<PAGE>   1
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                         -----------------------------

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

                    FOR THE FISCAL YEAR ENDED JUNE 30, 1997
                         COMMISSION FILE NUMBER 0-28814

                      COTTON VALLEY RESOURCES CORPORATION
          (Name of Small Business Issuer as Specified in Its Charter)


                 ONTARIO, CANADA                         98-0164357
          (State or other Jurisdiction      (I.R.S. Employer Identification No.)
        of Incorporation or Organization)

     8350 N. CENTRAL EXPRESSWAY, SUITE M2030               75206
    (Address of Principal Executive Offices)             (Zip Code)

                                 (214) 363-1968
                (Issuer's Telephone Number, Including Area Code)

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

        Securities registered under Section 12 (g) of the Exchange Act:
                        COMMON STOCK, WITHOUT PAR VALUE
                                (Title of Class)

         Check whether the Issuer (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for 
such shorter period that the Issuer was required to file such reports) and (2) 
has been subject to such filing requirements for the past 90 days.
         Yes   X    No
             -----     -----

         Check if there is no disclosure of delinquent filers in response to 
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         The Issuer's revenues for the fiscal year ended June 30, 1997, were
$276,230.

         The Issuer had 16,111,420 shares of common stock outstanding as of
September 15, 1997.

         The aggregate market value of the voting and non-voting common stock
held by non-affiliates of the Issuer, computed by reference to the average bid
and asked prices of such common stock as of October 7, 1997, was $56,472,278.

================================================================================
<PAGE>   2



                    1997 ANNUAL REPORT (S.E.C. FORM 10-KSB)

                                     INDEX

                       SECURITIES AND EXCHANGE COMMISSION
                          ITEM NUMBER AND DESCRIPTION


<TABLE>
                                                      PART I
<S>                                                                                                             <C>
Item 1    Business............................................................................................   3
Item 2    Properties........................................................................................... 10
Item 3    Legal Proceedings.................................................................................... 15
Item 4    Submission of Matters to a Vote of Security Holders.................................................. 15


                                                      PART II

Item 5    Market for the Company's Common Stock and Related Stockholder Matters................................ 16
Item 6    Management's Discussion and Analysis or Plan of Operation............................................ 17
Item 7    Consolidated Financial Statements and Unaudited Supplemental Information............................. 19
Item 8    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 41


                                                     PART III

Item 9    Directors, Executive Officers, Promoters and Control Persons of the Issuer; Compliance With
          Section 16(a) of the Exchange Act.................................................................... 41
Item 10   Executive Compensation............................................................................... 43
Item 11   Security Ownership of Certain Beneficial Owners and Management....................................... 44
Item 12   Certain Relationships and Related Transactions....................................................... 46


                                     PART IV AND SIGNATURES AND EXHIBIT INDEX

Item 13   Exhibits, Financial Statements and Reports on Form 8-KSB............................................. 47

Signatures..................................................................................................... 48
Exhibit Index.................................................................................................. 49
</TABLE>




                                      -2-

<PAGE>   3



                                     PART I

ITEM 1.           BUSINESS

GENERAL

          Cotton Valley Resources Corporation (referred to herein as either
"Cotton Valley" or the "Company") is a development stage, independent oil and
gas exploration, production and development company. The Company was
incorporated in Ontario, Canada, originally as Cotton Valley Energy Limited, on
February 15, 1995. Cotton Valley was formed, and its present name adopted on
June 14, 1996 as a result of the merger of Cotton Valley Energy Limited and
Arjon Enterprises Inc., both Ontario corporations. Arjon Enterprises Inc.
("Arjon") was a Canadian public company formed more than 50 years ago to
operate a gold mine. At the time of the merger, Arjon Enterprises Inc. had not
engaged in business for more than 25 years, it had no material liabilities, and
its only asset was a Cotton Valley Energy Limited debenture in the amount of
$146,300. The shareholders of Arjon received 686,551 shares of Cotton Valley
common stock, no par value (the "Common Stock") in the merger, representing
7.5% of Cotton Valley's then outstanding Common Stock. Cotton Valley accounted
for the merger as a purchase.

          Cotton Valley has five wholly-owned subsidiaries, Cotton Valley
Energy Corporation ("CV Energy"), a Nevada corporation, Cotton Valley Operating
Company ("CV Operating"), a Texas corporation, Mustang Oil Field Equipment
Company ("Mustang"), a Nevada corporation, Cotton Valley Energy, Inc. ("CVEI"),
an Oklahoma corporation, and Aspen Energy Corporation ("Aspen"), a Nevada
corporation, all of which were recently incorporated. CV Energy holds oil and
gas properties in Texas and agreements and options to acquire oil and gas
properties in Texas and offshore California. Cotton Valley acquired all of the
issued and outstanding shares of CV Energy on June 30, 1995 in a one-for-one
share and warrant exchange. Because Cotton Valley had no substantive activity
before this transaction, the acquisition was accounted for as a
recapitalization of Cotton Valley with CV Energy's net assets. Mustang was
formed to engage in trading of oil field equipment. CV Operating was formed to
operate oil and gas wells. CVEI was formed to own and operate the N.E. Alden
Field prospect and commenced operations on March 3, 1997. See "Properties --
N.E. Alden Field." Aspen was formed to accommodate the merger into Cotton
Valley of Aspen Energy Corporation, a New Mexico corporation ("Old Aspen"),
which was completed July 31, 1997.

          Cotton Valley may reincorporate in Canada's Yukon Territory during
calendar 1997. Under Yukon Territory law, Cotton Valley's board of directors 
need not be comprised of a majority of Canadian residents as currently required
under Ontario law. Since Cotton Valley's principal offices, management and
properties are located in the United States, Cotton Valley believes it is
advantageous to have a majority of its directors be residents of the United
States. Cotton Valley may in the future continue from the Yukon Territory to
the State of Wyoming. Management believes there are no significant differences
in corporate law concerning material stockholder rights between the Province of
Ontario, Yukon Territory and the State of Wyoming. Cotton Valley, at its annual
meeting held December 10, 1996, obtained stockholder approval for the
reincorporation which must be completed by December 10, 1997 or be subject to a
new stockholder vote.

BUSINESS STRATEGY

          Cotton Valley's business strategy is to continue to increase reserves
and commence and increase production and cash flows by concentrating on:

          o       Acquiring properties, or companies with properties, with
                  development and exploration opportunities and/or significant
                  cost reduction potential.

          o       Developing existing reserves through low-risk developmental
                  drilling or recompletion programs capitalizing on reserves
                  left behind in existing well bores by major oil companies.

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<PAGE>   4



          o       Exploring for new reserves utilizing state-of-the-art 
                  technology to reduce exploration risk.

          o       Concentrating on focused geographic areas to achieve operating
                  and technical efficiencies.

          o       Maintaining financial flexibility to take advantage of 
                  development and acquisition opportunities.

          o       Acquiring and refurbishing used oil field equipment to use in 
                  the development of properties and for resale.

RISK FACTORS

          Holders of the Common Stock and future investors in the Company
should be aware of the following factors in evaluating their investment in
Cotton Valley.

          DEVELOPMENT STAGE COMPANY. Cotton Valley was incorporated in February
1995 and is still in its development stage. Cotton Valley's operations are
subject to all of the risks inherent in establishing a new business enterprise.
Cotton Valley's potential for success must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with a new business. No assurance can be given that
Cotton Valley will be successful. See "Properties."

          HISTORY OF LOSSES. Cotton Valley incurred operating losses of
$712,360 and $2,006,878 for the fiscal years ended June 30, 1996, and 1997,
respectively. The accumulated deficit as of June 30, 1997 was $2,769,155. No
assurance can be given that Cotton Valley will be profitable in the future. See
"Management's Discussion and Analysis or Plan of Operation."

          NO SUBSTANTIAL PRODUCING PROPERTIES. Except for its recent
acquisition of properties in Oklahoma and West Texas, almost all of Cotton
Valley's proved reserves are classified as proved undeveloped, meaning very
little production currently exists. No assurance can be given that any wells
will be drilled or completed or will produce oil or gas in commercially
profitable quantities. See "Properties."

          CAPITAL EXPENDITURES FOR UNDEVELOPED PROPERTIES. Recovery of Cotton
Valley's proved undeveloped reserves will require significant capital
expenditures. Management estimates that aggregate capital expenditures of
approximately $20 million will be required to develop these reserves, of which
$10.0 million is expected to be incurred during the year ending June 30, 1998.
No assurance can be given that Cotton Valley's estimates of capital
expenditures will prove accurate, that its financing sources will be sufficient
to fully fund its planned development activities or that development activities
will be either successful or in accordance with Cotton Valley's schedule.
Additionally, any significant decrease in oil and gas prices or any significant
increase in the cost of development could result in a significant reduction in
the number of wells drilled. See "Management's Discussion and Analysis or Plan
of Operation."

          LIMITED CAPITAL; NEED FOR SIGNIFICANT ADDITIONAL FINANCING.
Development of the properties will require capital resources. Cotton Valley is
presently negotiating with respect to sources of additional financing; however,
no assurance can be given that additional financing will be available to Cotton
Valley on acceptable terms. The inability to obtain additional financing would
have a material adverse effect on Cotton Valley, including requiring Cotton
Valley to curtail significantly or farm-out development of the properties. Any
additional financing may involve substantial dilution to the interests of
Cotton Valley's stockholders at that time. See "Management's Discussion and 
Analysis or Plan of Operation."

          SWORD UNIT OPTION. The Company has an option to acquire a 51.8%
working interest in an offshore California oil field. In addition to
geophysical, environmental, and regulatory factors, management perceives that
an anti-drilling sentiment exists in California. This may make it difficult for
the Company to sell part of its option as it intends or to obtain financing to
participate in the project. The Company has recorded the option at

                                      -4-

<PAGE>   5



$1,345,882, and it is possible that the Company may have to record an
impairment of this value at some time in the future. See "Properties -- List of
Properties; Option to Acquire Additional Property."

          VOLATILITY OF OIL AND GAS PRICES. For the period from January 1991
through September 1997, oil and gas prices have fluctuated, with natural gas
prices ranging from $1.10 per Mcf to $3.72 per Mcf and oil prices ranging from
$16.00 per Bbl to $33.00 per Bbl. At June 30, 1997, oil prices were $19.50 per
Bbl and gas prices were $1.95 per Mcf. Prices for oil and gas probably will
continue to fluctuate, depending upon a number of conditions over which Cotton
Valley has no control. These conditions include, but are not limited to,
actions taken by the Organization of Petroleum Exporting Countries, turmoil in
the Middle East, the price of alternative fuels, weather and general economic
conditions. A major decline in oil or gas prices could have a material adverse
effect on Cotton Valley's operations, financial condition, proved reserves and
the cost of developing its oil and gas reserves.

          In addition, Cotton Valley assesses the carrying value of its assets
annually in accordance with generally accepted accounting principles under the
full cost method. If oil and gas prices decline dramatically, the carrying
value of Cotton Valley's assets could be subject to downward revision.

          UNCERTAINTY OF RESERVE ESTIMATES. The reserve estimates included in
this Annual Report could be materially different from the quantities and values
ultimately realized. Reserve data set forth herein is only an estimate. In
general, estimates of economically recoverable oil and gas reserves and future
net cash flows from them are based upon a number of variable factors and
assumptions, such as historical production from the properties, the assumed
effects of governmental regulation and future operating costs, 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. For those reasons, estimates of the
economically recoverable oil and gas reserves attributable to any particular
group of properties, classification of such reserves based on risk of recovery
and estimates of future net revenues expected from them, prepared by different
engineers or by the same engineers at different times, may vary substantially.
Cotton Valley's actual production, revenues, taxes and development and
operating expenditures with respect to its reserves will vary from such
estimates, and such variances could be material. Numerous uncertainties are
inherent in estimating proved reserves, including many factors beyond Cotton
Valley's control.

          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 variation, which may be material, in the
estimated reserves.

          Estimated discounted future net cash flows from estimated proved
reserves are based on prices and costs as of the date of the estimate unless
prices or costs are contractually determined at that 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 gas, curtailments or increases in consumption by gas purchasers,
changes in governmental regulation or taxation and the impact of inflation on
costs. See "Properties -- Oil and Gas Reserves."

          NEED TO REPLACE RESERVES. Cotton Valley's future oil and gas reserves
and production, and therefore its cash flows, are highly dependent upon its
success in exploiting its current reserve base and acquiring or discovering
additional reserves. Without the addition of reserves through exploration,
acquisition or development activities, Cotton Valley's reserves and production
will decline over time as reserves are exploited. The business of exploring
for, developing or acquiring reserves is capital intensive. To the extent cash
flows from operations are insufficient and external sources of capital become
limited or unavailable, Cotton Valley's ability to make the necessary capital
investments to maintain and expand its oil and gas reserves will be impaired.
In addition, no assurance can be given that Cotton Valley will be able to find
and develop or acquire additional reserves to replace production at acceptable
costs.

                                      -5-

<PAGE>   6



          ENVIRONMENTAL RISKS. All phases of the oil and gas business present
environmental risks and hazards and are subject to environmental regulation
pursuant to a variety of international conventions and United States and
Canadian federal, provincial, state and municipal laws and regulations.
Environmental legislation provides for, among other things, restrictions and
prohibitions on spills, releases or emissions of various substances produced in
association with Cotton Valley's past and current operations. The legislation
also requires that refineries, wells and facility sites be operated,
maintained, abandoned and reclaimed to the satisfaction of applicable
regulatory authorities. Compliance with such legislation can require
significant expenditures and a breach may result in the imposition of fines and
penalties. Environmental legislation is evolving in a manner expected to result
in stricter standards and enforcement, larger fines and liability and
potentially increased capital expenditures and operating costs. Although Cotton
Valley believes that it is currently in substantial compliance with all
existing material environmental regulations, no assurance can be given that
future environmental costs will not have a material adverse effect on the
Company's financial condition or results of operations.

          DEPENDENCE ON KEY PERSONNEL. Cotton Valley depends to a large extent
on the services of Messrs. Soltero and Hogue. The loss of the services of
either of them could have a material adverse effect on Cotton Valley's
operations. Cotton Valley has not entered into any employment contracts with
any of its executive officers, nor has it obtained key personnel life
insurance. Cotton Valley believes that its success is also dependent on its
ability to continue to employ and retain skilled technical personnel.

          LIMITED PUBLIC MARKET AND POSSIBLE VOLATILITY OF SECURITIES. The
Common Stock is traded "over-the-counter" on NASD's Electronic Bulletin Board
and "over-the-counter" in Canada on the Canadian Dealing Network. The Company
has made application to list its Common Stock on the American Stock Exchange
and the Toronto Stock Exchange; however, no assurance can be given that the
Common Stock will be listed on either exchange. The trading price of the Common
Stock could be subject to wide fluctuations in response to quarter-to- quarter
variations in operating results, announcements of drilling results by Cotton
Valley and other events or factors. In addition, the stock market has from time
to time experienced extreme price and volume fluctuations which have
particularly affected the market price for many companies and which often have
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Company's
securities.

          NO DIVIDENDS. Cotton Valley's board of directors presently intends to
retain all of Cotton Valley's earnings for the expansion of its business.
Cotton Valley therefore does not anticipate the distribution of cash dividends
in the foreseeable future. Any future decision of Cotton Valley's board of
directors to pay cash dividends will depend, among other factors, upon Cotton
Valley's earnings, financial position and cash requirements.

          AVAILABILITY OF PREFERRED STOCK. Cotton Valley's board of directors
is authorized, without further stockholder action, to issue preferred stock in
one or more series and may designate the dividend rate, voting rights and other
rights, preferences and restrictions of each series. No preferred stock
currently is outstanding and Cotton Valley has no plans to issue any preferred
stock. Any future preferred stock issuances could have the effect of, among
other things, restricting Common Stock dividends, diluting Common Stock voting
power, impairing Common Stock liquidation rights and delaying or preventing a
change in control of Cotton Valley without further action by the stockholders.

COMPETITION

          Competition in the oil and gas industry is intense generally. Cotton
Valley believes that price is the determinative factor in competition for
drilling prospects, equipment and labor. Major and independent oil and gas
companies and syndicates actively bid for desirable oil and gas properties and
equipment and labor required to operate and develop them. Many of Cotton
Valley's competitors have substantially greater financial resources and
exploration and development budgets than those of Cotton Valley. Cotton Valley
expects difficulty in competing for future drilling prospects.

                                      -6-

<PAGE>   7



MARKETS

          GENERAL. Oil and gas operating revenues are highly dependent upon
prices and demand for oil and production. Numerous factors beyond Cotton
Valley's control can impact the prices of its oil and gas. Decreases in oil and
gas prices would have an adverse effect on Cotton Valley's proved reserves,
revenues, profitability and cash flow.

          Cotton Valley has not engaged in any crude oil and gas price swaps or
other hedging transactions to reduce its exposure to price fluctuations. It
may, however, engage in such transactions from time to time as management deems
advisable.

          GAS SALES. Gas from its wells in East Texas (Cheneyboro Field) and
Southwest Oklahoma (N.E. Alden Field) are sold at spot prices on contracts with
thirty-day cancellation provisions and are gathered and delivered to purchasers
through pipeline systems owned by the Company.

          OIL SALES. Cotton Valley sells its oil production under short-term
arrangements at prices no less than the purchaser's posted prices for the
respective areas less standard deductions. Management believes that numerous
buyers are available for Cotton Valley's oil.

REGULATION

          Oil and gas exploration, production and related operations are
heavily regulated by federal and state authorities. Failure to comply with
applicable law can result in substantial penalties. The cost of regulatory
compliance will increase Cotton Valley's cost of doing business and affect its
profitability. Regulation of oil and gas activities has changed many times.
Consequently, Cotton Valley is unable to predict the future cost or impact of
complying with such laws. Texas requires drilling permits and bonds and
operating reports and imposes other burdens relating to oil and gas exploration
and production. Texas also requires conservation measures, including pooling of
oil and gas properties, establishing maximum production rates from oil and gas
wells, and spacing, plugging and abandoning wells. These laws limit the rate at
which oil and gas can be produced from Cotton Valley's properties.

          The transportation and sale of gas in interstate commerce is
regulated by United States law and the Federal Energy Regulatory Commission.

OPERATING HAZARDS AND UNINSURED RISKS

          The acquisition, development, exploration for, and production,
transportation and storage of, crude oil, gas liquids and gas involves a high
degree of risk, which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. Cotton Valley's operations are subject
to all of the risks normally incident to drilling gas and oil wells, operating
and developing gas and oil properties, transporting, processing, and storing
gas, including encountering unexpected formations or pressures, premature
reservoir declines, blow-outs, equipment failures and other accidents,
craterings, sour gas releases, uncontrollable flows of oil, gas or well fluids,
adverse weather conditions, pollution, other environmental risks, fires and
spills. Oil production requires high levels of investment and has particular
economic risks, such as retaining wall failure, fires, explosions, gaseous
leaks, spills and migration of harmful substances, any of which can cause
personal injury, damage to property, equipment and the environment, and result
in the interruption of operations. Cotton Valley is also subject to
deliverability uncertainties related to the proximity of its reserves to
pipeline and processing facilities and the inability to secure space on
pipelines that deliver oil and gas to commercial markets. Although Cotton
Valley maintains insurance in accordance with customary industry practice, it
is not fully insured against all of these risks, nor are all such risks
insurable. Losses resulting from the occurrence of these risks could have a
material adverse impact on Cotton Valley.


                                      -7-

<PAGE>   8

EMPLOYEES

          As of September 30, 1997, Cotton Valley had nine employees. Three
employees are executive officers, four are administrative and two work in the
field. Cotton Valley uses contract services in its oil and gas field
operations. Cotton Valley also uses consultants to evaluate Company projects,
reserves and other oil and gas assets for potential acquisitions.

RECENT  DEVELOPMENTS

          ASPEN ACQUISITION. Effective June 30, 1997, Cotton Valley acquired
Aspen Energy Corporation, a New Mexico corporation ("Old Aspen") by merger with
a wholly-owned Nevada subsidiary corporation which was renamed Aspen Energy
Corporation ("Aspen"). The acquisition closed on July 31, 1997 and has been
accounted for as a purchase. The Company's balance sheet for June 30, 1997 shows
the pro forma results of this acquisition as if it had been completed on the
effective date. The purchase price was $5,200,000 consisting of $500,000 cash
and short-term notes and 2,511,317 shares of Common Stock, of which 270,000
shares were returned to Cotton Valley by two Old Aspen shareholders in
settlement of notes payable to Old Aspen in the amount of $425,000. The 
principal property of Aspen is its interest in the Means (Queen Sand) Unit in
Andrews County, Texas. See "Properties -- Means (Queen Sand) Unit." The
acquisition also included an interest, having less than $500,000 in value, in
two wells in Utah, which have been sold by Cotton Valley for $200,000, two wells
in Latimer County, Oklahoma, one well in Harrison County, Texas and several 
shallow wells in Gregg County, Texas.

          ZAMA PROPERTY PROSPECT. Cotton Valley has entered into a letter of
intent to purchase substantially all of the interests in the Zama Lake area
(the "Zama Property") owned by a Canadian independent oil and gas producer. The
Company intends to deposit Cdn $425,000 with the operator which will be credited
against the Cdn $9.5 million purchase price once the transaction is completed.
If the Company is unable to complete the purchase by December 1, 1997, the Cdn 
$425,000 will be forfeited. Management of the Company has no reason to believe 
that this transaction will not be completed by December 1, 1997. The Company is 
currently negotiating with several financial institutions for the funding of the
purchase price of this property.

          The Zama Property is located in northwest Alberta approximately 55 
miles northeast of Rainbow Lake. Cotton Valley will hold an interest in a total
of 23,400 gross acres (11,672 net acres) of land in this area. The area
currently produces oil from the Keg River/Zama Member horizons, and natural gas
from both the Middle Devonian Slave Point and Sulphur Point formations.
Additional oil has just been found productive in one well in the "0" member of
the Muskeg formation and could be productive in a number of additional wells.
In September 1997, total area production net to the interest to be acquired by
Cotton Valley averaged approximately 270 Bbls/day of oil, 6 MMcf/day of gas and
30 Bbls/day of natural gas liquids. 

          Oil production from the Zama Property is obtained from 10 Keg River
oil wells, where Cotton Valley will hold working interests ranging from 25 to
100%. Of these producing oil wells, three horizontal and three vertical wells
will be operated by Cotton Valley. 

          After nearly 30 years of oil production from the Zama Basin, the Keg
River is still an attractive target. Three-dimensional seismic and horizontal
drilling technology have led to significant improvements in optimizing oil
recovery from the Keg River pinnacle reefs. The 56 wells on the property have
already produced approximately 9.5 million barrels of oil and 5.6 Bcf of gas.
Several opportunities exist within the land inventory for both new wells 
targeting undrilled reserves, as well as Keg River/Zama member workover
opportunities in existing pinnacle reefs to exploit undrained attic reserves.

          With the introduction of the Novagas Clearinghouse sour gas processing
facility into the area in April 1995, industry focus has shifted to include the
significant gas reserves contained within the Zama Basin. The


                                      -8-

<PAGE>   9



Slave Point and Sulphur Point gas reservoirs overlay and are trapped above
existing Keg River pinnacle reef oil wells. As ultimate oil recoveries are
attained from the Keg River pools, wellbores are recompleted to produce gas from
the uphole Slave Point and/or Sulphur Point formations. While the areal extent
is small (100 to 300 acres), the reserves are 0.5 Bcf to 2 Bcf per well and
initial deliverabilities are high, ranging from 4,000 Mcf to 10,000 Mcf per day.
The high flow rates are sustained for two to four months, then gradually decline
to 1,000 Mcf per day at the end of twelve months, which is expected to continue
to decline 10% to 20% annually. The area's gas gathering infrastructure
continues to expand with both new lines and conversion of existing oil pipelines
to carry natural gas to the central processing hub. 

          Current gas production from the Zama Property is obtained from three
Slave Point gas wells and three Sulphur Point gas wells with an average working
interest of 50%. In early October 1997, these six wells produced gross raw gas
of approximately 18.5 MMcf/day, equating to 8.8 MMcf/day net sales gas matching
the firm Nova transportation held at the Zama meter station. The gas is gathered
and processed at the Novagas Clearinghouse Plant where fees of Cdn $0.55/Mcf 
are paid for the first 3,500 Mcf/d and Cdn $.40/Mcf for the remainder. Gas is 
currently being sold at Cdn $1.80 per Mcf. Last winter, the price went to Cdn 
$2.97 per Mcf. The Company will be acquiring interests in 22 additional shut-in 
or suspended wells which have been assigned proven undeveloped, or probable 
reserves. 

          The Slave Point and Sulphur Point gas reservoirs are equally 
attractive targets in the northern portion of the Zama Basin which lie on the
flanks of the pinnacle reef trend. Gas reserves within the Slave Point formation
are typically found within an Upper Slave Point shoal facies, although locally 
developed porous intervals are also pervasive within the Middle Slave Point 
Members. The Sulphur Point reservoir consists of an upper Limestone member and
an underlying Dolomite member. Permeability is enhanced due to fracturing and 
dolomitization.

          The primary trapping mechanism for both the Slave Point and Sulphur
Point is drape structure associated with either underlying Keg River pinnacle
reef complexes or Keg River Bank margins. Potential for a stratigraphic trapping
component exists within several of the Slave Point pools whereby Middle and 
Upper Slave Point porous shoals pinch out against tight lagoonal limestone or 
basinal facies. Cotton Valley expects to explore this potential next year for 
significant additional potential reserves.

          The Company estimates that the Zama Property contains net proved
reserves of 456,000 barrels of oil and 19.3 Bcf of gas, 50% of which is
classified proved developed producing and the remainder of which is behind pipe
and classified as proved undeveloped.

          SEARS RANCH PROSPECT. In September 1997, the Company entered into a
letter of intent with a Midland, Texas based independent oil and gas company
for the acquisition of a 100% working interest (80% average net revenue
interest) in approximately 21,000 acres in the Sears Ranch area of Nolan and
Fisher Counties, Texas (the "Sears Ranch Prospect") for $400,000 cash. The
Company expects this acquisition to be completed by the end of October 1997.
The primary purpose of this acquisition is to acquire oil field equipment,
including pumpjacks, tank batteries, injection pumps, separators, tubing and
casing. A portion of this property has been productive in the Odem Lime
formation, with cumulative production of approximately eight million barrels.

          Attempts to waterflood this property by predecessor operators have
been unsuccessful. According to reports by Cotton Valley's consultants, the
Sears Ranch Prospect is an excellent candidate for redevelopment using
horizontal wells. Cotton Valley intends to test this prospect prior to the end
of calendar 1997 as a horizontal drilling prospect in the Odem Lime formation.
There can be no assurance that Cotton Valley can economically develop any
remaining reserves from the Sears Ranch Prospect through either horizontal or
vertical drilling. Accordingly, the Company did not attribute any reserves to
this prospect in making this acquisition.

          ACQUISITION OF OIL FIELD EQUIPMENT COMPANY.  In September 1997, 
the Company entered into a letter of intent with a holding company to acquire
its wholly-owned West Texas oil field equipment company. The


                                      -9-

<PAGE>   10



purchase price for this company is $800,000 cash plus payment of approximately
$2.3 million in secured indebtedness. This acquisition is contingent upon the
Company's ability to acquire asset based lender financing and other conditions.
The company is a major supplier of rebuilt oilfield equipment in the West Texas
area, and owns a warehouse, repair and remanufacturing facility which sources
much of its equipment.

          There can be no assurance that the transactions described above will
be closed, and, if closed, will be on final terms and conditions substantially
in accordance with those described above.


ITEM 2.           PROPERTIES

LIST OF PROPERTIES

          CHENEYBORO FIELD. Cotton Valley owns approximately 6,700 net acres of
producing and non-producing oil and gas leases (with rights of first refusal to
acquire additional leases) in the Cheneyboro Field of Navarro County, Texas.
Cotton Valley has entered into an Area of Mutual Interest ("AMI") Agreement
with a number of unaffiliated parties covering approximately 33,000 acres in
and around the Cheneyboro Field. Cotton Valley has the right to acquire up to a
75% working interest in any new lease acquired by any of the other parties to
the AMI Agreement.

          The Cheneyboro Field is located 17 miles southeast of Corsicana,
Texas, in Navarro County. This field is productive in the Cotton Valley
Limestone formation (also called the "Cotton Valley Lime") at a vertical depth
of approximately 9,500 feet. Field development continued following the initial
discovery in 1978 into the early 1980s. Between 1978 and 1987, marginal wells
were drilled defining the limits of the field. Approximately 30 interior
additional vertical wells in the Cheneyboro Field produced approximately 2.7
million Bbl of oil, representing an average of approximately 90,000 Bbl per
well. Some of the vertical wells have produced over 200,000 Bbl, indicating
better drainage where the wells penetrated the fracture system. In 1987, the
Tarrant County Water Authority expropriated approximately 12,000 acres of this
field. Producing wells were plugged and abandoned to permit construction of the
Richland/Chambers Creek Reservoir, a water supply project for Tarrant County
and the City of Fort Worth, Texas.

          The Cotton Valley Lime reservoir at Cheneyboro is highly fractured.
The primary objective reservoir rock is an oolitic carbonate grainstone of
Jurassic age that was deposited on a Paleozoic shelf break. Subsequent pullout
of the deeper Louann Salt caused extensive fracturing. The salt withdrawal left
the residual field structure as simple regional dip. Hydrocarbon trapping
occurs as a result of the high degree of fracture density bounded by areas of
non-permeability. Core and log analysis indicate the presence of 2.5 to 4.5%
oil saturated matrix porosity in the field. Vertical wells in this reservoir
produce 42(degree) API oil.

          Cotton Valley believes that horizontal drilling techniques will lead
to higher initial rates and better recovery efficiencies than those experienced
in the original vertical well completions. Since much of the field is under
water, some directional drilling from the shoreline is anticipated. Based on
analogy to horizontal drilling in fractured limestone reservoirs in other
areas, increased productive capacity and ultimate reserves are anticipated
relative to historical, vertical per well averages.

          The Company is unaware of any regulatory restrictions on drilling
near the reservoir. The Company will build the normal retaining walls around
its drilling and storage sites to prevent oil spills from spreading. The
Company intends drilling to a depth of approximately 9,500 feet while the
deepest point in the Richland/Chambers Creek Reservoir is approximately 100
feet. Consequently, the Company does not anticipate any special risks
associated with drilling near a reservoir.

          MEANS (QUEEN SAND) UNIT.  The Cotton Valley Means (Queen Sand) Unit 
consists of 2,096 acres on four leases in north central Andrews County, Texas.
Production began in 1954 and development followed rapidly. By 1960, when a 
secondary project


                                      -10-

<PAGE>   11
of water injection was initiated, there were 41 total wells in the unit. Most
wells were completed in casing, perforated and fractured with a large number
flowing initially. The best wells flowed more than 400 barrels of oil per day
("Bopd") initially and the initial potentials of 32 of the 41 wells (78%)
exceeded 100 Bopd.

          Primary production peaked in 1957 at 1096 Bopd from 41 wells. By
1960, the production was down to 327 Bopd, a decline of more than 70%.

          Secondary response was rapid in some wells and peak secondary
production occurred from 1961 through 1964, with almost flat production, at
slightly above 833 Bopd. The original waterflood used 21 injection wells and 20
producers, for an overall spacing of 50 acres per well, and an injection to
producing well ratio of approximately 1 to 1. However, during the period of
greatest production decline, starting in 1968, several injection wells were
down for extended periods of time because of severe corrosion of the tubing
strings. This was the result of not using protected tubing (plastic coated,
fiberglass or cement lined) in the injection wells. Also, several of the
injection wells had severe injectivity losses due to plugging problems (scale
and iron-sulfide) partly caused by being at the far end of the Exxon Means
Injection System. As a result, less water than needed to properly flood the
reservoir was used.

          The cumulative production to date (both primary and secondary) has
been 4.136 million barrels of oil, which is equal to 16.2% of the original oil
in place.

          Old Aspen purchased the leases in 1996 for the purpose of instituting
a 20-acre infill redevelopment program. Several redevelopments have been
completed since 1988 in other Queen Sand fields in Andrews County and adjacent
Gaines County and all of the redevelopments designed with adequate injection
support have been very successful. A study of 11 offset redevelopment
waterfloods in the Means, McFarland and Magutex fields indicated that 35.3% of
the original oil in place had been produced on average for these units.

          An engineering report, as of June 30, 1997, prepared by Ryder Scott
Company for Cotton Valley estimates that the Means (Queen Sand) Unit contains
net proved undeveloped reserves of 1.5 million barrels of oil and 0.5 Bcf of
gas. The Company estimates that it will require a capital investment of
approximately $7.5 million to develop this property.

          N.E. ALDEN FIELD. On March 3, 1997, Cotton Valley purchased all of
the interests held by the Homestake Company and certain other parties in the
N.E. Alden Field, Caddo County, Oklahoma. The properties, consisting of
approximately 550 net acres of oil and gas leases, seven producing oil and gas
wells, three injection wells and five shut in wells, contain proved developed
and undeveloped net reserves of approximately 515,515 Bbl of oil and 5,188,326
Mcf of gas, and probable reserves of 315,436 Bbl of oil and 5,872,940 Mcf of
gas. Working interest in the wells ranges from 50% to 100% and the net revenue
interest is at least 75% of the working interest.

          Located approximately 65 miles southwest of Oklahoma City, Oklahoma,
the field was discovered in 1956 and initially tested for 771 barrels of oil
and 608 Mcf of gas per day from the Bromide formation at a depth of
approximately 9,300 feet. Since the discovery, the Bromide has been developed
and is now a unitized water flood consisting of four producing wells and three
water injection wells. The remaining wells have been completed in other zones
above and below the Bromide. Gas from the field is transported through a
gathering system and a one-mile pipeline owned by Cotton Valley.

          In addition to the current production, there are also potential zones
either behind existing wells, or reachable by deepening existing well bores.
During 1997, Cotton Valley completed a number of workovers of the existing
wells which improved production from existing zones and opened new zones for
additional production and reserves. During fiscal 1998, Cotton Valley expects
to deepen at least one well to develop proved reserves in the Arbuckle
Formation offsetting a well which had initial flow rates of approximately 7,000
MCF of gas per day.

                                      -11-

<PAGE>   12



          OPTION TO ACQUIRE ADDITIONAL PROPERTY. The Company has entered into
agreements with several parties and has purchased an option to acquire a 51.8%
working interest in the Sword Unit, Offshore Santa Barbara, California (the
"Sword Unit"). The Company has paid approximately $1.3 million as of June 30,
1997 to acquire the option. To exercise the option and acquire the working
interests, the Company must pay an additional $8,000,000 of which up to
$2,000,000 may consist of the Company's marketable securities, if any. The
Company will also be obligated to participate in a $4,000,000 letter of credit
to fund development. There is no assurance that the Company will have the
financial resources to acquire any part of the working interests in the Sword
Unit.   

          The Sword Unit is located 10 miles off Point Conception, Santa
Barbara County, California, 800 to 1,800 feet underwater, at the juncture of
the Santa Barbara Channel and the offshore Santa Maria Basin. It is on a large
anticline covering approximately 7,800 acres of area and lies immediately south
of the Point Arguello oil field operated by Texaco and Chevron.

          Two successful wells have been drilled and tested on the structure.
The discovery well, the P-0322 #1, was drilled to a depth of 9,343 feet and
tested in 1983. The P-0320 #2, which was drilled to determine the size of
field, was drilled to a depth of 8,478 feet and tested in 1985. Both of these
wells tested Monterey zones at high rates. A 3-D seismic survey has been shot,
delineating the structure in great detail. The Upper Miocene fractured Monterey
pay is 800 feet thick at the crest and 1,200 feet thick on the flanks and is
encountered at approximately 7,000 feet. Proved recoverable reserves in the
Sword Unit are estimated to be 314 million Bbl of oil and 397 million Mcf of
gas.

          The regulatory framework within which the Company will develop the
Sword Field consists of: (a) Federal Offshore Lease and Administration,
including approvals of the development plan of the property; (b) a Federally-
mandated environmental impact statement; (c) State of California regulations
with respect of transport of oil and gas through state waters and the air
emissions from offshore and onshore facilities; and (d) Santa Barbara County
regulations with respect to the construction and operation of onshore
facilities. Permits and approvals from all three government levels will be
required to complete the development of the field and bring it into operation.

          The first three miles off the shore of the coastline are administered
by each state and are known as "State Waters". Within State Waters offshore
Santa Barbara County, the State of California regulates oil and gas leases,
drilling, and the installation of permanent and temporary production facilities.
Because the Sword Field is located outside and beyond the State Waters in the 
Outer Continental Shelf ("OCS"), leasing and drilling at Sword are not regulated
by the State of California. However, to the extent that the production from the
Sword Unit would be transported to a shore side facility from the field through
the State Waters, the Company's pipeline (or other transportation facilities) 
would be subject to California State regulations. Construction and operation of
the pipeline would require permits from the State. State regulations also govern
the construction and operations of shore side facilities such as terminals,
pumping stations, water separation facilities, and water disposal, all of which
require a comprehensive permitting process.

          Santa Barbara County, through its Board of Supervisors, also has a
significant impact on the method and timing of any offshore field development
through its concurrent regulation of the construction and operation of shore
side facilities.

          Due to political opposition, the Federal Government has not issued
new OCS leases in the Santa Barbara area within the past ten years and is
unlikely to do so in the near future. This means that any infrastructure for
common use by the different operators of existing leases in the Santa Barbara
OCS will have to rely solely on what is already in place and what would be
built to accommodate a limited number of now known, but undeveloped, properties
and cannot take into account the future growth of infrastructure from new
discoveries and a high level of exploratory activity. For these reasons, the
development of any existing property in the OCS, including the Sword Unit,
would be much more expensive and take longer than similar projects located in a
mature and still growing offshore province such as the U.S. Gulf Coast.


                                      -12-

<PAGE>   13

          Thus, the value of the proved undeveloped reserves, if acquired by
the Company upon exercise of the option, will be significantly lower than if
the same reserves were located onshore in a less environmentally sensitive area
of the United States that could be developed sooner. Although prices are not
currently regulated, they have been in the past and could be regulated in the
future. The rate of production could be affected by Minerals Management Service
regulations, which could also lower the value of the property.

         Cotton Valley currently does not have the capital, manpower, or
technical resources to exploit the Sword Unit leases successfully, assuming
exercise of the option. In order to effectively develop the Sword Unit leases
at the 51.8% working interest level, the Company would require significant
recapitalization and reorganization or would have to seek a merger with, or
become a subsidiary of, a much larger oil and gas company having significantly
larger resources. The Company's current strategy for development of the Sword
Unit is to retain only that portion of the 51.8% it feels it will be able to
financially and technically support over the next five years (currently
estimated at 11.8%) and seek joint venture partners to participate in and
operate the remainder. Due to the factors discussed above relating to
regulation and environmental compliance, many large independent oil and gas
producers have avoided the Sword Unit area, and the task of locating
appropriate joint venture partners will be difficult. If unsuccessful in
financing the project or finding partners by the time the option expires at the
end of 1998, the Company may be forced to drop its option and write-off up to
$1,300,000.

TITLE OF PROPERTIES

          Cotton Valley follows industry practice when acquiring undeveloped
properties on minimal title investigation. A title opinion is obtained before
drilling begins on the properties. Title opinions cover more than half of
Cotton Valley's properties . Cotton Valley's properties are subject to royalty
interests, liens incident to operating agreements, liens for current taxes and
other burdens that Cotton Valley believes do not materially interfere with
their use or value. Cotton Valley may incur additional expenses in obtaining
titles or doing remedial work on the titles, but in the opinion of management
these expenses would not be material.

OIL AND GAS RESERVES

         Cotton Valley's reserves consist primarily of proved and probable
reserves located in Texas and Oklahoma. Reserve estimates were made using
industry-accepted methodology including extrapolation of performance trends,
volumetrics, material balance and statistical analysis of analogs. The
evaluator's professional judgment and experience were used to select the most
appropriate method and to determine the reasonableness of the results. The
estimates were made in accordance with oil and gas reserve definitions
promulgated by the U.S. Securities and Exchange Commission (the "SEC").

         The following table summarizes Cotton Valley's estimated net proved
oil and gas reserves as of June 30, 1997 for properties owned by the Company as
of July 31, 1997. The Cheneyboro Field and N.E. Alden Field were evaluated by
K&A Energy Consultants, Inc. and the Means (Queen Sand) Unit was evaluated by
Ryder Scott Company. There are minor additional interests related to the Aspen
acquisition located in Louisiana, Oklahoma and Texas which have not been
included in the following table. The following table also does not include
1,500 net acres of additional leasehold interest in the Cheneyboro Field,
acquired during fiscal 1997, which would represent increases in the proved
undeveloped reserves attributable to that property.

                                      -13-

<PAGE>   14


<TABLE>
<CAPTION>
                                                                     TOTAL RESERVES(1)
                                                                     -----------------
               ITEM
               ----
               <S>                                                     <C>
               RESERVES
               Proved producing
                   Oil (Bbl)                                                128,545
                   Gas (Mcf)                                                652,388
               Proved developed non-producing
                   Oil (Bbl)                                                293,968
                   Gas (Mcf)                                              1,134,420
               Proved undeveloped
                   Oil (Bbl)                                              5,932,682
                   Gas (Mcf)                                             16,241,015
               Total Proved
                   Oil (Bbl)                                              6,355,195
                   Gas (Mcf)                                             18,027,823
               Total Probables
                   Oil (Bbl)                                              2,245,807
                   Gas (Mcf)                                             11,664,053

               ESTIMATED FUTURE NET REVENUES BEFORE INCOME TAXES

               Proved producing                                        $  2,177,031
               Proved developed non-producing                          $  5,216,699
               Proved undeveloped                                      $105,588,822
                                                                       ------------
                   Total                                               $112,982,552
                                                                       ============
               ESTIMATED FUTURE NET REVENUES BEFORE INCOME TAXES
                DISCOUNTED AT 10%

               Proved producing                                         $ 1,653,427
               Proved developed non-producing                           $ 3,509,009
               Proved undeveloped                                       $67,737,953
                                                                        -----------
                   Total                                                $72,900,389
                                                                       
</TABLE>

---------------------
(1)  Prices based on $19.50 per Bbl of oil and $1.95 - $2.25 per Mcf of gas.

         The reserve data set forth in this Annual Report is only an estimate.
Numerous uncertainties are inherent in estimating oil and gas reserves and
their values, including many factors beyond the control of the producer.
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 any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. As a result,
estimates of different engineers often vary. In addition, estimates of reserves
are subject to revision by the results of later drilling, testing and
production. Accordingly, reserve estimates often differ from the quantities of
oil and gas ultimately recovered. The meaningfulness of estimates is highly
dependent upon the accuracy of the assumptions upon which they are based.

         In general, oil and gas production declines as reserves are depleted.
Except to the extent that Cotton Valley acquires proven reserves or succeeds in
exploring and developing its own reserves, or both, Cotton Valley's proven
reserves will decline as they are produced. Cotton Valley's future oil and gas
production is, therefore, highly dependent upon its ability to acquire or
develop additional reserves.


                                      -14-

<PAGE>   15



ACREAGE

         The following table provides information regarding Cotton Valley's
undeveloped leasehold acreage as of July 31, 1997. Acreage in which Cotton
Valley's interest is limited to royalty, overriding royalty and similar
interests is excluded.


<TABLE>
<CAPTION>
                                                                            UNDEVELOPED
                                                                            -----------
                                         DEVELOPED ACREAGE                    ACREAGE
                                         -----------------                    -------
                                         GROSS         NET             GROSS            NET
                                         -----         ---             -----            ---
<S>                                      <C>          <C>              <C>             <C>
Cheneyboro Field                           820          820            6,680           5,680
N.E. Alden Field                           550          481              0               0
Means (Queen Sand)                       2,096        2,096              0               0
Unit
Others                                     680          340              0               0
</TABLE>

PRODUCTIVE WELLS

         The total gross and net wells, expressed separately for oil and gas,
as of July 31, 1997, are as follows:


<TABLE>
<CAPTION>
                                   GROSS                             NET
                                   -----                             ---
LOCATION                 OIL        GAS       TOTAL      OIL         GAS       TOTAL
--------                 ---        ---       -----      ---         ---       -----
<S>                       <C>         <C>        <C>     <C>        <C>       <C>
Texas                     18           1         19         18         1         19
Oklahoma                  14           3         17      12.25         2       14.2
Louisiana                  0           6          6          0       .37        .37
                          --          --         --      -----      ----      -----
                          32          10         42      30.25      3.37      33.57
</TABLE>

         The Company did not own any significant producing properties during
fiscal 1996.

EXECUTIVE OFFICES

         The Company leases approximately 3,000 square feet of office space at
8350 North Central Expressway, Suite M2030, Dallas, Texas 75206, on a
month-to-month basis at a rent of $3,600 per month. The Company also leases
3,000 square feet at 4849 Greenville Avenue (the Old Aspen offices) at $3,780
per month under a lease which expires August 18, 1998.


ITEM 3.           LEGAL PROCEEDINGS

         The Company is not currently party to any legal proceedings.


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

         The Company had no matters requiring a vote of security holders during
the fourth quarter of fiscal 1997 nor the first quarter of fiscal 1998.



                                      -15-

<PAGE>   16

                                    PART II

ITEM 5.           MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
                  RELATED STOCKHOLDER MATTERS

         MARKET INFORMATION. The Common Stock began trading through the
Canadian Dealing Network on June 24, 1996, under the symbol "CVZC." From June
24, 1996, through September 30, 1997, the following table sets forth the high
and low bid information for Cotton Valley's Common Stock in Canadian Dollars as
reported on the Canadian Dealing Network. The information in the table reflects
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions. During this period, the Canadian
Dollar traded in the $.72 to $.74 range. On September 30, 1997 one Canadian
Dollar was worth $.72.


<TABLE>
<CAPTION>
                                         High             Low
                                         ----             ---
<S>                                      <C>             <C>
June 24-30, 1996                         $2.80           $2.50
July 1-September 30, 1996                $2.60           $1.20
October 1-December 31, 1996              $1.90           $0.75
January 1-March 31, 1997                 $3.45           $1.45
April 1-June 30, 1997                    $2.55           $1.50
July 1-September 30, 1997                $6.50           $1.95
</TABLE>

         Cotton Valley's Common Stock began trading through the NASD Electronic
Bulletin Board on January 14, 1997 under the symbol "CTVYF". On July 1, 1997,
the Company's symbol was changed to CTVY. From January 14, 1997 to September
30, 1997 the following table sets forth the high and low bid information for
Cotton Valley's Common Stock in U.S. currency as reported on the NASD
Electronic Bulletin Board. The Company has made application to list its Common
Stock on the American Stock Exchange and the Toronto Stock Exchange; however,
no assurance can be given that the Common Stock will be listed on either
exchange. The table reflects inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.


<TABLE>
<CAPTION>
                                         High             Low
                                         ----             ---
<S>                                      <C>             <C>
January 14-March 31, 1997                $2.20           $1.00
April 1-June 30, 1997                    $1.81           $1.12
July 1-September 30, 1997                $4.81           $1.38
</TABLE>

         HOLDERS.  As of September 15, 1997, there were approximately 1,086 
record holders of the Company's Common Stock.

         DIVIDENDS. The Company has not previously paid any cash dividends on
its Common Stock and does not anticipate or contemplate paying dividends on the
Common Stock in the foreseeable future. It is the present intention of
management to utilize all available funds for the development of the Company's
business. In addition, the Company may not pay any dividends on common equity
unless and until all dividend rights on outstanding preferred stock, if any,
have been satisfied. The only other restrictions that limit the ability to pay
dividends on common equity or that are likely to do so in the future, are those
restrictions imposed by law or by certain credit agreements.



                                      -16-

<PAGE>   17
ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

FISCAL YEAR 1997 AND FISCAL YEAR 1996

         During the fiscal year ended June 30, 1997, Cotton Valley incurred a
net loss of $2,006,878. The loss of $2,006,878 for fiscal 1997 compares to a
loss of $712,360 for fiscal 1996. This 181% increase in net loss is primarily
attributable to increases in general and administrative expenses. 

         Oil and gas production costs were $252,272 in 1997 (none in 1996).
This is primarily comprised of costs related to the N.E. Alden Field and
particularly to rehabilitation costs which were not capitalized. Cotton Valley
initially acquired its interest in the N.E. Alden Field in December 1996 for
$416,328 of which $35,000 was paid in December 1996 and $381,328 was paid upon
closing on March 3, 1997. Oil and gas sales from the N.E. Alden Field in fiscal
1997 were approximately $200,000. Rehabilitation work on two wells in the
Cheneyboro Field in the fourth quarter of fiscal 1996 resulted in oil and gas
sales of $74,473 during fiscal 1997.

         General and administrative costs were $2,825,678 in fiscal 1997, an
increase of $1,859,902 or 193% over the $965,776 incurred in fiscal 1996.
Included in 1997 general and administrative expenses is $1,286,700
(representing 46% of total general and administrative expenses) representing
the value of shares and warrants issued to obtain certain investor relations
services. Included in 1997 general and administrative expense is approximately
$212,000 representing costs incurred with respect to a public offering of
securities which did not materialize. The rest of the increase in general and
administrative expense can be attributed to a higher level of staffing
throughout 1997, compared to staff levels which were in place for only part of
1996.

         The Company recognized an income tax benefit of $919,000 in 1997 
compared to $387,000 in 1996. This is directly related to the size of the loss
before income taxes.

         During fiscal 1996, Cotton Valley issued 300,000 shares for services
which was recorded at $446,950. Other expenses during this period were
657,796. The loss before income tax benefit of $387,000 was $1,099,360.

FISCAL YEAR 1996 AND FISCAL PERIOD 1995

         From February 15, 1995 (inception), to June 30, 1996, Cotton Valley
accumulated a deficit of $762,277 after an income tax benefit of $412,000.
During this period, Cotton Valley acquired its properties, merged with Arjon,
issued debentures and notes and sold stock for cash.

         Legal, audit and accounting fees were $190,053, which represents 17%
of the net loss before tax through June 30, 1996.

         Management fees of $82,840 and salaries of $163,309, for a total of
$246,149, represent 22% of the net loss before tax through June 30, 1996.
Cotton Valley paid management fees of $10,000 per month from incorporation to
July 31, 1995, and $20,000 per month from August 1, 1995 to March 31, 1996, for
the full-time services of two of its officers.


                                      -17-

<PAGE>   18

Effective April 1, 1996, each of these officers received a salary of $10,000
per month. A third officer earned $10,000 per month from August 1, 1995. A
fourth officer earned $10,000 per month from May 1, 1996.

         Management fees and salaries totaling $194,951 from inception through
June 30, 1996, were capitalized into oil and gas properties and are thus not
included in the accumulated deficit as of that date. These costs represent the
estimated portion of the compensation directly attributable to acquisition of
the properties in the Cheneyboro Field and related development activities.

LIQUIDITY AND CAPITAL RESOURCES

         As of June 30, 1997, Cotton Valley had a working capital deficiency of
approximately $600,000. Management estimates that aggregate capital
expenditures of approximately $20.0 million will be required to develop its
reserves, of which $10.0 million is expected to be incurred during the year
ending June 30, 1998. Cotton Valley intends to finance development with the
proceeds from private placements, exercise of options, traditional bank debt
and institutional mezzanine reserves based financing. No assurance can be given
that the Company will be successful in these efforts.

         Since July 1, 1997, the Company has raised $454,000 through the sale
of 272,700 shares of its Common Stock in a private placement and issued
$125,000 of 15% two-year notes. In addition, from July 1, 1997 through
September 15, 1997, warrants to purchase approximately 433,000 shares of stock
had been exercised for proceeds of $866,000.         

         The Company expects that its capital expenditure requirements will be
met as follows:

          - through the proceeds received from the exercise of outstanding
            warrants; 
          - institutional reserves based development financing mezzanine loans;
          - traditional commercial bank asset lending;
          - private sales of securities; and
          - revenues from operations.

           Management believes a combination of the above plans will provide
the necessary liquidity to operate the Company over the next 12 months. No
assurance can be given that any additional financing will be available to
Cotton Valley on acceptable terms or at all. The inability to obtain additional
financing would have a material adverse effect on Cotton Valley, including
requiring Cotton Valley to curtail significantly its development of the
properties. Any financing may involve substantial dilution to the interests of
Cotton Valley's then existing stockholders.

ESTIMATED RESERVES

           The carrying value of Cotton Valley's oil and gas properties is
supported almost entirely by proved undeveloped reserves. Cotton Valley
emphasizes that reserve estimates of new discoveries or undeveloped properties
are more imprecise than those of producing oil and gas properties. Accordingly,
these estimates are expected to change materially as future information becomes
available.




                                      -18-

<PAGE>   19



ITEM 7.        CONSOLIDATED FINANCIAL STATEMENTS AND UNAUDITED
               SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE                                                PAGE
--------------------------------------------------------------                                                ----
<S>                                                                                                            <C>
Independent Auditor's Report...............................................................................    20

FINANCIAL STATEMENTS

Consolidated Balance Sheet at June 30, 1997 and 1996.......................................................    21

Consolidated Statements of Operations for the Years Ended June 30, 1997 and 1996...........................    23

Consolidated Statement of Changes in Stockholders' Equity for the Period
     February 15, 1995 to June 30, 1997....................................................................    24

Consolidated Statements of Cash Flows for the Years Ended June 30, 1997 and 1996...........................    27

Notes to Consolidated Financial Statements.................................................................    29

Supplemental Information (Unaudited).......................................................................    38
</TABLE>




                                      -19-

<PAGE>   20





                          INDEPENDENT AUDITOR'S REPORT




Board of Directors
Cotton Valley Resources Corporation
Dallas, Texas


We have audited the accompanying consolidated balance sheets of Cotton Valley
Resources Corporation and subsidiaries (a development stage company) as of June
30, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended June 30, 1997 and 1996,
and the period from February 15, 1995 (date of incorporation) to June 30, 1995
and the period from February 15, 1995 to June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
June 30, 1997 and 1996, and the results of its operations and its cash flows
for the years ended June 30, 1997 and 1996, the period from February 15, 1995
(date of incorporation) to June 30, 1995 and the period from February 15, 1995
to June 30, 1997 in accordance with generally accepted accounting principles.

The carrying value of the Company's oil and gas properties is supported
primarily by proved undeveloped reserves.


HEIN + ASSOCIATES LLP

Dallas, Texas
September 15, 1997


                                      -20-

<PAGE>   21
                      COTTON VALLEY RESOURCES CORPORATION
                         (a development stage company)



                          CONSOLIDATED BALANCE SHEETS
                          (Expressed in U. S. Dollars)


                                     ASSETS

<TABLE>
<CAPTION>
                                                                     AS OF JUNE 30,
                                                       -------------------------------------------
                                                          1997
                                                       Pro Forma
                                                       (Unaudited)         1997            1996
                                                       -----------     -----------     -----------
                                                        (Note 9)
<S>                                                    <C>             <C>             <C>        
CURRENT ASSETS:
   Cash                                                $   442,612     $   642,612     $   803,070
   Accrued oil and gas sales                                85,602          85,602              --
   Prepaid expenses                                         25,196          25,196              --
                                                       -----------     -----------     -----------
           Total current assets                            553,410         753,410         803,070

PROVED OIL AND GAS PROPERTIES  (full cost method)
   net of accumulated depletion of $27,000 and $0       18,121,346      11,821,346      11,140,724

OFFICE FURNITURE AND EQUIPMENT, net of
    accumulated depreciation of $14,813 and $1,684          40,649          40,649          35,536
                                                       -----------     -----------     -----------
           Total assets                                $18,715,405     $12,615,405     $11,979,330
                                                       ===========     ===========     ===========
</TABLE>





                                   Continued

                                      -21-

<PAGE>   22


                      COTTON VALLEY RESOURCES CORPORATION
                         (a development stage company)


                     CONSOLIDATED BALANCE SHEETS, continued

                      LIABILITIES AND STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                 AS OF JUNE 30,
                                                                ------------------------------------------------
                                                                   1997
                                                                Pro Forma
                                                                (Unaudited)           1997              1996
                                                                ------------      ------------      ------------
                                                                  (Note 9)
<S>                                                             <C>               <C>               <C>         
CURRENT LIABILITIES:
   Current portion of long-term debt                            $    200,000      $    200,000      $         --
   Note payable, net of discount of $124,000                         755,000           455,000                --
   Accrued payroll taxes                                             197,006           197,006                --
   Accounts payable                                                  384,433           384,433           516,689
   Accrued expenses                                                   31,598            31,598                --
   Other liability                                                    80,000            80,000                --
                                                                ------------      ------------      ------------
           Total current liabilities                               1,648,037         1,348,037           516,689

LONG-TERM DEBT                                                            --                --           586,049

ADVANCES FROM RELATED PARTIES                                        139,710           139,710           171,709

DEFERRED INCOME TAXES                                              1,769,000           669,000         1,588,000

STOCKHOLDERS' EQUITY:
   Preferred stock, no par value, authorized-unlimited,
      issued -none                                                        --                --
   Common stock, no par value, authorized-unlimited:
      Issued -12,590,473 and 9,191,596 shares, respectively       17,407,063        12,707,063         9,879,160
      Subscribed - 177,000 shares                                    197,750           197,750                --
      Warrants                                                       323,000           323,000                --
   Deficit accumulated in development stage                       (2,769,155)       (2,769,155)         (762,277)
                                                                ------------      ------------      ------------
           Total stockholders' equity                             15,158,658        10,458,658         9,116,883
                                                                ------------      ------------      ------------

           Total liabilities and stockholders' equity           $ 18,715,405      $ 12,615,405      $ 11,979,330
                                                                ============      ============      ============
</TABLE>


             SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.

                                      -22-

<PAGE>   23


                      COTTON VALLEY RESOURCES CORPORATION
                         (a development stage company)


                     CONSOLIDATED STATEMENTS OF OPERATIONS
                          (Expressed in U. S. Dollars)



<TABLE>
<CAPTION>
                                                                        PERIOD FROM             PERIOD FROM         
                                          YEAR ENDED JUNE 30,         FEBRUARY 15, 1995       FEBRUARY 15, 1995      
                                    ------------------------------           TO                      TO             
                                        1997              1996         JUNE 30, 1995            JUNE 30, 1997        
                                    ------------      ------------     ---------------        -----------------      
<S>                                 <C>               <C>               <C>                     <C>                 
REVENUE:                                                                                                            
   Oil and gas sales                $    272,243      $         --      $         --            $    272,243        
   Interest income                         3,987             5,386                --                   9,373        
                                    ------------      ------------      ------------            ------------        
           Total revenues                276,230             5,386                --                 281,616        
                                                                                                                    
EXPENSES:                                                                                                           
   Oil and gas production costs          252,272                --                --                 252,272        
   Depletion                              27,000                --                --                  27,000        
   General and administrative          2,825,678           965,776            74,917               3,866,371        
   Interest                               97,158           138,970                --                 236,128        
                                    ------------      ------------      ------------            ------------        
           Total Expenses              3,202,108         1,104,746            74,917               4,381,771        
                                    ------------      ------------      ------------            ------------        
                                                                                                                    
LOSS BEFORE INCOME TAXES              (2,925,878)       (1,099,360)          (74,917)             (4,100,155)       
                                                                                                                    
INCOME TAX BENEFIT                       919,000           387,000            25,000               1,331,000        
                                    ------------      ------------      ------------            ------------        
                                                                                                                    
NET LOSS                            $ (2,006,878)     $   (712,360)     $    (49,917)           $ (2,769,155)       
                                    ============      ============      ============            ============        

NET LOSS PER SHARE                  $       (.20)     $       (.06)     $         --               
                                    ============      ============      ============

WEIGHTED AVERAGE SHARES                9,901,000        11,403,000        10,655,000               
                                    ============      ============      ============
</TABLE>


             SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.

                                      -23-

<PAGE>   24


                      COTTON VALLEY RESOURCES CORPORATION
                         (a development stage company)


           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
             FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1997
                          (Expressed in U. S. Dollars)


<TABLE>
<CAPTION>
                                                                                                                 COMMON STOCK
                                                                                           COMMON STOCK           SUBSCRIBED
                                                                                      ---------------------     --------------
                                                                                      SHARES         AMOUNT     SHARES  AMOUNT 
                                                                                      ------         ------     ------  ------
<S>                                                                                   <C>         <C>              <C>    <C> 
Issued upon incorporation to officers
   ($.003 per share)                                                                  560,001     $     1,401      --     -- 
Issued March 10, 1995 for the potential
   acquisition of subsequently abandoned
   oil and gas properties (621,600 shares
   issued and 310,800 shares canceled
   $.003 per share)                                                                   310,800             777      --     -- 
Issued March 10, 1995 for the acquisition
   of oil and gas properties ($1.82 per share)                                      3,875,957       7,072,914      --     -- 
Issued June 1, 1995 for cash ($1.00 per share)                                         10,000          10,000      --     -- 
Net loss                                                                                   --              --      --     -- 
                                                                                    ---------       ---------    ----   ----
BALANCES,  June 30, 1995                                                            4,756,758       7,085,092      --     -- 

Issued July - December 1995 in
   connection with notes payable
   ($1.49 per  share)                                                                 107,258         160,008      --     -- 
Repayment and conversion to equity
   of notes payable, net of amortized discount                                             --         (72,000)     --     -- 
Issued December 29, 1995 to officers
   upon conversion of special shares
   ($.004 per share)                                                                1,440,000           5,840      --     -- 
Issued December 29, 1995 as advance
   for stock offering costs ($1.49 per share)                                         340,000         506,409      --     -- 
Issued December 29, 1995 to officers
   for services ($1.49 per share)                                                     300,000         446,950      --     -- 
Sale of shares for cash during April - June
   1996 ($1.64 per share)                                                           1,272,500       2,089,872      --     -- 
Issued June 14, 1996 upon conversion
   of debentures ($1.48 per share)                                                    288,529         426,474      --     -- 
Issued June 14, 1996 to former Arjon
     shareholders ($.21 per share)                                                    686,551         146,300      --     -- 
Share issuance costs                                                                       --        (915,785)            -- 
Net loss                                                                                   --              --      --     -- 
                                                                                    ---------       ---------    ----   ----
BALANCES, June 30, 1996                                                             9,191,596       9,879,160      --     -- 

<CAPTION>
                                                                                         SPECIAL SHARES                 
                                                                                     ----------------------
                                                                                     SHARES          AMOUNT             WARRANTS 
                                                                                     ------          ------             --------
<S>                                                                                 <C>            <C>                       <C>
Issued upon incorporation to officers
   ($.003 per share)                                                                2,100,000      $         8               -- 
Issued March 10, 1995 for the potential
   acquisition of subsequently abandoned
   oil and gas properties (621,600 shares
   issued and 310,800 shares canceled
   $.003 per share)                                                                        --               --               -- 
Issued March 10, 1995 for the acquisition
   of oil and gas properties ($1.82 per share)                                             --               --               -- 
Issued June 1, 1995 for cash ($1.00 per share)                                             --               --               -- 
Net loss                                                                                   --               --               -- 
                                                                                    ---------      -----------             ----
BALANCES,  June 30, 1995                                                            2,100,000                8               -- 

Issued July - December 1995 in
   connection with notes payable
   ($1.49 per  share)                                                                      --               --               -- 
Repayment and conversion to equity
   of notes payable, net of amortized discount                                             --               --               -- 
Issued December 29, 1995 to officers
   upon conversion of special shares
   ($.004 per share)                                                               (2,100,000)              (8)              -- 
Issued December 29, 1995 as advance
   for stock offering costs ($1.49 per share)                                              --               --               -- 
Issued December 29, 1995 to officers
   for services ($1.49 per share)                                                          --               --               -- 
Sale of shares for cash during April - June
   1996 ($1.64 per share)                                                                  --               --               -- 
Issued June 14, 1996 upon conversion
   of debentures ($1.48 per share)                                                         --               --               -- 
Issued June 14, 1996 to former Arjon
     shareholders ($.21 per share)                                                         --               --               -- 
Share issuance costs                                                                       --               --               -- 
Net loss                                                                                   --               --               -- 
                                                                                    ---------      -----------             ----
BALANCES, June 30, 1996                                                                    --               --               -- 

<CAPTION>
                                                                                    DEFICIT
                                                                                  ACCUMULATED
                                                                                 IN DEVELOPMENT
                                                                                     STAGE             TOTAL
                                                                                 --------------        -----
<S>                                                                               <C>              <C>        
Issued upon incorporation to officers
   ($.003 per share)                                                              $        --      $     1,409
Issued March 10, 1995 for the potential
   acquisition of subsequently abandoned
   oil and gas properties (621,600 shares
   issued and 310,800 shares canceled
   $.003 per share)                                                                        --              777
Issued March 10, 1995 for the acquisition
   of oil and gas properties ($1.82 per share)                                             --        7,072,914
Issued June 1, 1995 for cash ($1.00 per share)                                             --           10,000
Net loss                                                                              (49,917)         (49,917)
                                                                                  -----------       ----------  
BALANCES,  June 30, 1995                                                              (49,917)       7,035,183

Issued July - December 1995 in
   connection with notes payable
   ($1.49 per  share)                                                                      --          160,008
Repayment and conversion to equity
   of notes payable, net of amortized discount                                             --          (72,000)
Issued December 29, 1995 to officers
   upon conversion of special shares
   ($.004 per share)                                                                       --            5,832
Issued December 29, 1995 as advance
   for stock offering costs ($1.49 per share)                                              --          506,409
Issued December 29, 1995 to officers
   for services ($1.49 per share)                                                          --          446,950
Sale of shares for cash during April - June
   1996 ($1.64 per share)                                                                  --        2,089,872
Issued June 14, 1996 upon conversion
   of debentures ($1.48 per share)                                                         --          426,474
Issued June 14, 1996 to former Arjon
     shareholders ($.21 per share)                                                         --          146,300
Share issuance costs                                                                       --         (915,785)
Net loss                                                                             (712,360)        (712,360)
                                                                                  -----------        ---------
BALANCES, June 30, 1996                                                              (762,277)       9,116,883
</TABLE>


                                   Continued

                                      -24-

<PAGE>   25


                      COTTON VALLEY RESOURCES CORPORATION
                         (a development stage company)


      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY, continued
             FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1997
                          (Expressed in U. S. Dollars)


<TABLE>
<CAPTION>
                                                                                     COMMON STOCK 
                                                          COMMON STOCK                SUBSCRIBED         SPECIAL SHARES
                                                      --------------------        -------------------    ---------------
                                                      SHARES        AMOUNT        SHARES       AMOUNT    SHARES   AMOUNT
                                                      ------        ------        ------       ------    ------   ------
<S>                                                <C>           <C>             <C>           <C>          <C>      <C> 
Issued August 13, 1996 for exercise
   of warrants ($1.64 per share)                       6,667        10,950            --            --       --       -- 
Issued in August and November 1996 for
   exercise of warrants ($.48 per share)             175,001        84,315            --            --       --       -- 
Sales of shares for cash during November 1996
   ($.73 per share)                                  100,000        73,365            --            --       --       -- 
Issued primarily in December 1996 for
   services ($.78 per share)                          86,888        67,432            --            --       --       -- 
Issued in December 1996 to settle
   liabilities ($.73 per  share)                      53,750        39,238            --            --       --       -- 
Issued in December 1996 for investor relations
   services ($.73 per share)                       1,490,000     1,087,700            --            --       --       -- 
Sale of shares for cash on January 7, 1997
   ($.82 per share), less commission of
   $16,400                                           200,000       147,825            --            --       --       -- 
Issued during January 1997 for exercise of
   warrants ($.48 per share)                         241,666       116,434            --            --       --       -- 
Issued February 5, 1997 for exercise of
   warrants ($2.00 per share)                         11,239        22,562            --            --       --       -- 
Issued February 5, 1997 for exercise of
   warrants ($1.47 per share)                         37,741        55,791            --            --       --       -- 
Issued during March 1997 for exercise of
   warrants ($1.64 per  share)                        31,667        52,014            --            --       --       -- 
Sale of shares from December 1996
   through March 1997 for cash, including
   shares subscribed but not issued ($.75
   per share)                                       375,000       281,250       125,000        93,750       --       -- 
Sale of shares for cash during February -
   June 1997 ($1.51 per share)                       266,667       402,527            --            --       --       -- 

<CAPTION>
                                                            DEFICIT
                                                          ACCUMULATED
                                                         IN DEVELOPMENT
                                                WARRANTS     STAGE        TOTAL
                                                -------- --------------   -----
<S>                                                  <C>                <C>   
Issued August 13, 1996 for exercise
   of warrants ($1.64 per share)                     --       --        10,950
Issued in August and November 1996 for
   exercise of warrants ($.48 per share)             --       --        84,315
Sales of shares for cash during November 1996
   ($.73 per share)                                  --       --        73,365
Issued primarily in December 1996 for
   services ($.78 per share)                         --       --        67,432
Issued in December 1996 to settle
   liabilities ($.73 per  share)                     --       --        39,238
Issued in December 1996 for investor relations
   services ($.73 per share)                         --       --     1,087,700
Sale of shares for cash on January 7, 1997
   ($.82 per share), less commission of
   $16,400                                           --       --       147,825
Issued during January 1997 for exercise of
   warrants ($.48 per share)                         --       --       116,434
Issued February 5, 1997 for exercise of
   warrants ($2.00 per share)                        --       --        22,562
Issued February 5, 1997 for exercise of
   warrants ($1.47 per share)                        --       --        55,791
Issued during March 1997 for exercise of
   warrants ($1.64 per  share)                       --       --        52,014
Sale of shares from December 1996
   through March 1997 for cash, including
   shares subscribed but not issued ($.75
   per share)                                        --       --       375,000
Sale of shares for cash during February -
   June 1997 ($1.51 per share)                       --       --       402,527
</TABLE>




                                   Continued

                                      -25-

<PAGE>   26


                      COTTON VALLEY RESOURCES CORPORATION
                         (a development stage company)



      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY, continued
             FOR THE PERIOD FROM FEBRUARY 15, 1995 TO JUNE 30, 1997
                          (Expressed in U. S. Dollars)



<TABLE>
<CAPTION>

                                                                                             COMMON STOCK        
                                                           COMMON STOCK                       SUBSCRIBED         
                                                     -----------------------           ------------------------  
                                                     SHARES           AMOUNT           SHARES            AMOUNT  
                                                     ------           ------           ------            ------  
<S>                                               <C>            <C>                   <C>         <C>           
Issuance of shares in May 1997 for                                                                               
    services (1.84 per share)                         20,400           37,500               --               --  
Cash received in June 1997 as                                                                                    
    prepayment for subsequent exercise of                --                --           52,000          104,000  
    warrants ($2.00 per share)                                                                                  
Issuance of shares in June 1997 for                                                                              
    conversion of notes payable ($1.16 per                                                                       
    share)                                           302,191          349,000               --               --  
Estimated fair value of warrants issued for                                                                      
    services in November 1997 and as                                                                            
    discount on note payable in June 1997                 --               --               --               --  
Net loss                                                  --               --               --               --  
                                                  ----------     ------------          -------     ------------  
BALANCES, June 30, 1997                           12,590,473     $ 12,707,063          177,000     $    197,750  
                                                  ==========     ============          =======     ============  

<CAPTION>
                                                                                          DEFICIT                  
                                                   SPECIAL SHARES                       ACCUMULATED                
                                                  -----------------                    IN DEVELOPMENT              
                                                  SHARES     AMOUNT      WARRANTS          STAGE            TOTAL  
                                                  ------     ------      --------      --------------       -----  
<S>                                                <C>       <C>        <C>                <C>             <C>          
Issuance of shares in May 1997 for                                                                                      
    services (1.84 per share)                      --            --               --               --            37,500 
Cash received in June 1997 as                                                                                           
    prepayment for subsequent exercise of          --            --               --               --           104,000 
    warrants ($2.00 per share)                                                                                         
Issuance of shares in June 1997 for                                                                                     
    conversion of notes payable ($1.16 per                                                                              
    share)                                         --            --               --               --           349,000 
Estimated fair value of warrants issued for                                                                             
    services in November 1996 and as                                                                                   
    discount on note payable in June 1997          --            --          323,000               --           323,000 
Net loss                                           --            --               --       (2,006,878)       (2,006,878)
                                                  ---        ------     ------------       ----------      ------------ 
BALANCES, June 30, 1997                            --        $   --     $    323,000       (2,769,155)     $ 10,458,658 
                                                  ===        ======     ============       ==========      ============ 
</TABLE>


             See accompanying notes to these financial statements.


                                      -26-

<PAGE>   27


                      COTTON VALLEY RESOURCES CORPORATION
                         (a development stage company)


                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                          (Expressed in U. S. Dollars)


<TABLE>
<CAPTION>
                                                                                                    PERIOD FROM      PERIOD FROM
                                                                         YEAR ENDED JUNE 30,        FEBRUARY 15,     FEBRUARY 15,
                                                                    ----------------------------      1995 TO          1995 TO
                                                                        1997             1996       JUNE 30, 1995    JUNE 30, 1997
                                                                    -----------      -----------    -------------    -------------
<S>                                                                 <C>              <C>              <C>              <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                         $(2,006,878)     $  (712,360)     $   (49,917)     $(2,769,155)
   Adjustments to reconcile net loss to net cash used by
   operating activities:
         Deferred income tax benefit                                   (919,000)        (387,000)         (25,000)      (1,331,000)
         Amortization of debt discount                                       --           88,000               --           88,000
         Depletion and depreciation                                      40,128            1,683               --           41,811
         Common stock and warrants issued for services                1,391,632          446,950            2,181        1,840,763
         Change in accrued oil and gas sales and prepaid expenses      (110,797)              --               --         (110,797)
         Change in accrued and other liabilities                        308,604               --               --          308,604
         Change in accounts payable                                      97,744          286,689               --          384,433
         Other                                                            2,189            5,843               --            8,032
                                                                    -----------      -----------      -----------      -----------
              Net cash used by operating activities                  (1,196,378)        (270,195)         (72,736)      (1,539,309)

 CASH FLOWS FROM FINANCING ACTIVITIES:
   Advances from (repayments of) related parties                        (32,000)         107,974           63,736          139,710
   Sales and subscription of common stock and exercise of
      warrants                                                        1,444,783        2,089,872           10,000        3,544,655
   Issuance of convertible debentures                                        --          426,474               --          426,474
   Issuance of note payable subsequently converted into
      convertible debentures                                                 --          146,300               --          146,300
   Payment of liability related to oil and gas property                      --         (500,000)              --         (500,000)
   Costs related to sale of stock and debentures                             --         (409,376)              --         (409,376)
   Issuance of note payable                                             579,000          250,000               --          829,000
   Repayment of note payable                                                 --         (250,000)              --         (250,000)
                                                                    -----------      -----------      -----------      -----------
              Net cash provided by financing activities               1,991,783        1,861,244           73,736        3,926,763
</TABLE>


                                   Continued

                                      -27-

<PAGE>   28


                      COTTON VALLEY RESOURCES CORPORATION
                         (a development stage company)

                CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
                          (Expressed in U.S. Dollars)



<TABLE>
<CAPTION>
                                                                                                    PERIOD FROM       PERIOD FROM
                                                                         YEAR ENDED JUNE 30,        FEBRUARY 15,      FEBRUARY 15,
                                                                    ----------------------------      1995 TO            1995 TO
                                                                        1997             1996       JUNE 30, 1995    JUNE 30, 1997
CASH FLOWS FROM INVESTING ACTIVITIES:                               -----------      -----------    -------------    -------------
<S>                                                                 <C>              <C>              <C>              <C>         
   Additions to oil and gas properties                                  (937,621)        (751,759)              --      (1,689,380)
   Acquisition of office equipment                                       (18,242)         (37,220)              --         (55,462)
                                                                     -----------      -----------      -----------     -----------
             Net cash used by investing activities                      (955,863)        (788,979)              --      (1,744,842)
                                                                     -----------      -----------      -----------     -----------

NET INCREASE (DECREASE) IN CASH                                         (160,458)         802,070            1,000         642,612

CASH - beginning of period                                               803,070            1,000               --              --
                                                                     -----------      -----------      -----------     -----------

CASH - end of year period                                            $   642,612      $   803,070      $     1,000     $   642,612
                                                                     ===========      ===========      ===========     ===========

SUPPLEMENTAL INFORMATION:
   Cash paid for interest                                            $    38,059      $    37,010      $        --     $    75,069
   Conversion of debt and other liabilities to common stock              388,238          426,474               --         814,712
   Liabilities incurred in acquisition of oil and gas properties              --          586,049          500,000       1,086,049
   Retirement of debenture upon merger with Arjon                             --          146,300               --         146,300
   Oil and gas property option acquired with payable                          --               --          230,000         230,000
   Oil and gas properties acquired with common stock                          --               --        7,072,914       7,072,914
   Issuance of common stock for stock offering costs                          --          506,409               --         506,409
   Transfer of account payable and related property option               230,000               --               --         230,000
</TABLE>


            See accompanying notes to these financial statements.


                                      -28-

<PAGE>   29
                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

1.       NATURE OF OPERATIONS

         The Company was incorporated under the laws of Ontario as Cotton Valley
         Energy Limited (CVEL) on February 15, 1995. It acquired all of the
         shares of Cotton Valley Energy Corporation (CVEC), a Nevada
         corporation, on June 30, 1995 in a one-for-one share and warrant
         exchange. CVEC was also incorporated in February 1995. CVEL had no
         substantive activity, so the acquisition of CVEC was accounted for as a
         recapitalization of CVEL with the net assets of CVEC. These
         consolidated financial statements have been prepared as if the Company
         had acquired CVEC at the Company's inception.

         The Company also owns 100% of the outstanding shares of Mustang Oil
         Field Equipment Co., a Nevada corporation that was formed to conduct
         used oil field equipment refurbishing and trading activities, and
         Cotton Valley Operating Company, a Texas corporation formed to operate
         oil and gas wells. Neither of the subsidiaries had commenced operations
         as of June 30, 1997. In addition, the Company owns 100% of Cotton
         Valley Energy, Inc., which was formed in 1997 to complete the Alden
         acquisition (see Note 3). Intercompany accounts and transactions are
         eliminated in consolidation.

         On June 14, 1996, the Company merged with Arjon Enterprises, Inc.
         (Arjon), an Ontario corporation and reporting issuer in Ontario. As a
         result of that merger the Company's name was changed to Cotton Valley
         Resources Corporation and a new capital structure was established.
         Transactions in the accompanying financial statements are reflected as
         if the resulting capital structure was in existence since inception.
         Arjon had no business activities and its only asset consisted of
         convertible debentures of the Company in the principal amount of
         $146,300. The Company accounted for the transaction as an issuance of
         stock for the net monetary assets of Arjon accompanied by a
         recapitalization. Former Arjon shareholders received 686,551 common
         shares (representing approximately 7.5% of the then outstanding common
         shares) of the Company.

         The Company is in the development stage and has not had material
         revenues from operations through June 30, 1997. The Company's planned
         principal business activity is to acquire, explore, and develop oil and
         gas properties. The Company also intends to refurbish and trade in used
         oil field equipment.

         The recoverability of amounts capitalized for oil and gas properties is
         dependent upon the identification of economically recoverable reserves,
         together with obtaining the necessary financing to exploit such
         reserves and the achievement of profitable operations.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Oil and Gas Properties

         The Company follows the full-cost method of accounting for oil and gas
         properties. Accordingly, all costs associated with acquisition,
         exploration and development of oil and gas reserves, including directly
         related overhead costs, are capitalized into a "full-cost pool."

         All capitalized costs of oil and gas properties, including the
         estimated future costs to develop proved reserves, are amortized on the
         unit-of-production method using estimates of proved reserves. Costs
         directly associated with the acquisition and evaluation of unproved
         properties are excluded from the amortization base until the related
         properties are evaluated. Such unproved properties are assessed

                                      -29-

<PAGE>   30


                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

         periodically and a provision for impairment is made to the full-cost
         amortization base when appropriate. Sales of oil and gas properties are
         credited to the full-cost pool unless the sale would have a significant
         effect on the amortization rate. Abandonments of properties are
         accounted for as adjustments to capitalized costs with no loss
         recognized.

         The net capitalized costs are subject to a "ceiling test," which limits
         such costs to the aggregate of the estimated present value of future
         net revenues from proved reserves discounted at ten percent based on
         current economic and operating conditions.

         Revenue Recognition

         Revenue is accrued and recognized in the month the oil and gas is
         produced and sold.

         Office Equipment
        
         Office equipment is recorded at cost and depreciated on a straight-line
         basis over the estimated useful lives of the assets, which range from
         three to five years.

         Foreign Currency Translation
        
         The Company's assets and principal activities are in the United States
         and its functional currency is the U.S. dollar. The effects of exchange
         rate changes on transactions denominated in Canadian dollars or other
         currencies are charged to operations. Foreign exchange gains or losses
         were insignificant for all periods presented.

         Income Taxes
        
         Income taxes are provided for the tax effects of transactions reported
         in the financial statements and consist of taxes currently due, if any,
         plus net deferred taxes related primarily to differences between the
         bases of assets and liabilities for financial and income tax reporting.
         Deferred tax assets and liabilities represent the future tax return
         consequences of those differences, which will either be taxable or
         deductible when the assets and liabilities are recovered or settled.
         Deferred tax assets include recognition of operating losses that are
         available to offset future taxable income and tax credits that are
         available to offset future income taxes. Valuation allowances are
         recognized to limit recognition of deferred tax assets where
         appropriate. Such allowances may be reversed when circumstances provide
         evidence that the deferred tax assets will more likely than not be
         realized.

         Deferred Site Restoration

         A provision is established for estimated future costs of site         
         restoration of oil and gas production interests, including the removal
         of production facilities at the end of their useful life. Costs are
         based on management's estimates of the anticipated method and extent of
         site restoration. The annual charge is determined on the same basis as
         the depletion and amortization of the underlying asset.

         Net Loss Per Share

         Per share information is based on the weighted average number of common
         stock and common stock equivalent shares outstanding. As required by
         the Securities and Exchange Commission rules, all warrants, options,
         and shares issued within a year prior to the initial filing of a
         registration statement are assumed to be outstanding for each year
         presented for purposes of the loss per share calculation.


                                      -30-

<PAGE>   31


                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

         Cash Flow Statement

         For purposes of the statement of cash flows, the Company considers all
         highly liquid debt instruments purchased with an original maturity of
         three months or less to be cash equivalents.

         Stock-Based Compensation

         Statement of Financial Accounting Standards No. 123 - Accounting for
         Stock-Based Compensation (SFAS 123), which was effective for the
         Company beginning with its 1997 fiscal year, requires recognition of
         compensation expense for grants of stock, stock options, and other
         equity instruments based on fair value. If the grants are to employees,
         companies may elect to disclose only the pro forma effect of such
         grants on net income and earnings per share in the notes to financial
         statements and continue to account for the grants pursuant to APB
         Opinion No. 25, "Accounting for Stock Issued to Employees". The Company
         has elected the pro forma disclosure alternative for employee grants.

         Use of Estimates
  
         The preparation of the Company's consolidated financial statements in
         conformity with generally accepted accounting principles requires the
         Company to make estimates and assumptions that affect the amounts
         reported in these financial statements and accompanying notes. Actual
         results could differ from those estimates. Significant assumptions are
         required in the valuation of proved oil and gas reserves, which as
         described above may affect the amount at which oil and gas properties
         are recorded. It is at least reasonably possible those estimates could
         be revised in the near term and those revisions could be material.

3.       OIL AND GAS PROPERTIES

         Cheneyboro Field
  
         The Company acquired approximately 5,000 net acres of oil and gas
         leases in the Cheneyboro Field of Navarro County, Texas during fiscal
         years 1995 and 1996. The Company issued 3,252,533 common shares,
         granted 406,567 Class A warrants (see Note 5), and paid $500,000 in
         cash and a promissory note of $586,049 as consideration. The stock was
         recorded at $5,935,281, based on the estimated fair value of the
         properties. The Company determined fair value by reference to an
         independent engineering firm's reserve report. In fiscal year 1997, an
         additional 1,500 net acres were acquired. During the year ended June
         30, 1996, the Company capitalized management fees and salaries of
         $195,476 directly related to the acquisition and proposed development
         of the property. No such costs were capitalized in the year ended June
         30, 1997.

         Movico Field, Mobile County, Alabama
        
         The Company acquired an option to acquire an interest in oil and gas
         leases in the Movico Field of Mobile County, Alabama in fiscal year
         1995. Consideration included 77,928 Class A warrants and 623,424 common
         shares, which were recorded at $1,137,635, based on the estimated fair
         value of the properties. The Company determined fair value by reference
         to an independent engineering firm's reserve report. In June 1997, the
         Company transferred the option to the company from which the Sword Unit
         option (see below) was acquired in exchange for a reduction in that
         option price.


                                      -31-

<PAGE>   32


                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

         Sword Unit, Offshore Santa Barbara, California

         The Company has entered into option agreements to acquire a working
         interest in the Sword Unit, Offshore Santa Barbara, California. The
         Company paid $400,000 in fiscal year 1996 to acquire the option. In
         addition, the Company agreed to pay an additional $125,000 in fiscal
         year 1997 to settle a contingent liability of up to $1,000,000 due upon
         closing the acquisition. To complete the option and acquire the working
         interest, the Company was initially required to pay $12,000,000 in cash
         and marketable securities (including the $1,000,000 referred to above)
         on closing sometime in 1997. In June 1997, in connection with the
         transfer of the Movico property described above, the requirement was
         reduced to $8,000,000, of which $2,000,000 may be in the Company's
         stock at the election of the other party. The Company is also required
         to participate in a $4,000,000 letter of credit related to the
         abandonment of two existing wells if it acquires the working interest.

         Alden Properties, Caddo County, Oklahoma

         In fiscal year 1997, the Company acquired an interest in the Alden
         properties for $390,000.

         Aspen Energy Corporation

         Subsequent to June 30, 1997, the Company acquired Aspen Energy
         Corporation as described in Note 9.

4.       NOTES PAYABLE AND LONG-TERM DEBT

         The Company has a $579,000 note payable at June 30, 1997 to a company
         that provided investor relations services to the Company and owns stock
         in the Company. The note bears interest at 9% and is due October 24,
         1997. The note is collateralized by the Company's rights to certain oil
         and gas properties and is convertible into the Company's common stock
         at $1.67 per share. Warrants to purchase 161,351 shares at $2.08
         through April 30, 2002 were also granted in connection with this
         transaction. The estimated fair value of the warrants at the time of
         grant of $124,000 has been accounted for as a discount to the note.

         The Company has promissory notes payable totaling $200,000 and $586,049
         at June 30, 1997 and 1996, respectively, for the unpaid purchase price
         of the Cheneyboro oil and gas properties (see Note 3). The notes are
         collateralized by the properties and are due July 17, 1997. Interest is
         payable quarterly at 12%. In June 1997, the creditor converted $349,000
         of the balance to common stock. In connection with the conversion, the
         creditor was granted warrants to purchase 302,191 shares as described
         in Note 5.

5.       STOCKHOLDERS' EQUITY

         The Company has an unlimited number of preferred shares authorized,
         which may be issued in series and include such rights and preferences
         as authorized by the board of directors. The board of directors has
         authorized the issuance of up to 2,000,000 shares of 8% Cumulative
         Convertible Preferred Stock. No such shares have been issued as of June
         30, 1997. If the shares were to be issued, holders of the Preferred
         Stock would be entitled to two votes per share on all matters submitted
         to a vote of the Company's shareholders. In addition, such holders
         would be entitled to receive cumulative dividends at the rate of 8% per
         annum, payable at the election of the Company in cash or in shares of
         common stock. Holders of the Preferred Stock would have a liquidation
         preference, limited to $6.00 per share of Preferred Stock; and each
         outstanding share of Preferred Stock would be convertible at any time
         by the holder into two shares of common stock.


                                      -32-

<PAGE>   33


                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

         Shortly after incorporation, the Company issued 2,100,000 special
         shares for total cash consideration of $2.00 to officers, which were
         subsequently exchanged for 1,440,000 common shares of the Company. The
         special shares were issued in exchange for preferred stock which had
         been issued upon incorporation of CVEC and subsequently canceled.

         In connection with the acquisition of oil and gas properties, including
         a property abandoned following its acquisition, the Company granted
         518,345 Class A warrants. In connection with the issuance of notes
         payable and debentures, the Company granted 112,390 Class A warrants.
         The Company also issued 636,250 Class A warrants in conjunction with a
         private placement of common shares. Each Class A warrant is a right to
         purchase one common share for $2.00 until December 31, 1997. None of
         the Class A warrants had been exercised as of June 30, 1997.

         Effective January 31, 1996, each 2.5 outstanding shares of the
         Company's common stock were consolidated into one share and the
         previously authorized unlimited number of special shares were canceled.
         The financial statements reflect the consolidation of common shares as
         if it occurred on inception of the Company.

         In December 1995, the Company issued a total of 300,000 shares of
         common stock to two officers in exchange for services performed from
         June 1995 through December 1995. The shares were recorded at $446,950,
         which represented the estimated value of the shares.

         During the year ended June 30, 1996, the Company granted to senior
         employees options that enable the employees to purchase 800,000 shares
         of the Company's common stock for $1.83 per share until July 1, 2000.
         In fiscal year 1997, options to purchase an additional 330,000 shares
         were granted directors and employees under substantially the same
         terms. The Company is authorized to issue shares of common stock under
         its employee stock option plan to employees, officers, directors,
         consultants and other service providers, provided that insiders must
         not in the aggregate hold options exceeding 10% of the outstanding
         shares. None of the director and employee options had been exercised as
         of June 30, 1997.

         The Company has granted to the placement agent of the debenture and
         private placement offerings that occurred in fiscal year 1996
         three-year options to purchase up to 10% of the common shares issued
         upon conversion of the debentures at a price equal to the conversion
         price. As a result, the agent has the right to buy 37,741 common shares
         at $1.48 per share until August 31, 1998; 73,739 common shares at $2.00
         per share until December 31, 1997; and 125,000 common shares at $1.64
         per share until April 30, 1998. Certain of these warrants were 
         exercised in fiscal year 1997.

         In conjunction with the merger with Arjon, a total of 431,755 common
         shares are issuable to former Arjon shareholders for Arjon warrants in
         existence prior to the merger. These shares are issuable as follows:
         333,334 common shares until December 31, 1998 at an exercise price of
         $0.48 per share and 98,421 common shares at an exercise price of $1.64
         per share until December 31, 1997. Certain of these warrants were
         exercised in fiscal year 1997.

         In November 1996, the Company entered into an agreement to obtain
         certain investor relations services. The other party was granted
         1,490,000 shares of the Company's common stock as non-forfeitable
         compensation. The stock was recorded at $1,087,800, based on the
         Company's stock price at the date of the agreement. The other party was
         required to acquire 500,000 units, with each unit consisting of one

                                      -33-

<PAGE>   34


                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

         share of the Company's common stock and a warrant to purchase one share
         for $0.80 through November 2001, for $375,000. As of June 30, 1997, the
         Company had received payment for the units, but 140,000 of the shares
         remained unissued. This has been recorded as common stock subscribed in
         the accompanying financial statements. None of the warrants had been
         exercised as of June 30, 1997. The estimated fair value of the warrants
         at the time of grant of $199,000 has been recorded as general and
         administrative expense.

         In fiscal year 1997, additional warrants were granted as set forth
         below. None of these warrants had been exercised as of June 30, 1997.

     o    Warrants to acquire 266,667 shares for $1.68 per share through January
          2002 were granted in connection with a private placement;

     o    Warrants to acquire 200,000 shares at $.73 per share through December
          31, 1999 were granted in connection with another private placement;

     o    Warrants to acquire 302,191 shares at $1.28 through June 30, 2002 were
          granted in connection with conversion of a note payable to common
          stock as described in Note 4;

     o    Warrants to acquire 161,351 shares as described in Note 4;

     o    Warrants to acquire 166,666 shares at $.73 per share through December
          31, 1999 were granted officers.

     The following table summarizes the option and warrant activity for the
years ended June 30, 1997 and 1996:


<TABLE>
<CAPTION>
                                                        June 30, 1997           June 30, 1996
                                                    ---------------------   --------------------
                                                                 Weighted               Weighted
                                                                 Average                Average
                                                     Number      Exercise    Number     Exercise
                                                    of Shares      Price    of Shares     Price
                                                    ---------    --------   ---------   --------
<S>                                                 <C>           <C>         <C>         <C>   
Outstanding, beginning of year                      2,735,220     $ 1.73      630,735     $ 2.00
     Granted to:                                                                                   
         Employees, officers and directors            496,666       1.46      800,000       1.83
         Others                                     1,430,209       1.20    1,304,485       1.53
         Expired                                           --                      --          
         Exercised                                   (413,981)       .70           --          
                                                    ---------               ---------           
Outstanding, end of year                            4,248,114       1.83    2,735,220       1.73
                                                    =========               =========           
</TABLE>


                                      -34-

<PAGE>   35


                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

     All outstanding warrants and options were exercisable at June 30, 1997. If
     not previously exercised, warrants and options outstanding at June 30,
     1997, will expire as follows:

<TABLE>
<CAPTION>
                                                                    Weighted
                                                                    Average
                                                   Number           Exercise
            Year Ending June 30,                 of Shares           Price
          ------------------------              ------------        --------
          <S>                                   <C>                 <C> 
                    1998                             191,754          $ 1.64
                    1998                           1,329,485            2.00
                    2000                             366,666             .73
                    2001                           1,130,000            1.83
                    2002                             500,000             .83
                    2002                             302,191            1.28
                    2002                             266,667            1.68
                    2002                             161,351            2.08
                                                ------------
                    Total                          4,248,114
                                                ============
</TABLE>

     Presented below is a comparison of the weighted average exercise prices and
     market price of the Company's common stock on the measurement date for all
     warrants and stock options granted during fiscal years 1997 and 1996:


<TABLE>
<CAPTION>
                                                    1997                             1996
                                      ------------------------------    ------------------------------
                                       Number     Exercise    Market     Number     Exercise    Market
                                      of Shares    Price      Price     of Shares    Price      Price
                                      ---------   --------    ------    ---------   --------    ------
<S>                                    <C>         <C>        <C>        <C>         <C>        <C>   
Fair value equal to
    exercise price                     935,524     $ 1.18     $ 1.18     925,000     $ 1.64     $ 1.64
Fair value greater than
    exercise price                          --         --         --     469,496     $  .80     $ 1.97
Exercise price greater
    than fair value                    991,351     $ 1.35     $ 1.02     709,989     $ 2.00     $ 1.60
</TABLE>

     Fair value of warrants granted to non-employees for services or in
     connection with debt transactions during the year ended June 30, 1997 was
     determined using the Black-Scholes option pricing model. Significant
     assumptions included a risk-free interest rate of 5.9%, expected volatility
     of 102%, and that no dividends would be declared during the expected term
     of the options. The weighted average contractual term of the warrants was
     approximately 5.0 years compared to a weighted average expected term of 2.0
     years. The estimated fair value of warrants described above amounted to
     $323,000 of which $124,000 is recorded as a debt issuance cost in the
     balance sheet and $199,000 is recorded as general and administrative
     expense in the statement of operations.

     Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
     Opinion 25 and related interpretations in accounting for its stock options
     and warrants which are granted to employees. Accordingly, compensation cost
     has not been recognized for grants of options and warrants to employees and
     directors unless the exercise prices were less than the fair value of the
     Company's common stock on the grant dates. Had compensation cost been
     determined based on the fair value at the grant dates for awards under
     those plans consistent with the method of FASB 123, the Company's net loss 
     and loss per share would have been increased to the pro forma amounts 
     indicated below.


                                      -35-

<PAGE>   36


                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)


<TABLE>
<CAPTION>
                                                                 Year Ended June 30,
                                                           --------------------------------
                                                               1997                1996
                                                           ------------        ------------ 
<S>                                                        <C>                 <C>          
Net loss applicable to common stockholders:
     As reported                                           $ (2,006,878)       $   (712,360)
     Pro forma                                             $ (2,408,000)       $ (1,800,000)
Net loss per common share:
     As reported                                           $       (.20)       $       (.06)
     Pro forma                                             $       (.23)       $       (.16)
</TABLE>

     The fair value of each employee option and warrant granted in 1997 and 1996
     was estimated on the date of grant using the Black-Scholes option-pricing
     model with the following weighted average assumptions:


<TABLE>
<CAPTION>
                                                   Year ended June 30,
                                                   -------------------
                                                   1997           1996
                                                   ----           ----
<S>                                                <C>            <C> 
Expected volatility                                 102%           102%
Risk-free interest rate                             5.9%           6.1%
Expected dividends                                   --             --
Expected terms (in years)                           4.5            5.0
</TABLE>

6.   RELATED PARTY TRANSACTIONS

     During the year ended June 30, 1996 and the period from February 15, 1995
     to June 30, 1995, the Company paid management fees in lieu of salaries to
     two corporations controlled by senior officers of the Company, aggregating
     $160,000 and $50,000, respectively. In addition, the Company has received
     advances from these two companies, net of repayments, totaling $139,710 and
     $171,709 at June 30, 1997 and 1996, respectively. The advances are
     unsecured, without interest and are due after June 30, 1998.

7.   INCOME TAXES

     The Company's deferred tax assets (liabilities) consist of the following:


<TABLE>
<CAPTION>
                                                                                    JUNE 30,
                                                                       ----------------------------------
                                                                            1997                 1996
                                                                       -------------         ------------
<S>                                                                     <C>                  <C>          
Deferred tax liabilities:
   Difference in bases of oil and gas properties acquired               $ (2,000,000)        $ (2,000,000)
   Costs capitalized for books and deducted for tax                          (84,000)             (65,000)
                                                                       -------------         ------------
           Total deferred tax liabilities                                 (2,084,000)          (2,065,000)
                                                                       -------------         ------------
Deferred tax asset (net operating loss carryforwards)                      1,415,000              477,000
                                                                       -------------         ------------
           Net deferred tax liability                                  $    (669,000)        $ (1,588,000)
                                                                       =============         ============
</TABLE>

     The difference from the expected income tax benefit for the year ended June
     30, 1997 at the statutory federal tax rated of 34% and the actual income
     tax benefit is primarily the result of amounts related to the estimated

                                      -36-

<PAGE>   37


                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

     value of warrants that were expensed for purposes of the financial
     statements, but are not deductible for income tax purposes. At June 30,
     1997, the Company has available net operating loss carryforwards of
     approximately $4,000,000 to reduce future taxable income. These
     carryforwards expire from 2002 to 2004.

8.   CONCENTRATION OF CREDIT RISK AND  FAIR VALUE OF FINANCIAL INSTRUMENTS

     At June 30, 1997 and 1996, the Company had deposits in one financial
     institution that were approximately $543,000 and $700,000, respectively in
     excess of FDIC insurance limits.

     The Company's financial instruments at June 30, 1997 and 1996 are cash,
     accrued oil and gas sales, accounts payable, long-term debt and advances
     from related parties. Management believes the fair market values of cash,
     accrued oil and gas sales and accounts payable approximate carrying values
     due to the short-term nature of these instruments. Management has estimated
     the fair values of long-term debt and advances from related parties based
     on expected discounted cash flows and believes the fair values are not
     materially different than carrying values.

9.   SUBSEQUENT EVENTS

     On July 31, 1997, effective June 30, 1997, the Company acquired 100% of
     Aspen Energy Corporation, an oil and gas company, for $200,000 in cash, a
     $300,000 promissory note payable in two installments through January 1998
     and 2,511,317 shares of the Company's common stock. In addition, the
     shareholders of Aspen agreed to deliver 270,000 of the shares they received
     in the transaction back to Aspen in satisfaction of obligations owed by
     such shareholders to Aspen in the amount of $425,000. Due to the
     significance of this transaction, it has been recorded by the Company in a
     pro forma column in the accompanying balance sheet as if it had occurred on
     June 30, 1997.

     In July 1997, the Company entered into a letter agreement with an
     investment banking firm to arrange a sale of part or all of the Company or
     a strategic alliance with a larger company. The investment banking firm was
     granted exclusive representation rights for a period of nine months and
     will receive a fee, if the transaction is completed, varying from 3% to 10%
     of the transaction size.

     In July 1997, the Company initiated a private placement of its common stock
     and of 15% two-year notes. Through September 15, 1997, the Company had sold
     272,700 shares for net proceeds of $454,500 in the stock placement and
     raised $125,000 in the note offering. In addition, warrants to purchase
     approximately 433,000 shares of stock had been exercised for proceeds of
     $866,000 from July 1, 1997 through September 15, 1997.


                                      -37-

<PAGE>   38


                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

10.  SUPPLEMENTAL INFORMATION (UNAUDITED)

     Costs incurred by the Company with respect to its oil and gas producing
     activities are set forth below. No significant costs were incurred in
     exploration activities or in the acquisition of unproved properties.


<TABLE>
<CAPTION>
                                                 FOR THE PERIODS ENDED
                                                        JUNE 30,
                                             ------------------------------
                                                 1997               1996
                                             -----------        -----------
<S>                                          <C>                <C>        
Proved property acquisition cost             $   515,000        $ 1,110,054
Development costs                                422,621            227,754
                                             -----------        -----------
              Total                          $   937,621        $ 1,337,808
                                             ===========        ===========
</TABLE>

11.  OIL AND GAS RESERVE INFORMATION (UNAUDITED)

     Proved oil and gas reserves are the estimated quantities of crude oil,
     condensate and natural gas which geological and engineering data
     demonstrate with reasonable certainty to be recoverable in future years
     from known reservoirs under existing economic and operating conditions.
     Proved developed oil and gas reserves are reserves that can be expected to
     be recovered through existing wells with existing equipment and operating
     methods. The following estimated net interests in proved reserves are based
     upon subjective engineering judgments and may be affected by the
     limitations inherent in such estimation. The process of estimating reserves
     is subject to continual revision as additional information becomes
     available as a result of drilling, testing, reservoir studies and
     production history. There can be no assurance that such estimates will not
     be materially revised in subsequent periods.

     The Company emphasizes that reserve estimates of new discoveries or
     undeveloped properties are more imprecise than those of producing oil and
     gas properties. The Company's reserves are substantially from undeveloped
     properties. Accordingly, these estimates are expected to change materially
     as future information becomes available. The Company's reserves were
     estimated by independent petroleum engineers. All of the Company's reserves
     are located onshore in the continental United States. The recoverability of
     the proved undeveloped reserves is dependent upon obtaining financing to
     exploit the reserves.


                                      -38-

<PAGE>   39

                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

     The following table sets forth proved oil and gas reserves at June 30,
     1997, 1996 and 1995 together with changes therein:


<TABLE>
<CAPTION>
                                                   OIL AND         NATURAL
                                                  CONDENSATE         GAS
                                                  -----------    -----------
                                                    (BBLS)          (MCF)
                                                  -----------    -----------
<S>                                               <C>            <C>       
Balance at February 15, 1995                               --             --
     Purchase of minerals in place                  4,294,000     12,882,000
                                                  -----------    -----------
Balance at June 30, 1995                            4,294,000     12,882,000
                                                  -----------    -----------
Balance at June 30, 1996                            4,294,000     12,882,000
     Purchase of minerals in place                    523,000      5,222,000
     Production                                       (12,000)       (34,000)
     Revision of prior estimates                      (19,000)        (8,000)
                                                  -----------    -----------
Balance at June 30, 1997                            4,786,000     18,062,000
                                                  ===========    ===========

Proved developed reserves at June 30:
     1995                                                  --             --
                                                  ===========    ===========
     1996                                              93,000        280,000
                                                  ===========    ===========
     1997                                             423,000      1,787,000
                                                  ===========    ===========
</TABLE>

     The standardized measure of discounted future net cash flows at June 30,
     1997, 1996 and 1995 relating to proved oil and gas reserves is set forth
     below. The assumptions used to compute the standardized measure are those
     prescribed by the Financial Accounting Standards Board and as such, do not
     necessarily reflect the Company's expectations of actual revenues to be
     derived from those reserves nor their present worth. The limitations
     inherent in the reserve quantity estimation process described above are
     equally applicable to the standardized measure computations since these
     estimates are the basis for the valuation process.

     Standardized measure of discounted future net cash flows relating to proved
     reserves:


<TABLE>
<CAPTION>
                                                               AT JUNE 30,
                                            -----------------------------------------------
                                                1997              1996            1995
                                            -------------    -------------    -------------
<S>                                         <C>              <C>              <C>           
Future cash inflows                         $ 129,610,000    $ 118,003,000    $  98,023,000 
Future production costs                       (18,826,000)     (15,013,000)     (13,249,000)
Future development costs                      (13,915,000)     (12,446,000)     (12,361,000)
                                            -------------    -------------    -------------
Future net cash flows, before income tax       96,869,000       90,544,000       72,413,000
Future income tax expenses                    (31,526,000)     (30,785,000)     (24,723,000)
                                            -------------    -------------    -------------
Future net cash flows                          65,343,000       59,759,000       47,690,000
10% discount to reflect timing of net
 cash flows                                   (22,543,000)     (19,315,000)     (17,890,000)
                                            -------------    -------------    -------------
Standardized measure of discounted future
      net cash flows                        $  42,800,000    $  40,444,000    $  29,800,000
                                            =============    =============    =============
</TABLE>


                                      -39-

<PAGE>   40


                       COTTON VALLEY RESOURCES CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)

     Changes in standardized measure of discounted future net cash flows
     relating to proved reserves:


<TABLE>
<CAPTION>
                                                      FOR THE PERIOD ENDED JUNE 30,
                                               --------------------------------------------
                                                   1997            1996            1995
                                               ------------    ------------    ------------
<S>                                            <C>             <C>             <C>         
Standardized measure, beginning of period      $ 40,444,000    $ 29,800,000    $         --
Net change in sales price, net of production
costs                                            (5,288,000)     11,762,000              --
Accretion of discount                             4,044,000       2,980,000              --
Purchases of reserves in-place                    6,687,000              --      45,249,000
Production                                          (21,000)             --              --
Change in timing of production and other         (2,581,000)             --              --
Net changes in income taxes                        (485,000)     (4,098,000)    (15,449,000)
                                               ------------    ------------    ------------
Standardized measure, end of period            $ 42,800,000    $ 40,444,000    $ 29,800,000
                                               ============    ============    ============
</TABLE>


                                      -40-

<PAGE>   41



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

             There are not and have not been any disagreements between the
Company and its accountants on any matter of accounting principles or practices
or financial statement disclosure.


                                    PART III

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


DIRECTORS AND EXECUTIVE OFFICERS

             The following is a list of the names and ages of each of the
             Company's directors and executive officers:
<TABLE>
<CAPTION>

Name                   Age  Position
--------------------   ---  --------
<S>                    <C>  <C>
Eugene A. Soltero       54  Chairman of the Board and Chief Executive Officer
James E. Hogue          60  Director, President and Chief Operating Officer
Peter Lucas             43  Senior Vice President and Chief Financial Officer
Wayne T. Egan(1)        32  Director
Michael Kamis           44  Director
Richard J. Lachcik(2)   38  Director
</TABLE> 
---------------------
(1)  Member, Audit Committee
(2)  Member, Compensation Committee


         Eugene A. Soltero has served Cotton Valley as a director since February
1995. He was President from February 1995 to July 1996 and has been Chairman and
Chief Executive Officer since January 1996. He has been Chairman and Chief
Executive Officer of CV Trading since May 1995. From March 1994 to February
1995, Mr. Soltero was President and Chief Executive Officer of Cimarron
Resources, Inc., an independent gas production company. From August 1991 to
March 1994, he was Chairman of the Board, President and Chief Executive Officer
of Aztec Energy Corporation, a publicly-held independent oil and gas production
company. In June 1994, Aztec Energy Corporation entered into bankruptcy
proceedings. Mr. Soltero has served as Chief Operating Officer and/or Chief
Executive Officer for private and public oil and gas companies for more than 20
years, including directing the formation and growth of start-up companies. Early
in his career, he was trained at Sinclair Oil Corporation in exploration and
production management, served as Manager of Planning for Texas International
Petroleum Corporation, and Petroleum Economist for DeGolyer and MacNaughton,
petroleum exploration and production consultants. Mr. Soltero is a member of the
Society of Petroleum Engineers, a member and former director of the Independent
Petroleum Association of America and the Texas Independent Producers and Royalty
Owners. He has also served, on two separate terms, as a director of the
Independent Petroleum Refiners Association of America. He is a master's graduate
of the Massachusetts Institute of Technology in business (where he was awarded
the Sinclair Fellowship in Petroleum Economics) with an undergraduate
engineering degree from The Cooper Union. Mr. Soltero is a registered
professional engineer in the State of Texas.

         James E. Hogue became President, Chief Operating Officer and a director
of Cotton Valley in July 1996 and he served as Chairman of CV Energy from
February 1995 to January 1996 and Chairman of CV Trading from May 1995 to
January 1996. He became President of CV Energy and CV Operating in January 1996.
Mr. Hogue also has been director, President and major shareholder of Third Coast
Capital, Inc., a venture capital company, since 1988. Since 1991, Mr. Hogue has
served as President of Martex Oil and Gas, Inc. In 1983, Mr. Hogue

                                      -41-

<PAGE>   42



formed Mayco Petroleum, Inc., for which he served as President until 1988. Early
in his career, Mr. Hogue served as a driller for Leatherwood Company and as a
core engineer for Sargent Diamond Bit, Inc. Subsequently, Mr. Hogue became
President and major shareholder of a diamond bit manufacturing company. In the
late 1970s, Mr. Hogue served for four years as President of Union Crude Oil
Company, an exploration and drilling company, and for two years as Vice
President of Independent Producers Marketing Company, a crude oil supply and
transportation company. Mr. Hogue has participated in drilling or furnishing
services for over 3,000 wells in Texas, Oklahoma, New Mexico, Louisiana and
Colorado.

         Peter Lucas became Senior Vice President and Chief Financial Officer of
Cotton Valley and all of its subsidiaries in August 1995. From May 1992 to July
1995, Mr. Lucas served as Chief Financial Officer to Canmax, Inc., a publicly
traded company that developed software for oil and gas retailers. Mr. Lucas is a
member of the Canadian Institute of Chartered Accountants. Mr. Lucas received
his tax and accounting training at Coopers & Lybrand, which he left in 1984 to
form his own tax practice. Six years later, Mr. Lucas' practice was merged into
Coopers & Lybrand, with whom he was a partner until April 1992. He holds a
bachelor of commerce degree from the University of Alberta.

         Wayne T. Egan is a partner in the law firm of Weir and Foulds and
serves in the securities law section of said firm. He holds an L.L.B. from
Queen's University and a Bachelor of Commerce from the University of Toronto,
and is a member of the Canadian Bar Association. Weir and Foulds serves as
Cotton Valley's corporate counsel.

         Michael Kamis has served Cotton Valley as a director since November
1996. Mr. Kamis has a Bachelor of Science degree in Petroleum Engineering from
the University of Wyoming. He has held increasingly responsible positions
throughout the world with oil and gas producers and service companies. Currently
and continuously since 1985, Mr. Kamis serves as president of Apex Energy
Consultants, Inc., of Calgary, Alberta, which provides reserve and economic
evaluations to the petroleum industry and financial institutions. In this
capacity, Mr. Kamis has managed reservoir and production studies in Canada,
Southeast Asia, Europe, North Africa, Central America, Australia, and the U.S.

         Richard J. Lachcik has practiced law with the Toronto law firm of Weir
and Foulds since 1988. He currently serves as the partner in charge of the
securities law section. Mr. Lachcik is a graduate of Queen's University with an
L.L.B., holds a B.A. from the University of Toronto, and is a member of the
Ontario Bar. Weir & Foulds serves as Cotton Valley's corporate counsel. See
"Legal Matters."

DIRECTOR COMPENSATION

         Directors who are not Cotton Valley employees receive $500 per meeting
of the board and $500 per committee meeting not held on the same date as a board
meeting. Directors are permitted to accept stock in lieu of cash. Employee
directors receive no extra compensation for service on the board.

FAMILY RELATIONSHIPS

         There are no family relationships among the Company's directors or
executive officers.

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

         None of the Company's directors or executive officers have been
involved during the past five years in any legal proceedings material to an
evaluation of such persons ability or integrity.


                                      -42-

<PAGE>   43



COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         The Company is not aware of any transactions in its outstanding
securities by or on behalf of any director, executive officer or 10% holder of
the Common Stock, which would require the filing of any report pursuant to
Section 16(a) during the fiscal year ended June 30, 1997, that was not filed
with the Company.


ITEM 10.          EXECUTIVE COMPENSATION

         The following table sets forth the compensation paid or to be paid to
Cotton Valley's executive officers, directly or indirectly, for services
rendered in all capacities for the period from inception to June 30, 1995,
fiscal 1996 and fiscal 1997:


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                               LONG-TERM
                                                            ANNUAL COMPENSATION(1)           COMPENSATION
                                                            ------------------------        ---------------
                                                                        OTHER ANNUAL          RESTRICTED
       NAME AND PRINCIPAL POSITION           YEAR             SALARY    COMPENSATION        STOCK AWARDS(2)
       ---------------------------           ----           --------    ------------        ---------------
<S>                                          <C>            <C>              <C>                <C>    
Eugene A. Soltero, Chairman of the           1997           $120,000         $0                 $60,000
   Board and Chief Executive                 1996           $115,000         $0
Officer
                                             1995            $25,000         $0

James E. Hogue, President and                1997           $120,000         $0                 $60,000
Chief
   Operating Officer                         1996           $115,000         $0
                                             1995            $25,000         $0

Peter Lucas, Senior Vice President           1997           $110,000         $0
   and Chief Financial Officer               1996           $101,500         $0
                                             1995           $      0         $0
</TABLE>
--------------------------
(1)  Certain of Cotton Valley's executive officers receive personal benefits in
     addition to salary. The aggregate amounts of these benefits, however, do
     not exceed the lesser of $50,000 or 10% of the total annual salary reported
     for the executives.
(2)  Each of Messrs. Soltero and Hogue received warrants to purchase 83,333 
     shares of Common Stock at a per warrant exercise price of $.72.  The 
     warrants expire December 31, 1999.

EMPLOYMENT AGREEMENTS

         Cotton Valley does not have employment contracts with any of its
executive officers.


                                      -43-

<PAGE>   44



OPTIONS

         The following table sets forth information regarding options granted to
executive officers under Cotton Valley's employee stock option plan in fiscal
1997:


                        OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)

<TABLE>
<CAPTION>
                             NUMBER OF               PERCENT OF TOTAL
                      SECURITIES(1) UNDERLYING      OPTIONS GRANTED TO         EXERCISE OR      EXPIRATION
         NAME             OPTIONS GRANTED        EMPLOYEES IN FISCAL YEAR       BASE PRICE         DATE
         ----         ------------------------   ------------------------      -----------      -----------
<S>                   <C>                        <C>                           <C>              <C>    
Eugene A. Soltero               -0-                         N/A                    N/A             N/A
James E. Hogue                  -0-                         N/A                    N/A             N/A
Peter Lucas                     -0-                         N/A                    N/A             N/A
Wayne Egan                     50,000                      13.8%                  $1.83        July 1, 2000
Michael Kamis                 200,000                      55.5%                  $1.83        July 1, 2000
Richard J. Lachcik             50,000                      13.8%                  $1.83        July 1, 2000
</TABLE>
----------------------
(1)  Shares of Common Stock

         The following table sets forth information regarding the value of
unexercised options held by executive officers as of June 30, 1997. No options
were exercised by executive officers or directors of the Company during fiscal
1997.


                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                       NUMBER OF SECURITIES(1)          VALUE OF UNEXERCISED
                                       UNDERLYING-UNEXERCISED          IN-THE-MONEY-OPTIONS AT
                                         OPTIONS AT FY-END                      FY-END
NAME                                 EXERCISABLE/UNEXERCISABLE        EXERCISABLE/UNEXERCISABLE
----                                 -------------------------        -------------------------
<S>                                  <C>                              <C>  
Eugene A. Soltero                             200,000/0                         $0/$0
James E. Hogue                                200,000/0                         $0/$0
Peter Lucas                                   200,000/0                         $0/$0
Wayne Egan                                     50,000/0                         $0/$0
Michael Kamis                                 200,000/0                         $0/$0
Richard J. Lachcik                             50,000/0                         $0/$0
</TABLE>


ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

         The following table sets forth certain information regarding beneficial
ownership of Cotton Valley's Common Stock as of September 15, 1997, by (i) each
person who "beneficially" owns more than 5% of all outstanding shares of Common
Stock, (ii) each Cotton Valley director and executive officer, and (iii) all
directors and executive officers of Cotton Valley as a group. Except as
otherwise indicated, all persons listed below have (a) sole voting power and
investment power with respect to their Common Stock except to the extent that
authority is shared by spouses under applicable law, and (b) record and
beneficial ownership of their shares.

                                      -44-

<PAGE>   45

<TABLE>
<CAPTION>
                                                                                 PERCENTAGE OF
                                               AMOUNT AND NATURE OF               OUTSTANDING
                  NAME                         BENEFICIAL OWNERSHIP              COMMON STOCK
                  ----                         --------------------              ------------- 
<S>                                            <C>                               <C>  
Eugene A. Soltero (1)                             2,814,333 (4)                      17.2%
James E. Hogue (1)                                2,844,333 (5)                      17.3%
Peter Lucas (1)                                     350,000 (6)                       2.1%
Wayne T. Egan (2)                                    50,000 (7)                         *
Michael Kamis (3)                                   200,000 (7)                       0.1%
Richard J. Lachcik (2)                              100,000 (7)                         *
All directors and executive officers
   as a group (six persons)                       6,308,666 (8)                      36.8%

Liviakis Financial Communications,                2,237,000 (9)                      13.8%
     Inc.(9)
</TABLE>

*Less than 1%.
(1)  The address of Messrs. Soltero, Hogue and Lucas is 8350 North Central
     Expressway, Suite M2030, Dallas, Texas 75206.
(2)  The address of Messrs. Egan and Lachcik is Suite 1600, 2 First Canadian 
     Place, Toronto, Ontario, Canada M5X  1J5
(3)  The address of Mr. Kamis is Suite 700, 816-8 Avenue SW, Calgary, Alberta,
     Canada T2P 3P2. 
(4)  Includes 200,000 shares of Common Stock subject to an employee stock
     option, 83,333 warrants to purchase 83,333 shares of Common Stock and the
     following shares, beneficial ownership of which is disclaimed: 710,000
     shares of Common Stock owned by the Soltero Family Limited Partnership,
     256,000 shares of Common Stock held by Mr. Soltero's wife and
     approximately 1,500,000 shares of common stock held as attorney under a
     voting trust agreement. See "Voting Agreements" below.         
(5)  Includes 200,000 shares of Common Stock subject to an employee stock
     option, 83,333 warrants to purchase 83,333 shares of Common Stock and the
     following shares, beneficial ownership of which is disclaimed: 740,000
     shares of Common Stock owned by the Hogue Family Limited Partnership,
     241,000 shares of Common Stock held by Mr. Hogue's wife and approximately
     1,500,000 shares of Common Stock held as attorney under a voting trust
     agreement. See "Voting Agreements" below.  
(6)  Includes 200,000 shares of Common Stock subject to an employee stock option
     and 75,000 shares owned by Mr. Lucas' wife, beneficial ownership of which
     is disclaimed.
(7)  Includes 50,000 shares of Common Stock subject to an employee stock option.
(8)  Includes 916,666 shares subject to options or warrants and 3,000,000 held
     as attorney under a voting trust agreement.
(9)  Includes 100,000 shares to be issued for services, and the following
     shares, beneficial ownership of which is disclaimed: 125,000 shares owned
     by an officer of Liviakis Financial. The address of Liviakis Financial is
     2420 ' Street, Sacramento, California 95816. See Certain Relationships
     and Related Transactions."

VOTING AGREEMENTS

        Under the terms of a Voting Trust Agreement (the "Voting Agreement"),
unaffiliated parties that transferred their interests in certain properties to
Cotton Valley in exchange for securities provided a power of attorney to Eugene
A. Soltero and James E. Hogue to vote approximately 3.28 million shares of
Common Stock held by such property contributors in Messrs. Soltero and Hogue's
discretion between January 1, 1996, and January 1, 2001. Each property
contributor may transfer to unrelated third parties the Common Stock subject to
the Voting Agreement at any time. The agreement expires with respect to the
Common Stock transferred by any property contributor to an unaffiliated third
party. The Company believes that as of September 15, 1997 approximately  3.0
million shares of Common Stock were subject to the Voting Agreement.


                                      -45-

<PAGE>   46

         Liviakis Financial and its beneficial holders have agreed that, with
respect to any shares of Common Stock acquired by them pursuant to the Liviakis
Agreement, they will vote such shares of Common Stock for a period of five years
for directors nominated by Messrs. Hogue and Soltero. Approximately 1,949,000
shares are currently subject to this agreement.
  
         The four previous shareholders of Old Aspen have agreed, for a period 
of five years, to vote their shares of Common stock for directors nominated by
Messrs. Hogue and Soltero. Messrs. Hogue and Soltero have agreed that following
the reincorporation of Cotton Valley in any jurisdiction which allows a majority
of the directors to be U.S. citizens that they will nominate and vote for Mr.
Leon Romero, former President of Old Aspen, as a director of Cotton Valley. Mr.
Romero has been designated an advisory director of Cotton Valley and has the
right to attend all board meetings. Approximately 2,240,000 shares are
currently subject to this agreement.        


ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In February 1995, Cotton Valley issued a total of 1,840,001 shares of
Common Stock to Eugene A. Soltero and James E. Hogue for pre-incorporation
services to Cotton Valley. In December 1995, Cotton Valley issued an additional
80,000 shares of Common Stock each to Eugene A. Soltero and James E. Hogue for
pre-incorporation services. In December 1995, Cotton Valley issued 150,000
shares of Common Stock to Peter Lucas for post-incorporation services to Cotton
Valley.

         During the year ended June 30, 1996, Cotton Valley granted to senior
employees options that enable the employees to purchase 800,000 Common Shares of
Cotton Valley for $1.83 per share until July 1, 2000. During the years ended
June 30, 1996 and 1995, Cotton Valley paid management fees to two corporations
controlled by senior officers of Cotton Valley, aggregating $160,000 and
$50,000, respectively, in lieu of salaries. In addition, Cotton Valley has
received advances from these two companies which total $171,709 at June 30,
1997. As of June 30, 1997, $149,710 of the advances remained outstanding. The
advances are unsecured and without interest and are payable after June 30,
1998. During the year ended June 30, 1997, Cotton Valley paid to Weir and
Foulds approximately $50,000 in legal services. Most of the legal services are
provided by Richard Lachcik and Wayne Egan, directors of Cotton Valley, who are
members of Weir and Foulds. The foregoing transactions were on no less
favorable terms than could have been obtained from unaffiliated third parties.

         Cotton Valley entered into an agreement effective November 7, 1996 and
ending January 2, 1998 with Liviakis Financial of Sacramento, California.
Liviakis Financial will advise and assist in the development and implementation
of materials to inform the financial community about Cotton Valley, introduce
Cotton Valley to the financial community, assist in dissemination of news
releases and investor relations materials, assist in presentations to
stockholders, brokers, dealers and others, respond to public inquiries, conduct
meetings, review corporate strategy and identify acquisition candidates. In
consideration of Liviakis Financial's services, Cotton Valley has sold a total
of 500,000 shares of Common Stock to Liviakis Financial and an officer of
Liviakis Financial for $.75 per share and agreed to issue 1,490,000 shares of
Common Stock, of which 1,390,000 shares have been issued, to Liviakis Financial.
Cotton Valley also granted Liviakis Financial and an officer of Liviakis
Financial warrants to purchase 500,000 shares of Common Stock from January 2,
1998, until November 8, 2001, at $.80 per share. Liviakis Financial will receive
no cash compensation or reimbursement. Based on the value of Common Stock on the
Canadian Dealing Network at the time the contract was negotiated, Cotton Valley
recorded an expense of $1,249,200 during the year ended June 30, 1997. Liviakis
Financial has agreed to vote its shares for directors nominated by Messrs.
Soltero and Hogue. Cotton Valley has agreed to file a registration statement
before the end of calendar 1997 which includes the Common Stock held by
Liviakis Financial.

         Any future transactions between Cotton Valley and its affiliates will
be approved by a majority of disinterested directors and will be on terms no
less favorable to Cotton Valley than those which could be obtained from
unrelated third parties.


                                      -46-

<PAGE>   47



                                     PART IV

ITEM 13.          EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-KSB

(a)(1)   Financial Statements: See Index to Consolidated Financial Statements on
         page 19.

(a)(2)   Exhibits: See Exhibit Index on page 49.

(b)      Reports on Form 8-KSB: No reports on Form 8-KSB were filed during the
         last quarter of fiscal 1997.




                                      -47-

<PAGE>   48



                                   SIGNATURES

         Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
October 14, 1997.


COTTON VALLEY RESOURCES
CORPORATION
         (Registrant)

By: /s/ Eugene A. Soltero                By: /s/ Peter Lucas
    --------------------------------         --------------------------------
    Eugene A. Soltero                        Peter Lucas
    Chairman of the Board and Chief          Senior Vice President and Chief
    Executive Officer                        Financial Officer
    (Principal Executive Officer)            (Principal Financial and 
                                              Accounting Officer)

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

<TABLE>

SIGNATURE                                     TITLE                                    DATE
---------                                     -----                                    ----
<S>                                           <C>                                      <C> 
                                              Chairman of the Board and Chief                October 14, 1997
            /s/ Eugene A. Soltero             Executive Officer
-----------------------------------------
Eugene A. Soltero

                                              President, Chief Operating Officer             October 14, 1997
            /s/ James E. Hogue                and Director
-----------------------------------------
James E. Hogue

                                              Senior Vice President and Chief                October 14, 1997
            /s/ Peter Lucas                   Financial Officer
-----------------------------------------
Peter Lucas

            /s/ Wayne T. Egan                 Director                                       October 14, 1997
-----------------------------------------
Wayne T. Egan


            /s/ Michael Kamis                 Director                                        October 14, 1997
-----------------------------------------
Michael Kamis


            /s/ Richard J. Lachcik            Director                                       October 14, 1997
-----------------------------------------
Richard J. Lachcik
</TABLE>




                                      -48-

<PAGE>   49



                       COTTON VALLEY RESOURCES CORPORATION

                                 EXHIBITS INDEX



<TABLE>
<CAPTION>
EXHIBIT      
NUMBER       DESCRIPTION
------       -----------
<S>          <C>
  3(a)*      Articles of Amalgamation
  3(b)*      Bylaws                 
  4          Description of the Common Stock
 11          Statement regarding computation of per share loss
 21          Subsidiaries           
 23(a)       Consent Of K&A Energy Consultants, Inc.
 23(b)       Consent Of Ryder Scott Company
 27          Financial Data Schedule
</TABLE>

------------------------
*Previously Filed and Incorporated by Reference herein.



                                      -49-