimates are based on prices at year-end.
Estimated future cash inflows are reduced by estimated future development and
production costs based on year-end cost levels, assuming continuation of
existing economic conditions, and by estimated future income tax expense. Tax
expense is calculated by applying the existing statutory tax rates, including
any known future changes, to the pre-tax net cash flows, less depreciation of
the tax basis of the properties and depletion allowances applicable to the
gas, oil, condensate and NGL production. The results of these disclosures
should not be construed to represent the fair market value of the Company's
oil and gas properties. A market value determination would include many
additional factors including: (i) anticipated future increases or decreases in
oil and gas prices and production and development costs; (ii) an allowance for
return on investment; (iii) the value of additional reserves, not considered
proved at the present, which may be recovered as a result of further
exploration and development activities; and (iv) other business risks.
 
                                      46
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Costs incurred (in thousands)
 
  The following table sets forth the costs incurred in property acquisition and
development activities:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED JUNE 30,
                                                         -----------------------
                                                           1997    1996   1995
                                                         -------- ------ -------
<S>                                                      <C>      <C>    <C>
Property acquisition:
  Proved properties..................................... $138,984 $  128 $25,072
  Unproved properties...................................    1,002    424  13,233
Exploration.............................................    1,576    824     530
Development.............................................   14,032  5,558   2,841
                                                         -------- ------ -------
                                                         $155,594 $6,934 $41,676
                                                         ======== ====== =======
</TABLE>
 
 Capitalized costs (in thousands)
 
  The following table sets forth the capitalized costs relating to oil and gas
activities and the associated accumulated depreciation, depletion and
amortization:
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED JUNE 30,
                                                    --------------------------
                                                      1997     1996     1995
                                                    --------  -------  -------
<S>                                                 <C>       <C>      <C>
Proved properties.................................. $228,675  $62,590  $56,300
Unproved properties................................    4,500   13,453   15,125
                                                    --------  -------  -------
Total capitalized costs............................  233,175   76,043   71,425
Accumulated depreciation, depletion and
 amortization......................................  (61,783) (28,316) (20,983)
                                                    --------  -------  -------
Net capitalized costs.............................. $171,392  $47,727  $50,442
                                                    ========  =======  =======
</TABLE>
 
 Results of operations for producing activities (in thousands)
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED JUNE 30,
                                                     ---------------------------
                                                      1997   1996(/1/) 1995(/1/)
                                                     ------- --------- ---------
<S>                                                  <C>     <C>       <C>
Revenues from oil and gas producing activities.....  $39,067  $15,666   $8,507
Production costs...................................   11,437    5,317    2,856
Depreciation, depletion and amortization...........   14,691    6,933    3,893
Income tax.........................................    4,529       --       --
                                                     -------  -------   ------
Results of operations from producing activities
 (excluding corporate overhead and interest costs).  $ 8,410  $ 3,416   $1,758
                                                     =======  =======   ======
</TABLE>
--------
(/1/)Net operating loss carryfowards were sufficient to offset income.
 
 Per unit sales prices and costs
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED JUNE 30,
                                                           --------------------
                                                            1997   1996   1995
                                                           ------ ------ ------
<S>                                                        <C>    <C>    <C>
Average sales price(/1/)
  Oil (per barrel)........................................ $17.41 $17.81 $16.89
  Gas (per MCF)........................................... $ 2.29 $ 2.02 $ 1.66
Average production cost per equivalent barrel............. $ 4.38 $ 4.49 $ 4.05
Average unit depletion rate per equivalent barrel......... $ 5.62 $ 5.86 $ 5.52
</TABLE>
--------
(/1/)Average sales price is exclusive of the effect of natural gas and crude
oil price hedges.
 
 
                                       47
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
RESERVES
 
  The Company's estimated total proved and proved developed reserves of oil and
gas are as follows:
 
<TABLE>
<CAPTION>
                                          YEAR ENDED JUNE 30,
                           ------------------------------------------------------
                                   1997                1996            1995
                           ----------------------  --------------  --------------
                            OIL     NGL     GAS     OIL     GAS     OIL     GAS
       DESCRIPTION         (MBBL)  (MBBL) (MMCF)   (MBBL)  (MMCF)  (MBBL)  (MMCF)
       -----------         ------  ------ -------  ------  ------  ------  ------
<S>                        <C>     <C>    <C>      <C>     <C>     <C>     <C>
Proved reserves at
 beginning of year.......   1,808     --   33,194  2,597   30,159    393   10,671
Revisions of previous es-
 timates.................  (1,187) 2,435   (2,773)  (534)   2,853    (61)    (988)
Extensions and discover-
 ies.....................     658     52    4,202     89    7,128    724    1,179
Production...............    (854)    --  (10,552)  (334)  (5,099)  (216)  (2,932)
Sales of reserves in-
 place...................  (1,260)    --  (16,194)   (14)  (2,023)    (1)      (3)
Purchase of reserves in
 place...................  12,842  1,536  120,063      4      176     --      163
Reserves added in Merg-
 ers.....................      --     --       --     --       --  1,758   22,069
                           ------  -----  -------  -----   ------  -----   ------
Proved reserves at end of
 year....................  12,007  4,023  127,940  1,808   33,194  2,597   30,159
                           ======  =====  =======  =====   ======  =====   ======
Proved developed re-
 serves--
  Beginning of year......   1,494     --   22,696  1,891   23,795    361    9,154
                           ======  =====  =======  =====   ======  =====   ======
End of year..............  10,162  3,705  117,914  1,494   22,696  1,891   23,795
                           ======  =====  =======  =====   ======  =====   ======
</TABLE>
 
 Discounted future net cash flows (in thousands)
 
  The standardized measure of discounted future net cash flows and changes
therein related to proved oil and gas reserves are shown below:
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED JUNE 30,
                                                ------------------------------
                                                  1997       1996       1995
                                                ---------  ---------  --------
   <S>                                          <C>        <C>        <C>
   Future cash inflows......................... $ 529,928  $ 113,550  $ 96,738
   Future production costs.....................  (183,479)   (33,117)  (34,093)
   Future income taxes.........................   (59,419)   (11,095)       --
   Future development costs....................   (32,237)    (8,959)   (7,738)
                                                ---------  ---------  --------
   Future net cash flows.......................   254,793     60,379    54,907
   10% discount factor.........................   (67,300)   (15,191)  (17,616)
                                                ---------  ---------  --------
   Standardized measure of discounted future
    net cash flows............................. $ 187,493  $  45,188  $ 37,291
                                                =========  =========  ========
</TABLE>
 
                                       48
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The following are the principal sources of change in the standardized
measure of discounted future net cash flows:
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED JUNE 30,
                                                    --------------------------
                                                      1997     1996     1995
                                                    --------  -------  -------
<S>                                                 <C>       <C>      <C>
Standardized measure--beginning of year............ $ 45,188  $37,291  $12,044
Sales, net of production costs.....................  (27,630) (10,349)  (5,651)
Purchases of reserves in-place.....................  151,836      246      162
Reserves received in Mergers.......................       --       --   34,039
Net change in prices and production costs..........   22,599   11,458   (8,326)
Net change in income taxes.........................  (20,265)  (2,958)      --
Extensions, discoveries and improved recovery, net
 of future production and development costs........   12,555    7,709    5,085
Changes in estimated future development costs......   (3,034)     497   (3,148)
Development costs incurred during the period.......    9,124      883      629
Revisions of quantity estimates....................   27,102     (438)      (4)
Accretion of discount..............................    4,518    3,729    1,204
Sales of reserves in-place.........................  (16,140)  (1,614)      (5)
Changes in production rates and other..............  (18,360)  (1,266)   1,262
                                                    --------  -------  -------
Standardized measure--end of year.................. $187,493  $45,188  $37,291
                                                    ========  =======  =======
</TABLE>
 
 
 
                                      49
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  On or about June 18, 1997 the Company replaced the firm of Deloitte and
Touche LLP as its principal independent accountant and auditors to audit all
the Company's financial statements with the firm of KPMG Peat Marwick LLP. The
decision to make this change was influenced by the acquisition of Partnership
properties and interests, which were previously audited by KPMG Peat Marwick
LLP. The Company does not and has not during the past three years had
disagreements with Deloitte and Touche LLP concerning their audit or the
application of accounting principles according to GAAP.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  Incorporated by reference to the Proxy Statement for the 1997 Annual Meeting
of Shareholders to be held on November 21, 1997, pursuant to Regulation 14A.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  Incorporated by reference to the Proxy Statement for the 1997 Annual Meeting
of Shareholders to be held on November 21, 1997, pursuant to Regulation 14A.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  Incorporated by reference to the Proxy Statement for the 1997 Annual Meeting
of Shareholders to be held on November 21, 1997, pursuant to Regulation 14A.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Incorporated by reference to the Proxy Statement for the 1997 Annual Meeting
of Shareholders to be held on November 21, 1997, pursuant to Regulation 14A.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
  (a) 1. and 2. Financial Statements. See index to Consolidated Financial
                Statements and Supplemental Information in Item 8, which
                information is incorporated herein by reference.
 
  (b) Report on Form 8-K (incorporated herein by reference to report on Form
              8-K dated September 30, 1997, filed on October 15, 1997)
 
  3. Exhibits
 
  3.1   Certificate of Incorporation of Bellwether Exploration Company
        (incorporated by reference to Exhibit 3.1 to the Company's
        Registration Statement No. 33-76570)
 
  3.2  Certificate of Amendment to Certificate of Incorporation (previously
       filed with Form 10-K dated September 29, 1997)
 
  3.3  Certificate of Designation, Preferences and Rights of Series A
       Preferred Stock (previously filed with Form 10-K dated September 29,
       1997)
 
  3.4  By-laws of Bellwether Exploration Company (incorporated by reference to
       Exhibit 3.2 to the Company's Registration Statement No. 33-76570)
 
                                      50
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY
 
  4.1  Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to
       the Company's Registration Statement on Form S-1, File No. 33-76570)
 
  4.2  The Company's 1996 Stock Incentive Plan (incorporated by reference to
       Exhibit 10.20 to the Company's Registration Statement on Form S-1, File
       No. 33-21813)
 
  4.3  Indenture dated April 9, 1997 among the Company, a Subsidiary Gurantor
       and Bank of Montreal Trust Company (Incorporated herin by reference to
       Exhibit 4.2 to the Company's registration statement on Form S-1
       (Registration No. 333-21813))
 
  4.4  First Supplemental Indenture dated April 21, 1997 among the Company,
       Odyssey Petroleum Company, Black Hawk Oil Company, 1989-I TEAI Limited
       Partnership and Bank of Montreal Trust Company, as Trustee
       (incorporated by reference to Exhibit 99.2 on the Company's Form 8-K
       Current Report filed on April 23, 1997)
 
  4.5  Shareholders Rights Agreement between the Company and American Stock
       Transfer & Trust Company (Incorporated herein by reference to the
       Company's Registration Statement on Form 8-A as filed with the
       Securities and Exchange Commission on September 19, 1997)
 
  4.6  Warrant to Torch Energy Dated April 9, 1997 (previously filed with Form
       10-K dated September 29, 1997)
 
  10.1 1988 Non-qualified Stock Option Plan (incorporated by reference to
       Exhibit 10.37 to the Company's Annual Report on Form 10-K for the
       fiscal year ended June 30, 1988)
 
  10.2 Stock Option Agreement dated March 25, 1988 between the Company and J.
       Darby Sere' (incorporated by reference to Exhibit 10.38 to the
       Company's Annual Report on Form 10-K for the fiscal year ended June 30,
       1988)
 
  10.3 Administrative Services Agreement with Torch Energy Advisors
       Incorporated commencing January 1, 1994 (incorporated by reference to
       Exhibit 94-10-3 to the Company's Report on Form 10-Q for the quarter
       ended March 31, 1994)
 
  10.4 Amended Joint Venture Agreement dated July 29, 1993 between the Company
       and NGL Associates (incorporated by reference to Exhibit 10.93.5 to the
       Company's Report on Form 10-K dated July 29, 1993)
 
  10.5 Amended Joint Venture dated July 15, 1993 between Torch Energy
       Marketing, Inc. and NGL Associates (incorporated by reference to
       Exhibit 10.93.8 to the Company's report on Form 8-K dated December 31,
       1993)
 
  10.6 Agreement and Plan of Merger dated December 15, 1993 among the Company,
       BEC Acquisitions, Inc. and Associated Gas Resources, Inc. (incorporated
       by reference to Exhibit 10.93.7 to the Company's Report on Form 8-K
       dated December 31, 1993)
 
  10.7 Purchase and Sale Agreement dated December 27, 1993 between Torch
       Energy Marketing, Inc. and Associated Gas Resources, Inc. (incorporated
       by reference to Exhibit 10.93.9 to the Company's Report on Form 8-K
       dated December 31, 1993)
 
  10.8 Registration Rights Agreement dated December 31, 1993 among the Company
       and the Stockholders of Associated Gas Resources, Inc. (incorporated by
       reference to Exhibit 10.1 to the Company's Registration Statement No.
       33-76570)
 
  10.9 1994 Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to
       the Company's Registration Statement No. 33-76570)
 
  10.10 Amendment dated March 14, 1994 to the Amended Joint Venture Agreement
        dated as of July 29, 1993 between the Company and NGL Associates
        (incorporated by reference to Exhibit 10.11 to the Company's
        Registration Statement No. 33-76570)
 
                                      51
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY
 
  10.11 Amendment dated March 14, 1994 to the Amended Joint Venture Agreement
        dated as of July 15, 1993 between Torch Energy Marketing, Inc. and NGL
        Associates (incorporated by reference to Exhibit 10.12 to the
        Company's Registration Statement No. 33-76570)
 
  10.12 Asset Purchase and Merger Agreement with Odyssey Partners, Ltd. dated
        July 19, 1994 (incorporated by reference to Exhibit 2.1 to the
        Company's Registration Statement No. 33-76570)
 
  10.13 Registration Rights Agreement among the Company, Allstate Insurance
        Company and the former owners of Odyssey Partners, Ltd. (incorporated
        by reference to Exhibit 10.4 to the Company's Registration Statement
        No. 33-76570)
 
  10.14 Assignment of gas purchase contract from Texas Gas Transmission
        Corporation to Bellwether (incorporated by reference to Exhibit 96-10-
        4 to the Company's Report on Form 10-Q for the quarter ended March 31,
        1997)
 
  10.15 Credit Agreement among Bellwether Eploration Company as borrower and
        The Chase Manhattan Bank as agent(incorporated by reference to Exhibit
        10.1 to the Company's Report on Form 10-Q for the quarter ended
        September 30, 1996)
 
  10.16 Acquisition Agreement dated March 31, 1997 among Bellwether
        Exploration Company, Program Acquisition Company and the other parties
        thereto. (incorporated by reference to Exhibit 2.2 of the Company's
        Registration Statement on Form S-1 (Registration No. 333-21813) filed
        on April 3, 1997)
 
  10.17 Credit Agreement dated April 21, 1997 among the Company, Odyssey
        Petroleum Company, Black Hawk Oil Company, 1989-I TEAI Limited
        Partnership, Morgan Guarantee Trust Company of New York, as
        administrative Agent, and certain banking institutions (incorporated
        by reference to the Company's Form 8-K Current Report as filed with
        the Commission on April 23, 1997)
 
  10.18 Purchase and Sale Agreement dated June 9, 1997 among Bellwether
        Exploration Company, Black Hawk Oil Company, 1988-II TEAI Limited
        Partnership, 1989-I TEAI Limited Partnership, TEAI Oil and Gas
        Company, and the other parties thereto as Sellers, and Jay Resources
        Corporation as Buyer (previously filed with Form 10-K dated September
        29, 1997)
 
  16.1 Letter from predecessor auditors regarding change in certifying
       accountant (incorporated by reference to Exhibit 16-1 to the Company's
       Form 8K/A-1 dated July 8, 1997)
 
  21.1 Subsidiaries of Bellwether Exploration Company--Included herewith.
 
  23   Consents of experts:
 
  23.1 Consent of Williamson Petroleum Consultants, Inc. Previously filed with
       Form 10-K dated September 29, 1997.
 
  23.2 Consent of R.T. Garcia & Co. Inc. Previously filed with Form 10-K dated
       September 29, 1997.
 
  23.3 Consent of Ryder Scott Company. Previously filed with Form 10-K dated
       September 29, 1997.
 
  23.4 Consent of KPMG Peat Marwick LLP
 
  27   Financial Data Schedule
 
                                      52
<PAGE>
 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
 
                                          Bellwether Exploration Company
 
 
                                          By___________________________________
                                                       J. Darby Sere
                                            Chairman of Board of Directors and
                                                  Chief Executive Officer
 
Dated October 20, 1997
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----
<S>                                  <C>                           <C>
  /s/ J. Darby Sere                  Chairman of the Board of       October 20, 1997
------------------------------------  Directors and Chief    
       J. Darby Sere                  Executive Officer       
                                                              
                                                              
  /s/ J. P. Bryan                    Director                       October 20, 1997
------------------------------------
       J. P. Bryan                            

  /s/ Charles C. Green, III          Director                       October 20, 1997 
------------------------------------
       Charles C. Green, III         

  /s/ Michael B. Smith               Vice President                 October 20, 1997
------------------------------------
       Michael B. Smith                             

  /s/ Vincent H. Buckley             Director                       October 20, 1997
------------------------------------
       Vincent H. Buckley                     

  /s/ A. K. McLanahan                Director                       October 20, 1997
------------------------------------
       A. K. McLanahan               

  /s/ Dr. Jack Birks                 Director                       October 20, 1997
------------------------------------
       Dr. Jack Birks                

  /s/ Michael D. Watford             Director                       October 20, 1997
------------------------------------
       Michael D. Watford            

  /s/ C. Barton Groves               Director                       October 20, 1997
------------------------------------
       C. Barton Groves              

  /s/ Habib Kairouz                  Director                       October 20, 1997
------------------------------------
       Habib Kairouz                 
</TABLE>
 
                                       53