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

                                   FORM 10-K
(Mark One)
(X)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the fiscal year ended 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)

            Delaware                                     76-0437769
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)
 
 1331 Lamar, Suite 1455, Houston, Texas                    77010
(Address of principal executive offices)                 (Zip Code)

      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:


     Title of each class                                 Name of each exchange
     -------------------                                 on which registered
                                                         ---------------------

Common Stock, $0.01 par value                                  NASDAQ/NMS
10 7/8% Senior Subordinated Notes due 2007                        None      

     Indicate by check mark whether the registrant (1) has filed all reports
required 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
                    FOR THE FISCAL YEAR ENDED JUNE 30, 1997

                               TABLE OF CONTENTS
 
                                                                         PAGE
                                                                        NUMBER
                                                                        ------
PART I
 
  Item 1.     Business..................................................   3
  Item 2.     Properties................................................  12
  Item 3.     Legal Proceedings.........................................  22
  Item 4.     Submission of Matters to a Vote of Security Holders.......  22

PART II

  Item 5.     Market for the Registrant's Common Equity 
               and Related Stockholder Matters..........................  23
  Item 6.     Selected Financial Data...................................  24
  Item 7.     Management's Discussion and Analysis of Financial
              Condition and Results of Operations.......................  25
  Item 8.     Financial Statements and Supplementary Data...............  33
  Item 9.     Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure.......................  65

PART III

  Item 10.    Directors and Executive Officers of the Registrant........  65
  Item 11.    Executive Compensation....................................  65
  Item 12.    Security Ownership of Certain Beneficial Owners 
               and Management...........................................  65
  Item 13.    Certain Relationships and Related Transactions............  65

PART IV

  Item 14.    Exhibits, Financial Statement Schedules and Reports
               on Form 8-K..............................................  65

 --    Signatures
<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 

                                       3
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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 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 of the 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 valued at $1.2 million 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 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 June, 1997 for
$14.8 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.

                                       4
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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.

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 

                                       5
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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 

                                       6
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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.
 
          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 

                                       7
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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 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 

                                       8
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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.

                                       9
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES 


          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 

                                       10
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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 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.

                                       11
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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, 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
                                                      Reserves                  1997 Net Production*
                                             ---------------------------    --------------------------
FIELD                                         OIL & NGL         GAS          OIL & NGL          GAS
                                               (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 Mexico         962          5,191              65             368
High Island Block A-334 field, Gulf of Mexico       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 Transaction from April 1, 1997
     to June 30, 1997.

     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 

                                       12
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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
Commission ("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.

                                              Gross     Net
                                             -------  -------
 
          Developed Acreage...............  512,431  115,753
          Undeveloped Acreage.............   41,694   11,726
                                            -------  -------
            Total.........................  554,125  127,479
                                            =======  =======
 
     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

                                       13
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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 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.

                                              Gross     Net
                                             -------  -------
 
          Oil Wells.......................    531.00    93.69
          Gas Wells.......................  1,454.00   159.15
                                            --------   ------
            Total.........................  1,985.00   252.84
                                            ========   ======
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 nine gross (0.51 net) wells drilling at June 30, 1997.
The following table sets forth the results of drilling activity by the 

                                       14
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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

                     GROSS                                 NET
          -----------------------------       ----------------------------
                        DRY                                 DRY    
          PRODUCTIVE   HOLES      TOTAL       PRODUCTIVE   HOLES     TOTAL
          -----------------------------       ----------------------------    
   1995       3          4(1)     7            .27        .65       .92
   1996       1          3          4            .06        .24       .30
   1997       2          4          6            .45        .55      1.00
                                        
 
                               DEVELOPMENT WELLS

                     GROSS                                 NET
          -----------------------------       ----------------------------
                        DRY                                 DRY    
          PRODUCTIVE   HOLES      TOTAL       PRODUCTIVE   HOLES     TOTAL
          -----------------------------       ----------------------------    
   1995       1          2          3            .30        .18       .48
   1996      21          1         22           1.66        .90      2.56
   1997      49          2         51           5.47        .63      6.10


(1) Includes well drilled on the Serj Permit in Tunisia.
 

                                       15
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


Gas Plant and Gas Gathering Facilities

As of June 30, 1997 the Company owned interests in the following gas plant and
gas gathering systems:
 
                                                          1997
                                          Capacity     Throughput      Ownership
Facility        State       Operator       MMCFD         MMCFD         Interest
--------        -----       --------     --------     ----------       ---------

Snyder Gas                 Torch Energy
Plant            TX        Marketing Inc.    60           18             11.98%
 
Diamond M-                 Exxon Company,
Sharon Ridge               U.S.A.
Gas Plant(1)     TX                          (1)          (1)              (1)
 
Monroe Gas                West Monroe Gas
Gathering                 Gathering Corp.,  
System(2)        LA       a subsidiary of    (2)          (2)              100%
                          the Company
                                        

/(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.

                                       16
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


     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 proved reserves of Bellwether will generally decline as
reserves are depleted. The Company therefore must locate and develop or acquire
new oil and gas reserves to replace those being depleted by production. Because
the Company's reserves on a pro forma basis are characterized by relatively
rapid decline rates, without successful exploration, development or acquisition
activities, the 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 

                                       17
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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, the proceeds of 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

                                       18
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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

                                       19
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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 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 

                                       20
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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.

     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 

                                       21
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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.

                                       22
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
                                        

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.

                                    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.

                                                  Sales Price
                                                 -------------
                                                 High      Low
                                                 ----      ---
          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   $ 5.63
            March 31, 1997.....................  $11.50   $ 7.88
            June 30, 1997......................  $10.25   $ 7.25 
 

                                       23
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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).

                                       24
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


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


     Bellwether is an independent energy company primarily engaged in the
acquisition, exploitation, development and exploration of oil and gas
properties. The Company has grown and diversified its operations through the
acquisition of oil and gas properties and the subsequent 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. Fluctuations in oil
and gas prices have also significantly affected the Company's results.

     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.
 

Capital Resources and Liquidity

     Sources of Capital

     The Company and certain third parties were the sellers under a gas purchase
contract whereby another party had an obligation to purchase, until May 31,
1999, gas produced and purchased by the Company and gas produced by third
parties from the West Monroe field in Union Parish, Louisiana at a price of
$4.50 per MMBTU.  Bellwether supplied a significant portion of the gas sold
pursuant to the gas purchase contract.  In March 1996, in exchange for
Bellwether's agreement to assume the purchase obligation under the gas 

                                       25
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


purchase contract, Bellwether was paid $9.9 million. From the proceeds, $9.5
million was repaid on the Company's credit facility.
 
     During fiscal years 1997 and 1996, the Company's net cash flows provided by
operating activities before changes in assets and liabilities were $23.1 million
and $9.1 million, respectively.

     Also in fiscal 1997, the Company borrowed $57 million under credit
facilities, and repaid $55 million. As part of the financing of the Partnership
Transactions, the Company issued $100.0 million of 10-7/8% Senior Subordinated
Notes and used net proceeds of $34.1 million from the issuance of 4.7 million
shares of common stock.

     Uses of Capital

     During the past three fiscal years, the Company's primary uses of its
capital have been to fund the acquisitions of Odyssey, Hampton and the
Partnership Transactions.  During fiscal 1997, 1996 and 1995 capital
expenditures of $15.6 million, $6.4 million and $3.4 million, respectively, were
incurred in connection with the development and exploration of the Company's
properties.

     Financing Activities

     On February 28, 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 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 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 redetermined 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 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 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 

                                       26
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


Notes is payable semi-annually on April 1 and October 1 commencing on October 1,
1997. 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 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.

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 in 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 56,000 MCF of natural gas per day for July to October 1997 at prices 
ranging from $1.98 to $2.69 per MCF.

     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.

     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 B 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 

                                       27
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


disclose within the financial statements the number of shares issued upon
conversion, excerise, 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.

     Outlook

     The Company has adopted a $20.6 million capital budget for fiscal 1998,
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.  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.

                                       28
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


     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
exploration and development.  Thus, increased prices may generate increased
revenue without necessarily increasing profitablity.  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 on the Company's operating results.

                                       29
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


Results of Operations

     The following table sets forth certain oil and gas production information
of the Company for the periods presented.

                                                       Year Ended June 30,
                                                  ----------------------------
                                                    1997      1996      1995
                                                  --------  --------  --------
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 depletion rate per equivalent
  barrel (6 MCF equal 1 barrel).................. $  5.62   $   5.86  $   5.52

/(1)/ Average sales price is exclusive of the effect of natural gas and crude
      oil price swaps.

Operations of the Gas Plant are summarized as follows:

                                                       Year Ended June 30,
                                                  ----------------------------
                                                    1997      1996      1995
                                                  --------  --------  -------- 

Product sales volume - (MBBLS)                         319       321       382
 
Average sales price per barrel................... $  16.77  $  13.01  $  11.96
 
Revenues:  ($000)
  Product sales.................................. $  5,351  $  4,175  $  4,568
  Operating fees.................................      680       690       786
  Residual gas sales.............................      621       480       324
                                                  --------  --------  -------- 
Total revenues...................................    6,652     5,345     5,678
 
Operating expenses ($000)........................    3,322     2,768     3,004
                                                  --------  --------  -------- 
Operating margin ($000).......................... $  3,330  $  2,577  $  2,674
                                                  ========  ========  ======== 

                                       30
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


Operations of the Gathering System, acquired in December 1994, are summarized as
follows:

                                                     1997      1996(1)   1995
                                                   --------  --------  -------- 
 
     Net throughput (MMCF per day)...............        --       4.0       4.1
 
     Gas gathering revenues ($000)...............  $     --  $  3,374  $  5,027
     Operating expenses ($000)...................        --     2,417     3,074
                                                   --------  --------  -------- 
     Operating margin ($000).....................  $     --  $    957  $  1,953
                                                   ========  ========  ========

(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).

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 attributable
primarily to increased production in the fourth quarter of fiscal 1997 from the
Partnership Transactions.

     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.  The Company's mergers with
Odyssey and Hampton were responsible for the increased revenues during fiscal
1995 and 1996. During the three year period, the volatility of oil and gas
prices 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.
During fiscal 1997, the Company utilized various hedging transactions to manage
a portion of the risks associated with natural gas and crude oil volatility.  As
a result of these hedges, oil and gas revenues were reduced by $18,000.

     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 last 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 price.

     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 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 

                                       31
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


Hampton mergers. Such mergers were included in operations for 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
prices.

     Gas gathering expenses in fiscal 1996 of $2.4 million are 23% under the
prior year total of $3.1 million, due to the Company's agreement to accept
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.

     Depreciation, depletion and amortization of $8.1 million reflects 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 and $0.3 million and $0.6 million of the increase in
general and administrative expenses in fiscal years 1997, 1996, and 1995,
respectively, and is due to the significant 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 increase is 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 $198,000, $126,000 and $9,000 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 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.

                                       32
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

                                                                      PAGE
                                                                      NUMBER
                                                                      ------

Independent Auditors' Report..........................................  34

Financial Statements:

 Consolidated Balance Sheets as of June 30, 1997 and 1996.............  35

 Consolidated Statements of Operations for the Years Ended
  June 30, 1997, 1996 and 1995........................................  37

 Consolidated Statements of Changes in Stockholders'
  Equity for the Years Ended June 30, 1997, 1996 and 1995.............  38

 Consolidated Statements of Cash Flows for the Years Ended
  June 30, 1997, 1996 and 1995........................................  39

 Notes to Consolidated Financial Statements...........................  41

                                       33
<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.



/s/ KPMG PEAT MARWICK LLP

Houston, Texas

September 29, 1997

                                       34
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                                    ASSETS
                            (Amounts in thousands)


                                                            JUNE 30,   JUNE 30,
                                                             1997       1996
                                                           ---------  ---------
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
                                                           =========  =========


                See Notes to Consolidated Financial Statements.

                                       35
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                     LIABILITIES AND STOCKHOLDERS' EQUITY
                     
               (Amounts in thousands, except share information)


                                                            JUNE 30,   JUNE 30,
                                                             1997       1996
                                                           ---------  ---------
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
                                                           =========  =========


                See Notes to Consolidated Financial Statements.

                                       36
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (Amounts in thousands, except per share data)


                                                       Year Ended June 30,
                                               --------------------------------
                                                 1997        1996        1995
                                               --------    --------    --------
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 B 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
                                               ========    ========    ========


                See Notes to Consolidated Financial Statements.

                                       37
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CHANGES
                            IN STOCKHOLDERS' EQUITY
                            (Amounts in thousands)

<TABLE> 
<CAPTION> 
                                     COMMON  STOCK      PREFERRED STOCK    ADDITIONAL               TREASURY 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.........................   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.

                                       38
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Amounts in Thousands)


                                                       Year Ended June 30,
                                               --------------------------------
                                                 1997        1996        1995
                                               --------    --------    --------
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...................                                   
  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)
                                               --------    --------    --------


                See Notes to Consolidated Financial Statements.

                                       39
<PAGE>
 
                BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                            (Amounts in Thousands)


                                                       Year Ended June 30,
                                               --------------------------------
                                                 1997        1996        1995
                                               --------    --------    --------
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
                                               ========    ========    ========


                See Notes to Consolidated Financial Statements.

                                       40
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

                  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 and
     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 

                                       41
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     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 plants
     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 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, 1997 and 1996.
 
     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.

                                       42
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     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 incude 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
     activity 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.

     Income Taxes

     Deferred 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 

                                       43
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     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 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 was
     issued as part of the costs of the Odyssey and Hampton mergers in 1995,
     respectively.
 
     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 

                                       44
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     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
     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 all 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).
 

                                       45
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


                                                          (Unaudited)
                                                   ------------------------
                                                      Year Ended June 30,
                                                   ------------------------
                                                      1997           1996
 
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 common share and
  common shares equivalent, fully diluted          $    1.38      $    1.71
                                                   =========      =========

                                       46
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            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
     SUBORDINATED NOTES DUE 2007 ARE AS FOLLOWS:
     CONDENSED CONSOLIDATING BALANCE SHEETS - UNAUDITED

        AS OF JUNE 30, 1997
          (IN THOUSANDS)

<TABLE> 
<CAPTION> 
                                                                  GUARANTOR       NON-GUARANTOR
                                                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 liabilities.....................  $   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 liabilities...................       1,910               -                 -              (955)                955
Total stockholders' equity....................      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       NON-GUARANTOR
                                                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) before 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>

                                       47
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS B - 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.................................................     $   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 INVESTING ACTIVITIES:
Additions to oil and gas properties........................       (11,946)         (7,894)           (971)           -      (20,811)
Acqusition of partnership 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 FINANCING 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 (decrease) 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>

                                       48
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            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 liabilities                       $  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 liabilities                        2,115             -             --           (732)        1,383
Total stockholders' equity                        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) before income taxes                           (203)           770          814         (353)           1,028
                                                              --------       --------       ------        -----         --------
Income taxes                                                      (404)           285          141           24               46
                                                              --------       --------       ------        -----         --------
Net earnings                                                  $    201       $    485       $  673        $(377)        $    982 
                                                              ========       ========       ======        =====         ========
</TABLE>

                                       49
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - UNAUDITED
     FOR THE YEAR ENDED JUNE 30, 1996
             (IN THOUSANDS)
<TABLE> 
<CAPTION> 
                                                                             GUARANTOR     NON GUARANTOR                          
                                                            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 operating activities                       5,948        1,747              2,146        (2,356)        7,485  
                                                             --------      -------           --------      --------      --------
                                                                                                                                   
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                              
Additions to oil and gas properties                            (5,432)      (1,567)                 -             -        (6,999) 
Proceeds from sales of properties                                 644            -                  -             -           644  
Proceeds from gas contract assumption                           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 FINANCING ACTIVITIES:                                                                                              
Proceeds from borrowings                                      (11,500)           -                  -             -       (11,500) 
Equity contributions                                                -                          (2,356)        2,356             -
Payments of long-term debt                                          -            -                  -             -             -  
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>

                                       50
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY
 
            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 not paid 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 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; 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
     partnerships 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.

                                       51
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
     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 $117,000, $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 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 sold 4.7 million shares of common stock. Of the
    net proceeds to the Company, $34.1 million was used in financing the
    Partnership Transactions. Also sold in the Offering were 719,264 shares sold
    by certain shareholders.

                                       52
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

     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:

                                                 Number         Option
                                                of shares     Price Range
                                                ---------   ------------------
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                                         364,500    $ 6.25 -  $10.1875
  Surrendered                                     (10,000)   $7.625
  Exercised                                       (82,500)   $5.625 -  $ 5.75
                                             ------------   ------------------
Balance at June 30, 1997                        1,192,325    $5.625 -  $10.1875
                                             ============   ==================
Exercisable at June 30, 1997                    1,090,435    $ 3.00 -  $  7.75
                                             ============   ==================

     Detail of stock options outstanding and options excercisable at
     June 30, 1997 follows:

<TABLE> 
<CAPTION> 
                                                    Outstanding                             Excercisable
                                  -------------------------------------------------    ------------------------
                                               Weighted-Average    Weighted-Average            Weighted-Average
                                                Remaining Life         Exercise                    Excerise 
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>

                                       53
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


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):

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

Net Income                           As reported        $  4,645    $    982
                                     Pro forma          $  3,853    $    921
 
Primary earnings per share           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

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 6,888
     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 revenues 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.

                                       54
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     DETERMINATION OF FAIR VALUES OF FINANCIAL INSTRUMENTS

     Fair value for cash, short-term investments, receivables and payables
     apparoximates 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>
                                       June 30, 1997                June 30, 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                    115,300        120,580        13,048        13,048
   (See Note 8)

</TABLE>

8.   LONG-TERM DEBT

     Long-term debt is comprised of the following at June 30, 1997 and 1996 (in
     thousands):

                                                          1997         1996
                                                        ---------    ---------
 
     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
                                                        =========    =========

     Debt maturities by fiscal year are as follows (amounts in thousands):

     1998..........................   $     --
     1999..........................         --
     2000..........................         --
     2001..........................         --
     2002..........................     15,300
     Thereafter....................    100,000
                                      --------
                                      $115,300
                                      ========

     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.

                                       55
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     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 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.

                                       56
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9.   INCOME TAXES (IN THOUSANDS)

     Income tax expense is summarized as follows:

                                                      Year Ended June 30,
                                               --------------------------------
                                                  1997       1996       1995
                                               ---------   ---------  ---------
     Current                       
       Federal...............................  $     (12)  $     126          9
       State.................................         35         103        ---
                                   
     Deferred - Federal and State............      2,562        (183)       ---
                                               ---------   ---------  ---------
     Total income tax expense................  $   2,585   $      46  $       9
                                               =========   =========  =========

     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 are as follows:

                                                            At June 30,
                                                      ---------------------
                                                         1997       1996
                                                      ---------   --------- 
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)
 
Valuation allowances................................     (2,894)     (2,894)
                                                      ---------   --------- 
Net deferred income tax liability...................  $  (5,521)  $  (2,861)
                                                      =========   =========

     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 

                                       57
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     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 allowances, 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%           .3 %         1.2 % 
                                                                                            
          Reduction of valuation allowance due                                              
            to utilization of net operating loss                                            
            carryforwards............................     ---         (36.5)%       (34.4)% 
                                                      ----------    ----------    ----------
                                                         35.8%          4.8 %         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 carryfowards for federal income tax purposes is subject to significant
     restrictions.

     Section 382 of the Internal Revenue Code significantly limits the amount of
     net operating loss carryforwards 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.

                                       58
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            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):


                                                      Year Ended June 30,
                                               --------------------------------
                                                  1997       1996       1995
                                                ---------  ---------  ---------
      Revenues:                                
        Oil...................................  $  14,865  $   5,810  $   4,864
        Gas...................................     24,202      9,856      3,643
        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...........................  $  12,939  $   3,416  $   1,758
        Gas plants and gas gathering..........      2,447      2,319      3,251
                                                ---------  ---------  ---------
                                                   15,386      5,735      5,009
      Unallocated corporate expenses..........      3,679      2,897      2,814
      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
                                                ---------  ---------  ---------
                                                $ 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
                                                ---------  ---------  ---------
                                                $  15,574  $   8,148  $   5,269
                                                =========  =========  =========

                                       59
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     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.

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):
                                               Quarter Ended 
                             --------------------------------------------------
                             September 30,  December 31,   March 31,  June 30, 
                                  1996           1996         1997       1997
                              -------------  ------------   ---------  --------
     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

                              September 30,  December 31,   March 31,  June 30, 
                                  1995           1995         1996       1996
                              -------------  ------------   ---------  --------
     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
     

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.

                                       60
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     Costs incurred (in thousands)

     The following table sets forth the costs incurred in property acquisition
     and development activities:

                                                      Year Ended June 30,
                                               --------------------------------
                                                  1997       1996       1995
                                               ----------  ---------  ---------
 
     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
                                               ==========  =========  =========

     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:

                                                      Year Ended June 30,
                                               --------------------------------
                                                  1997       1996       1995
                                               ----------  ---------  ---------

     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
                                               ==========  =========  =========

                                       61
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     Results of operations for producing activities (in thousands):

                                                      Year Ended June 30,
                                               --------------------------------
                                                  1997       1996 (1)   1995 (1)
                                               ----------  ---------  ---------
     Revenues from oil and gas producing   
       activities............................  $   39,067  $  15,666  $   8,507
                                           
     Production costs........................      11,437      5,317      2,856

     Income tax..............................       9,892        ---        ---

     Depreciation, depletion and           
       amortization..........................      14,691      6,933      3,893
                                               ----------  ---------  ---------
     Results of operations from producing  
       activities (excluding corporate     
       overhead and interest costs)..........  $    3,047  $   3,416  $   1,758
                                               ==========  =========  =========

     (1) Net operating loss carryforwards were sufficient to offset income.

     Per unit sales prices and costs:

                                                      Year Ended June 30,
                                               --------------------------------
                                                  1997       1996       1995
                                               ----------  ---------  ---------
     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


     /(1)/  Average sales price is exclusive of the effect of natural gas and
            crude oil price swaps.

                                       62
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            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,                                  
                                              -------------------------------------------------------------------------------      
Description                                                  1997                         1996                  1995               
------------------------------------------------------------------------------------------------------------------------------     
                                                 Oil         NGL         Gas         Oil         Gas          Oil       Gas        
                                                (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 estimates                     247       2,435      (4,208)       (534)      2,853        (61)       (988)    
                                                                                                                                   
Extensions and discoveries                          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                       (1,158)        ---     (14,759)        (14)     (2,023)        (1)         (3)    
                                                                                                                                   
Purchase of reserves in place                    11,306       1,536     120,063           4         176        ---         163     
                                                                                                                                   
Reserves added in Mergers                           ---         ---         ---         ---         ---      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 reserves -                                                                                                        
  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>

                                       63
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     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:

                                                      Year Ended June 30,
                                               --------------------------------
                                                  1997       1996       1995
                                               ----------  ---------  ---------
     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
                                               ==========  =========  =========

     The following are the principal sources of change in the standardized
     measure of discounted future net cash flows:

                                                      Year Ended June 30,
                                               --------------------------------
                                                  1997       1996       1995
                                               ----------  ---------  ---------
     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      9,679     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               34,386       (438)        (4)
     Accretion of discount                          4,518      3,729      1,204
     Sales of reserves in-place                   (14,532)    (1,614)        (5)
     Changes in production rates and other         14,332     (1,266)     1,262 
                                               ----------  ---------  ---------
     Standardized measure - end of year        $  187,493  $  45,188  $  37,291
                                               ==========  =========  =========

                                       64
<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 any
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.


     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)

                                       65
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY


     3.2  Certificate of Amendment to Certificate of Incorporation
 
     3.3  Certificate of Designation, Preferences and Rights of Series A 
          Preferred Stock

     3.4  By-laws of Bellwether Exploration Company (incorporated by reference 
          to Exhibit 3.2 to the Company's Registration Statement No. 33-76570)
   
     4.1  Speciment 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 
          Guarantor and Bank of Montreal Trust Company (incorporated herein 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
 
     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)

                                       66
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY


     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)
 
     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)

                                       67
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY


     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) 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.
            
     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 June 30, 1994)
 
     16.2   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.

                                       68
<PAGE>
 
                        BELLWETHER EXPLORATION COMPANY
 

     23     Consents of experts:

     23.1   Consent of Williamson Petroleum Consultants, Inc.

     23.2   Consent of R.T. Garcia & Co. Inc.

     23.3   Consent of Ryder Scott Company
 
     23.4   Consent of KPMG Peat Marwick LLP
 
     27     Financial Data Schedule

                                       69
<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

                                       /S/ J. DARBY SERE'
                                       ______________________________________
                                       J. Darby Sere'
                                       Chairman of Board of Directors
                                       and Chief Executive Officer
 

Dated September 26, 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.

     SIGNATURES                      TITLE                          DATE
     ----------                      -----                          ---- 
 
/s/ J. DARBY SERE'
__________________________    Chairman of Board of Directors  September 26, 1997
J. Darby Sere'                and Chief Executive Officer


/s/ J.P BRYAN
__________________________    Director                        September 26, 1997
J.P. Bryan


/s/ CHARLES C. GREEN
__________________________    Director                        September 26, 1997
Charles C. Green


/s/ MICHAEL B. SMITH
__________________________    Vice President                  September 26, 1997
Michael B. Smith


/s/ VINCENT H. BUCKLEY
__________________________    Director                        September 26, 1997
Vincent H. Buckley


/s/ A.K. MCLANAHAN
__________________________    Director                        September 26, 1997
A. K. McLanahan


/s/ DR. JACK BIRKS
__________________________    Director                        September 26, 1997
Dr. Jack Birks


/s/ MICHAEL D. WATFORD
__________________________    Director                        September 26, 1997
Michael D. Watford


/s/ C. BARTON GROVES
__________________________    Director                        September 26, 1997
C. Barton Groves


/s/ HABIB KAIROUZ
__________________________    Director                        September 26, 1997
Habib Kairouz

                                       70