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                 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, 1998
                  COMMISSION FILE NUMBER 0-28814

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


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


6510 Abrams Road, Suite 300, Dallas, TX                75231
(Address of Principal Executive Offices)            (Zip Code)



                  (214) 221-6500
(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, 1998, 
were $1,825,852.

     The Issuer had 17,273,278 shares of common stock outstanding as 
of September 15, 1998.

     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 September 
15, 1998, was $6,333,672.
     
<PAGE>1     
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                   1998 ANNUAL REPORT (S.E.C.  FORM 10-KSB)

                             INDEX

                   Securities and Exchange Commission
                     Item Number and Description


     PART I

Item 1     Business                                                  3 
Item 2     Properties                                                11 
Item 3     Legal Proceedings                                         15 
Item 4     Submission of Matters to a Vote of Security Holders       17 


     PART II

Item 5     Market for the Company's Common Stock and Related 
           Stockholder Matters                                       17
Item 6     Management's Discussion and Analysis or Plan of Operation 18 
Item 7     Consolidated Financial Statements and Unaudited 
           Supplemental Information                                  22 
Item 8     Changes in and Disagreements with Accountants on 
           Accounting and Financial Disclosure                       45


     PART III

Item 9     Directors, Executive Officers, Promoters and Control 
           Persons of the Issuer; Compliance With 
           Section 16(a) of the Exchange Act                         45 
Item 10    Executive Compensation                                    47 
Item 11    Security Ownership of Certain Beneficial Owners and 
           Management                                                48 
Item 12    Certain Relationships and Related Transactions            49 


     PART IV AND SIGNATURES AND EXHIBIT INDEX 

Item 13    Exhibits, Financial Statements and Reports on Form 8-KSB  51 
           Signatures                                                51 
           Exhibit Index                                             52 

<PAGE>2

________________________________________________________________________
                                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 energy company engaged in the exploration and 
development, acquisition and operation of oil and gas properties with 
a geographic focus in major oil and gas producing regions in the 
United States.  The Company was incorporated in the Province of 
Ontario, Canada, originally as Cotton Valley Energy Limited, on 
February 15, 1995.  From its inception through June 30, 1997, the 
Company was engaged principally in organization and capitalization 
activities and did not generate material revenues from operations. 
For the year ended June 30, 1998, the Company concentrated on 
acquiring additional properties and integrated engineering and 
development.

     On June 30, 1995 in a one-for-one share and warrant exchange, 
the Company acquired all the issued and outstanding shares of Cotton
Valley Energy Corporation ("CV Energy"), a Nevada corporation.  On
June 14, 1996, the Company completed an amalgamation with Arjon 
Enterprises, Inc. ("Arjon"), a Province of Ontario, Canada 
corporation.  As a result of the Arjon amalgamation, the Company's 
name was changed to Cotton Valley Resources Corporation and its 
shares of Common Stock began trading through the Canadian Dealing
Network.  Arjon was a public Canadian company formed more than 50
years ago to operate a gold mine.  At the time of the amalgamation,
Arjon 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 Common Stock in the amalgamation.

     On April 30, 1996, the Company organized Cotton Valley Operating
Company, a Texas corporation ("CV Operating") to operate the 
Company's oil and gas properties.  The Company on February 25, 1997,
organized Cotton Valley Energy, Inc., an Oklahoma corporation 
("CVEI") to acquire and operate the N.E. Alden Field properties in 
Caddo County, Oklahoma.  CVEI commenced operations on March 3, 1997.  
Aspen Energy Corporation, a Nevada corporation ("Aspen"), was an 
inactive subsidiary of the Company, formed on May 1, 1996, which was 
used to accommodate the merger of Aspen Energy Corporation, a New 
Mexico corporation ("Old Aspen") into Aspen on July 31, 1997.  The 
principal asset of Old Aspen was its interest in the Means Unit 
in Andrews County, Texas (the "Means Unit").  On May 27, 1998, Aspen 
organized Cotton Valley Means, Inc. as a Texas corporation ("CV 
Means") and transferred all of its interest in the Means Unit to CV 
Means to facilitate a $10 million financing relating to the 
development of this property. See "Business -- Recent Developments; 
Means Unit Credit Facility."

     In addition to CV Energy, CV Operating, CVEI, Aspen and CV 
Means, the Company recently organized Mustang Well Servicing Company, 
a Nevada corporation ("Mustang Well Servicing"), Mustang Oilfield 
Equipment Company, a Nevada corporation ("Mustang Equipment"), and 
Mustang Horizontal Services, Inc., a Nevada corporation ("Mustang 
Horizontal") (collectively, the "Mustang Service Companies").  All of 
the Company's subsidiaries are wholly owned by the Company, except 
for CV Means which is a wholly-owned subsidiary of Aspen.  See 
"Certain Relationships and Related Transactions."

Business Strategy

     The Company's current business strategy is to: (i) complete its 
registration requirements of its outstanding convertible debentures; 
(ii) continue to increase reserves, production and cash flows by 
acquiring properties, or companies with properties, with development 
opportunities; (iii) develop existing reserves through low risk 
developmental drilling or recompletion programs; (iv) concentrate on 
development activities within a limited number of core areas; (v) 
acquire and refurbish used oil field equipment for use in development 
activities and for resale; and (vi) provide well servicing for the 
Company's and other wells.  Although the Company continuously is 
seeking acquisitions of reserves and oil field equipment, there can 
be no assurance that the Company will be able to identify and acquire 
reserves or oil field equipment upon terms favorable to the Company 
or obtain the necessary financing on favorable terms.

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

      o Exploitation and Development of Existing Properties.  The 
        Company has a significant inventory of exploitation projects, 
        including development drilling, workovers and recompletions. 
        The Company intends to maximize the value of its properties 
        through development activities including in-fill drilling, 
        waterflooding and other enhanced recovery techniques.

      o Management of Operating Costs.  The Company emphasizes strict 
        cost controls in all aspects of its business and intends to 
        seek the lowest cost of operations by either operating its own 
        properties or having the properties operated by others under 
        contract.  

      o Property Acquisitions.  Although the Company has a significant 
        inventory of exploitation and development opportunities, it 
        continues to pursue strategic acquisitions which fit its 
        objectives of increasing oil and gas reserves with development 
        potential.

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.

     Limited Operating History; Capital Intensive Business; Need for
Additional Funds.  From its inception in February 1995 through June 
30, 1997, the Company was engaged principally in organization and 
capitalization activities and did not generate material revenues from 
operations.  The Company's business is highly capital intensive 
requiring continuous development and acquisition of oil and gas 
reserves.  In addition, capital is required to operate and expand the 
Company's oil field operations and purchase equipment.  At June 30, 
1998, the Company had a working capital of approximately $20,823.  
Because of the limited operating history of the Company and the recent 
acquisitions of reserves and oil field equipment, the Company's working 
capital requirements increased significantly over the last 12 months and
are expected to continue to do so.  The Company anticipates, based on 
its currently proposed plans and assumptions relating to its operations,
including proceeds from the exercise of outstanding warrants, and 
proceeds from the private offerings of debt and equity securities, 
together with cash expected to be generated from operations, that it 
will be able to meet its cash requirements for at least the next 12 
months.  However, if such plans or assumptions change or prove to be 
inaccurate, the Company could be required to seek additional financing 
sooner than currently anticipated. Although the Company is currently 
negotiating with private investors and lenders with respect to 
additional financing, the Company has no commitments to obtain any 
additional debt or equity financing and there can be no assurance that 
additional funds will be available, when required, on terms favorable to
the Company. Any future issuances of equity securities would likely 
result in dilution to the Company's then existing shareholders while the
incurring of additional indebtedness would result in increased interest
expense and debt service changes.  See "Management's Discussion and 
Analysis or Plan of Operations". 

     History of Losses.  The Company incurred losses before income tax
benefits of $2,925,868 and $1,276,745 for the fiscal years ended June
30, 1997 and 1998, respectively.  The Company's accumulated deficit as
of June 30, 1998 was $3,599,755.  The Company does not have a bank line
of credit.  The Company has funded its operating losses, acquisitions
and expansion costs primarily through a combination of private offerings
of debt and equity securities, including the issuance of the Convertible
Debentures and proceeds from the exercise of options and warrants.  
The success of the Company in obtaining the necessary capital resources
to fund future costs associated with its operations and expansion plans
is dependent upon the Company's ability to: (i) satisfy its registration
obligations to its holders of Convertible Debentures; (ii) increase 
revenues through acquisitions and recovery of the Company's proved 
producing and proved developed non-producing oil and gas reserves;
(iii) implement stringent cost controls at the corporate administrative
office and in field operations; (iv) convert the Convertible Debentures
to equity; (v) obtain the exercise of outstanding warrants; and (vi) 
obtain asset based commercial financing. However, even if the Company 
achieves some success with its plans, there can be no assurance that it 
will be able to generate sufficient revenues to achieve significant 
profitable operations or fund its expansion and acquisition plans. See 
"Management's Discussion and Analysis or Plan of Operations".

     Possible Contingent Liability for Violation of Securities Act.  On
February 9, 1998, the Company effected a Continuance of its domicile
from the Province of Ontario to Yukon Territory (the "Yukon
Continuance") in accordance with applicable Canadian law.  The Yukon
Continuance was approved by the shareholders of the Company at a meeting
held on December 10, 1996, for which proxies were solicited in
accordance with applicable Canadian laws, but the transaction was not
registered under the Securities Act.  The Staff of the U.S. Securities
and Exchange Commission (the "Commission") has advised the Company that
the registration of the Yukon Continuance was required pursuant to Rule
145 and that the failure to register the Yukon Continuance was a 
violation of Section 5 of the Securities Act.  As a result, the Company
may have a contingent liability to certain of its shareholders, who may
sue the Company to recover the consideration paid, if any, for shares of
the Company's Common Stock, with interest thereon from the date of the
Yukon Continuance to the date of repayment by the Company, less the
amount of any income received thereon, upon the tender of such 
securities, or for damages if the shareholder no longer owns such 
securities.  The Company intends to vigorously defend any such 
shareholder lawsuit and believes that it may have valid 
defenses, including the running of applicable statutes of limitations, 
against claims by some or all of its shareholders.  However, to the 
extent any of the Company's shareholders obtain a judgment against the 
Company for damages, the Company's net assets and net worth will be 
reduced, which in turn could reduce the Company's ability to obtain 
financing for its exploration and drilling operations and cause the 
Company to curtail operations.  There is no assurance that the Company 
will have the necessary funds or sufficient assets to pay any such 
judgment obtained by any shareholder against the Company.  The Company 
is unable to quantify the amount of such contingent liability, if any.
See Legal Proceedings -"Yukon Continuance."

     Consequences of Default under Convertible Debentures.  The Company
has $4,320,000 of outstanding Convertible Debentures, representing
approximately 16.2% of the Company's capitalization at June 30, 1998.
The Convertible Debentures are secured with approximately 29.2% of the
Company's assets and are subject to various operating and financial
covenants.  The Company's ability to meet its debt service
obligations will depend on the Company's future operations, which are
subject to prevailing industry conditions and other factors, many of
which are beyond the Company's control.  In the event of a violation by
the Company of any of its loan covenants or any other default by the
Company on its obligations relating to its indebtedness, the lenders
could declare such indebtedness to be immediately due and payable and,
in certain cases, foreclose on some of the Company's assets.  Moreover,
to the extent that 29.2% of the Company's assets continue to be pledged
to secure outstanding indebtedness under the Convertible Debentures,
such assets will not be available to secure additional indebtedness,
which may adversely affect the Company's ability to borrow in the
future.  See "Business--Recent Developments; Sale of Convertible
Debentures." 

     Significant Capital Expenditures Necessary for Undeveloped 
Properties.  Almost all of the Company's oil and gas reserves are
classified as Proved Undeveloped Reserves, meaning very little
production currently exists.  Recovery of the Company's Proved
Undeveloped Reserves will require significant capital expenditures.
Management estimates that aggregate capital expenditures of
approximately $20 million will be required to fully develop these
reserves, of which $10 million is expected to be incurred during the
next twelve months from its recently negotiated $10 million development
credit facility. No assurance can be given that the Company'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 the Company'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 and/or reworked.  No assurance can be given
that any wells will produce oil or gas in commercially profitable 
quantities. 
 

     No Assurance of Additional Financing.  Development of the Company's
properties will require additional capital resources. Although the 
Company is presently negotiating with private lenders and investors with
respect to sources of additional financing to supplement its existing
$10 million credit facility, the Company has no commitments to obtain
any additional debt or equity financing and there can be no assurance
that additional financing will be available, when required, on favorable
terms to the Company.  The inability to obtain additional financing
would have a material adverse effect on the Company, including requiring
the Company to curtail significantly its oil and gas acquisition and
development plans or farm-out development of its properties.  Any
additional financing may involve substantial dilution to the interests
of the Company's shareholders at that time.  See "Management's
Discussion and Analysis or Plan of Operations" and "Business--Recent
Developments; Means Unit Credit Facility."

     Exploration and Development Risks; Waterflood Projects.  The 
Company intends to increase its development and, to a lesser extent, 
exploration activities. The Company does not intend to engage in any 
significant exploration drilling activities during 1998.  Exploration
drilling and, to a lesser extent, development drilling of oil and gas
reserves involve a high degree of risk that no commercial production
will be obtained and/or that production will be insufficient to recover
drilling and completion costs.  The cost of drilling, completing and 
operating wells is often uncertain.  The Company's drilling operations
may be curtailed, delayed or canceled as a result of numerous factors,
including title problems, weather conditions, compliance with 
governmental requirements and shortages or delays in the delivery of
equipment.  Furthermore, completion of a well does not assure a profit
on the investment or a recovery of drilling, completion and operating
costs.  

     There are certain risks associated with secondary recovery 
operations, especially the use of waterflooding techniques, and 
drilling activities in general.  Part of the Company's inventory of
development prospects consists of waterflood projects.  Waterflooding
involves significant capital expenditures and uncertainty as to the 
total amount of secondary reserves that can be recovered.  In waterflood
operations, there is generally a delay between the initiation of water
injection into a formation containing hydrocarbons and any increase in
production that may result.  The operating cost per unit of production
of waterflood projects is generally higher during the initial phases of
such projects due to the purchase of injection water and related costs,
as well as during the later stages of the life of the project as 
production declines.  The degree of success, if any, of any secondary
recovery program depends on a large number of factors, including the
porosity of the formation, the technique used and the location of
injector wells.

     Volatility of Oil and Gas Prices.  The Company's revenues, 
profitability and the carrying value of its oil and gas properties 
are substantially dependent upon prevailing prices of, and demand for, 
oil and gas and the costs of acquiring, finding, developing and 
producing reserves.  The Company's ability to maintain or increase its 
borrowing capacity, to repay current or future indebtedness, and to 
obtain additional capital on favorable terms is also substantially 
dependent upon oil and gas prices.  Historically, the markets for oil 
and gas have been volatile and are likely to continue to be volatile in 
the future.  Prices for oil and gas are subject to wide fluctuations in 
response to: (i) relatively minor changes in the supply of, and demand 
for, oil and gas; (ii) market uncertainty; and (iii) a variety of 
additional factors, all of which are beyond the Company's control.  
These factors include domestic and foreign political conditions, the 
price and availability of domestic and imported oil and gas, the level 
of consumer and industrial demand, weather, domestic and foreign 
government relations, the price and availability of alternative fuels 
and overall economic conditions. Furthermore, the marketability of the 
Company's production depends in part upon the availability, proximity 
and capacity of gathering systems, pipelines and processing facilities. 
Volatility in oil and gas prices could affect the Company's ability to 
market its production through such systems, pipelines or facilities.  
Substantially all of the Company's gas production is currently sold to 
gas marketing firms or end users either on the spot market on a month-
to-month basis at prevailing spot market prices or under long-term 
contracts based on current spot market prices. The Company normally 
sells its oil under month-to-month contracts with a variety of 
purchasers.  Accordingly, the Company's oil and gas sales expose it to 
the commodities risks associated with changes in market prices.  

     Uncertainty of Estimates of Reserves and Future Net Cash Flows.  
This Annual Report contains estimates of the Company's oil and gas 
reserves and the future net cash flows from those reserves, which 
have been prepared or audited by certain independent petroleum 
consultants.  There are numerous uncertainties inherent in estimating 
quantities of reserves of oil and gas and in projecting future rates of 
production and the timing of development expenditures, including many 
factors beyond the Company's control.  The reserve estimates in this 
Annual Report are based on various assumptions, including, for example, 
constant oil and gas prices, operating expenses, capital expenditures 
and the availability of funds, and, therefore, are inherently imprecise 
indications of future net cash flows. Actual future production, cash 
flows, taxes, operating expenses, development expenditures and 
quantities of recoverable oil and gas reserves may vary substantially 
from those assumed in the estimates.  Any significant variance in these 
assumptions could materially affect the estimated quantity and value of 
reserves set forth in this Annual Report.  Additionally, the Company's
reserves may be subject to downward or upward revision based upon actual
production performance, results of future development and exploration,
prevailing oil and gas prices and other factors, many of which are
beyond the Company's control.  

     The present value of future net reserves discounted at 10% (the 
"PV-10") of Proved Reserves referred to in this Annual Report should 
not be construed as the current market value of the estimated Proved 
Reserves of oil and gas attributable to the Company's properties.  In 
accordance with applicable requirements of the Commission, the estimated 
discounted future net cash flows from Proved Reserves are generally 
based on prices and costs as of the date of the estimate, whereas actual 
future prices and costs may be materially higher or lower.  Actual 
future net cash flows also will be affected by: (i) the timing of both 
production and related expenses; (ii) changes in consumption levels; and 
(iii) governmental regulations or taxation.  In addition, the 
calculation of the present value of the future net cash flows using a 
10% discount as required by the Commission is not necessarily the most 
appropriate discount factor based on interest rates in effect from time 
to time and risks associated with the Company's reserves or the oil and 
gas industry in general. Furthermore, the Company's reserves may be 
subject to downward or upward revision based upon actual production, 
results of future development, supply and demand for oil and gas, 
prevailing oil and gas prices and other factors.  See "Properties -- Oil 
and Gas Reserves" 

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

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

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

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

     Environmental Risks.  Operations of the Company are also subject to
numerous environmental laws, including but not limited to, those 
governing management of waste, protection of water, air quality, the
discharge of materials into the environment, and preservation of natural
resources.  Noncompliance with environmental laws and the discharge of
oil, gas, or other materials into the air, soil or water may give rise 
to liabilities to the government and third parties, including civil and
criminal penalties, and may require the Company to incur costs to remedy
the discharge.  Laws and regulations protecting the environment have
become more stringent in recent years, and may in certain circumstances
impose retroactive, strict, and joint and several liability rendering
entities liable for environmental damage without regard to negligence or
fault.  From time to time the Company has agreed to indemnify sellers of
producing properties from whom the Company has acquired reserves against
certain liabilities for environmental claims associated with such 
properties.  There can be no assurance that new laws or regulations, or 
modifications of or new interpretations of existing laws and 
regulations, will not increase substantially the cost of compliance or 
otherwise adversely affect the Company's oil and gas operations and 
financial condition or that material indemnity claims will not arise 
against the Company with respect to properties acquired by or from the 
Company.  While the Company does not anticipate incurring material costs 
in connection with environmental compliance and remediation, it cannot 
guarantee that material costs will not be incurred.  

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

     Dependence on Key Personnel.   The Company depends to a large 
extent on the services of Eugene A. Soltero, the Company's Chairman of 
the Board and Chief Executive Officer, James E. Hogue, the President and
Chief Operating Officer of the Company, and Leon A. Romero, Senior Vice 
President and Chief Financial Officer.  The loss of the services of
any one of these individuals could have a material adverse effect on the
Company's operations.  The Company has not entered into any 
employment contracts with any of its executive officers, nor has it 
obtained key personnel life insurance.  The Company believes that its 
success is also dependent on its ability to continue to employ and 
retain skilled technical personnel.  

     Concentration of Voting Power. The Company's executive officers, 
directors and their affiliates will continue to vote for directors  
approximately 45% of the Company's outstanding 17,233,278 shares of 
Common Stock, including rights under certain Voting Agreements to vote 
approximately 6 million shares of Common Stock representing 
approximately 35% of the outstanding shares of Common Stock.  As a 
result, officers, directors and their affiliates will have the ability 
to exert significant influence over the business affairs of the Company, 
including the ability to influence the election of directors and results 
of voting on all matters requiring shareholder approval.  

     Conflicts of Interests.  Certain officers, directors and related 
parties have engaged in business transactions with the Company which 
were not the result of arm's length negotiations between independent 
parties.  Management believes that the terms of these transactions were 
as favorable to the Company as those that could have been obtained from 
unaffiliated parties under similar circumstances.  All future 
transactions between the Company and its affiliates will be on terms no 
less favorable than could be obtained from unaffiliated third parties 
and will be approved by a majority of the disinterested members of the 
Board of Directors of the Company.  

     Public Market and Possible Volatility of Securities.  The Common 
Stock is traded on the AMEX and Aover-the-counter"  in Canada on the 
Canadian Dealing Network CDN").  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 the Company and other events or factors.  In addition, the 
U.S. 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.  The Company's board of directors presently intends 
to retain all of its earnings for the expansion of its business.  The 
Company therefore does not anticipate the distribution of cash dividends 
in the foreseeable future.  Any future decision of the Company's board 
of directors to pay cash dividends will depend, among other factors, 
upon the Company's earnings, financial position and cash requirements.  

     Exchange Rate Fluctuations.  The Company is exposed to foreign 
exchange risks since it has granted stock options and warrants 
denominated in Canadian currency while the majority of its expenditures 
will be in United States dollars.  Any significant reduction in the 
value of the Canadian dollar may decrease the value of funds in United 
States dollars the Company receives upon exercise of warrants and 
options.

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.

Markets

     General.  Oil and gas operating revenues are highly dependent upon 
prices and demand for oil and gas.  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. Pursuant to the terms of the Means Credit Facility, the 
lender may initiate crude oil commodity swaps with the Company for its 
production from the Means Unit. The Company may also, however, engage in 
other similar 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.
During fiscal year 1998, the Company sold its gas to eight different 
purchasers, no single one of which accounted for more than 10% of the 
Company's gross revenues.

     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. During fiscal year
1998, the Company sold its oil to six different purchasers, one of
which, National Cooperative Refinery Association, accounted (at 11.7%) 
for more than 10% of the Company's gross revenues.

     Oilfield Equipment Sales.  Cotton Valley sells its oilfield equipment
and supplies to numerous retail and wholesale customers located in several 
states and Canada.  During fiscal year 1998, one Customer, Dunnam Pumping
Units (at 18.1%) accounted for more than 10% of the Company's gross revenues.  

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.

Employees

     At September 15, 1998, the Company had 20 full-time employees of 
which five were management, six were administrative and nine were 
field employees.  None of the Company's employees are represented by a 
union.  The Company has experienced no work stoppages and management 
considers its relations with employees to be good.  The Company uses 
contract services in its field operations and employs independent 
consultants, as needed, to evaluate Company prospects, reserves and 
other oil and gas assets for potential acquisitions.

Facilities

     The Company occupies approximately 7,132 square feet of office 
space at 6510 Abrams Road, Suite 300, Dallas, Texas 75231 under a five-
year lease that expires on April 30, 2003.  Monthly basic rent is 
$7,430.  The Company leases a field office and an equipment yard in 
Odessa, Texas and also leases a warehouse, shop and field office in 
Mineral Wells, Texas.

Recent Developments

     M&M Acquisition.  Effective November 5, 1997, the Company, through 
its subsidiary, Mustang Horizontal, acquired certain horizontal 
drilling technology and equipment from M&M Directional Drilling 
Consultants ("M&M"). In connection with the purchase, the Company issued 
warrants to purchase 60,000 shares of Common Stock and warrants to 
purchase 100,000 shares of Common Stock (the "Mustang Warrants") to M&M 
and Liviakis Financial Communications, Inc. ("Liviakis"), respectively.  
Liviakis directed that 25,000 of its Mustang Warrants be issued to 
Robert B. Prag, an officer of Liviakis.  The Mustang Warrants are 
exercisable at any time at an exercise price of $3.50 per share until 
December 31, 2000.  In addition, the Company paid M&M $550,000 cash for 
the horizontal drilling technology and equipment.  Subsequent to the 
acquisition, the M&M personnel and equipment were used to drill a single 
three-lateral horizontal well on one of the Company's properties, which 
was completed as a water injection well for a waterflood program.  This 
well will be tested for injection for a number of months before a 
decision would be made to drill additional horizontal wells on the same 
property.  As a result of the recent downturn in oil and gas prices, 
third party service work is not economically available for Mustang 
Horizontal and the horizontal drilling of other Company properties has 
been delayed pending increases in development capital availability.  
Accordingly, the horizontal equipment has been stacked and the 
appropriate personnel laid off.  The company is currently seeking to 
exchange the equipment with a larger horizontal contractor in return for 
the horizontal drilling of a test well on the Company's Cheneyboro 
property.

     Equipment Acquisition.  On December 30, 1997, the Company, through 
its subsidiary, Mustang Well Servicing, acquired from three 
institutional lenders, who had obtained the equipment through a 
foreclosure proceeding, two recently rebuilt well servicing rigs and 
related transportation and service equipment (the "Equipment") for $1 
million in cash and issuance of $220,000 of the Convertible Debentures 
described below.  The Equipment was tooled out at Mustang Well 
Servicing's facilities at Odessa, Texas and began workover and 
horizontal drilling re-entry operations on the Company's Means Unit in 
Andrews County, Texas and Sears Ranch Prospect in Nolan and Fisher 
Counties, Texas.

     Sale of Convertible Debentures.  On December 30, 1997, the Company 
completed the private placement of the Convertible Debentures to a 
group of nine institutional investment firms.  Approximately $1 million 
of the cash proceeds and $220,000 of Convertible Debentures were used to 
purchase the Equipment.  The remaining funds have been used for the 
acquisition and development of oil and gas properties, purchase of oil 
field equipment and working capital.

     The Convertible Debentures are due December 31, 2001 and are 
secured by the Equipment and other assets of the Company.  The 
Convertible Debentures are convertible into shares of the Company's 
Common Stock and Debenture Warrants, subject to adjustment upon certain 
events.  Under the terms of the Convertible Debentures, the Company was 
obligated to obtain on or before May 30, 1998 an effective registration 
statement covering the shares of Common Stock to be issued upon 
conversion of the Convertible Debentures and exercise of the Debenture 
Warrants. The Company was not successful in obtaining the effectiveness 
of the registration statement which event, with notice would be an event 
of default under the Convertible Debentures. No notice has been given.

     As of  September 15, 1998, the Company and each Convertible 
Debentureholder were in negotiation for certain amendments to the 
Convertible Debentures and related documents, including a waiver of 
the prospective event of default.  As consideration for the waiver, the
Company has agreed to issue a total of 400,000 shares (the "Waiver 
Shares") on a pro rata basis to each Convertible Debentureholder.  
The Waiver Shares will be valued by the board of directors at $0.425 per
share when issued to the Convertible Debentureholder.  Additionally, 
the Company expects to issue and deliver to the Convertible 
Debentureholders approximately 700,000 shares of common stock in lieu 
of accrued interest of approximately $302,000 on the Convertible 
Debentures for December 30, 1997 through December 31, 1998. 
 

     Zama Lake Property Purchase and Sale.  In January 1998, the Company 
completed the purchase of substantially all of the oil and gas 
interests in the Zama Lake area in Alberta, Canada (the "Zama Property") 
owned by two Canadian independent oil and gas producers.  The purchase 
price was $6.9 million.  Shortly after the purchase of the Zama 
Property, the Company sold all of its interests to Phillips Petroleum 
Resources, Ltd. and certain of its affiliates for $7.5 million.

     The Zama Property consists of a total of 23,400 gross acres (11,672 
net acres) of oil and gas leases and 42 producing wells in northwest 
Alberta approximately 55 miles northeast of Rainbow Lake.  At the 
time of this transaction, the Zama Property's production net to the 
interests acquired averaged approximately 270 Bopd of oil, 6 MMcfd of 
gas and 30 Bopd of natural gas liquids.

     East Binger Unit, Caddo County, Oklahoma.  On January 14, 1998, 
CVEI, a subsidiary of the Company, and Phillips Petroleum Company 
("Phillips") entered into an agreement for the purchase by CVEI of 
all of Phillips' interests in certain oil and gas leases (the "Leases"), 
including the wells, equipment and personal property located on the 
Leases, in the East Binger Unit, Caddo County, Oklahoma ("East Binger 
Unit") for $4,000,000.  Closing of the transaction was subject to 
CVEI obtaining financing for the purchase by May 31, 1998. As a result 
of declining oil and gas prices, the Company was unable to obtain the 
necessary financing by the scheduled closing date. The Company did 
not incur any liability as a result of the failure of the East Binger 
Unit to close.

     Means Credit Facility.  On June 12, 1998, CV Means entered into a 
credit agreement with Triassic Energy Partners, L.P. ("Triassic"),  
an affiliate of Cambrian Capital Corporation whereby CV Means could 
borrow up to $10,000,000 on a multiple-advance, non-revolving basis (the 
"Means Credit Facility").  Repayment of amounts advanced under the Means 
Credit Facility is guaranteed by the Company and all its subsidiaries.  

     Under the Means Credit Facility, up to $1,000,000 may be advanced 
for new project development working capital purposes.  The remaining 
$9,000,000 may be advanced for the development of the Company's Means 
(Queen Sand) Unit in Andrews County, Texas (the "Means Unit").  As of 
September 15, 1998, the Company had drawn down $350,000 for working 
capital and $388,600 for Means Unit property development purposes.  A 
$10,000,000 promissory note dated June 12, 1998 with interest at the 
prime rate of Citibank N.A., New York, New York plus 2% was issued to 
Triassic by CV Means in accordance with the terms of the Means Credit 
Facility.  Until the maturity date, May 31, 2002, the Company will 
deliver to Triassic each month a percentage of the revenues from the 
Means Unit to be applied to accrued interest and payment of principal of 
the note.  On the maturity date, the accrued interest and outstanding 
principal balance of the note is due and payable.  As security for the 
Means Credit Facility, CV Means granted a security interest in 
substantially all the assets of CV Means, including the Means Unit and 
all income generated thereby.  As further security for the Means Credit 
Facility, Aspen, the sole shareholder of CV Means, pledged all the 
outstanding shares of CV Means to Triassic.  

     As further consideration for the Means Credit Facility, CV Means 
assigned a net profits overriding royalty interest in the Means Unit 
to Cambrian Capital Partners, L.P. ("Cambrian") and also entered into a 
commodities swap agreement with Triassic.  The Company also issued a 
Unit Purchase Option to Cambrian which allows Cambrian to purchase up to 
100,000 units of the Company for $1.75 per unit.  Each unit consists 
of 1.085 shares of the Company's Common Stock and one warrant, which 
grants to the warrantholder the right to purchase two shares of Common 
Stock at an exercise price of $2.02 per share.  All shares issuable 
under this Unit Purchase Option are subject to a registration rights 
agreement that requires the Company to register such shares under 
certain circumstances.


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 of water injection was 
initiated, there were 41 total wells in the Means 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.

     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.  The 
cumulative production to date (both primary and secondary) in the 
Company's initial 2096 acre Means Unit has been 4.136 million barrels of 
oil, which is equal to 16.2% of the original oil in place. If the 
property produces at the average of the other eleven projects, it will 
have 2.5 million barrels of additional reserves.

     An engineering report, as of June  30, 1998, 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 $9.2 million to develop this 
property.  

     During March and April of 1998, the Company, using personnel and 
tools belonging to its Mustang subsidiaries, re-entered the Spinks #2 
well and horizontally drilled three lateral legs of 1,500-2,000 feet 
length in the Queens "B", Queen "C" and Queen "D" Sands.  The well has 
been permitted as a water injection well and the Company has planned an 
extensive test program to determine whether a horizontal injection 
pattern would provide increased recovery.

     The Company, during May and June 1998, acquired two more leases 
adjacent to the original 2,096 acre Means Unit and extended it to 
approximately 2,600 acres.  Accordingly, the pattern has been 
increased and the additional property was included in a reserves report 
by K&A Energy Consultants Inc., dated as of June 30, 1998 which 
estimates that the 2600 acre extended Means Unit contains net proved 
reserves of 2.8 million barrels of oil and 0.8 Bcf of gas.

      N.E. Alden Field.  On March 3, 1997, Cotton Valley purchased all 
of the interests held by the Homestake Companies 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 1998, 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.

     Sears Ranch Prospect.   In October 1997, the Company, through its 
subsidiary, CV Energy, completed the acquisition of a 100% working 
interest in approximately 6,200 acres in the Sears Ranch area of 
Nolan and Fisher Counties, Texas (the "Sears Ranch Prospect") for cash 
and other considerations.   The assets received by the Company included 
pooling rights, existing contracts related to the Sears Ranch Prospect 
and all personal property (including equipment) located on or used in 
connection with the Sears Ranch Prospect.  The primary purpose of this 
acquisition was to acquire oil field equipment, including pumpjacks, 
tank batteries, injection pumps, separators, tubing and casing.

     The Sears Ranch Prospect 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 the Company's 
independent consultants, the Sears Ranch Prospect is an excellent 
candidate for redevelopment using horizontal drilling.  In February 
1998, the Company began testing this prospect as a horizontal drilling 
prospect in the Odem Lime formation.  During September 1998, the Company 
initiated a pilot waterflood project consisting of one injection well 
and four producing wells.  There can be no assurance that the Company 
can economically develop any remaining reserves from the Sears Ranch 
Prospect through either horizontal or vertical drilling or a different 
waterflood pattern. 

     Option to Acquire Additional Property.  Since 1995, the Company has 
owned an option to acquire a 51.8% working interest in the Sword 
Unit, Offshore Santa Barbara, California (the "Sword Unit"), containing 
significant volumes of heavy crude oil.  As a result of lower crude 
oil prices during 1998, the Company has been unable to arrange a 
syndicate to complete the purchase and re-assigned its option back to 
the original holders.

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, 1998 as estimated by K&A 
Energy Consultants, Inc.

<TABLE>
                                                       Total Reserves(1)
                                                       -----------------
                  Item
                  Reserves
                 ----------
                              <S>                           <C>
                              Proved producing
                                    Oil (Bbl)                    156,657
                                    Gas (Mcf)                    161,204
                              Proved developed non-producing
                                    Oil (Bbl)                    198,667
                                    Gas (Mcf)                    837,134
                              Proved undeveloped
                                    Oil (Bbl)                  5,414,700
                                    Gas (Mcf)                 11,763,141
                              Total Proved
                                    Oil (Bbl)                  5,770,024
                                    Gas (Mcf)                 12,761,479
                              Total Probables
                                    Oil (Bbl)                  2,076,754
                                    Gas (Mcf)                 11,059,135


                     Estimated future net revenues before income taxes

                              Proved producing               $   781,299
                              Proved developed non-producing $ 2,577,157
                              Proved undeveloped             $51,783,502
                                                             -----------
                                    Total                    $55,141,958
                                                             ===========

                    Estimated future net revenues before income taxes
                       discounted at 10%

                              Proved producing               $   594,857
                              Proved developed non-producing $ 1,710,935
                              Proved undeveloped             $28,841,250
                                                             -----------
                                    Total                    $31,147,042
                                                             ===========
</TABLE>
----------------------
- Prices based on $13.01 per Bbl of oil and $2.04 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.

Drilling Activity

     The Company did not drill any wells during the two fiscal years 
ended June 30, 1997.  During the year ended June 30, 1998, the 
Company participated for a 12.5% working interest in a single exploratory
well which was a dry hole. The Company also successfully completed the 
drilling of a horizontal water injection well in which its working interest is
100%.

Oil and Gas Wells

The following table sets forth the number of productive oil and gas 
wells in which the Company had a working interest at June 30, 1998.  During
fiscal year 1998, the average price received for oil and gas sales 
was $14.33 per Boe, and the average cost of production was $10.55 per
Boe, where Boe is defined as the barrel of oil equivalent using 6 Mcf 
of gas to one barrel of oil. The full cost pool was amortized at the 
rate of $6.26 per Boe.


                                          Productive Wells
                             Gross(1)               Net(2)
                       --------------------    ----------------------
        Location        Oil    Gas    Total     Oil     Gas     Total
   -----------------   -----  -----   -----    -----   ------   -----
   Texas                34     1       35       34       1        35
   Oklahoma             10     4       14        9       3        12
                       -----  -----   -----    -----   ------   -----
       Total            44     5       49       43       4        47
                       =====  ====    =====    =====   ======   =====

-------------------
- The number of gross wells is the total number of wells in which a 
  working interest is owned.
- The number of net wells is the sum of fractional working interests 
  owned in gross wells expressed as whole numbers and fractions thereof.

Oil and Gas Acreage

     The following table summarizes the Company's developed and 
undeveloped leasehold acreage at June 30, 1998.


    
                            Developed                Undeveloped
      Location              Gross(1)   Net(2)     Gross(1)     Net(2)
   -----------------        --------   ------     --------    -------
   Texas                     3,729     3,729       13,056      13,056
   Oklahoma                  1,350     1,181         -0-         -0-
                             ------    ------      ------      ------
       Total                 5,079     4,810       13,056      13,056
                             ======    ======      ======      ======

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

ITEM 3.     LEGAL PROCEEDINGS

Yukon Continuance

     On December 10, 1996, the Company's shareholders of record as of 
November 4, 1996, approved the continuance of domicile from the 
Province of Ontario to Yukon Territory (the "Continuance").  The Company
mailed proxy solicitation materials to its shareholders on November 8, 1996.
The Company has received an opinion of its Canadian counsel that the 
Notice, Information Circular and Proxy delivered to its shareholders complied
in all material respects with applicable corporate and securities laws 
of the Province of Ontario.  A total of 1,791,195 shares voted for the Yukon
Continuance (19.5% of the 9,204,318 shares then outstanding), with 86 
shares voting against.  No shareholder exercised his dissenter's 
rights under Ontario law.  On February 9, 1998, the Company filed Articles
of Continuance with the Registrar of Yukon Territory, changing the 
domicile of the Company from the Province of Ontario to the Yukon Territory.

     At the time of the December 10, 1996 meeting of shareholders, the 
Company  believed it to be in the best interest of its shareholders 
to continue its domicile into the Yukon Territory because under Yukon 
Territory law the Company's Board of Directors need not be comprised 
of a majority of Canadian residents  as required under Ontario law.  The
Company believed that since its principal executive office, 
management and principal properties were located in the United States, 
it would be advantageous to both its U.S. and Canadian shareholders to 
have a majority of its Board of Directors comprised of U.S. residents.
The Company's Charter and bylaws were not changed as a result of the Yukon 
Continuance. The Company has been advised by its Canadian counsel that there 
are no significant differences in corporate law concerning shareholder
rights between the Province of Ontario and Yukon Territory except for the
allowance of a majority of U.S. residents as directors under Yukon 
law.  The Company intended to eventually reincorporate into the United
States after completion of the Yukon Continuance since its future business
activities would primarily be in the United States.

     On November 27, 1996, the Company filed with the Commission a 
Registration Statement on Form SB-2 (the "1996 Registration 
Statement") for the purpose of registering securities to be offered in an
underwritten public offering. On or about February 6, 1997, the Staff of the
Commission orally advised the former Chief Financial Officer of the Company 
that the Yukon Continuance, as approved by the shareholders on December 10,
1996, involved a transaction which would require registration under the
Securities Act.  As a result of the Staff's position, the 1996
Registration Statement was amended to state that the Company would 
not proceed with the Yukon Continuance until after the filing of a 
registration statement covering the Yukon Continuance under the 
Securities Act.  The 1996 Registration Statement was never declared effective 
and was subsequently withdrawn by the Company.

     On February 10, 1997 and as a result of the Staff's advice to the 
Company, the Company filed with the Commission a Current Report on 
Form 8-K which stated that the Company's continuance from Ontario to the 
Yukon Territory would require registration under the Securities Act and 
would be delayed until after such registration had been effected and further 
shareholder approval had been sought.

     During the Staff's review of the Company's 1996 Registration 
Statement (November 1996 through June 1997), the Company's principal 
officer and liaison with the Staff was the Company's former Chief 
Financial Officer and it was with him in February 1997 that the Staff 
discussed by telephone the applicability of Rule 145 to the Yukon 
Continuance. In October 1997, the Chief Financial Officer resigned 
his position as an officer of the Company.  Unfortunately, during the 
review process of the Company's 1996 Registration Statement by the Staff, 
the significance and materiality of the Yukon Continuance registration 
issue was not effectively communicated to current management of the 
Company.

     In December 1997, management of the Company was advised by its 
Canadian counsel that the Company should initiate the process of 
filing its Articles of Continuance with the Registrar of the Yukon Territory 
prior to the end of 1997 or it could be necessary to again seek 
shareholder approval of the Yukon Continuance.  Current management, 
without the knowledge of the significance of the previous discussions 
between the Staff of the Commission and the Company's former Chief 
Financial Officer regarding the Yukon Continuance issue, decided that 
it would be in the Company's best interest to complete the Yukon 
Continuance as directed and approved by its shareholders at the December 10, 
1996 meeting.  The Yukon Continuance was effected in conformity with 
applicable Canadian law on February 9, 1998.

Yukon Continuance May Have Violated Securities Act

      On March 16, 1998, the Company filed with the Commission a 
Registration Statement on Form SB-2 (the "March 1998 Registration 
Statement") for the purpose of registering up to 10,891,184 shares of 
the Company's Common Stock for sale by certain shareholders of the 
Company, including approximately 5.7 million shares to be issued upon exercise 
of outstanding warrants and conversion of the Convertible Debentures.  
On May 1, 1998, the Company received a letter of comments from the Staff 
of the Commission (the May 1998 Staff Comment Letter") relating to the 
March 1998 Registration Statement.  In the May 1998 Staff Comment Letter, 
the Staff advised the Company that it should have registered the Yukon 
Continuance under the Securities Act.  The Yukon Continuance was not 
registered under the Securities Act.

      The Company in its supplemental response on May 26, 1998 to the 
Staff's May 1998 Comment Letter contended, with the concurrence of 
Jackson Walker L.L.P., the Company's U.S. securities counsel, that the Yukon 
Continuance was a transaction not subject to the registration 
requirements of Section 5 of the Securities Act.  The Staff has advised the 
Company that is does not agree with the Company and its U.S. securities 
counsel's conclusion regarding the Yukon Continuance.

     Assuming the Yukon Continuance violated Section 5 of the Securities 
Act because it was required to be but was not registered thereunder, 
shareholders of the Company would have a cause of action against the 
Company for damages under Section 12(a) of the Securities Act. 
Section 12(a) of the Securities Act provides in relevant part as 
follows:

"Section 12(a) In General.  Any person who:

- Offers or sells a security in violation of Section 5.

- .shall be liable, subject to subsection (b), to the 
person purchasing such security from him, who may sue 
either at law or in equity in any court of competent 
jurisdiction, to recover the consideration paid for such 
security with interest thereon, less the amount of any 
income received thereon, upon the tender of such 
security, or for damages if he no longer owns the 
security."

      The Company, therefore, may have a contingent liability to certain 
of its shareholders, who may sue the Company to recover the 
consideration paid, if any, for shares of the Company's Common Stock, with 
interest thereon, from the date of the Yukon Continuance to the date of 
repayment by the Company less the amount of any income received thereon, upon 
tender of such securities, or for damages if the shareholder no longer owns 
such securities.  The Company intends to vigorously defend any such 
shareholder lawsuit and believes that it may have valid defenses, including the 
running of applicable statutes of limitations, against claims by some 
or all of its shareholders.  However, to the extent that any of the 
Company's shareholders obtain a judgment for damages against the Company, the 
Company's net assets and net worth will be reduced, which in turn 
could reduce the Company's ability to obtain financing for its exploration 
and drilling operations and cause the Company to curtail operations.  The 
Company is unable to quantify the amount of such contingent 
liability.  Nothing herein should be construed as an admission by the Company 
that it has violated any provision of the Securities Act.  See "Risk Factors 
--Possible Contingent Liability for Violation of Securities Act."

      The Company contends that in the Yukon Continuance transaction, the 
"consideration" given by the shareholders was stock in an Ontario 
corporation in exchange for stock in a Yukon Territory corporation.  
Thus one of the remedies of a shareholder under Section 12(a) would be for 
the Company to rescind the Yukon Continuance and offer to exchange with 
its shareholders shares of common stock of an Ontario corporation.  Under 
Canadian law such action would require a vote of the present 
shareholders and would give them dissenters' rights under Yukon law.  If Rule 
145 were deemed applicable, the continuance back to Ontario would require 
registration under the Securities Act with the attendant costs and 
delays.  The Company believes this would be an impractical and expensive 
solution, and would be inconsistent with the Company's shareholders' approval 
of the Yukon Continuance at the December 10, 1996 meeting.  The Company does 
not intend to make such a rescission offer or any other rescission offer to 
its shareholders regarding the Yukon Continuance.  Further, the Company 
does not believe that its shareholders suffered any monetary loss or other 
damages as a result of the Yukon Continuance.

Other Legal Proceedings. 

      The Company is not currently party to any other legal 
proceedings which would have material adverse effect on the Company.


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 1998 nor the first quarter of 
fiscal 1999, through September 15, 1998.

_____________________________________________________________________________
                             PART II
_____________________________________________________________________________

ITEM 5.     MARKET FOR THE COMPANY's COMMON STOCK AND RELATED
            STOCKHOLDER MATTERS
     
Market Investments.  

     The Common Stock began trading through the Canadian Dealing 
Network ("CDN") on June 24, 1996, under the symbol "CVZC".  From June 24, 
1996, through June 30, 1998, the following table sets forth the high and 
low bid information for the Company'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 $.69 to $.74 range.  
On December 31, 1998, one Canadian dollar was worth $0.72 U.S. Since 
December 31, 1997, there have been no significant trades on the Canadian 
Dealing Network. 

                                            High          Low
        June 21-30, 1996                    C$2.80        C$2.50
        July 1 - September 30, 1996         C$2.60        C$1.20
        October 1 - December 31, 1996       C$1.90        C$0.75
        January 1 - March 31, 1997          C$3.45        C$1.45
        April 1 - June 30, 1997             C$2.55        C$1.50
        July 1 - September 30, 1997         C$6.50        C$1.95
        October 1 - December 31, 1997       C$4.17        C$3.91
 
      The Company'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".  The following  
table sets forth the high and low bid information for the Company's Common 
Stock in U.S. currency as reported on the NASD Electronic Bulletin Board 
since January 14, 1997.  The table reflects inter-dealer prices, without 
retail mark-up, mark-down or commission, and may not necessarily represent 
actual transactions.   The Company's Common Stock was not traded through the 
NASD Electronic Bulletin Board after October 17, 1997.


                                            High          Low
        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
        October 1-17, 1997                  $3.45         $3.12

     On October 17, 1997, the Common Stock was listed on the American 
Stock Exchange under the symbol "KTN".  The following table sets 
forth the high and low sales prices for the Common Stock since October 17, 
1997.

                                            High         Low
         October 17 to December 31, 1997    $6.00        $2.12
         January 1 - March 31, 1998         $2.94        $1.38
         April 1 - June 30, 1998            $1.75        $0.88
         July 1 - September 15, 1998        $1.19        $0.50
 
     Holders.  As of June 30, 1998, there were approximately 1,065 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.

     
ITEM 6.     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Fiscal Year 1998 as Compared to Fiscal Year 1997

      During the fiscal year ended June 30, 1998, the Company had a net 
loss of $830,600 on revenues of $1,825,852 as compared with a net 
loss of $2,006,878 on revenues of $272,243 for the fiscal year ended June 30, 
1997.  The improvement results from the first used equipment sales by 
the Company's subsidiary, Mustang Oilfield Equipment Company, oil and gas 
production beginning March 1997 from the N.E. Alden Field and August 
1997 from the Aspen properties, oil and gas production beginning November 
1997 from the Sears Ranch Prospect, and continued production from the 
Company's Cheneyboro properties, as well as reductions in general and 
administrative costs, and gain from the purchase and sale of a Canadian 
property, which were offset by costs associated with the financing and 
development of the Company.

      Oil and gas sales increased  207% from $272,243 for the fiscal year 
ended June 30, 1997 to $835,684 for the fiscal year ended June 30, 
1998, reflecting the addition of the Aspen, N.E. Alden and Sears Ranch 
acquisitions.  Oil and gas production costs increased 144% for the 
fiscal year ended June 30, 1998, reflecting the addition of oil and gas 
properties and continued remedial work required at the N.E. Alden 
Field.  The Company did not have any significant oil and gas production 
costs for the fiscal year ended June 30, 1997.

      Equipment sales for the fiscal year ended June 30, 1998 were 
$987,811 as compared to no sales for the fiscal year ended June 30, 
1997. Equipment purchase and refurbishing expenses were $660,373 for the 
fiscal year ended June 30, 1998 as compared to zero expenses for the 
comparable period ended June 30, 1997.

      General and administrative costs were $1,330,361 for the fiscal year 
ended June 30, 1998, a decrease of $1,495,317 or 53% less than the 
$2,825,678 incurred for the fiscal year ended June 30, 1997.  A 
substantial portion of the decrease was due to the expiration of the 
investor relations contract with LFC and an administrative cost 
reduction program instituted by management in mid-June 1997.  In 
addition, the Company allocated that portion of its general and 
administrative expenses that were directly associated with oil and gas 
acquisition and development activities during the fiscal year ended 
June 30, 1998 to oil and gas properties.  No such costs were allocated 
during the fiscal year ended June 30, 1997 because the Company was 
primarily involved in fund raising activities during that time period.

     The Company purchased and sold a Canadian oil and gas property 
during January 1998 that resulted in a gain of $629,660.

     The Company will recognize an income tax benefit of $467,678 for the 
fiscal year ended June 30, 1998 as compared to recognition of an income 
tax benefit of $919,000 for the fiscal year ended June 30, 1997.  
This is directly related to the size of the profit or loss before income 
taxes during such periods.

Fiscal Year 1997 As Compared to Fiscal Year 1996

      During the fiscal year ended June 30, 1997, the Company incurred a 
net loss of $2,006,878 as compared 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.

      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 a 
compensation expense of $1,286,800, (approximately 46% of total general
and administrative expenses) representing the value of shares and 
warrants issued to LFC for certain investor relations services, and 
approximately $212,000 representing costs incurred with respect to a public 
offering of securities which did not materialize.  The remaining increase in 
general and administrative expense can be attributed to the addition of staff 
and technical personnel during 1997 as compared to a relatively small 
staff which was in place for only a part of 1996.  

      Oil and gas production costs were $252,272 in 1997 as compared to 
none in 1996.  These costs primarily relate to the N.E. Alden Field 
and particularly to rehabilitation costs which were not capitalized. The 
Company initially acquired its interest in the N.E. Alden Field in 
December 1996 for $390,000 of which $35,000 was paid in December 1996 
and $355,000 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.

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

     During fiscal 1996, the Company issued 300,000 shares to two former 
officers of the Company for services which was recorded at $446,950.  
Other expenses during this period were $657,796 which includes 
$138,970 in interest expense and officers and staff compensation.  The loss 
before income tax benefit of $387,000 was $1,099,360 during fiscal 1996.

Fiscal Year 1996 As Compared to Fiscal Period 1995

     From February 15, 1995 (inception), to June 30, 1996, the Company 
accumulated a deficit of $762,277 after an income tax benefit of 
$412,000.  During this period, the Company acquired certain oil and gas 
properties, completed the amalgamation 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.  The Company paid management fees of $10,000 per month from its 
inception to July 31, 1995, and $20,000 per month from August 1, 1995 to March 
31, 1996, for the full-time services of Eugene A. Soltero, Chairman of 
the Board and Chief Executive Officer, and James E. Hogue, President and 
Chief Operating Officer.  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 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, 1998, the Company had a net working capital of 
$20,823, before adjustments of $396,411 for non-cash accrued 
liabilities, leaving an effective working capital of $417,234.  For 
fiscal year 1999, the Company anticipates a capital budget of 
approximately $10 million, of which $8 million would be spent 
developing the Means Unit, $0.5 million is allocated to workovers at 
N.E. Alden and $1.5 million will be used at Cheneyboro.  The Means Unit 
and N.E. Alden funding is scheduled to be provided by the $10 million 
Triassic line of credit.  The Company plans to obtain the capital for its 
initial Cheneyboro drilling from a combination of reduction of its oilfield 
equipment inventory, vendor financing, exchange of horizontal tools for
services and private placements.  No assurance can be given that the Company 
will be successful in these efforts.

     During the fiscal year ended June 30, 1998, the Company used 
$714,969 net cash for its operating activities, of which $891,359 was 
used for increases in materials and supplies inventory for its used 
equipment resale business and $196,966 was loss before non-cash charges, 
offset by $373,356 net increases in cash from net changes to receivables and 
payables.  Cash of $11,286,846 was used in investing activities, 
primarily in oil and gas properties, and well service and horizontal 
drilling equipment.  Net cash from investing activities was  $11,444,965, 
consisting of: (i) $13,122,331 generated from the issuance of long 
term notes, sale of common stock, exercise of warrants, exchange of stock 
for oil and gas properties, and the issuance of the Convertible 
Debentures; less (ii) $1,677,366 used for payment of liability related to the 
Aspen acquisition, costs related to sale of stock and notes, and repayments 
of advances payable, notes payable and long-term debt.
      
     The Company did not obtain effectiveness of a registration statement
by May 31, 1998 for the securities underlying the Convertible Debentures, 
which event would, with notice, be an event of default under the 
relevant financing agreements.  No notice has been given.  As of  
September 15, 1998, the Company and each Convertible Debentureholder 
were in negotiation for certain amendments to the Convertible 
Debentures and related documents, including a waiver of the prospective 
event of default.  As consideration for the waiver, the Company has 
agreed to issue a total of 400,000 shares (the "Waiver Shares") on a 
pro rata basis to the Convertible Debentureholders.  The Waiver Shares 
will be valued by the board of directors at $0.425 per share when issued 
to the Convertible Debentureholder.  Additionally, the Company expects 
to issue and deliver to the Convertible Debentureholders approximately 
700,000 shares of common stock in lieu of accrued interest of 
approximately $302,000 on the Convertible Debentures for December 
30, 1997 through December 31, 1998.  If the amendments are not 
completed, and the Debentureholders give notice of default, 
the Company's liquidity and activities could be severely adversely 
affected.

     During the first quarter of fiscal year 1999, through September 15, 
1998, the Company has raised $145,000 through the sale of 290,000 
shares of its Common Stock and warrants to purchase 290,000 shares, 
exercisable at $0.60 per share until December 31, 1001, in a private placement, 
and signed a subscription agreement for an additional $430,00 to be 
subscribed during the second quarter of fiscal 1999.

     For the remainder of fiscal year 1999, the Company expects that its 
cash for operations and capital expenditure requirements will be met 
in the aggregate as follows:

- through the proceeds received from the exercise of outstanding 
  warrants;
- institutional reserves based development mezzanine loans;
- traditional commercial bank asset lending;
- private sales of securities; 
- conversion of debt to equity;
- reduction of oilfield equipment inventory;
- exchange of drilling and well servicing equipment for drilling 
  services;
- farmout and/or sale of oil and gas property interests; and
- revenues from operations.

     Management believes a combination of the above sources of capital 
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 the Company on acceptable terms, if at all.  The 
inability to obtain additional financing would have a material adverse effect 
on the Company, including requiring the Company to curtail significantly 
development of its properties.  Any financing may involve substantial 
dilution to the interests of the Company's then existing shareholders.

Year 2000 Modifications

     The Company is currently reviewing its computer systems in order to 
evaluate necessary modifications for the year 2000.  The Company does 
not currently anticipate that it will incur material expenditures to 
complete any such modifications.  Many of the companies with whom the Company 
has material transactions have responded to the Company's inquiring and 
stated that they are Year 2000 compliant, or are currently examining Year 
2000 compliance issues.

Other Matters

     In February 1997, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 128, Earnings Per 
Share ("SFAS 128").  SFAS 128 requires companies with complex capital 
structures that have publicly held common stock or common stock equivalents
to present both basic and diluted earnings per share ("EPS") on the face 
of the income statement.  The presentation of basic EPS replaces the 
presentation of primary EPS currently required by Accounting Principles 
Board Opinion No. 15 ("APB No. 15").  Basic EPS is calculated as 
income available to common shareholders divided by the weighted average 
number of common shares outstanding during the period.  Diluted EPS is 
calculated using the "if converted" method for convertible securities and
the treasury stock method for options and warrants as prescribed by APB 
No. 15.  This statement is effective for financial statements issued 
for interim and annual periods ending after December 15, 1997.  The 
Company adopted SFAS 128 as of December 31, 1997 for the period ended 
December 31, 1997 and all prior periods.  The adoption of SFAS 128 has 
not had a significant impact on the Company's reported EPS to date.

     In February 1997, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 129, Disclosures of 
Information About Capital Structure ("SFAS 129") which establishes 
standards for disclosing information about an entity's capital 
structure.  The disclosures are not expected to have a significant 
impact on the consolidated financial statements of the Company.  
SFAS 129 is effective for financial statements ending after 
December 15, 1997.

     In June 1997, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 130, Reporting 
Comprehensive Income ("SFAS 130") which established standards for 
reporting and displaying comprehensive income and its components 
(revenues, expenses, gains and losses) in a full set of general 
purpose financial statements.  SFAS 130 requires that all items that
are required to be recognized under accounting standards as components 
of comprehensive income be reported in a financial statement that is 
displayed with the same prominence as other financial statements.  
SFAS 130 is effective for years beginning after December 15, 1997.
The Company does not anticipate a material impact to its consolidated
financial statements upon adoption of this standard.

     In June 1997, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 131, Disclosures 
About Segments of an Enterprise and Related Information ("SFAS 131") 
which establishes standards for the way public business enterprises 
are to report information about operating segments in annual financial 
statements and requires those enterprises to report selected information
about operating segments in interim financial reports issued to 
shareholders.  It also establishes the related disclosures about products
and services, geographic areas and major customers.  SFAS 131 replaces the 
"industry segment" concept of Financial Accounting Standard No. 14 with a 
"management approach" concept as the basis for identifying reportable 
segments.  SFAS 131 is effective for financial statements for periods 
beginning after December 15, 1997.  The Company expects additional 
disclosures will be required, but otherwise does not anticipate a 
material impact to its consolidated financial statements upon adoption 
of this standard.

     In 1998, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards No. 132, Employers' Disclosures 
about Pensions and Other Postretirement Benefits ("SFAS 132"), and SFAS 
133, Accounting for Derivative Instruments and Hedging Activities."  SFAS 
132 is effective for fiscal years beginning after December 15, 1997, and 
SFAS 133 is effective for fiscal years beginning after June 15, 1999.  The 
Company does not anticipate a material impact to its consolidated 
financial statements upon adoption of these standards.


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.

ITEM 7.            CONSOLIDATED FINANCIAL STATEMENTS AND UNAUDITED
                              SUPPLEMENTARY DATA

Index to Financial Statements and Financial Statement Schedule     
Page

Independent Auditor's Reports                                         24  

Financial Statements

Consolidated Balance Sheet                                            26  

Consolidated Statements of Operations                                 27  

Consolidated Statement of Changes in Stockholders'                    28  

Consolidated Statements of Cash Flows                                 27  

Notes to Consolidated Financial Statements                            29  

Supplemental Information (Unaudited)                                  38  



INDEPENDENT AUDITOR'S REPORT




Board of Directors
Cotton Valley Resources Corporation
Dallas, Texas


We have audited the accompanying consolidated balance sheet of Cotton 
Valley Resources Corporation and subsidiaries (a development stage 
company) as of June 30, 1998, and the related consolidated statements of 
operations, changes in stockholders' equity and cash flows for the 
year then ended and the period from February 15, 1995 (date of 
incorporation) to June 30, 1998.  These financial statements are the 
responsibility of the Company's management. Our responsibility is to 
express an opinion on these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to 
above present fairly, in all material respects, the financial 
position of Cotton Valley Resources Corporation and subsidiaries
as of June 30, 1998 and the results of their operations and their cash
flows for the year then ended and the period from February 15, 1995 
(date of incorporation) to June 30, 1998, in conformity with generally 
accepted accounting principles.

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


LANE GORMAN TRUBITT L.L.P.


Dallas, Texas
September 11, 1998

<PAGE>

Board of Directors
Cotton Valley Resources Corporation
Dallas, Texas


We have audited the accompanying of consolidated statements of 
operations, stockholders' equity and cash flows 
Cotton Valley Resources Corporation and subsidiaries (a development stage 
company) for the year ended June 30, 1997, 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, results of the Company
its operations and its cash flows for the year ended June 30, 1997, 
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, L.L.C.


Dallas, Texas
September 15, 1997

<PAGE>

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

             ASSETS

<S>                                                                 <C>
CURRENT ASSETS:
 Cash                                                               $    85,762
 Accounts receivable                                                    396,390
 Materials and supplies inventory                                       891,359
 Prepaid expenses                                                       219,119
                                                                    -----------
   Total current assets                                               1,592,630

Proved Oil & Gas Properties (full cost method)                       24,331,189 
 net of accumulated depletion of $396,008 

Office Furniture and Equipment                                           92,412
 net of accumulated depreciation of $24,724 

Debenture Financing Costs and Other Assets                              521,625
                                                                    -----------
    Total Assets                                                    $26,537,856
                                                                    ===========

                  LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
 Accounts payable                                                   $ 1,175,396
 Accrued expenses                                                        51,288
 Accrued interest                                                       158,483
 Accrued well plugging costs                                            186,640
                                                                    -----------
    Total current liabilities                                         1,571,807

Long Term Debt, net of discount of $53,962                            4,654,638

Advances from Related Parties                                           122,989
 
Deferred Income Taxes                                                 1,845,000

Stockholders' Equity 
 Preferred stock, no par value, authorized-unlimited,- issued, none           -
 Common Stock, no par value, authorized-unlimited:
  issued: - 17,273,278                                               21,119,482
 Warrants and beneficial conversion feature                             823,695
 Deficit accumulated in development state                            (3,599,755)
                                                                    ----------- 
   Total liabilities and stockholders equity                        $26,537,856
                                                                    ===========

See accompanying notes to these financial statements.

</TABLE> 
<TABLE>
                             COTTON VALLEY RESOURCES CORPORATION
                                (a development stage company)
                                  
                      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                (Expressed in U.S. Dollars)
                               
                                                                 Period from
                                                              February 15, 1995
                                   Year Ended June 30,                to 
                                   1998            1997          June 30, 1998  
                                   -----           -----         --------------
<S>                                    <C>            <C>             <C>
REVENUE:
 Oil and gas sales                 $  835,684     $   272,243     $   1,107,927
 Equipment sales                      987,811                           987,811
 Other income                           2,357               -             2,357
                                    ----------    ------------    -------------
  Total Revenue                     1,825,852         272,243         2,098,098

EXPENSES:
 Oil and gas production               615,162         252,272           867,434
 Cost of equipment sold               542,864               -           542,864
 Operating expenses                   117,509               -           117,509
 General and administrative         1,330,361       2,825,678         5,196,732
 Depreciation and depletion           378,920          27,000           405,920
 Other expenses                         1,566               -             1,566
                                   -----------     -----------    --------------
  Total Expenses                    2,986,382       3,104,950         7,132,025
                                   -----------     -----------    --------------

LOSS FROM OPERATIONS               (1,160,530)     (2,832,707)       (5,033,930)

OTHER INCOME (EXPENSES):
 Interest and financing expense      (814,845)       (97,158)        (1,050,973)
 Gain on sale of assets               629,660              -            629,660
 Interest income                       47,437          3,987             56,810
                                   -----------     -----------    --------------
   Total Other                       (137,747)       (93,171)          (364,503)
                                   -----------     -----------    --------------

LOSS BEFORE INCOME TAX             (1,298,278)     (2,925,878)       (5,398,433)

INCOME TAX BENEFIT                    467,678         919,000         1,798,678
                                   -----------     -----------    --------------

NET LOSS                           $ (830,600)    $(2,006,878)      $(3,599,755)

NET LOSS PER SHARE                 $    (0.05)    $     (0.18)      $     (0.30)

WEIGHTED AVERAGE SHARES            16,301,723      11,403,000        11,868,140

See accompanying notes to these financial statements.

</TABLE> 

<TABLE>

                             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, 1998
                                (Expressed in U.S. Dollars)

                                                       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 
   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       -      -

--Continued-- 
</TABLE>

<TABLE>
                                                             WARRANTS
                                                                AND
                                                             BENEFICAL
                                       SPECIAL    SHARES     CONVERSION
                                      SHARES      AMOUNT       DISCOUNT
                                      -------     ------     ---------- 
<S>                                   <C>         <C>        <C>
Issued upon incorporation to officers
($.003 per share)                     2,100,000   $     8            -
Issued March 10, 1995 for the 
   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                       -         -            -

--Continued-
</TABLE>
<TABLE>
                                             DEFICT
                                         ACCUMULATED
                                        IN DEVELOPMENT
                                           STAGE               TOTAL
                                        --------------      -----------
<S>                                     <C>                 <C>
Issued upon incorporation to officers
($.003 per share)                                -          $    1,409
Issued March 10, 1995 for the 
   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)
                                       -------------      -------------
BALANCES, June 30, 1996                           -          9,116,883

--Continued-- 
</TABLE>
<TABLE>
                                                                COMMON STOCK
                                            COMMON STOCK         SUBSCRIBED 
                                            SHARES     AMOUNT  SHARES    AMOUNT
                                            ------     ------   -------  ------
<S>                                         <C>        <C>      <C>      <C>
--Continued--
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         -       -
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         -        -

--Continued-- 
</TABLE>
        
<TABLE>                                                             WARRANTS
                                                                       AND
                                                                    BENEFICAL
                                              SPECIAL SHARES        CONVERSION
                                              SHARES      AMOUNT       DISCOUNT
                                               -------     ------   ------------
<S>                                           <C>         <C>        <C>
--Continued--
Issued August 13, 1996 for exercise 
   of warrants ($1.64 per share)                    -           -              -
Issued in August and November 1996 for 
   exercise of warrants ($.48 per share)            -           -              -
Sales of shares for cash during November 1996
   ($.73 per share)                                 -           -              -
Issued primarily in December 1996 for
   services ($.78 per share)                        -           -              -
Issued in December 1996 to settle 
   liabilities ($.73 per  share)                    -           -              -
Issued in December 1996 for investor relations
   services ($.73 per share)                        -           -              -
Sale of shares for cash on January 7, 1997
   ($.82 per share), less commission of  
    $16,400                                         -           -              -
Issued during January 1997 for exercise of 
      warrants ($.48 per share)                     -           -              -
Issued February 5, 1997 for exercise of
      warrants ($2.00 per share)                    -           -              -
Issued February 5, 1997 for exercise of 
     warrants ($1.47 per share)                     -           -              -
Issued during March 1997 for exercise of
    warrants ($1.64 per  share)                     -           -              -
Sale of shares from December 1996 through
    March 1997 for cash, including shares
    subscribed but not issued 
     ($.75 per share)                               -           -              -
Sale of shares for cash during February - 
   June 1997 ($1.51 per share)                      -           -              -

--Continued-

</TABLE>
<TABLE>
                                                     DEFICT
                                                  ACCUMULATED
                                                 IN DEVELOPMENT
                                                     STAGE             TOTAL
                                                 --------------      -----------
<S>                                              <C>                 <C>
--Continued--
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

--Continued-
</TABLE>
<TABLE>
                                                                  COMMON STOCK
                                              COMMON STOCK         SUBSCRIBED 
                                       SHARES     AMOUNT   SHARES        AMOUNT
                                       ------     ------   -------       ------
                                       <C>        <C>      <C>           <C>
--Continued--
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 
    warrants ($2.00 per share)              -          -    52,000     104,000
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 1996 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
                                   ===========  ==========  =======   ========


Issuance of shares in July for Aspen Energy
   acquisition ($1.87 per share)     2,511,287  4,700,000         -         -
WPM Group private placement
   in August 1997 ($1.667 per share)   272,700    454,500         -         -
Share issued in July 1997 against prior   
   subscription agreement              177,000    197,750  (177,000)  (197,750)
Shares issued for employee bonuses
    in August 1997 ($1.06 per share)    45,000     47,813         -          -
Shares issued in September  1997 for  
    purchase of property 
     ($3.70 per share)                   9,447     35,000         -          -

--Continued-

Warrants issued in connection with
   $125,000 note placement in September
    1997                                     -          -         -          -
Warrants exercised July-October
    1997 ($1.85 per share)           1,610,674  3,017,812         -          -
Exercise of warrants in December 1997
    ($1.22 per share)                   66,667     81,419         -          -

Discount for beneficial conversion feature of
    $4,320,000 of convertible debentures
    issued in December, 1998                 -          -         -          -
Issuance of  shares in February 1998 for
    conversion of convertible note      60,000    100,000         -          -
Cancellation of shares in March 1998
    for debt in Aspen acquisition     (269,970)  (425,000)        -          -
Issuance of shares for services in May 1998
    ($1.1875 per share)                150,000    178,125         -          -
Issuance  of shares for property option
     ($.50 per share)                   50,000     25,000         -          -
Net loss                                     -          -         -          -
                                   ----------- -----------    --------   -------
BALANCES, June 30, 1998            17,273,278 $21,119,482         -     $    -
                                   =========== ===========    ========  ========
See accompanying notes to these financial statements.
</TABLE>
<TABLE>

                                                              WARRANTS
                                                                AND
                                                             BENEFICAL
                                       SPECIAL SHARES       CONVERSION
                                      SHARES      AMOUNT       DISCOUNT
                                      -------     ------     ---------- 
<S>                                   <C>         <C>        <C> 
--Continued--
Issuance of shares in May 1997 for
   services (1.84 per share)               -           -             -
Cash received in June 1997 as
   prepayment for subsequent exercise of 
    warrants ($2.00 per share)             -           -             -
Issuance of shares in June 1997 for 
  conversion of notes payable 
   ($1.16 per share)                       -           -             -
Estimated fair value of warrants issued for
  services in November 1996 and as
   discount on note payable in 
     June 1997                              -          -       323,000 
                                    ----------    -------     ---------
Net loss                                    -          -             -          
BALANCES, June 30, 1997                     -          -       323,000
                                   ===========  ==========    ==========


Issuance of shares in July for Aspen Energy
   acquisition ($1.87 per share)
                                            -          -             -
WPM Group private placement
   in August 1997 ($1.667 per share)        -          -             -
Share issued in July 1997 against prior   
   subscription agreement                   -          -             -
Shares issued for employee bonuses
    in August 1997 ($1.06 per share)        -          -             -
Shares issued in September  1997 for  
    purchase of property 
    ($3.70 per share)                       -          -             -

--Continued-

Warrants issued in connection with
   $125,000 note placement in September
    1997                                     -          -       21,533
Warrants exercised July-October
    1997 ($1.85 per share)                   -          -            -
Exercise of warrants in December 1997
    ($1.22 per share)                        -          -            -

Discount for beneficial conversion feature of
    $4,320,000 of convertible debentures
    issued in December, 1998                 -          -       479,162
Issuance of  shares in February 1998 for
    conversion of convertible note           -          -            -
Cancellation of shares in March 1998
    for debt in Aspen acquisition            -          -            -
Issuance of shares for services in May 1998
    ($1.1875 per share)                      -          -            -
Issuance  of shares for property option
     ($.50 per share)                        -          -            -
Net loss                                     -          -            -
                                     ----------    --------   ---------
BALANCES, June 30, 1998                     -      $    -     $823,695 
                                     ===========   ========   =========
See accompanying notes to these financial statements.
</TABLE>
<TABLE>

                                           DEFICT
                                         ACCUMULATED
                                        IN DEVELOPMENT
                                           STAGE               TOTAL
                                        --------------      -----------
<S>                                     <C>                 <C>
--Continued--
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 
    warrants ($2.00 per share)                     -           104,000
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
Net loss                                  (2,006,878)       (2,006,878)
                                       ---------------     ------------
BALANCES, June 30, 1997                   (2,769,155)       10,458,658
                                       ===============     ============


Issuance of shares in July for Aspen Energy
   acquisition ($1.87 per share)                   -         4,700,000
WPM Group private placement
   in August 1997 ($1.667 per share)               -           454,500
Share issued in July 1997 against prior   
   subscription agreement                          -             
Shares issued for employee bonuses
    in August 1997 ($1.06 per share)               -            47,813
Shares issued in September  1997 for  
    purchase of property
     ($3.70 per share)                             -            35,000

--Continued-

Warrants issued in connection with
   $125,000 note placement in September
    1997                                           -            21,533
Warrants exercised July-October
    1997 ($1.85 per share)                         -         3,017,812
Exercise of warrants in December 1997
    ($1.22 per share)                              -            81,419

Discount for beneficial conversion feature of
    $4,320,000 of convertible debentures
    issued in December, 1998                       -           479,162
Issuance of  shares in February 1998 for
    conversion of convertible note                 -           100,000
Cancellation of shares in March 1998
    for debt in Aspen acquisition                  -          (425,000)
Issuance of shares for services in May 1998
    ($1.1875 per share)                            -           178,125
Issuance  of shares for property option
     ($.50 per share)                              -            25,000
Net loss                                    (830,600)         (830,600)
                                           ----------       -----------
BALANCES, June 30, 1998                  $(3,599,755)      $18,343,422 
                                          ===========       =========== 
See accompanying notes to these financial statements.
</TABLE>

<TABLE>
                             COTTON VALLEY RESOURCES CORPORATION
                                (a development stage company)
                                  
                      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (Expressed in U.S. Dollars)


                                             Year Ended June 30,   
                                         1998               1997   
                                     ----------         ------------
<S>                                  <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                             $  (830,600)       $ (2,006,878)
Adjustments to reconcile net loss 
  to net cash used by operating activities:
   Deferred income tax benefit          (467,678)           (919,000)
   Depreciation and depletion            378,920              40,128
   Amortization                          633,632                   -
   Common stock and warrants issued
    for services                          69,346           1,391,632
   Change in accounts receivable
    and prepaid expenses                (341,430)           (110,797)
   Change in accounts payable and
    accrued liabilities                  878,770             406,348
   Change in materials and supplies
    inventory                           (891,359)                  -
   Other                                 (33,685)              2,189
                                    -------------       -------------
     Net cash used by 
        operating activities            (604,084)         (1,196,378)

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties   (6,600,175)           (937,621)
Acquisition of office furniture
 and equipment                           (61,673)            (18,242)
                                     ------------       --------------
     Net cash used by 
       investing activities           (6,661,848)           (955,863)

CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock and exercise 
 of warrants                           3,553,731           1,444,783
Issuance of convertible debentures     4,320,000                   -
Issuance of note payable subsequently 
  converted into convertible debentures        -                   -
Payment of liability related to 
 oil and gas property                          -                   -
Costs related to sale of stock 
 and notes                              (557,528)                  -
Issuance of notes payable                513,600             579,000
Repayment of notes payable 
 and long-term debt                   (1,104,000)         
Advances from (repayments to) 
 related parties                         (16,721)            (32,000)
                                    -------------         -------------
    Net cash provided by 
      financing activities             6,709,082           1,991,783

NET INCREASE (DECREASE) IN CASH         (556,850)           (160,458)

CASH - Beginning of period               642,612             803,070
                                    -------------         -------------
CASH - End of period                $     85,762          $  642,612

SUPPLEMENT INFORMATION:
Cash paid for interest                   169,973              38,059
Conversion of debt and other 
 liabilities to common stock             100,000             388,238
Liabilities incurred in acquisition 
 of oil and gas properties               300,000                   -
Retirement of debenture upon merger 
 with Arjon                                    -                   -
Oil and gas property option acquired 
 with payable                                  -                   -
Oil and gas properties acquired with 
 common stock                          4,335,000                   -
Issuance of common stock for stock 
 offering costs                                -                   -
Transfer of accounts payable and 
 related property option                       -             230,000
Prepaid expenses acquired with 
 common stock                            178,125                   -
Beneficial conversion feature on 
 convertible debentures                  479,162                   -    

See accompanying notes to these financial statements.
</TABLE>

<TABLE>
                             COTTON VALLEY RESOURCES CORPORATION
                                (a development stage company)
                                  
                      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (Expressed in U.S. Dollars)

                                                             Period From 
                                                           February 15, 1995 
                                                                  to 
                                                            June 30, 1998 
                                                           -----------------        
<S>                                                          <C>                     
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss)                                             $(3,599,755)
Adjustments to reconcile net loss to net cash 
  used by operating activities:
   Deferred income tax benefit                                 (1,798,678)
   Depreciation and depletion                                     420,731
   Amortization                                                  721,632
   Common stock and warrants issued
    for services                                                1,910,109
   Change in accounts receivable
    and prepaid expenses                                         (452,227)
   Change in accounts payable and
    accrued liabilities                                         1,571,807
   Change in materials and supplies
    inventory                                                    (891,359)
   Other                                                          (25,653)
                                                             -------------
     Net cash used by 
        operating activities                                   (2,143,393)

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties                            (8,289,555)
Acquisition of office furniture
 and equipment                                                   (117,135)
                                                             ------------
     Net cash used by 
       investing activities                                    (8,406,690)

CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock and exercise 
 of warrants                                                    7,098,386
Issuance of convertible debentures                              4,746,474
Issuance of note payable subsequently 
  converted into convertible debentures                           146,300
Payment of liability related to 
 oil and gas property                                            (500,000)
Costs related to sale of stock 
 and notes                                                       (966,904)
Issuance of notes payable                                       1,342,600
Repayment of notes payable 
 and long-term debt                                            (1,354,000)
Advances from (repayments to) 
 related parties                                                  122,989
                                                             -------------
    Net cash provided by 
      financing activities                                     10,635,845

NET INCREASE (DECREASE) IN CASH                                    85,762

CASH - Beginning of period                                              -
                                                            -------------
CASH - End of period                                       $       85,762

SUPPLEMENT INFORMATION:
Cash paid for interest                                            245,042
Conversion of debt and other 
 liabilities to common stock                                      914,712
Liabilities incurred in acquisition 
 of oil and gas properties                                      1,386,049
Retirement of debenture upon merger 
 with Arjon                                                       146,300
Oil and gas property option acquired 
 with payable                                                     230,000
Oil and gas properties acquired with 
 common stock                                                  11,407,914
Issuance of common stock for stock 
 offering costs                                                   506,409
Transfer of accounts payable and 
 related property option                                          230,000
Prepaid expenses acquired with 
 common stock                                                     178,125
Beneficial conversion feature on 
 convertible debentures                                           479,162


See accompanying notes to these financial statements.

</TABLE>


                     COTTON VALLEY RESOURCES CORPORATION
                      (a development stage company)

                  NOTES TO FINANCIAL STATEMENTS


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.

      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. 

     On April 30, 1996, the Company organized Cotton Valley Operating 
Company, a Texas corporation ("CV Operating") to operate the 
Company's oil and gas properties.  The Company on February 25, 1997, 
organized Cotton Valley Energy, Inc., an Oklahoma corporation ("CVEI") to 
acquire and operate the N.E. Alden Field properties in Caddo County, 
Oklahoma.  CVEI commenced operations on March 3, 1997.  Aspen Energy 
Corporation, a Nevada corporation ("Aspen"), was an inactive subsidiary 
of the Company, formed on May 1, 1996, which was used to accommodate the 
merger of Aspen Energy Corporation, a New Mexico corporation ("Old 
Aspen") into Aspen on July 31, 1997.  The principal asset of Old 
Aspen was its interest in the Means Unit in Andrews County, Texas (the 
"Means Unit").  On May 27, 1998, Aspen organized Cotton Valley Means, Inc. 
as a Texas corporation ("CV Means") and transferred all of its interest 
in the Means Unit to CV Means to facilitate a $10 million financing 
relating to the development of this property.

     In addition to CV Energy, CV Operating, CVEI, Aspen and CV Means, the 
Company recently organized Mustang Well Servicing Company, a Nevada 
corporation ("Mustang Well Servicing"), Mustang Oilfield Equipment 
Company, a Nevada corporation ("Mustang Equipment"), and Mustang 
Horizontal Services, Inc., a Nevada corporation ("Mustang 
Horizontal") (collectively, the "Mustang Service Companies").  All of the 
Company's subsidiaries are wholly owned by the Company, except for CV Means 
which is a wholly-owned subsidiary of Aspen.

     The Company is in the development stage and has not had material 
revenues from operations through June 30, 1997.  Although it 
commenced sales during the year ended June 30, 1998, the Company incurred 
losses due to its efforts to raise capital for its development.  The 
Company's planned principal business activity is to acquire, explore, and 
develop oil and gas properties, including trading 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".  A 
separate full cost pool is established for U.S. and non-U.S. 
properties.

     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 
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. See Note 9.   
Abandonments of properties are accounted for as adjustments to capitalized
costs with no loss recognized. Oil and gas drilling and workover equipment 
used primarily on the Company's properties are included in the full 
cost pool.

     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 Furniture and 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 ten 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.

Cash Flow Statement

     For purposes of the statements 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.

Inventories

     Inventories, which consist primarily of oilfield equipment and
supplies held for resale, are stated at the lower of cost or market 
using the first-in, first-out (FIFO) method.

Debenture Financing Costs

     Debenture financing costs are being amortized ratably over the life 
of the related debenture.

Principles of Consolidation

     The consolidated financial statements include the accounts of the 
Company and its wholly-owned subsidiaries.  All material intercompany 
accounts and transactions of consolidated subsidiaries have been 
eliminated in consolidation.

Reclassifications

     Certain reclassifications have been made to the prior years financial
statements to conform to the current year presentation.

Accounting Pronouncements

     In 1998, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 132, Employers' 
Disclosures about Pensions and Other Postretirement Benefits 
("SFAS 132"), and SFAS 133, Accounting for Derivative Instruments and 
Hedging Activities."  SFAS 132 is effective for fiscal years beginning 
after December 15, 1997, and SFAS 133 is effective for fiscal years 
beginning after June 15, 1999.  Also in June 1997 the FASB issued 
SFAS 130, Reporting Comprehensive Income effective for years beginning 
after December 15, 1997.  The Company does not anticipate a material 
impact to its consolidated financial statements upon adoption 
of these standards. 


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. Since inception, the 
Company has invested approximately $9,512,000 on this property, 
including the aforementioned acquisition costs.


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 paid 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 one of the Company's properties, 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. Subsequent to June 30, 1998, the Company determined that it would be 
unable to raise the necessary capital to exercise the option and 
reassigned the option back to its original holder.

Alden Properties, Caddo County, Oklahoma

     In fiscal year 1997, the Company acquired an interest in the Alden 
properties for $390,000.  In fiscal year 1998, the company acquired 
additional interests in the Alden properties for cash and common 
stock.

Aspen Energy Corporation

     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 which was paid in two installments through 
January 1998 and 2,511,317 shares of the Company's common stock. The 
transaction was recorded for as a purchase.  The stock was recorded at 
$4,700,000.  In March 1998 the shareholders of Aspen to delivered 269,870 
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.  

Well Servicing and Drilling Equipment  

     During fiscal year 1998, the Company purchased $2,756,296 of well 
servicing and horizontal drilling equipment. Most of this equipment 
was "tooled out" and put into service during January, February and March 
1998, and has for the remainder of fiscal year 1998 worked only on 
development of the Company's properties.  All the costs associated 
with purchase, tooling out and operations have been capitalized in the 
full cost pool.  Subsequent to June 30, 1998 some of the equipment has 
been rented to third parties and the proceeds therefore have been treated 
as a credit to the full cost pool.  On June 30, 1998, the full cost pool 
of $24,331,189 includes $3,197,877 of drilling and well service 
equipment.

4.     NOTES PAYABLE AND LONG-TERM DEBT

     The Company had a $579,000 convertible 9% note payable at June 30, 1997 
to a company that provided investor relations services to the Company 
and owns stock in the Company. 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 was accounted for as a discount to the note.  During 
November 1997, $100,000 of the note was converted into 60,000 shares 
of common stock and the remaining principal and accrued interest was 
paid.

     The Company had a 12% promissory note payable totaling $200,000 at June 
30, 1997, for the unpaid purchase price of the Cheneyboro oil and gas 
properties (see Note 3).  The note was paid in November 1997.

     Sale of Convertible Debentures.  On December 30, 1997, the Company 
completed the private placement of the $4,320,000 Convertible Debentures 
to a group of nine institutional investment firms.  Approximately $1 
million of the cash proceeds and $220,000 of Convertible Debentures were 
used to purchase the Equipment.  The remaining funds have been used for 
the acquisition and development of oil and gas properties, purchase of 
oil field equipment and working capital.

     The Convertible Debentures are due December 31, 2001 and are secured 
by the Equipment and other assets of the Company.  Interest is payable 
annually at 7%. The Convertible Debentures are convertible into shares 
of the Company's Common Stock and Debenture Warrants, subject to 
adjustment upon certain events.  Under the terms of the Convertible 
Debentures, the Company was obligated to obtain on or before May 30, 
1998 an effective registration statement covering the shares of 
Common Stock to be issued upon conversion of the Convertible 
Debentures and exercise of the Debenture Warrants.  The Company was 
not successful in obtaining the effectiveness of the registration 
statement which event, with notice, would have been an event of default 
under the Convertible Debentures.

     A beneficial conversion feature was recognized and measure by 
allocating a portion of the proceeds equal to the intrinsic value of that
feature to stockholders' equity.  The estimated fair value of $479,162 
has been recorded as a discount to the note and is being amortized 
from the issue date to the date the debenture first becomes convertible.

     As of September 15, 1998, the Company and each Convertible 
Debentureholder were in negotiation for certain amendments to the 
Convertible Debentures and related documents, including a waiver of 
the event of default.  As consideration for the waiver, the Company has 
agreed to issue a total of 400,000 shares (the "Waiver Shares") on a 
pro rata basis to each Convertible Debentureholder.  The Waiver 
Shares will be valued by the board of directors at $0.425 per share when 
issued to the Convertible Debentureholder.  Additionally, the Company 
expects to issue and deliver to the Convertible Debentureholders 
approximately 700,000 shares of common stock in lieu of accrued 
interest of approximately $302,000 on the Convertible Debentures 
for December 30, 1997 through December 31, 1998.  

     Means Credit Facility.  On June 12, 1998, CV Means entered into a 
credit agreement with Triassic Energy Partners, L.P. ("Triassic"),  
an affiliate of Cambrian Capital Corporation whereby CV Means could 
borrow up to $10,000,000 on a multiple-advance, non-revolving basis (the 
"Means Credit Facility").  Repayment of amounts advanced under the 
Means Credit Facility is guaranteed by the Company and all its 
subsidiaries.  

     Under the Means Credit Facility, up to $1,000,000 may be advanced for 
new project development working capital purposes.  The remaining 
$9,000,000 may be advanced for the development of the Company's Means 
(Queen Sand) Unit in Andrews County, Texas (the "Means Unit").  As of 
September 15, 1998, the Company had drawn down $350,000 for working 
capital and $388,600 for Means Unit property development purposes. A 
$10 million promissory note dated June 12, 1998 with interest payable 
monthly at the prime rate of Citibank N.A., New York, New York plus 
2% was issued to Triassic by CV Means in accordance with the terms of 
the Means Credit Facility.  Until the maturity date, May 31, 2002, 
the Company will deliver to Triassic each month a percentage of the 
revenues from the Means Unit to be applied to accrued interest and 
payment of principal of the note.  On the maturity date, the accrued 
interest and outstanding principal balance of the note is due and 
payable.  As security for the Means Credit Facility, CV Means 
granted a security interest in substantially all the assets of CV 
Means, including the Means Unit and all income generated thereby.  
As further security for the Means Credit Facility, Aspen, the sole 
shareholder of CV Means, pledged all the outstanding shares of CV 
Means to Triassic.  

     As further consideration for the Means Credit Facility, CV Means 
assigned a net profits overriding royalty interest in the Means Unit 
to Cambrian Capital Partners, L.P. ("Cambrian") and also entered into a 
crude oil commodities swap agreement with Triassic.  The Company also 
issued a Unit Purchase Option to Cambrian which allows Cambrian to 
purchase up to 100,000 units of the Company for $1.75 per unit.  Each 
unit consists of 1.085 shares of the Company's Common Stock and one 
warrant, which grants to the warrant holder the right to purchase two 
shares of Common Stock at an exercise price of $2.02 per share.  All shares 
issuable under this Unit Purchase Option are subject to a registration 
rights agreement that requires the Company to register such shares under 
certain circumstances.

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, 1998.  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.

     Shortly after incorporation, the Company issued 2,100,000 special 
shares for total cash consideration of $8.00 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, which 
was extended to June 30, 1998.  During fiscal year 1998 all Class A 
warrants, except for approximately 32,000 had been exercised.  The remaining 
32,000 Class A Warrants expired on June 30, 1998.

     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 three 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 services.

     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.  280,000 of the director and employee options were exercised 
during fiscal year 1998.
  
     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 options were 
exercised in fiscal year 1997, and the remainder during fiscal year 
1998.

     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, and the remainder during fiscal year 
1998.

     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 $1,087,700, 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 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 June 30, 1997 financial statement.  The shares were 
issued in October 1997.  None of the warrants had been exercised as 
of June 30, 1998.  The estimated fair value of the warrants at the time 
of grant of $199,000 was recorded in fiscal year 1997 as general and 
administrative expense.

     In fiscal year 1998, additional warrants were granted as set forth 
below.  None of these warrants had been exercised as of June 30, 
1998.

    X   Warrants to acquire 160,000 shares for $3.50 per share through 
        December 31, 2000 were granted in connection with an acquisition;

    X   Warrants to acquire 260,000 shares for $1.75 per share through July 
        7, 2000 were granted as compensation for assisting in exercise of 
        the Company's Class A Warrants outstanding;

    X   Warrants to acquire 355,200 shares for $2.08 per share through 
        April 3, 2002 were issued  in connection with a private placement;

    In fiscal year 1997, additional warrants were granted as set forth below.


     X     Warrants to acquire 266,667 shares for $1.68 per share through 
           January 2002 were granted in connection with a private placement;
     X     Warrants to acquire 200,000 shares at $.73 per share through 
           December 31, 1999 were granted in connection with another private 
           placement;
     X     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;
     X     Warrants to acquire 161,351 shares as described in Note 4;
     X     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, 1998 and 1997:

<TABLE>
                                    June 30, 1998              June 30, 1997 
                                    ----------------           -----------------
                                             Weighted                   Weighted
                                             Average                    Average
                                 Number      Exercise       Number      Exercise
                                 of Shares     Price       of Shares     Price
                                 ---------   ---------     ----------   --------
<S>                              <C>         <C>           <C>          <C> 
Outstanding, 
 beginning of year               4,248,114    $ 1.83       2,735,220     $1.73
   Granted to:
Employees, officers 
  and directors                    674,000      1.65         496,666      1.46
Others                             775,200      2.33       1,430,209      1.20
Expired                            177,665      1.75            -  
Exercised                       (1,610,674)     1.87        (413,981)      .70
                                -----------                ----------
Outstanding, end of year         3,908,975      1.87       4,248,114      1.83  
   
</TABLE>

All outstanding warrants and options were exercisable at June 30, 1998. 
If not previously exercised, warrants and options outstanding at June 30, 1998, 
will expire as follows:

<TABLE>
                                                                       Weighted
                                                                        Average
                                                     Number            Exercise
                Year Ending June 30,              of Shares             Price
                --------------------              ---------            --------
                <S>                               <C>                  <C>

                2000                                566,666              .76   
                2001                              1,014,000             2.03  
                2002                              1,728,309             1.48  
                2003                                600,000             1.65  
                                                  ---------
                Total                             3,908,975 
 


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 1998 
and 1997:


                    
                                 1998                            1997          
                      ---------------------------     --------------------------
                      Number     Exercise   Market    Number    Exercise  Market
                      of Shares   Price     Price     of Shares  Price    Price

Fair value equal to
    exercise price    934,000    $1.69      $1.69     935,524    $1.18    $1.18
Fair value greater 
  than exercise price    -       $  -       $   -          -     $   -    $   - 
Exercise price greater
  than fair value     515,200    $2.52      $2.10     991,351    $1.35    $1.02 
  
Fair value of warrants granted in connection with short term debt 
transactions during the year ended June 30, 1998 was determined using 
the Black-Scholes option pricing model.  Significant assumptions 
included a risk-free interest rate of 5.5%, expected volatility of 
87%, and that no dividends would be declared during the expected term of 
the options.  The weighted average contractual term of the warrants was 
approximately 4.5 years compared to a weighted average expected term 
of 2 years.  The estimated fair value of warrants described above 
amounted to $21,533 which is recorded as an expense in the statement of 
operations.

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.


                                          Year Ended June 30,      
                                       ------------------------------
                                       1998                 1997 
                                       -----------      -------------    
Net loss applicable to common stockholders:
     As reported                      $   (830,600)     $  (2,006,878)  
     Pro forma                        $ (1,337,440)     $  (2,408,000)  
Net loss per common share:
    As reported                       $       (.05)     $        (.18)
    Pro forma                         $       (.08)     $        (.21) 
 

The fair value of each employee option and warrant granted in 1998 
and 1997 was estimated on the date of grant using the Black-Scholes 
option-pricing model with the following weighted average assumptions:


                                         Year ended June 30,    
                                       ------------------------------
                                       1998                  1997
                                       ------------      ------------
Expected volatility                      87%                 102% 
Risk-free interest rate                 5.5%                 5.9%     
Expected dividends                       -                    -     
Expected terms (in years)               5.0                  4.5
    
   


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.  The advances are unsecured, without 
interest and are due after June 30, 1999.  See Note 5 for other 
transactions with related parties.

7.     INCOME TAXES

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


                                                     JUNE 30,
                                          -------------------------------
                                            1998              1997 
                                          -----------       -------------
Deferred tax liabilities:
   Difference in bases of oil and 
    gas properties acquired               $ (3,643,000)     $ (2,000,000)
   Costs capitalized for books and 
    deducted for tax                          (397,000)          (84,000)
                                          -------------    --------------
           Total deferred tax liabilities   (4,040,000)       (2,084,000)
                                          -------------    --------------
Deferred tax asset (net operating 
    loss carryforwards)                      2,195,000         1,415,000
                                          -------------    --------------
           Net deferred tax liability     $ (1,845,000)   $    (669,000)
                                          -------------    --------------

     The difference from the expected income tax benefit for the year 
ended June 30, 1998 at the statutory federal tax rated of 34% and the 
actual income tax benefit is primarily the result of payroll tax penalties 
and entertainment expenses, which are not deductible for income tax 
purposes.  The difference for the year ended June 30, 1997 is 
primarily the result of amounts related to the estimated value of warrants that 
were expensed for purposes of the financial statements, but are not 
deductible for income tax purposes.  

     At June 30, 1998, the Company has available net operating loss 
carryforwards of approximately $6,455,000  to reduce future taxable 
income.  These carryforwards expire from 2002 to 2013.

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

Financial instruments that potentially subject the Company to concentrations 
of credit risk consis principally of cash and accounts receivable.  The 
Company maintains its cash with banks primarily in Dallas, Texas.  The term 
of these deposits are on demand to minimize risk.  The Company has not 
experienced any losses related to these cash deposits and believes it is not 
exposed to any significant credit risk.

Accounts receivable consist of uncollateralized receivables from domestic and 
international customers primarily in the oil and gas industry.  To minimize 
risk associated with international transactions, all sales are denominated in 
U.S. currency.  The Company routinely assesses the financial strength of it 
sutomers.  The Company consider accounts receivable to be fully collectible; 
accordingly, no allowance for doubtful accounts is required.  If amounts 
become uncollectible, they will be charged to operations when that 
determination is made.  

Fair value of financial instruments ar estimated to approximate the related
book value, unless otherwise indicated, base on market information available 
to the Company. 



9. ZAMA LAKE PROPERTY SALE.  

     In January 1998, the Company completed the purchase of 
substantially all of the oil and gas interests in the Zama Lake area in Alberta,
Canada (the "Zama Property") owned by two Canadian independent oil 
and gas producers. The purchase price was approximately $6.9 million.  
Shortly after the purchase of the Zama Property, the Company sold all 
of its interests to Phillips Petroleum Resources, Ltd. and certain of its 
affiliates for approximately $7.5 million.  The Zama property was the only 
property in the non-U.S. full cost pool.  Proceeds of the sale exceeding 
the basis in the full cost pool were $629,660 and were accounted for as 
a gain on sale of assets.

10.     SUBSEQUENT EVENTS

     In September 1998, the Company initiated a private placement of its 
common stock, with warrants attached. Through September 15, 1998, the 
Company had sold 285,000 shares and 285,000 warrants exercisable for 
$0.60 per share until December 31, 2001 for net proceeds of $142,500. 
A subscription agreement for 860,000 shares and 860,000 warrants has 
been executed by one of the Company's significant shareholders. The 
net proceeds of approximately $430,000 is expected to be received by the 
Company during October, November and December 1998. 

11.     COMMITMENTS AND CONTINGENCIES

     Leases.  The Company leases office space that requires monthly 
payments aggregating $95,160, $89,160, $90,050, $95,392, and $83,210 
for fiscal years ending June 30, 1999, 2000, 2001,2002 and 2003, 
respectively.  Rent expense for fiscal 1998 for office space was 
approximately $54,000.  One facility lease contains an option to 
allow the Company to purchase the facility for $115,900.

     The Company also leases equipment.  Rent expense for equipment for 
fiscal 1998 was approximately $52,000.  Future commitments for 
equipment leases run through fiscal 1999 and aggregate approximately 
$24,000.

     Potential Securities Act Violation.  On March 16, 1998, the Company 
filed with the Commission a Registration Statement on Form SB-2 (the 
"March 1998 Registration Statement") for the purpose of registering 
up to 10,891,184 shares of the Company's Common Stock for sale by 
certain shareholders of the Company, including approximately 5.7 million 
shares to be issued upon exercise of outstanding warrants and conversion of 
the Convertible Debentures.  On May 1, 1998, the Company received a 
letter of comments from the Staff of the Commission (the "May 1998 
Staff Comment Letter") relating to the March 1998 Registration Statement.  
In the May 1998 Staff Comment Letter, the Staff advised the Company that 
it should have registered the Yukon Continuance under the Securities 
Act. The Yukon Continuance was not registered under the Securities 
Act.

     The Company in its supplemental response on May 26, 1998 to the 
Staff's May 1998 Comment Letter contended, with the concurrence of, the 
Company's U.S. securities counsel, that the Yukon 
Continuance was a transaction not subject to the registration 
requirements of Section 5 of the Securities Act.  The Staff has 
advised the Company that is does not agree with the Company and its U.S. 
securities counsel's conclusion regarding the Yukon Continuance.

     The Company, therefore, may have a contingent liability to certain of 
its shareholders, who may sue the Company to recover the 
consideration paid, if any, for shares of the Company's Common Stock, with 
interest thereon, from the date of the Yukon Continuance to the date of 
repayment by the Company less the amount of any income received 
thereon, upon tender of such securities, or for damages if the 
shareholder no longer owns such securities.  The Company intends to 
vigorously defend any such shareholder lawsuit and believes that it 
may have valid defenses, including the running of applicable statutes of 
limitations, against claims by some or all of its shareholders.  
However, to the extent that any of the Company's shareholders obtain 
a judgment for damages against the Company, the Company's net assets 
and net worth will be reduced, which in turn could reduce the Company's 
ability to obtain financing for its exploration and drilling 
operations and cause the Company to curtail operations.  The Company is unable 
to quantify the amount of such contingent liability.

Litigation.  The Company, in the normal course of business, is a party to a 
number of lawsuits and other proceedings.  The Company's management does not 
expect that the results in these lawsuits and proceedings will have a 
material adverse effect on the financial position or results of operations of 
the Company.  

Liquidity and Capital Resources.  The statement of operations presented in 
the financial statements reflect net losses for 1998 and 1997.  However, the 
Company has been able to improve its financial position through stock 
offerings and has obtained financing for development of its oil and gas 
properties.  

Successful development of the Company's oil and gas properties and, 
ultimately, the attainment of profitable operations is dependent upon future 
events, including adequate financing to fulfill its development activities 
and achieving a level of revenue adequate to support the Company's cost 
structure.  Management believes that the Company's future success will be 
achieved by the development of its oil and gas properties.  While management 
believes the Company is well positioned for future profitability, there can 
be no assurance of future success.  Management is aware of the need for 
additional cash resources to be obtained for the continuance of operations 
and anticipates such financial resources will primarily come the financing 
described in Note 4, placements of the Company's stock and revenues generated 
from its oil and gas properties.  Management believes that the cash provided 
by operations and financing activities will be sufficient for its needs.

Potential Convertible Debenture Default.  The Company did not obtain 
effectiveness of a registration statement by May 31, 1998 for the securities 
underlying the Convertible Debentures, which event would, with notice, be an 
event of default under the relevant financing agreements.  No notice has been 
given.  As of  September 15, 1998, the Company and each Convertible 
Debentureholder were in negotiation for certain amendments to the Convertible 
Debentures and related documents, including a waiver of the prospective event 
of default.  As consideration for the waiver, the Company has agreed to issue 
a total of 400,000 shares (the "Waiver Shares") on a pro rata basis to each 
Convertible Debentureholder.  The Waiver Shares will be valued by the board 
of directors at $0.425 per share when issued to the Convertible 
Debentureholder.  Additionally, the Company expects to issue and deliver to 
the Convertible Debentureholders approximately 700,000 shares of common stock 
in lieu of accrued interest of approximately $302,000 on the Convertible 
Debentures for December 30, 1997 through December 31, 1998.  If the 
amendments are not completed, and the Debentureholders give notice of 
default, the Company's liquidity and activities could be severely adversely 
affected.

12.  EMPLOYEE BENEFIT PLAN

The Company sponsors a defined contribution 401(k) Plan to which both the 
Company and eligible employees may contribute.  Company contributions are 
voluntary and at the discretion of the board of directors.  There were no 
Company contributions for the periods presented.

13.     SUPPLEMENTAL INFORMATION (UNAUDITED)

     Costs incurred by the Company with respect to its oil and gas 
producing activities are set forth below.  

                                        FOR THE PERIODS ENDED
                                             JUNE 30,                     
                                        1998                1997
                                      -------------    --------------
Exploration Activities                $    85,000      $       - 
Proved property acquisition cost        8,093,083           515,000
Development costs                       1,012,012           422,621
Drilling & Well Service Equipment 
  Acquisition Cost                      2,756,296              - 
Drilling & Well Service Equipment 
  Tooling Out Cost                        441,581              - 
                                      ------------    ---------------
         Total                        $12,387,972     $     937,621
                                      ------------    ---------------
14.     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.

The following table sets forth proved oil and gas reserves at June 
30, 1998, 1997, 1996 and 1995 together with changes therein:


                                     OIL AND                NATURAL
                                   CONDENSATE                 GAS
                                     (BBLS)                  (MCF)
                                   ------------         -------------   
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
                                   =============         =============

   Purchase of minerals in place     1,560,000                468,000
   Production                          (28,000)              (181,000)
   Revision of prior estimates        (548,000)            (5,588,000)
                                   -------------         -------------
Balance at June 30, 1998             5,770,000             12,761,000    
                                   =============         =============

Proved developed reserves at June 30:
        1995                              -                      -  
                                   =============         =============
        1996                            93,000                280,000 
                                   =============         =============
        1997                           423,000              1,787,000
                                   =============         =============
        1998                           355,000                998,000 
                                   =============         =============

     The standardized measure of discounted future net cash flows at June 
30, 1998, 1997 and 1996 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:


                                      
                                      AT JUNE 30, 
                             1998               1997            1996   
                          -------------       --------------   ------------
Future cash inflows       $ 101,128,000       $ 129,610,000   $ 118,003,000 
Future production costs     (19,923,000)        (18,826,000)    (15,013,000)
Future development costs    (26,064,000)        (13,915,000)    (12,446,000)
                           -------------       -------------   -------------
Future net cash flows, 
  before income tax          55,141,000          96,869,000      90,544,000 
Future income tax expenses  (16,542,000)        (31,526,000)    (30,785,000)
                           -------------       -------------   -------------
Future net cash flows        38,599,000          65,343,000      59,759,000 
10% discount to reflect timing of net               
 cash flows                 (12,866,000)        (22,543,000)    (19,315,000)
                           -------------       -------------    -------------
Standardized measure of 
 discounted future
  net cash flows          $  25,733,000        $ 42,800,000    $ 40,444,000 
                           -------------       -------------   -------------

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


                                        FOR THE PERIOD ENDED JUNE 30, 
                                    1998           1997              1996
Standardized measure, 
  beginning of period          $ 42,800,000     $ 40,444,000      $ 29,800,000
Net change in sales price, 
  net of production costs       (17,591,000)      (5,288,000)       11,762,000
Accretion of discount           ( 9,677,000)       4,044,000         2,980,000
Purchases of reserves in-place      432,000        6,687,000              - 
Production                         (221,000)         (21,000)             -
Change in timing of 
  production and other                 -          (2,581,000)             -
Net changes in income taxes       9,990,000         (485,000)       (4,098,000)
                               -------------     -------------    --------------
Standardized measure, end of 
   period                      $ 25,733,000      $42,800,000      $ 40,444,000 
                               -------------     -------------    --------------
     



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.  The Company's 
accountants for fiscal 1997, Hein & Associates LLP declined to stand for re-
election for fiscal 1998.  They were replaced with Lane Gorman Trubitt, L.L.P.  
Form 8-K was filed on August 5, 1998 which described the transition.

_____________________________________________________________________________
                                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:

Name                          Age                    Position
Eugene A. Soltero             55            Chairman of the Board and Chief 
                                            Executive Officer
James E. Hogue                62            Director, President and 
                                            Chief Operating Officer
Leon A. Romero                46            Senior Vice President and 
                                            Chief Financial Officer
Patricia A. Dickerson         52            Vice President, Corporate
                                            Affairs/Investor Relations 
                                            and Secretary
Wayne T. Egan(1)              33            Director

(1)  Member, Audit Committee, 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 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 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.

     Leon A. Romero has served as a director, and, on an interim basis, 
as Senior Vice President and Chief Financial Officer of the Company 
since February 1998.  From August 1997 through February 1998, Mr. Romero 
was an Advisory Director of the Company.  From 1992 to August 1997, Mr. 
Romero was the President and co-founder of Old Aspen.  Mr. Romero is 
President of MAR Oil and Gas Corporation. Mr. Romero is a former Director of the
Independent Petroleum Association of New Mexico and member of the 
New Mexico Oil and Gas Association.  Mr. Romero received his Bachelor of 
Science in Accounting from the University of Albuquerque.  He also 
holds a Master of Business Administration degree from New Mexico Highlands 
University.  He completed a program in Entrepreneurial Development 
from the University of California at Los Angeles.

     Patricia A. Dickerson has served as Director of Investor Relations 
of the Company since March, 1997.  In February 1998, she was elected 
as Vice President, Corporate Affairs/Investors Relations.  She was 
formerly employed with Box Energy Corporation, a Dallas, Texas based and 
Nasdaq listed independent oil and gas exploration company, from 1985 to 1997 
where she served as Senior Assistant to the Chairman of the Board.  
She also served as Director of Investor Relations for Box Energy 
Corporation.  Ms. Dickerson holds a B.A. degree in Government from Texas Woman's
University, Denton, Texas and a Juris Doctorate degree from Texas 
Tech University, Lubbock, Texas.  She is a member of the National 
Association of Investor Relations Professionals and the Texas Investor Relations
Association for the Petroleum Industry.

     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.

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.

Compliance with Section 16(a) of the Exchange Act

     In the Company's Annual Report on Form 10-KSB for the fiscal year 
ended June 30, 1997, the Company reported that all persons or 
entities subject to the reporting requirements of Section 16(a) of the 
Securities Exchange Act of 1934, as amended (the "Exchange Act"), timely filed 
all reports required under the rules and regulations promulgated 
thereunder.  Subsequent to the filing of the Annual Report with the Commission, 
the Company became aware that both Wayne T. Egan and Richard J. Lachcik, 
each a director of the Company, failed to file a Form 3 C Initial 
Statement of Beneficial Ownership of Securities, which filing was due in 
December 1996, and Form 4's C Statement of Changes in Beneficial Ownership of 
Securities for the months ended September and October 1997.  On December 19, 
1997, Messrs. Egan and Lachcik filed with the Commission appropriate forms 
promulgated under Section 16(a) of the Exchange Act for the purpose 
of reporting their respective ownership interests and related 
transactions in the Company's Common Stock for the noted periods.

     Except for the events described in the foregoing paragraph, 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) 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, fiscal 1997, and fiscal 1998:

                        SUMMARY COMPENSATION TABLE
                                                                       Long-Term
                                       Annual Compensation(1)       Compensation

Name and Principal Position      Year              Other Annual       Restricted
                                          Salary   Compensation         Stock
                                                                      Awards(2)
Eugene A. Soltero, Chairman 
 of the Board, Chief 
 Executive Officer               1998    $160,000   $0                $       0
                                 1997    $120,000                     $  60,000
                                 1996    $115,000   $0
                                 1995    $ 25,000   $0

James E. Hogue, President
 and Chief Operating Officer     1998    $160,000   $0                
                                 1997    $120,000                     $  60,000
                                 1996    $115,000   $0
                                 1995    $ 25,000   $0
Leon A. Romero, Senior Vice
  President and Chief 
  Financial Officer              1998    $ 40,000   $0

Patty Dickerson, Vice Prsident,
  Corporate Affairs/Investor
  Relations and Secretary        1998    $ 50,000   $0               $  50,000
                                 1997    $ 37,000   $0

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

(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)     During fiscal 1997 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. Ms. 
        Dickerson received a stock bonus award during fiscal year 1998 of  
        25,000 common shares.




Employment Agreements

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

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)

                      Number of    Percent of Total  
                  Securities(1)    Options Granted to   
                  Underlying       Employees in         Exercise or   Expiration
Name              Options Granted  Fiscal Year          Base Price    Date
----------------  ---------------  ------------------   -----------   ---------
Eugene A. Soltero      300,000          48%                1.65        2/28/03
James E. Hogue         300,000          48%                1.65        2/28/03
Patricia A. Dickerson   25,000           4%                1.67        7/01/00
______________________
(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, 1998. 
During fiscal 1998 a former executive officer (Peter Lucas) exercised 
200,000 options, a former director (Richard Lachick) exercised 50,000 
options, and a current director (Wayne Egan) exercised 30,000 options.

                    Aggregated Option Exercises in Last Fiscal Year
                         and Fiscal Year-End Option Values

Name               Exercisable/Unexercisable         Exercisable/Unexercisable
-----------------  -------------------------         -------------------------
Eugene A. Soltero         500,000/0                            $0/$0
James E. Hogue            500,000/0                            $0/$0
Patricia A. Dickerson      25,000/0                            $0/$0
Wayne Egan                 20,000/0                            $0/$0


ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
             MANAGEMENT

     The following table sets forth certain information regarding 
beneficial ownership of the Company's Common Stock as of September 
15, 1998, by (i) each person who "beneficially" owns more than 5% of all 
outstanding shares of Common Stock, (ii) each director and executive 
officer, and (iii) all directors and executive officers as a group.  
Except as otherwise indicated, all persons listed below have (") 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.
  
Name                                       Amount and          
                                           Nature of             Percentage
                                           Beneficial                of
               Name                        Ownership             Ownership

Eugene A. Soltero (1)                      4,394,333(5)            24.61
James E. Hogue (1)                         4,594,333(6)            25.73
Leon A. Romero(1) (2)                        973,571                5.64
Wayne T. Egan (3)                             28,000(7)             *
Patricia A. Dickerson (4)                     50,000(8)             *
Liviakis Financial Communications, Inc.    3,041,851(9)            17.01
All directors and executive 
  officers as a group (five persons)      9,066,666(10)            49.05

*Less than 1%.
(1)     Mr. Soltero is a director, Chairman of the Board and Chief 
        Executive Officer of the Company and Mr. Hogue is a director, 
        President and Chief Operating Officer of the Company.  Messrs. 
        Soltero and Hogue may be deemed promoters of the Company.  
        The address of Messrs. Soltero, Hogue and Romero is 6510 Abrams Road,
        Suite 300, Dallas, Texas 75231.  
(2)     Mr. Romero is the Senior Vice President, Chief Financial 
        Officer and a director of the Company. 
(3)     Mr. Egan is a director of the Company.  The address of Mr. 
        Egan is Weir & Foulds, Exchange Tower, Suite 1600, 130 King Street West,
        Toronto, Ontario, Canada M5X  1J5
(4)     Ms. Dickerson is Vice President, Corporate Affairs/Investor 
        Relations and Secretary of the Company.  
(5)     Includes 583,333 shares of Common Stock subject to employee 
        stock options and the following shares, beneficial ownership of 
        which is disclaimed: 710,000 shares of Common Stock owned by the Soltero
        Family Limited Partnership, 36,000 shares of Common Stock held by Mr. 
        Soltero's wife and approximately 3,000,000 shares of Common Stock, 
        which represents 50% of the 6,000,000 shares owned by others subject 
        to a voting trust agreement and voting covenants under certain 
        agreements.  See "Voting Agreements," below.
(6)     Includes 583,333 shares of Common Stock subject to employee 
        stock options and warrants and the following shares, beneficial
        ownership of which is disclaimed: 740,000 shares of Common Stock 
        owned by the Hogue Family Limited Partnership, 231,000 shares of 
        Common Stock held by Mr. Hogue's wife and approximately 3,000,000 
        shares of Common Stock, which represents 50% of the 6,000,000 shares
        owned by others subject to a voting trust agreement and voting covenants
        under certain agreements. See "Voting Agreements," below.
(7)     Includes 20,000 shares of Common Stock subject to employee 
        stock options.
(8)     Includes 25,000 shares of Common Stock issuable upon exercise 
        of stock options.
(9)     Includes 611,351 shares issuable upon exercise of LFC, 
        Liviakis and LFC Mustang Warrants held by LFC and does not 
        include 150,000 shares of Common Stock issuable upon exercise of 
        125,000 LFC Warrants and 25,000 LFC Mustang Warrants, or 125,000 shares
        owned by Robert B. Prag, an officer of LFC.  The address of LFC is 2420
         >K= Street, Sacramento, California 95816.  See "Certain Relationships
        and Related Transactions".
(10)    Includes 6,000,000 shares subject to a voting trust agreement 
        and voting covenants under certain agreements, of which 973,571 are
        owned by Mr. Romero.

Voting Agreements

     Under the terms of a Voting Trust Agreement (the "Voting 
Agreement"), unaffiliated parties that transferred their interests in 
certain properties to the Company in 1995 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 until January 1, 2001.  The Voting Agreement 
expires with respect to any of the shares of Common Stock transferred to an 
unaffiliated third party by such shareholder.  The Company believes 
that as of June 30, 1998, approximately 2 million shares of Common Stock 
were subject to the Voting Agreement.  See "Principal Shareholders."

    Liviakis Financial Communications, Inc. ("LFC") and its affiliates 
have agreed that, with respect to any shares of Common Stock acquired 
by them pursuant to the LFC Consulting Agreement with the Company, they 
will vote such shares of Common Stock until January 1, 2001 for directors 
nominated by Messrs. Hogue and Soltero and certain other matters.  
Approximately 2,000,000 shares are currently subject to this voting 
rights covenant.  See "Certain Relationships and Related Transactions" and 
"Principal Shareholders."

     Pursuant to the terms of the definitive acquisition agreement, the 
four previous shareholders of Old Aspen 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 were obligated, 
upon the Company's continuance into the Yukon Territory, a jurisdiction 
which allows a majority of the directors to be U.S. citizens, to nominate 
and vote for Mr. Leon A. Romero, former President of Old Aspen, as a 
director of the Company.  In February 1998, Mr. Romero was elected as a 
director, Senior Vice President and Chief Financial Officer of the Company.  
Approximately 2,000,000 shares are currently subject to this voting 
covenant. 


ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In February 1995, the Company issued a total of 560,001 shares of 
Common Stock to the wives of Eugene A. Soltero, Chairman of the Board 
and Chief Executive Officer, and James E. Hogue, President and Chief 
Operating Officer, for pre-incorporation services valued at $1,401.  Shortly 
after incorporation, the Company issued 2,100,000 special shares to family 
partnerships of Messrs. Soltero and Hogue which were subsequently 
exchanged for 1,440,000 shares of Common Stock of the Company valued 
at $5,832. 

     In December 1995, the Company issued 80,000 shares of Common Stock 
to each of Messrs. Soltero and Hogue for pre-incorporation services 
valued at $0.04 per share.  Additionally, since June 14, 1996, the Company 
has granted to each of Messrs. Soltero and Hogue warrants to purchase 
83,333 shares of Common Stock at $0.73 per share and employee options to 
purchase 500,000 shares at prices ranging from $1.65 to $1.83 per share.

     During the fiscal years ended June 30, 1996 and 1995, the Company 
paid management fees to two family corporations controlled by Messrs. 
Soltero and Hogue aggregating $160,000 and $50,000, respectively, in 
lieu of salaries.  In addition, the Company has received advances from 
these two companies which totaled $139,710 at June 30, 1997.  As of June 
30, 1998, $119,710 of the advances remained outstanding.  The advances 
are unsecured and without interest and are payable after January 1, 1999.

     During each of the years ended June 30, 1998 and 1997, the Company 
paid to Weir and Foulds approximately $50,000 in legal fees.  Most of 
the legal services were provided by Richard J. Lachcik and Wayne T. Egan, 
respectively, former director and director of the Company, who both 
at the time were members of Weir and Foulds. Messrs. Lachcik and Egan each 
received in fiscal year 1997 options to purchase 50,000 shares of 
Common Stock at $1.83 per share.  The Company believes that the legal fees 
it pays to Weir & Foulds are comparable to legal fees charged by 
unaffiliated law firms.

     In November 1996, the Company entered into a consulting agreement 
(the "LFC Consulting Agreement") with Liviakis Financial 
Communications, Inc., a California corporation ("LFC").  Under the terms of the 
LFC Consulting Agreement, LFC was retained to assist and consult with the 
Company in matters concerning corporate finance and to represent the 
Company in investor communications and public relations with existing 
shareholders, brokers and other investment professionals.  As 
consideration for LFC undertaking the engagement, the Company issued 
and delivered to LFC an aggregate of 1,490,000 shares of Company's Common 
Stock as non-forfeitable compensation.  The stock issuance was 
recorded at $1,087,800 based on the Company's stock price at the date of the LFC
Consulting Agreement.

     In connection with LFC undertaking the consulting engagement, the 
Company sold to LFC and Robert B. Prag, an affiliate of LFC, an 
aggregate of 500,000 units (the "Units") for $375,000 or $0.75 per Unit.  Each 
Unit consisted of one share of the Common Stock and one stock purchase 
warrant ("LFC Warrant") which entitled the holder thereof to purchase a share 
of Common Stock at an exercise price of $0.80 through November 7, 2001.  
The estimated value of the LFC Warrants of $199,000 was recorded as an 
expense. The LFC Consulting Agreement provided that any shares of 
Common Stock received by LFC and its affiliate under the LFC Consulting 
Agreement, either directly or indirectly through the exercise of 
warrants, shall be voted in accordance with the terms and conditions of the 
voting rights covenant contained therein.  The LFC Consulting Agreement 
expired on January 2, 1998.

     As further compensation to LFC, the Company agreed to pay LFC a fee 
in the event that LFC introduces the Company, or its nominees, to a 
lender or equity purchaser, not already having a pre-existing relationship 
with the Company and such financing is ultimately consummated.  In 
connection with the sale by the Company of its Convertible Debentures in 
December 1997, LFC received a cash fee of $108,000.  Additionally, in December 
1997, the Company agreed to issue to LFC warrants to purchase 100,000 
shares of Common Stock exercisable at $3.50 per share until December 
31, 2000 (the "LFC Mustang Warrants") as additional compensation for 
LFC's assistance to the Company in completing acquisitions and other 
financings during calendar 1997.  LFC directed the Company to issue 25,000 of 
the Mustang Warrants to Robert B. Prag, an officer of LFC.  
 
     On June 24, 1997, the Company issued to LFC a 9% Convertible Secured 
Promissory Note (the "LFC Note") for a $579,000 loan.  On December 3, 
1997, the Company repaid $479,000 of the principal amount of the LFC 
Note and accrued interest.  LFC converted the remaining principal amount 
of $100,000 into 60,000 shares of Common Stock ($1.67 per share).  As 
additional consideration for the loan, the Company issued to LFC 
warrants (the "Liviakis Warrants") expiring April 3, 2002 to purchase 161,351 
shares of Common Stock at an exercise price of $2.08 per share.  
Leon A. Romero, Senior Vice President, Chief Financial Officer and 
a director of the Company received 977,771  net shares of Common 
Stock from the Company in July 1997 as a result of the Aspen Acquisition.  
Mr. Romero was one of the selling shareholders of Old Aspen.  

     The transactions described in this section were ratified by a 
majority of the Company's independent directors who did not have an 
interest in the transactions and who had access, at the Company's 
expense, to available material information and to the Company's independent 
counsel.

     Any future transactions between the Company and its affiliates will 
be approved by a majority of disinterested directors and will be on 
terms no less favorable to the Company than those which could be obtained 
from unrelated third parties.  Any forgiveness of loans must be approved 
by a majority of the Company's independent directors who do not have an 
interest in the transactions and who have access, at the Company's 
expense, to either the Company's or their own independent legal 
counsel.
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 1998.


     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 September 29, 1998.  


COTTON VALLEY RESOURCES CORPORATION
(Registrant)



By:      /s/ Eugene A. Soltero 
______________________________
Eugene A. Soltero
Chairman of the Board and 
Chief Executive Officer
(Principal Executive 
Officer)

By:      /s/ Leon Romero
______________________________     
Leon Romero
Senior Vice President 
and Chief Financial 
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:

     Signature                        Title                        Date
     /s/ Eugene A. Soltero     Chairman of the Board 
Eugene A. Soltero              and Chief Executive Officer   September 29, 1998

     /s/ James E. Hogue        President, Chief Operating 
James E. Hogue                 Officer and Director          September 29, 1998
     
     /s/ Leon Romero           Senior Vice President 
Leon Romero                    and Chief Financial Officer   September 29, 1998

    /s/ Wayne T. Egan          Director                      September 29, 1998
Wayne T. Egan









                          COTTON VALLEY RESOURCES CORPORATION

                                   EXHIBITS INDEX

    
 
Exhibit
Number              Description
________           _________________________
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


*Previously filed and incorporated by reference herein.


                                    EXHIBIT 4

                          DESCRIPTION OF COMMON STOCK

     Cotton Valley is authorized to issue an unlimited number of shares 
of common stock, without par value (the ACommon Stock").  Holders of 
Common Stock are entitled to one vote per share on all matters 
submitted to a vote of stockholders.  They are entitled to receive dividends 
when and as declared by the board of directors out of legally available 
funds and to share ratably in the assets of Cotton Valley legally available 
for distribution upon liquidation, dissolution or winding up.

      Holders of Common Stock do not have subscription, redemption or 
conversion rights, nor do they have any preemptive rights.  Holders 
of Common Stock do not have cumulative voting rights.  All stockholder 
action is taken by vote of a majority of voting shares of the capital 
stock of Cotton Valley present at a meeting of stockholders at which a 
quorum existing of a majority of the issued and outstanding shares of 
the voting capital stock is present in person or by proxy.  Directors 
are elected by a plurality vote.

       For certain fundamental changes, the corporate legislation under 
which Cotton Valley was formed may require each class of outstanding 
stock to vote separately.

                                EXHIBIT 21

                               SUBSIDIARIES

(i)      Cotton Valley Energy Corporation, a Nevada corporation.
(ii)     Cotton Valley Operating Company, a Texas corporation.
(iii)    Mustang Oil Field Equipment Company, a Nevada corporation.
(iv)     Cotton Valley Energy, Inc., an Oklahoma corporation.
(v)      Aspen Energy Corporation, a Nevada corporation.
(vi)     Mustang Well Service Company, a Nevada Corporation.
(vii)    Mustang Horizontal Company, a Nevada Corporation.
(viii)   Cotton Valley Means, Inc., a Texas Corporation, which is a 
         subsidiary of Aspen Energy Corporation



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