SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


                     ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1997


                         Commission file number 0-19766

                        THE HOME-STAKE OIL & GAS COMPANY
                 (Name of small business issuer in its charter)

                Oklahoma                                  73-0288030
     (State or other jurisdiction of                   (I.R.S. Employer
      incorporation or organization)                  Identification No.)

      15 East 5th Street, Suite 2800
             Tulsa, Oklahoma                                74103
  (Address of principal executive offices)                (Zip Code)

                    Issuer's telephone number: (918) 583-0178

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

              Securities registered under Section 12(g) of the Act:

                     Common Stock, par value $0.01 per share

     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  registrant 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  disclosure  of  delinquent  filers  in  response  to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the best of the  Registrant's  knowledge,  in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10- KSB. |_|

     State issuer's revenues for its most recent fiscal year: $8,070,518

     As of March 26, 1998,  4,517,363  shares of the  Registrant's  Common Stock
were outstanding. As of March 26, 1998, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was $16,576,296 based on the last
reported  trading  price  reported  on  the  Over-the-Counter   Bulletin  Board.
(Officers and directors of the  Registrant,  and holders of more than 10% of the
outstanding  common  stock,  are  considered  affiliates  for  purposes  of this
calculation.)

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the  Registrant's  Proxy  Statement  for the Annual  Meeting of
Stockholders  to be held June 1, 1998, are  incorporated  by reference into Part
III of this Form 10-KSB.

     Transitional Small Business Disclosure Format (Check one) Yes No X

<PAGE>



                        THE HOME-STAKE OIL & GAS COMPANY

                                   FORM 10-KSB
                          YEAR ENDED DECEMBER 31, 1997

                                TABLE OF CONTENTS

                                                                           Page
                                     PART I

Item 1.     Description of Business.....................................      1

Item 2.     Description of Property.....................................      5

Item 3.     Legal Proceedings...........................................     11

Item 4.     Submission of Matters to a Vote of Security Holders.........     11


                                     PART II

Item 5.     Market for Common Equity and Related Stockholder Matters....     12

Item 6.     Management's Discussion and Analysis........................     13

Item 7.     Financial Statements........................................     16

Item 8.     Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure......................     16

                                    PART III

Item 9.     Directors, Executive Officers and Compliance with
            Section 16(a)of the Exchange Act............................     16

Item 10.    Executive Compensation......................................     16

Item 11.    Security Ownership of Certain Beneficial
            Owners and Management.......................................     16

Item 12.    Certain Relationships and Related Transactions..............     16

Item 13.    Exhibits and Reports on Form 8-K............................     17

Signatures  ............................................................     18

Index to Financial Statements...........................................    F-1

                                       -i-

<PAGE>



                                     PART I


Item 1., Description of Business, and Item 2., Description of Property,  include
certain  statements  which are not  historical  fact,  but are "forward  looking
statements". These forward looking statements are based on current expectations,
estimates,  assumptions and beliefs of management;  and words such as "expects",
"believes",  "anticipates",  "intends",  "plans"  and  similar  expressions  are
intended to identify such forward looking  statements.  The Home-Stake Oil & Gas
Company  (the  "Company"  or "HSOG")  does not  undertake  to update,  revise or
correct  forward  looking  information.  Readers are cautioned that such forward
looking statements should be read in conjunction with the Company's  disclosures
under the heading "Forward Looking Statements", included on page 15 hereof.

ITEM 1. DESCRIPTION OF BUSINESS

General

The Company is actively engaged in the acquisition, exploration, development and
production of oil and gas properties.  Its principal  geographic operating areas
lie within the states of Oklahoma, Montana, Wyoming, Louisiana and Texas.

The Company was  incorporated  in the State of Oklahoma in 1917.  The  Company's
principal business activity from the date of its incorporation through the early
1950's  was the  acquisition  and  leasing  of oil and  gas  mineral  interests.
Accordingly, the Company's revenues were primarily from royalty interests in oil
and gas production from the mineral interests in properties leased to others. In
the 1950's the Company began  participating as a working interest partner in the
acquisition  and  drilling  of oil and gas  properties,  primarily  drilled  and
operated by industry  partners.  The Company also originated and participated in
the drilling of a few of its own prospects and  discovered  several  significant
oil fields in south  central  Kansas during the 1950's.  Beginning in 1985,  the
Company  developed  an  exploration  staff to  generate,  sell and drill its own
prospects. The Company now also serves as operator for 50 producing wells.

In the mid-1970's the Company revised its business  strategy to pursue a program
to increase its revenues  generated  from the ownership of working  interests in
oil and gas properties relative to its revenues generated from royalty interests
(resulting from the ownership and leasing of oil and gas mineral interests). The
Company  increased its relative  investment in drilling  ventures  developed and
sold by  other  industry  partners  and in the oil  and gas  properties  that it
acquired.  In 1977, the Company received  approximately 70% of its revenues from
royalty interests, whereas, in 1997, approximately 30% of its revenues were from
royalty interests.

At December 31, 1997,  the Company had estimated  proved  reserves of 18,540,196
Mcf  of  natural  gas  and  4,470,192  barrels  of  oil.  Natural  gas  reserves
constituted  approximately  41% of  the  Company's  reserves  based  on an  "oil
equivalent"  basis  (converting  each six Mcf of natural gas to a barrel of oil,
representing the estimated relative energy content of oil and natural gas).

Merger

Effective  December 31, 1997, The Home-Stake  Royalty  Corporation  ("HSRC") was
merged with and into the Company  (the  "Merger").  Over the past 40 years,  the
Company and HSRC were operated as essentially a single company. For most of this
period the Company and HSRC (the "Companies"), split administrative costs evenly
and generally  participated jointly in acquisition and exploration activities on
an equal basis. However, the differences in financial condition and liquidity of
the  two  companies  eventually  resulted  in  a  change  in  the  participation
arrangement   between  the  Companies.   Effective   January  1,  1996,   HSRC's
participation  interest  in  new  drilling  ventures,   acquisitions  and  other
investments  was  increased to 60% and the  Company's  was reduced to 40%.  HSRC
owned 33.9% of the Company at the time of the Merger and the Company owned 19.3%
of HSRC.  The  Companies  shared the same  employees and members of the Board of
Directors.  There were  approximately  200 holders of the Company's common stock

                                       -1-

<PAGE>



and  approximately  300 holders of HSRC's common stock,  with  approximately  90
persons owning shares in both companies.

The Merger has been  accounted  for as a  purchase,  with HSOG  deemed to be the
purchased  entity  for  accounting  purposes.   Under  the  purchase  method  of
accounting,  the cost of the assets and liabilities  acquired is allocated based
on their fair value,  with the operations of the acquired  entity  included with
those of the acquiring  entity from the date of  acquisition.  Accordingly,  the
historical  tables and other  information  included  in this  report for periods
prior to 1997 reflect such  information  for HSRC and do not include  historical
amounts for HSOG.  Information for activities during 1997 is also for HSRC only;
whereas,  information as of December 31, 1997, includes the combined amounts for
HSRC and HSOG (i.e. the merged entity).

Partnership

The Company serves as general partner of H-S Royalty,  Ltd., an Oklahoma limited
partnership (the  "Partnership")  formed in 1982. The Partnership was formed for
the purpose of distributing to stockholders a 3/16th royalty interest in certain
jointly owned mineral  interests in properties,  which were  nonproducing at the
time of formation of the Partnership,  located in ten states.  Management of the
Company  distributed  the royalty  interests to allow  stockholders to realize a
portion  of the  direct  economic  benefits  that  result  from  the  commercial
production  and  sale of oil and gas,  as well as the  maximization  of  certain
income  tax  benefits  attributable  to oil and  gas  producing  activities.  In
connection with the  administration  of the Partnership,  the Company receives a
monthly administrative management fee of $500.

Competition

Competition  in the oil and gas  industry  is  intense.  In  seeking  to  obtain
desirable  producing  properties,  new leases  and  exploration  prospects,  the
Company faces competition from both major and independent oil and gas companies,
as well as from numerous  individuals and income and drilling programs.  Many of
these competitors have financial and other resources  substantially in excess of
those available to the Company.

Increases  in  worldwide  energy   production   capability  have  brought  about
substantial  surpluses in energy  supplies in recent years.  This, in turn,  has
resulted in substantial  competition for markets historically served by domestic
natural gas sources both with alternate sources of energy, such as residual fuel
oil,  and among  domestic  gas  suppliers.  Changes  in  government  regulations
relating to the  production,  transportation  and  marketing of natural gas have
also resulted in significant changes in the historical marketing patterns of the
industry.  Generally,  these  changes have resulted in the  abandonment  by many
pipelines  of  long-term   contracts  for  the  purchase  of  natural  gas,  the
development  by gas producers of their own marketing  programs to take advantage
of new regulations  requiring pipelines to transport gas for regulated fees, and
the reliance on short-term sales contracts priced at spot market prices.

In light of these  developments,  many  producers,  including the Company,  have
accepted oil prices that may differ from area  "posted  prices" in order to sell
their production.  Also, gas prices,  which were once effectively  determined by
government regulations, are now largely established by competition.  Competitors
in this market  include other  producers,  gas  pipelines  and their  affiliated
marketing companies,  independent  marketers,  and providers of alternate energy
supplies, such as residual fuel oil.

Marketing

The Company's gas production from properties in which it owns working  interests
is sold  primarily  on the spot market with a variety of  purchasers,  including
intrastate  and  interstate  pipeline  companies,  their  marketing  affiliates,
independent marketing companies and other companies who have the ability to move
gas under firm transportation  agreements. Gas produced from properties in which
the  Company  owns  royalty  interests  is  marketed  and sold by  owners of the
leasehold interests in such properties. Substantially all of the Company's crude


                                       -2-

<PAGE>



oil and  condensate  production  is  sold  at  posted  prices  under  short-term
contracts, as is customary in the industry.

Seasonality

The results of operations of the Company are subject to seasonal fluctuations in
the price for natural gas.  Natural gas prices have been generally higher in the
fourth  and first  quarters.  Due to these  seasonal  fluctuations,  results  of
operations  for  individual  quarterly  periods may not be indicative of results
which may be realized on an annual basis.

Regulation

     General

The oil and gas industry is  extensively  regulated by federal,  state and local
authorities.  Legislation  affecting the oil and gas industry is under  constant
review for  amendment or expansion.  Numerous  departments  and  agencies,  both
federal and state, have issued rules and regulations  binding on the oil and gas
industry and its individual members,  some of which carry substantial  penalties
for the failure to comply.  The  regulatory  burden on the oil and gas  industry
increases   its  cost  of  doing   business  and,   consequently,   affects  its
profitability.  Inasmuch as such laws and regulations are frequently  amended or
reinterpreted,  the  Company is unable to predict  the future  cost or impact of
complying with such regulations.

     Exploration and Production

Exploration  and  production  operations  of the  Company are subject to various
types of regulation  at the federal,  state and local  levels.  Such  regulation
includes  requiring  permits  for the  drilling  of wells,  maintaining  bonding
requirements in order to drill or operate wells,  and regulating the location of
wells,  the method of drilling and casing wells, the surface use and restoration
of  properties  upon which wells are drilled and the plugging and  abandoning of
wells.  The  Company's  operations  are also  subject  to  various  conservation
matters.  These include the regulation of the size of drilling and spacing units
or  proration  units  and the  density  of wells  which may be  drilled  and the
unitization or pooling of oil and gas  properties.  In this regard,  some states
allow the forced  pooling or  integration  of tracts to  facilitate  exploration
while  other  states  rely on  voluntary  pooling  of lands  and  leases.  State
conservation  laws establish maximum rates of production from oil and gas wells,
generally prohibit the venting or flaring of gas and impose certain requirements
regarding the  ratability of  production.  In addition,  Oklahoma and Texas have
adopted limits on gas production  that attempt to match  production  with market
demand.  The effect of these  regulations is to limit the amounts of oil and gas
the Company can produce  from their  wells,  and to limit the number of wells or
the locations at which the Company can drill.

     Sales and Transportation

Federal legislation and regulatory controls have historically affected the price
of the gas  produced by the Company and the manner in which such  production  is
marketed.  However, due to the deregulation provisions of the Natural Gas Policy
Act of 1978,  the Natural Gas  Wellhead  Decontrol  Act of 1989 and  regulations
promulgated  by  the  Federal  Regulatory  Commission  ("FERC"),  the  price  of
virtually all gas produced by producers not affiliated with interstate pipelines
has been  deregulated.  As a result,  most of the Company's gas production is no
longer  subject  to price  regulation.  Gas which has been  removed  from  price
regulation is subject only to that price  contractually  agreed upon between the
producer and purchaser.  Market  determined  prices for deregulated  natural gas
fluctuate in response to market pressures.

The FERC  regulates  interstate  natural  gas  transportation  rates and service
conditions,  which affects the marketing of gas produced by the Company, as well
as the revenues  received from sales of such  production.  Since the mid- 1980s,
the FERC has issued a series of orders  culminating in Order Nos. 636, 636-A and
636-B  ("Order  636"),  that  have  significantly   altered  the  marketing  and
transportation  of gas.  Order  636  mandates  a  fundamental  restructuring  of
interstate pipeline sales and transportation  service,  including the unbundling
by  interstate  pipelines  of  the  sales,  transportation,  storage  and  other
components of the city-gate sales services such pipelines previously  performed.

                                       -3-

<PAGE>



One of the FERC's  purposes  in issuing  the orders is to  increase  competition
within all phases of the gas industry.  Order 636 and subsequent  FERC orders on
rehearing have been appealed and are pending judicial review. Because the orders
may be  modified  as a result of the  appeals,  it is  difficult  to predict the
ultimate  impact of the orders on the  Company  and its  natural  gas  marketing
efforts.  Generally,  Order 636 has  eliminated  or  substantially  reduced  the
interstate  pipelines'  traditional  role as  wholesalers of natural gas and has
substantially increased competition and volatility in natural gas markets. While
significant regulatory uncertainty remains, Order 636 may ultimately enhance the
ability of  producers  such as the  Company to market  and  transport  their gas
directly to end-users  and local  distribution  companies,  although it may also
subject  producers  to greater  competition  and the more  restrictive  pipeline
imbalance  tolerances  and greater  associated  penalties  for violation of such
tolerances.

Sales of oil and natural gas  liquids by the Company are not  regulated  and are
made at market  prices.  The price the Company  receives  from the sale of these
products  is  affected  by the cost of  transporting  the  products  to  market.
Effective as of January 1, 1995, the FERC implemented  regulations  establishing
an indexing system for transportation rates for oil pipelines, which, generally,
would  index  such  rates  to  inflation,  subject  to  certain  conditions  and
limitations.  These  regulations could increase the cost of transporting oil and
natural gas liquids by pipeline,  although the most recent adjustment  generally
decreased rates. These regulations are subject to pending petitions for judicial
review.  The Company is not able to predict with certainty what effect,  if any,
these  regulations  will have on its operations,  however,  the regulations may,
over time, tend to increase  transportation  costs or reduce wellhead prices for
oil and natural gas liquids.

     Operational Hazards and Insurance

The  operations  of the  Company  are  subject  to  all  risks  inherent  in the
exploration for, and development and production of, oil and gas,  including such
natural hazards as blowouts,  cratering and fires,  which could result in damage
or injury  to, or  destruction  of,  drilling  rigs and  equipment,  formations,
producing facilities or other property, or could result in personal injury, loss
of life or  pollution  of the  environment.  Any  such  event  could  result  in
substantial  cost to the  Company  which  could have an adverse  effect upon the
financial condition of the Company to the extent it is not fully insured against
such risk. The Company carries  insurance against certain of these risks but, in
accordance with standard industry practice,  is not fully insured for all risks,
either  because such insurance is unavailable or because it elects not to obtain
insurance coverage because of cost.  Although such operational risks and hazards
may to some extent be minimized,  no combination  of  experience,  knowledge and
scientific evaluation can eliminate the risk of investment or assure a profit to
any company engaged in oil and gas operations.

Environmental Matters

Operations  of the  Company  are subject to  numerous  and  constantly  changing
federal,  state  and local  laws and  regulations  governing  the  discharge  of
materials  into  the   environment  or  otherwise   relating  to   environmental
protection.  These laws and  regulations  may require the acquisition of certain
permits,  restrict or prohibit  certain types,  quantities and  concentration of
substances that can be released into the environment in connection with drilling
and  production,  restrict or prohibit  drilling  activities  that could  impact
wetlands,  endangered or threatened species or other protected natural resources
and impose  substantial  liabilities for pollution  resulting from the Company's
operations.  Such laws and  regulations may  substantially  increase the cost of
exploring for,  developing or producing oil and gas and may prevent or delay the
commencement or continuation of a given project. In the opinion of the Company's
management,  the Company is in substantial  compliance  with current  applicable
environmental  laws and regulations  and it is not anticipated  that the Company
will be required in the near future to expend  amounts  that are material in the
aggregate  to its  overall  operations  by  reason  of  environmental  laws  and
regulations.   Nevertheless,   changes  in  existing   environmental   laws  and
regulations or in the interpretations thereof could have a significant impact on
the  operating  costs of the  Company,  as well as the oil and gas  industry  in
general.  For instance,  legislation  has been proposed in Congress from time to
time that would reclassify  certain oil and gas production  wastes as "hazardous
wastes",  which  reclassification  would make exploration and production  wastes
subject  to much more  stringent  and costly  handling,  disposal  and  clean-up
requirements.  State initiatives to further regulate the disposal of oil and gas
wastes and naturally occurring radioactive materials are also pending in certain
states and these various initiatives could have a similar impact on the Company.


                                       -4-

<PAGE>



The  Comprehensive  Environmental  Response,  Compensation,  and  Liability  Act
("CERCLA"), also known as "Superfund" law, imposes liability,  without regard to
fault or the legality of the  original  conduct,  on certain  classes of persons
that  are  considered  to  have  contributed  to  the  release  of a  "hazardous
substance" into the environment.  These persons include the owner or operator of
the disposal  site where the release  occurred and  companies  that  disposed or
arranged for the disposal of the hazardous substances found at the site. Persons
who are or were  responsible for releases of hazardous  substances  under CERCLA
may be subject to joint and several  liability  for the costs of cleaning up the
hazardous  substances  that  have been  released  into the  environment  and for
damages to natural resources,  and it is not uncommon for neighboring landowners
and other third parties to file claims for personal  injury and property  damage
allegedly caused by the hazardous substances released into the environment.  The
Company is only able to  directly  control  the  operations  of those wells with
respect to which it acts as  operator.  Notwithstanding  the  Company's  lack of
control over wells  operated by others,  the failure of an operator of a well in
which  the  Company   owns  a  working   interest  to  comply  with   applicable
environmental  regulations may, in certain  circumstances,  be attributed to the
Company. As of the date of this report, the Company has no material  commitments
for capital expenditures to comply with existing environmental requirements.

Employees

At December  31,  1997,  the Company  employed 17 persons  whose  functions  are
associated  with  management,  operations and mineral  management,  engineering,
geology,  land  and  gas  contract  administration,   accounting  and  financial
planning,  and administration and data processing.  In addition, the Company has
two  consulting  geologists on retainer to develop oil and gas prospects for the
Company. The Company considers its relations with its employees to be excellent.

ITEM 2. DESCRIPTION OF PROPERTY

General

The Company owns interests in 1,525 producing properties, including both working
interests  and royalty  interests,  located in 16 states.  (For further  details
regarding these properties,  see "Producing Wells" included  elsewhere  herein.)
The Company is engaged in leasing of its  minerals  as well as the  exploration,
production  and  sale  of  natural  gas,  condensate  and  crude  oil  from  its
properties.

The  Company has an  extensive  ownership  of  nonproducing  perpetual  minerals
located in 16 states,  including  North  Dakota,  Oklahoma,  Michigan,  Montana,
Mississippi and Texas. Such ownership comprises 3,291 properties covering 92,517
net  acres.  The  Company  may  from  time-to-time  participate  in  exploration
activities on certain of these properties,  but generally leases them to others,
retaining a royalty  interest in whatever  production may be derived  therefrom,
thereby  eliminating  the risk in the  exploration  of such  properties.  At the
present time, there are  approximately  40 properties  leased to others for such
exploration comprising 1,209 net acres.

In  addition,  the  Company  owns  a  leasehold  interest  in  125  nonproducing
properties  comprising  8,082 net acres.  These  properties  have varying  lease
terms, with most expiring in the next five years. These leasehold  interests are
located in eleven states, including Texas, Oklahoma and Montana.

Acquisitions

During 1997,  the Company  completed  one small  acquisition  of  producing  and
nonproducing  mineral  interests.  On March 5, 1998, the Company entered into an
agreement with Sid R. Bass, Inc. et al to purchase 18 non-operated producing gas
properties for a purchase price of  $6,685,000,  subject to certain  adjustments
for operations  subsequent to January 1, 1998. This purchase includes  estimated
proved reserves of 6.4 Bcf of natural gas at December 31, 1997, and is scheduled
to close on March 31,  1998.  This  acquisition  is  payable in cash and will be
financed by the Company's new credit facility  described in Financial  Condition
and Liquidity on page 14 hereof.




                                       -5-

<PAGE>



Current Activities

The Company's exploration and development activities generally have been located
in the states of Oklahoma  (Anadarko  Basin),  Montana and Texas.  In 1997,  the
majority of the  Company's  activities  were located in the Anadarko and Permian
Basins  of  Oklahoma,   Texas  and  Montana.   Most  recent  drilling  has  been
developmental  in  nature  (80% in 1997  and 85% in  1996)  on both  oil and gas
properties.  In 1997, there were 11 oil wells and 14 gas wells drilled;  in 1996
there were five oil wells and 14 gas wells drilled.

During 1998,  the Company's  drilling  activities  will continue to be primarily
developmental  in nature.  The Company is presently  committed to participate in
the drilling (or  completion) of 23 (3.9 net) wells in 1998. The Company expects
to operate nine (2.6 net) of these wells.  In 1998,  the Company has budgeted $5
million for drilling  activities,  of which  approximately $2.7 million has been
committed.  The  primary  area of focus  during  the next 12 to 18  months  will
continue to be  developmental  drilling in the Anadarko Basin of Oklahoma and in
the Permian  Basin of Texas and New Mexico.  In addition,  the Company  plans to
continue to pursue an exploratory oil prospect in Montana and  participate  with
its minerals in Michigan and Mississippi prospects proposed by other operators.

The Company  remains  active in the property  acquisition  market.  In 1997, the
Company  reviewed 63 property  sales packages and submitted bids on six of these
packages,  containing  nine groups of properties.  The Company was successful in
acquiring  one group of  properties.  Through  March 27,  1998,  the Company has
reviewed 17 sales packages.

During 1995, the Company acquired  approximately  440 net acres of leases in the
Lodgepole  "play" in North Dakota at a cost of $170,000.  The Lodgepole area has
generated  a great  deal of  interest  in the  oil  and gas  industry  and it is
expected that new drilling  will  continue in this area.  In February,  1996 and
November,  1997,  the  Company  executed  permits to allow 3-D  seismic  work on
certain of these leases;  and in March,  1998,  received a request to acquire 80
acres  on one of the  leases.  There  are no  present  plans by the  Company  to
initiate  exploration  in  this  area in the  near  future;  however,  it is the
Company's  intention to participate with its leased acreage in wells proposed by
others.


                                       -6-

<PAGE>



Drilling Activity

During  the  periods  indicated,  the  Company  drilled or  participated  in the
drilling of the following exploratory and development wells:



                                     Years ended December 31,
                             1997              1996               1995
  ==================   ================  ===============   ==================
                         Gross     Net    Gross     Net      Gross       Net
  Exploratory:
   Productive.......       0        .00       1      .17         0        .00
   Nonproductive....       5        .82       2      .29         2        .44
                          --       ----      --      ---        --        ---
     Total..........       5        .82       3      .46         2        .44
                          ==       ====      ==      ===        ==       ====
  Development:
   Productive.......      14        .50      13      .26        13        .41
   Nonproductive....       6        .75       3      .48         3        .19
                         ---      -----      --     ----        --        ---
     Total..........      20       1.25      16      .74        16        .60
                          ==       ====      ==      ===        ==        ===
  Total:
   Productive.......      14        .50      14      .43        13        .41
   Nonproductive....      11       1.57       5      .77         5        .63
                         ---       ----      --     ----        --       ----

      Total.........      25       2.07      19     1.20        18       1.04
                         ===       ====      ==     ====        ==       ====

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

     The above well information  excludes wells in which the Company has only
     a royalty or mineral interest.

At December 31, 1997, the Company was participating in the drilling of four (.71
net) wells.  All four of these wells have been  completed,  resulting in two oil
wells and two gas wells. In addition, the Company participated in one additional
well (.06 net) subsequent to year-end which resulted in a dry hole.

Operating Activities

The  Company  operates 50  producing  wells and 7 service  wells  located in ten
separate fields,  which includes one waterflood  consisting of 9 producing wells
and 7 service  wells.  In  addition,  the  Company  has a  non-operator  working
interest ownership in approximately 260 other producing properties.

The  Company  operates  wells in two  fields  in  Dawson  County,  Montana.  The
operations  in the  Glendive  Field  consist  of 13  producing  wells  and  four
saltwater  disposal wells. The Gas City Field is unitized for secondary recovery
operations and consists of nine producing wells and three water injection wells.
Production is primarily  from the Red River  formation of Ordovician age in both
of these fields.

Operations  in the Golden Trend Field in Grady and McClain  counties in Oklahoma
consist of 16 producing wells completed in four formations of Pennsylvanian  and
Ordovician age rock.

                                       -7-

<PAGE>



Northwestern  Oklahoma  operations  consist of five producing  wells in the Vici
Field in Ellis County. Production is from Pennsylvanian age rock.

The Company's  operations in the Anadarko Basin of Eastern Oklahoma  consists of
five  producing  gas wells located in the  Hartshorne  South and Kinta Fields in
Latimer County and the Ti North and Ashland Fields in Pittsburg County.

Another of the  Company's  producing  fields is the West  Cement  Field in Caddo
County,  Oklahoma.  At present,  there is one  producing  well  completed in the
Medrano formation of Pennsylvania age rock.

The  Company  also  operates  one well in the  Champmon  Strawn  Field in Gaines
County, Texas.

Producing Wells

The  following  table sets forth certain  information  relating to the Company's
producing properties. Because the Company owns the mineral interests in numerous
producing  wells,  it does not have current  information on the numbers of wells
drilled  by  the  owners  of  the  leasehold  interests  for  these  properties.
Accordingly,   the  Company   keeps  track  of  its  royalty   interests   on  a
property-by-property  rather than a well-by-well  basis, and the following table
sets forth the number of properties  upon which there are one or more  producing
wells. Net wells refers to the total number of wells in which the Company has an
interest, multiplied by the Company's working interest percentage in the wells.



                   Producing Wells as of December 31, 1997
  ------------------------------------------------------------------------
                                                       Gross         Net
  Working interests -           Oil..............          118          29
                                Gas..............          195          21
  Royalty interests -           Oil..............          728          (1)
                                Gas..............          484          (1)

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

     (1) The term "net wells" is not applicable to a royalty interest since
         the Company has no working interest in the applicable well.



                                       -8-

<PAGE>



Acreage

As previously noted, the Company owns an interest in 1,525 producing properties,
including royalty interests in 1,212 properties (comprising approximately 28,117
net  acres) and  working  interests  in 313  properties  (comprising  14,223 net
acres).  The following  table sets forth the Company's gross and net oil and gas
leasehold acreage as of December 31, 1997.



                        Acreage as of December 31, 1997
  ------------------------------------------------------------------------
                                                  Gross            Net
  Developed Acreage:
          Leasehold..................              67,171         12,760
          Mineral....................             299,518         29,580
  Undeveloped Acreage:
          Leasehold..................              24,813          8,082
          Mineral....................             632,522         92,517
                                              -----------       --------
  Total Acreage                                 1,024,024        142,939
                                               ==========       ========

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

Proved Reserves

The following table reflects the proved reserves and proved developed  producing
reserves,  the future net revenues and the present  value of future net revenues
from such  reserves  of the Company at December  31,  1997 as  estimated  by the
Company.  The quantities of the Company's proved reserves of oil and natural gas
presented below,  representing developed and undeveloped reserves,  include only
those amounts which the Company reasonably expects to recover in the future from
known oil and gas reservoirs under existing  economic and operating  conditions.
Proved  developed  producing  reserves are limited to those quantities which are
recoverable  commercially from existing wells at current prices and costs, under
existing regulatory  practices and with existing  technology.  Accordingly,  any
changes in prices, operating and developmental costs, regulations, technology or
other  factors  could  significantly  increase  or  decrease  estimates  of  the
Company's proved developed producing reserves.  The Company's proved undeveloped
reserves include only those quantities which the Company  reasonably  expects to
recover  from the  drilling  of new  wells  based on  geological  evidence  from
directly  offsetting  wells.  The risks of recovering  these reserves are higher
from both  geological and mechanical  perspectives  than the risks of recovering
developed  reserves.  The  estimates  of the  Company's  proved  reserves do not
include  proved  undeveloped  reserves  attributable  to the  Company's  royalty
interests (this information is not available to the Company) or outside operated
working  interests  (quantities  are not  considered  material to the  Company's
proved  reserves).  Furthermore,  the reserve  estimates do not include reserves
whose  estimates of  recoverability  are less precise,  commonly  referred to as
"probable"  or  "possible"  reserves.  The Company  has no reserves  outside the
continental United States.

                                       -9-

<PAGE>




              Proved Oil and Gas Reserves at December 31, 1997
  ----------------------------------------------------------------------------
                                                               Present Value
                             Oil         Gas       Future Net     of Future
                            (Bbls)      (Mcf)       Revenues   Net Revenues(1)
                          ----------  ----------  ------------ ---------------

  Proved reserves.......   4,470,192  18,540,196  $ 80,335,832   $ 42,900,768
  Proved developed
    producing reserves..   4,386,132  15,902,988  $ 73,865,498   $ 40,801,719

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

     (1) Present  value of future net revenues  before  deducting  the impact of
         federal and state income taxes (discounted at 10%).

The future net revenues are determined by using  estimated  quantities of proved
reserves and proved developed  producing  reserves and the periods in which they
are expected to be developed  and produced  based on December 31, 1997  economic
conditions. The estimated future production is priced based on the actual prices
in effect at  December  31,  1997,  except  where fixed and  determinable  price
escalations  are  provided by contract.  The  resulting  estimated  future gross
revenues are reduced by estimated future costs to develop and produce the proved
reserves  based on December  31,  1997 cost  levels,  but not for debt  service,
general and administrative  expense and income taxes. For additional information
concerning the discounted  future net revenues to be derived from these reserves
and the disclosure of the  standardized  measure  information in accordance with
the  provisions  of  Statement  of Financial  Accounting  Standards  No. 69, see
"Supplementary  Information on Oil and Gas Producing Activities  (unaudited)" at
page F-16 herein.

The reserve data set forth in this report  represents  only  estimates.  Reserve
engineering is a subjective process of estimating  underground  accumulations of
crude oil and  natural  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  may vary.  In addition,  results of drilling,
testing  and  production  subsequent  to the  date of an  estimate  may  justify
revision of such estimate. Accordingly,  reserve estimates often differ from the
quantities  of crude oil and  natural  gas that are  ultimately  recovered.  The
meaningfulness  of such  estimates is highly  dependent upon the accuracy of the
assumptions upon which they were based.

Oil and Gas Production, Sales Prices and Production Costs

The  following  table sets forth  information  with  respect to  production  and
average  product  prices  attributable  to the Company's  royalty  interests and
working  interests in producing  properties,  and, with respect to properties in
which the Company  owns a working  interest,  the  production  costs  (including
production  taxes  and  transportation  charges)  per  equivalent  barrel of oil
produced for the periods indicated.


                                      -10-

<PAGE>




                                 Royalty Interests
                                         1997        1996        1995
                                      ----------  ----------  ----------

     Production:
        Oil (Bbls)...................     55,014      57,137      64,500
        Gas (Mcf)....................    376,703     393,114     372,291

     Average Sales Prices:
        Oil (per Bbl)................     $18.97      $20.13      $16.51
        Gas (per Mcf)................       2.52        2.12        1.48

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


                                 Working Interests
                                         1997        1996        1995
                                      ----------  ----------  ----------

     Production:
        Oil (Bbls)...................    155,983     182,388     165,221
        Gas (Mcf)....................    831,761     864,916     942,016

     Average Sales Prices:
        Oil (per Bbl)................     $18.74      $20.16      $16.01
        Gas (per Mcf)................       2.33        1.97        1.39

     Average direct operating
        costs per barrel of
        oil equivalent (1)...........      $6.51       $9.03       $6.13

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

     (1)  Barrels of oil equivalent are determined  using the ratio of
          six Mcf of gas to one  barrel of crude  oil,  condensate  or
          natural gas liquids.  See Item 6.,  Management's  Discussion
          and Analysis, for further discussion of these costs.

ITEM 3. LEGAL PROCEEDINGS

The  Company is involved in various  minor legal  actions  arising in the normal
course of business. In the opinion of management, the Company's liabilities,  if
any, in these matters will not have a material effect on the Company's financial
position, results of operations or cash flows.

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

A Special  Meeting of the  stockholders  of the Company was held on December 11,
1997 for the purpose of 1)  considering a proposal to merge the Company with The
Home-Stake Royalty Corporation  (including a recapitalization of the Company and
a common stock split on a 30-for-1 basis),  2) considering  certain proposals to
amend the HSOG  Certificate of  Incorporation,  and 3) considering a proposal to
adopt the HSOG 1997 Incentive Stock Plan.

     Proposal  #1 - Adoption  of  the  Agreement  of  Merger  (and  the  related
                    recapitalization  of the Company and the common stock split)
                    whereby The Home-Stake Royalty  Corporation was to be merged
                    into the  Company  (For - 64,521,  Against - 0 and Abstain -
                    0).

     Proposal #2a - Amend the Company's  Certificate of Incorporation to provide
                    for  perpetual  existence  of the  Company  (For  -  64,386,
                    Against - 0 and Abstain - 145).


                                      -11-

<PAGE>



     Proposal #2b - Amend the Company's  Certificate of  Incorporation to expand
                    the business purpose of the Company (For - 64,490, Against -
                    0 and Abstain - 131).

     Proposal #2c - Amend  the  Company's   Certificate  of   Incorporation   to
                    authorize  the  Company's  Board to establish  the number of
                    directors of the Company  (For  62,490,  Against - 1,896 and
                    Abstain - 145).

     Proposal #2d - Amend  the  Company's   Certificate  of   Incorporation   to
                    eliminate  the  supermajority  vote to approve  any  merger,
                    consolidation or sale of a substantial portion of the assets
                    of the  Company  or change the  number of  directors  of the
                    Company (For - 64,226, Against - 14 and Abstain - 291).

     Proposal #2e - Amend the Company's  Certificate of  Incorporation  to limit
                    the  personal  liability  of  directors  for certain acts or
                    omissions (For - 63,381, Against - 715 and Abstain - 435).

     Proposal #2f - Amend  the  Company's   Certificate  of   Incorporation   to
                    authorize the Company's Board to adopt,  repeal or amend the
                    Bylaws of the  Company  (For -  62,490,  Against - 1,896 and
                    Abstain - 145).

     Proposal #2g - Amend  the  Company's   Certificate  of   Incorporation   to
                    authorize  the   indemnification  of  officers,   directors,
                    employees   and  agents  of  the   Company   under   certain
                    circumstances  (For - 64,171,  Against  - 215 and  Abstain -
                    145).

     Proposal #2h - Amend the Company's  Certificate of Incorporation to provide
                    that the Company shall be governed by the  provisions of the
                    Oklahoma General Corporation Act (For - 64,336, Against - 50
                    and Abstain - 145).

     Proposal #3 -  Adoption of the Company's 1997  Incentive  Stock Plan (For -
                    62,576, Against - 1,766 and Abstain - 189).

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of December 31, 1997, the Company had  approximately 425 holders of record of
its common stock.  During 1997, the common stock was listed in the "pink sheets"
published by the National Quotation Bureau. Trades in the stock were sporadic or
limited and, accordingly, there was no established public trading market for the
Company's  common  stock as defined in Item  201(a)(1)  of SEC  Regulation  S-B.
Beginning on February 12, 1998,  trading of the Company's stock,  reflecting the
effects  of  the  Merger  and  related   common  stock   split,   began  on  the
Over-the-Counter  Bulletin  Board.  Since  that  time,  there has been  reported
trading of a total of 6,000  shares,  at prices  ranging from $4.50 per share to
$6.25 per share.

                                      -12-

<PAGE>



The following  table sets forth the per share amount of cash dividends  declared
and paid by the  Company  (HSRC)  on  their  common  stock  during  the  periods
indicated (restated to reflect the Merger and common stock split).


                                                 Cash Dividends
                                              Declared and Paid Per
                                                    Share of
            Year ended December 31,               Common Stock
     =====================================    =====================
     1997:
     First Quarter                                     $ .02
     Second Quarter                                      .02
     Third Quarter                                       .02
     Fourth Quarter                                      .00

     1996:
     First Quarter                                     $ .03
     Second Quarter                                      .02
     Third Quarter                                       .02
     Fourth Quarter                                      .02
     =====================================           ========

The Company has historically  paid quarterly cash dividends to its stockholders.
The Company's Board of Directors has adopted a dividend policy that provides for
the payment of quarterly  dividends,  dependent on numerous  factors,  including
future earnings,  anticipated capital requirements,  the financial condition and
prospects of the Company, and such other factors as the Board may deem relevant.
In addition,  future  dividends may be  restricted  pursuant to the terms of the
loan  agreement  between the Company and  NationsBank,  N.A.  See  "Management's
Discussion and Analysis" below for a description of these restrictions.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

The  following  discussion  should  be read in  conjunction  with the  Company's
financial statements and notes thereto included elsewhere herein.

Results of Operations

Net income for 1997 increased 17% from $1,844,161 in 1996 to $2,162,482 in 1997.
The factors contributing to this increase are as follows:

Oil sales  decreased  $860,104 (18%)  primarily as a result of a decrease in the
average  sales price per barrel  from $20.16 in 1996 to $18.80 in 1997,  coupled
with a decrease in production of 28,527 barrels.  The decrease in production was
attributable to the sales of producing properties described below.

Gas sales  increased  14%  ($353,272)  as a result of an increase in the average
sales  price  from  $2.02  per Mcf in 1996 to $2.39  per Mcf in 1997,  partially
offset by a 4% decrease in production.

Income from equity  affiliates  increased  by  $144,718.  In 1997 the  Company's
equity  investee,  reported net income of  $1,825,749  compared to $1,437,674 in
1996.

Gains on sales of assets  increased 93%  ($156,808) in 1997. The Company had two
major  property  sales in 1997.  In March,  the Company sold its interest in its
Alden Field  properties at a gain of $99,600.  In October,  the Company sold its
interest in the Countyline Unit for a gain of $194,900.

Production  expenses  decreased 33%. Lease operating expenses decreased $943,515
(39%) due primarily to the sales of the Alden Field  properties  and  Countyline
Unit. 1997 expense included  $103,000  associated with these properties and 1996

                                      -13-

<PAGE>



expense included $1,056,638. In 1996, the Company incurred certain non-recurring
costs on the  Countyline  Unit in the settlement of claims by surface owners and
the remediation of saltwater  contamination.  Production taxes decreased $78,057
as a result of the lower oil and gas sales described above.

Exploration   expenses  increased  $602,874.   Dry  hole  costs  increased  438%
($578,067)  in 1997.  In 1997,  there were 11 dry holes drilled (1.57 net) at an
average cost of $452,256 per net well; in 1996, there were 5 dry holes (.45 net)
drilled at an average cost of $293,278  per net well.  Condemned  and  abandoned
property  expense  increased  $24,807 (45%) due to the  abandonment of leasehold
costs associated with the dry holes drilled during the year.

General and  administrative  expense  increased  $361,968 (46%) in 1997.  During
1997, the Company  incurred  expenses of $122,400 in connection  with the Merger
and salaries increased $101,000 in connection with the personnel  additions made
in the engineering and geology  departments.  1996 expense  included a credit in
the amount of $82,500, representing the reimbursement of legal expenses from the
Company's Directors' and Officers' Liability Insurance carrier.  This amount was
received in  settlement  of a suit the Company  brought  against the carrier for
recovery of certain costs incurred by the Company in the  successful  defense of
the Company's directors in a lawsuit in 1991.

Interest expense decreased $210,094,  reflecting the retirement of the Company's
debt during the year.

The Company's  effective tax rate varies  significantly  from year to year,  due
principally to the significant  effects of statutory  depletion which is largely
independent  of  pre-tax  income.  In  addition,  a  portion  of net  income  is
attributable to income from the Company's equity investee, for which there is no
corresponding  income  tax  provision  required.   For  additional   information
attributable to each of these factors, see Note 5 to the Consolidated  Financial
Statements on page F-13.

Financial Condition and Liquidity

The Company's operating activities have traditionally been self-financed through
internally  generated cash flows.  The principal uses of cash flows have been to
fund the Company's  exploration and production activities and for the payment of
dividends to stockholders.  The use of borrowed funds has generally been limited
to the  acquisition  of producing oil and gas properties  where future  revenues
from such purchases are expected to fund the debt.

In 1997,  the  Company  spent  $1.9  million  for  exploration  and  development
activities and $9,300 on  acquisitions.  The Company has budgeted $5 million for
exploration  and  development  activities in 1998, of which  approximately  $2.7
million has been committed.

The  working  capital  deficit at  December  31,  1996  became a surplus of $1.8
million at December 31, 1997 due  primarily to the  retirement  of the Company's
debt  during the year and the cash that was added by the Merger.  The  Company's
working capital and internally generated cash flows from operations are expected
to  finance  the  budgeted  1998  exploration  and  development  activities.  In
addition, the Company's line of credit described below extends into 1999.

Again in 1997, the Company  aggressively applied cash flows to the retirement of
its bank note.  Note  payments  were  $1,366,035,  which was  $401,775  over the
required  monthly  payments.  As a result,  the Company's  bank note was retired
early,  on May 31, 1997.  The Company has a bank line of credit in the amount of
$700,000  available  until May 1, 1998,  which provides for monthly  payments of
interest on the  outstanding  borrowings at bank prime.  In connection with this
line of  credit,  the  Company  has  issued a letter of credit in the  amount of
$120,000,  which  is  guaranteed  by this  line,  and pays a  commitment  fee of
one-half of one percent (1/2%) per annum on the unused portion of the line.

On March 31, 1998,  the Company is  scheduled  to execute a new credit  facility
with its bank to finance the  acquisition of producing gas properties  described
in Acquisition on page 5 hereof.  In addition,  this  arrangement will provide a
revolving  term line of credit in the amount of  $5,000,000,  which will  extend
until May 1, 1999.  This credit  facility will include  certain  covenants which
require, among  other things, that the Company maintain (i) a ratio of cash flow

                                      -14-

<PAGE>



(defined  in  the  loan   agreement  to  be  income  before  income  taxes  plus
depreciation,  depletion and  amortization)  to current  maturities of long-term
debt  of  more  than  1.75  to  1.0,  (ii)  a  ratio  of  total  liabilities  to
stockholders'  equity of not more than 1.0 to 1.0, and (iii) a minimum net worth
of not less than $20,000,000.  In addition,  the Company's annual cash dividends
will be limited to the lesser of $550,000 or net income.

In 1997,  the  Company's  average  direct  operating  costs  per  barrel  of oil
equivalent  decreased 28% to $6.51. This decrease is primarily the result of the
sale of the Alden Field properties and the Countyline Unit, described above. The
Alden Field  properties  were sold  effective  December 31, 1996. The Countyline
Unit was sold effective July 31, 1997.  Excluding the Countyline  Unit,  average
direct  operating costs per barrel of oil equivalent for the Company in 1997 was
$6.44.

Average direct  operating  costs per barrel of oil equivalent are dependent upon
several factors, including principally the nature of a company's operations. For
example,  gas  properties  are  generally  more  economical  to operate than oil
properties.  Likewise,  oil  wells in a form of  primary  recovery  (flowing  or
pumping)  are more  economical  to operate than oil wells in a form of secondary
recovery,  such  as  waterfloods.   The  Company  has  large  interests  in  two
waterfloods  and  one  water-drive   operation.   These  properties  contributed
approximately  43% of the  total  working  interest  barrels  of oil  equivalent
production in 1997, but were  responsible  for  approximately  74% of the direct
operating  costs.  Excluding these waterflood  properties,  the Company's direct
operating costs per barrel of oil equivalent in 1997 was $3.40.

The  Company  believes  it will fully  realize  its  deferred  tax  assets  and,
accordingly,  no  valuation  allowances  have  been  provided.  In  management's
opinion, the deferred tax assets will be realized as reductions in future income
taxes payable or by utilizing available tax planning  strategies.  Uncertainties
that may affect the ultimate  realization of these assets include future product
prices,  costs and tax rates.  Therefore,  the Company will periodically  review
these factors and determine whether a valuation allowance has become necessary.

The Company does not expect its costs of  addressing  the "Year 2000" problem to
be  significant.  Nor is this problem  expected to cause any  disruption  in the
operations or business activities of the Company.

Inflation

In recent years  inflation  has not had a  significant  impact on the  Company's
operations or financial  condition.  The general economic pressures limiting oil
and gas prices in recent years have generally been  accompanied by corresponding
downward pressure on costs to develop and operate oil and gas properties as well
as the costs of drilling and  completing  wells.  The impact of inflation on the
Company in the future  will  depend on the  relative  increases,  if any, in the
selling price of oil and gas and in the  Company's  operating,  development  and
drilling costs.

Forward Looking Statements

Certain  statements  included in this report which are not historical  facts are
"forward looking  statements",  including statements with respect to oil and gas
reserves,  the  number  and  location  of wells to be  drilled,  future  capital
expenditures  (including  the amount and nature  thereof),  anticipated  date of
repayment  of bank debt,  extension  of  existing  line of credit and other such
matters.  These forward  looking  statements are based on current  expectations,
estimates,  assumptions and beliefs of management;  and words such as "expects",
"believes",  "anticipates",  "intends",  "plans"  and  similar  expressions  are
intended to identify such forward  looking  statements.  These  forward  looking
statements  involve  risks and  uncertainties,  including,  but not  limited to:
dependence  upon the prices for oil and natural gas which  prices are subject to
significant  fluctuations in response to relatively  minor changes in supply and
demand  for such  products,  market  uncertainty,  political  conditions  in oil
producing regions,  domestic and foreign government  regulations,  the price and
availability of alternative fuels and a variety of other factors; competition in
the  acquisition of oil and gas properties and the  development,  production and
marketing of oil and natural gas;  operating hazards  typically  associated with
the exploration,  development,  production and transportation of oil and natural
gas;  federal,  state and local laws relating to the  exploration,  development,
production  and marketing of oil and natural gas,  including  environmental  and
safety  matters;  changes in laws and  regulations;  and other factors,  most of
which are beyond the control of the  Company.  Accordingly,  actual  results and

                                      -15-

<PAGE>



developments  may differ  materially from those expressed in the forward looking
statements.

ITEM 7. FINANCIAL STATEMENTS

The  information  required  by this Item  begins at page F-1  following  page 18
hereof.

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

There has been no change in accountants and no  disagreements  on any matters of
accounting principles or practices, financial statement disclosures, or auditing
scope or procedures.

                                    PART III

ITEM 9. DIRECTORS,  EXECUTIVE  OFFICERS AND COMPLIANCE WITH SECTION 16(a) OF THE
        EXCHANGE ACT

The information required by this Item is incorporated by reference from sections
of the  Company's  definitive  Proxy  Statement  for its 1998 Annual  Meeting of
Stockholders  (the  "Proxy   Statement")   entitled   "Election  of  Directors",
"Executive  Officers of the  Company" and "Section  16(a)  Beneficial  Ownership
Reporting Compliance".

ITEM 10. EXECUTIVE COMPENSATION

The  information  required by this Item is  incorporated  by reference  from the
section of the Proxy Statement entitled "Executive Compensation".

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required by this Item is  incorporated  by reference  from the
section of the Proxy Statement  entitled  "Principal  Stockholders  and Security
Ownership of Management".

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required by this Item is  incorporated  by reference  from the
section of the Proxy  Statement  entitled  "Certain  Relationships  and  Related
Transactions".



                                      -16-

<PAGE>



ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits:

The  following  documents  are included as exhibits to this Form  10-KSB.  Those
exhibits  below  incorporated  by reference  herein are indicated as such by the
information  supplied  in  the  parenthetical  thereafter.  If no  parenthetical
appears after an exhibit, such exhibit is filed herewith.

  Exhibit
  Number      Description

    3.1       Amended and Restated Certificate of Incorporation of the Company.

    3.2       Bylaws of the Company, as amended.

    4.1       Rights  Agreement and Indenture  dated as of May 2, 1994,  between
              the  Company and The Fourth  National  Bank of Tulsa (now known as
              NationsBank,   N.A.)  (Filed  as  Exhibit  4.1  to  the  Company's
              Registration Statement on Form 10, Registration No. 0-19766).

  *10.1       Amended  and  Restated Home-Stake  Oil &  Gas Company Key Employee
              Incentive Bonus Plan.

  *10.2       Amended and Restated Employment Agreement by and between Robert C.
              Simpson and the Company dated February 5, 1998.

  *10.3       Amended  and  Restated  Home-Stake  Oil  &  Gas  Company Change in
              Control Severance Pay Plan.

  *10.4       The Home-Stake Oil & Gas Company 1997 Incentive Stock Plan.

  *10.5       Form of Indemnity Agreement between the Company and each Director,
              dated  May 14,  1996  (Filed  as  Exhibit  10.1  to the  Company's
              Quarterly  Report of Form  10-QSB for the  quarter  ended June 30,
              1996).

   10.6       Third  Amended and Restated  Loan  Agreement  dated March 29, 1995
              between the Company and Bank IV Oklahoma,  N.A.  (Filed as Exhibit
              10.9 to the  Company's  Annual  Report on Form 10-KSB for the year
              ended December 31, 1994).

   10.7       First  Amendment and  Modification  to Loan Agreement dated May 1,
              1996 to the Third Amended and Restated Loan Agreement  dated March
              29, 1995 between the Company and Bank IV Oklahoma,  N.A. (Filed as
              Exhibit 10.2 to the Company's  Quarterly Report of Form 10-QSB for
              the quarter ended June 30, 1996)

     27       Financial Data Schedule.


         *    Management contract or compensatory plan or arrangement.

     (b) Reports on Form 8-K:

     No reports on Form 8-K were filed  during the fourth  quarter of the fiscal
year ended December 31, 1997.

                                      -17-

<PAGE>


                                   SIGNATURES

In accordance  with Section 13 or 15(d) of the Exchange Act, the  Registrant has
caused this Form 10-KSB to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                            THE HOME-STAKE OIL & GAS COMPANY



Date:    March 30, 1998                  By: /s/ Robert C. Simpson
                                            --------------------------------
                                            Robert C. Simpson
                                            Chairman of the Board,
                                            Chief Executive Officer
                                            and President

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

      Signature                   Title                             Date
      ---------                   -----                             ----

 /s/ Robert C. Simpson     Director, Chairman of the Board,     March 30, 1998
-------------------------- Chief Executive Officer and
                           President
                           (Principal Executive Officer)

 /s/ Chris K. Corcoran     Director, Executive Vice President,  March 30, 1998
-------------------------- Chief Financial Officer
Chris K. Corcoran          (Principal Financial and
                           Accounting Officer)


 /s/ L.W. Allegood         Director                             March 30, 1998
--------------------------
L.W. Allegood

 /s/ Larry F. Grindstaff   Director                             March 30, 1998
--------------------------
Larry F. Grindstaff

 /s/ Ronald O. Gutman      Director                             March 30, 1998
--------------------------
Ronald O. Gutman

 /s/ Joseph J. McCain, Jr. Director                             March 30, 1998
--------------------------
Joseph J. McCain, Jr.

 /s/ I. Wistar Morris, III Director                             March 30, 1998
--------------------------
I. Wistar Morris, III


                                      -18-

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY

                          INDEX TO FINANCIAL STATEMENTS

Covered by Report of Independent Auditors

Report of Independent Auditors.............................................F-2

Balance Sheets as of December 31, 1997 and 1996............................F-3

Statements of Income and Retained Earnings for the years
  ended December 31, 1997 and 1996.........................................F-4

Statements of Cash Flows for the years ended December 31, 1997 and 1996....F-5

Notes to Financial Statements..............................................F-6

Not Covered by Report of Independent Auditors

Supplementary Information on Oil and Gas Producing Activities for
  the years ended December 31, 1997 and 1996 (unaudited)...................F-16


                                       F-1

<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
The Home-Stake Oil & Gas Company

We have audited the  accompanying  financial  statements of The Home-Stake Oil &
Gas Company listed in the accompanying  index to financial  statements (Item 7).
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 financial  statements  listed in the accompanying  index to
financial  statements  (Item 7) present fairly,  in all material  respects,  the
financial  position of The Home-Stake Oil & Gas Company at December 31, 1997 and
1996,  and the results of its  operations  and its cash flows for the years then
ended in conformity with generally accepted accounting principles.

                                                           /s/ ERNST & YOUNG LLP

Tulsa, Oklahoma
March 23, 1998

                                       F-2

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
                                 BALANCE SHEETS

                           December 31, 1997 and 1996

                                     ASSETS

                                                         1997          1996
                                                         ----          ----
Current assets:

  Cash and cash equivalents........................  $  1,507,782  $    626,864
  Accounts receivable..............................     1,730,114     1,469,877
  Receivable from affiliate........................             -        66,213
  Prepaid expenses.................................       188,461       255,957
                                                     ------------  ------------
         Total current assets......................     3,426,357     2,418,911

Investments (Note 3)...............................             -     3,592,495

Property and equipment, at cost:

  Producing oil and gas leases (working interests).    29,138,034    21,063,614
  Producing oil and gas royalties..................     9,075,949     2,842,116
  Nonproducing oil and gas properties..............     1,841,049       837,271
  Office equipment and other.......................       569,172       492,244
                                                     ------------ -------------
                                                       40,624,204    25,235,245

  Less accumulated depreciation,
     depletion and amortization....................    15,613,520    16,437,277
                                                     ------------  ------------
            Net property and equipment.............    25,010,684     8,797,968

Other assets.......................................       246,918        24,119
                                                     ------------  ------------
                                                     $ 28,683,959  $ 14,833,493
                                                     ============  ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

  Accounts payable and accrued liabilities.........  $  1,517,932  $  1,534,535
  Dividends declared...............................             -        62,827
  Income taxes payable.............................        92,822        75,198
  Current note payable (Note 4)....................          -          964,260
                                                     ------------  ------------
         Total current liabilities.................     1,610,754     2,636,820
Long-term note payable (Note 4)....................             -       401,775
Deferred income taxes (Note 5).....................     5,207,548       773,200

Stockholders' equity (Note 8):
  Preferred stock, $1 par value -

    2,000,000  shares  authorized;
     none issued
    Common stock,  $ .01 par value -
     12,000,000 shares authorized,
     4,517,363 share issued in 1997 and
     4,866,000 shares issued in 1996...............        45,174        48,660
  Additional paid-in capital.......................    15,460,621     9,951,340
  Retained earnings................................     6,359,862     4,385,862
                                                     ------------  ------------
                                                       21,865,657    14,385,862

  Less treasury stock, at cost - 1,469,143 shares..          -        3,364,164
                                                     ------------  ------------
         Total stockholders' equity................    21,865,657    11,021,698
                                                     ------------  ------------
                                                     $ 28,683,959   $14,833,493
                                                     ============  ============

                             See accompanying notes.

                                       F-3

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
                   STATEMENTS OF INCOME AND RETAINED EARNINGS
                     Years ended December 31, 1997 and 1996

                                                          1997          1996
                                                          ----          ----
Revenues:

     Oil and gas sales.............................  $  6,857,072  $  7,363,904
     Income from equity affiliates.................       534,690       389,972
     Gain on sales of assets.......................       325,472       168,664
     Other income..................................       353,284       290,924
                                                     ------------  ------------
                                                        8,070,518     8,213,464

Costs and expenses:

     Production....................................     2,054,149     3,075,721
     Exploration...................................       790,517       187,643
     General and administrative....................     1,143,448       781,480
     Depreciation, depletion and amortization......     1,015,466     1,351,335
     Interest......................................        39,598       249,692
     Property and other taxes......................       126,567       110,736
                                                     ------------  ------------
                                                        5,169,745     5,756,607

Income before provision for income taxes...........     2,900,773     2,456,857

Provision for income taxes (Note 5):

     Current.......................................       448,214       327,634
     Deferred......................................       290,077       285,062
                                                     ------------  ------------
                                                          738,291       612,696
                                                     ------------  ------------
Net income.........................................     2,162,482     1,844,161

Retained earnings at beginning of year.............     4,385,862     2,855,837

Cash dividends ($ .06 per share - 1997,
     $ .09 per share - 1996).......................      (188,482)     (314,136)
                                                     ------------  ------------

Retained earnings at end of year...................  $  6,359,862  $  4,385,862
                                                     ============  ============

Weighted average number of shares outstanding......     3,396,857     3,396,857
                                                        =========     =========

Basic net income per share of common stock.........         $ .64        $ .54
                                                            =====        =====
                             See accompanying notes.

                                       F-4

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
                            STATEMENTS OF CASH FLOWS
                     Years ended December 31, 1997 and 1996

                                                         1997          1996
                                                         ----          ----
Operating activities:

  Oil and gas sales, net of production taxes.......  $  6,439,737   $ 6,600,732
  Other............................................       353,284       290,924
                                                     ------------   -----------
                                                        6,793,021     6,891,656

  Cash paid to suppliers and employees.............     3,964,129     3,595,153
  Interest paid....................................        39,598       249,692
  Property and other taxes.........................       126,567       110,736
  Income taxes paid................................       389,982       224,756
                                                     ------------   -----------
                                                        4,520,276     4,180,337

    Net cash provided by operating activities......     2,272,745     2,711,319

Investing activities:

  Proceeds from sales of property and equipment....     1,718,211       362,260
  Acquisition of property and equipment............    (1,903,505)     (523,073)
  Acquisition of investments.......................             -      (202,558)
  Dividends from equity affiliate..................        60,674        71,022
                                                     ------------  ------------
    Net cash used in investing activities..........      (124,620)     (292,349)

Financing activities:

  Note payments....................................    (1,366,035)   (2,008,875)
  Cash dividends paid..............................      (262,563)     (348,106)
                                                     ------------  ------------
    Net cash used in financing activities..........    (1,628,598)   (2,356,981)
                                                     ------------  ------------
Net increase in cash...............................       519,527        61,989
Cash acquired in merger............................       361,391             -
Cash and cash equivalents at beginning of year.....       626,864       564,875
                                                     ------------  ------------
Cash and cash equivalents at end of year...........     1,507,782  $    626,864
                                                     ============  ============

Reconciliation of net income to net cash
     provided by operating activities:

Net income.........................................  $  2,162,482  $  1,844,161
Reconciling adjustments:
  Depreciation, depletion and amortization.........     1,015,466     1,351,335
  Gain on sales of assets..........................      (325,472)     (168,664)
  Income from equity affiliates....................      (534,690)     (389,972)
  Dry hole costs and condemned and abandoned

    properties.....................................       790,517       187,643
  Deferred income taxes............................       290,077       285,062
  Changes in other assets and liabilities:

    Accounts receivable............................      (875,831)     (316,570)
    Prepaid expenses and other assets..............        18,629      (114,062)
    Accounts payable...............................      (317,723)       (7,908)
    Other liabilities..............................        49,290        40,294
                                                     ------------  ------------
Net cash provided by operating activities..........  $  2,272,745  $  2,711,319
                                                     ============  ============
                             See accompanying notes.
                                      F-5
<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
                          NOTES TO FINANCIAL STATEMENTS

Description of business

The  Home-Stake Oil & Gas Company  ("HSOG" or the "Company") is an  "independent
oil  and  gas  producer"  actively  engaged  in  the  acquisition,  exploration,
development  and production of oil and gas  properties.  Oil and gas exploration
and  production  activities  are  subject  to  numerous  risks  inherent  in the
business.  These  include the  volatility  of oil and gas prices,  environmental
concerns  and  governmental  regulations,  general  business  risks and  hazards
involving the acquisition  and operation of oil and gas properties,  the ability
to continue to find new reserves to replace those being  depleted and the highly
competitive nature of the business. Its principal geographic operating areas lie
within the states of Oklahoma, Montana and Texas.

Note 1 - Summary of significant accounting policies

Merger

As further  described  in Note 2 below,  on December 31,  1997,  The  Home-Stake
Royalty  Corporation  ("HSRC")  was  merged  with  and into  the  Company.  This
transaction  was accounted for by the purchase method of accounting for business
combinations. The merged companies adopted the name of HSOG, which was deemed to
be  the  purchased  entity  for  accounting   purposes  since  the  former  HSRC
stockholders  received  approximately  61% of the merged  entity's common stock.
Accordingly, the balance sheet at December 31, 1996 and the statements of income
and retained  earnings and statements of cash flows for the years ended December
31,  1997 and 1996,  have been  restated  to reflect  the  historical  financial
position  and  operations  of HSRC prior to the  merger.  The  balance  sheet at
December 31, 1997,  reflects the assets and liabilities of the merged entity, as
described in Note 2 below.

Basis of Presentation

The financial  statements  include the accounts of the Company and, in 1996, its
wholly owned  subsidiary  Alden Gas Gathering  Company.  The principal assets of
Alden Gas Gathering  Company were sold in 1997 and the subsidiary was dissolved.
The  equity  method  of  accounting  is used when the  Company  has a 20% to 50%
interest in other companies.  Under the equity method,  original investments are
recorded at cost and adjusted by the Company's share of  undistributed  earnings
or losses of these companies.  Dividends and  distributions are credited against
the investment when received.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial  statements in conformity  with generally  accepted
accounting principals requires management to make estimates and assumptions that
affect  the  reported  amounts  of  assets  and  liabilities  at the date of the
financial statements and revenues and expenses during the reporting period.

Actual results could differ from those estimates.

One of the most  significant  estimates made by the Company involves its oil and
gas reserves.  The Company  amortizes  its costs of producing  properties on the
unit-of-production  method over the estimated remaining reserves of the Company.
Since  estimates of remaining  oil and gas  reserves are highly  subjective  and
subject to constantly changing conditions,  most of which are beyond the control
of the Company,  it is reasonably  possible that the  Company's  estimates  will
change over time, affecting the rates of amortization. In addition, in assessing
whether any  impairment  to the  carrying  values of  producing  properties  has
occurred,  these same  estimates of oil and gas reserves are used.  Consequently
impairment adjustments to the carrying values are reasonably possible.

Fair Value of Financial Instruments

The carrying amounts for cash and cash equivalents and notes payable reported in
the balance sheets approximate fair value.

                                       F-6

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 1 - Summary of significant accounting policies (continued)

Cash and cash equivalents

The Company includes  certificates of deposit and money market funds in cash and
cash equivalents  since such amounts are readily  convertible into known amounts
of cash.

Credit risks

The Company sells its oil and gas production  directly or indirectly to numerous
oil refiners and pipeline companies without collateral. In addition, the Company
has numerous  working interest owners to whom it grants credit on wells in which
it serves as operator.  Substantially  all of these owners are industry partners
or individuals who invest in oil and gas drilling ventures. The Company believes
its credits risks are limited due to the nature of its business and partner base
and has not incurred any significant losses in connection therewith.

Environmental costs

Environmental  liabilities,  which  historically  have  not been  material,  are
recognized  when it is probable  that a loss has been incurred and the amount of
that loss is reasonably estimable.  Environmental liabilities, when accrued, are
based upon estimates of expected future costs without  discounting.  At December
31, 1997 there are no such costs accrued.

Property and equipment

The Company follows the successful  efforts method of accounting for its oil and
gas  operations.  Costs  of  productive  oil or gas  wells,  as well as costs of
acquiring  producing and nonproducing  oil and gas properties,  are capitalized.
Exploratory costs, annual delay rentals and exploratory dry holes are expensed.

Depreciation, depletion and amortization of producing properties are provided on
the   unit-of-production   method  based  on   estimates  of  proved   reserves.
Depreciation  of other  property and equipment is provided on  straight-line  or
accelerated  methods  over  estimated  useful  lives.  Impairment  of  producing
properties is measured based on their discounted estimated future net cash flows
and is included in depreciation, depletion and amortization, when required.

Nonproducing  oil and gas properties  include both perpetual  mineral rights and
term leasehold  interests.  The perpetual  mineral rights are  written-off  when
unsuccessful  exploration information is obtained. The Company does not maintain
an  extensive  inventory  of  nonproducing  leasehold  interests,   rather  such
interests are acquired in connection  with specific  drilling  objectives.  Such
nonproducing  leasehold  interests are  written-off  or reserved as warranted by
drilling results.

Renewals and betterments are capitalized; maintenance and repairs are charged to
expense.  Replacement of individual  items of lease  equipment are  capitalized.
When  leases  or  other  assets  are  sold or  retired,  the  cost  and  related
accumulated  depreciation,  depletion and  amortization  are eliminated from the
accounts and the resulting  gain or loss is recognized in income.  The Company's
historical  experience  has been that the salvage value of equipment on property
abandonments  is  sufficient  to  cover  the  costs  of  dismantlement  and site
restoration. Therefore, the Company does not accrue such costs and salvage value
is not considered in calculating property amortization.

                                       F-7

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 1 - Summary of significant accounting policies (continued)

Oil and gas sales

The  Company  sells  most of its  crude  oil and  natural  gas  concurrent  with
production and does not store significant  volumes for future sales.  Revenue is
recognized on the "sales  method" when oil and gas are sold.  Under this method,
the  Company  may  "sell"  more or less  than  its  proportionate  share  of gas
production in a given period, creating an imbalance position.  However, an asset
or  liability  is  recorded  only to the  extent  that the  Company's  imbalance
position in a property cannot be recouped from remaining reserves. The Company's
net imbalance positions at December 31, 1997 and 1996 were not material.

Derivatives

The Company does not utilize  financial or commodity  derivative  instruments to
hedge its market risks.

Income taxes

Certain  income and  expense  items are  recorded  in one year in the  financial
statements and are reported in a different  year in the income tax return.  Such
items  generally  include  tax credit  carryforwards,  intangible  drilling  and
development costs,  depreciation and depletion.  The tax effects associated with
these  differences are recorded in these  financial  statements and described as
"deferred income taxes".

Note 2 - Merger and Pro Forma Financial Information

As discussed in Note 1, on December 31, 1997,  HSRC was merged with and into the
Company, with HSOG deemed to be the purchased entity for accounting purposes. In
connection with this transaction,  the Company issued 2,742,203 shares of common
stock to former  stockholders of HSRC. In accordance with the Merger  Agreement,
holders of common stock of HSOG  received 30 shares of new HSOG common stock for
each share of stock  held prior to the  merger,  holders  of HSRC  common  stock
received  48.66  shares of new HSOG  common  stock for each  share of stock held
prior to the merger, and all treasury shares and shares owned by each company in
the other were canceled. (Also see Note 8.)

Since there was no established  public  trading market for the Company's  common
stock at December 31, 1997,  the purchase  price was  determined  based upon the
fair values of HSOG's assets and liabilities. The current assets and liabilities
of HSOG were valued at historical cost, which  approximates fair value. The fair
values  of  property  and  equipment  were  based  on (i) the  estimated  future
discounted  net cash  flows of HSOG's  producing  oil and gas  properties  as of
December  31,  1997,  after  giving  effect to deferred  income  taxes;  (ii) an
independent  appraisal of HSOG's nonproducing  minerals as of December 31, 1997;
and  (iii)  historical  cost  of  nonproducing  oil and gas  leases  and  office
equipment and other,  which  approximates  fair value. No oil and gas properties
were deemed to have been  impaired and no goodwill  was  recorded in  connection
with this transaction.

                                       F-8

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 2 - Merger and Pro Forma Financial Information (continued)

The  allocation  of the purchase  price of HSOG included in the balance sheet at
December 31, 1997 is summarized as follows:

     Current assets.....................................  $   933,865
     Property and equipment:
       Producing oil and gas leases.....................   10,154,056
       Producing royalty interests......................    6,235,349
       Nonproducing oil and gas properties..............      823,817
       Office equipment and other.......................       45,818
     Other assets.......................................      123,063
     Current liabilities................................   (1,449,456)
     Deferred income taxes..............................   (4,144,271)
                                                          -----------
                                                          $12,722,241
                                                          ===========

Estimated proved reserves of the producing properties acquired totaled 2,226,892
barrels of oil and 8,973,426 mcf of natural gas.



                                       F-9

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 2 - Merger and Pro Forma Financial Information (continued)

Pro Forma Information (unaudited)

Since the  merger of the  Company  and HSRC was  accounted  for by the  purchase
method of accounting,  the  accompanying  1997 and 1996 statements of income and
retained  earnings do not include any  revenues or expenses of the former  HSOG.
Following  is  summarized  pro forma  1997 and 1996  information,  assuming  the
acquisition had occurred on January 1, 1996. This pro forma information reflects
the combined historical amounts for the two companies, adjusted to eliminate the
income and  amortization  of each company related to its ownership in the other,
and the increases in  depreciation,  depletion and amortization and income taxes
related to the merger.

                                                        1997            1996
                                                        ----            ----
Revenues:

  Oil and gas sales................................ $ 13,344,522   $ 14,458,162
  Other............................................    1,303,239        824,483
                                                    ------------   ------------
                                                      14,647,761     15,282,645

Costs and expenses:

  Production.......................................    4,044,742      6,166,465
  Exploration......................................    1,351,996        343,378
  General and administrative expense...............    2,289,280      1,554,810
  Depreciation, depletion and amortization.........    2,552,615      3,154,717
  Interest expense.................................      276,139        702,185
  Property and other taxes.........................      231,957        213,049
                                                    ------------   ------------
                                                      10,746,729     12,134,604

Income before income tax...........................    3,901,032      3,148,041
Income tax expense.................................    1,351,961      1,018,110
                                                    ------------   ------------
Net income......................................... $  2,549,071   $  2,129,931
                                                    ============   ============

Weighted average number of shares outstanding......    4,517,363      4,517,363
                                                       =========      =========
Basic net income per share.........................        $ .56          $ .47
                                                           =====          =====

Note 3 - Related party transactions and investments

Prior to their merger on December 31, 1997, both HSOG and HSRC were under common
management,  with both  frequently  participating  jointly in the acquisition of
mineral and leasehold  interests and in exploration and development  activities.
Each company  generally owned an equal interest in the oil and gas properties in
which they jointly  participated,  however such interests sometime varied.  Only
HSRC,  however,  served as  operator  on  properties  that were not  operated by
outside parties.

                                       F-10

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 3 - Related party transactions and investments (continued)

In accordance  with oil and gas industry  practice,  the oil and gas ventures in
which both companies participated were considered to be joint, but separate. For
those properties operated by outside parties,  each Company was generally billed
separately  for their  share of  operating  and  drilling  costs and  separately
reimbursed the operator for such costs.  For properties  operated by HSRC,  HSOG
was billed for such costs monthly.

Payroll costs for personnel were paid by HSRC,  with HSOG  reimbursing  one-half
share of such costs.  For  substantially  all other  general and  administrative
costs, each Company separately paid for its one-half share.

For the two years ended  December  31,  HSRC paid or billed  HSOG the  following
amounts:

                                                       1997            1996
                                                       ----            ----
Paid:

  Oil and gas sales, net of production taxes.......  $ 394,759        $ 451,941
Billed:
  Property and equipment...........................    473,352           82,838
  Lease operating expenses.........................    686,450          818,886
  Payroll costs....................................    583,320          494,243

All revenues and expenses described above were paid by the respective company in
cash on a monthly basis.

At December 31, 1996, HSRC owned 33.9% of the  outstanding  common stock of HSOG
and accounted for its  investment in HSOG using the equity  method.  At December
31,  1996,  HSOG  owned  19.3% of the  outstanding  common  stock  of  HSRC.  In
connection  with the  merger  described  in Note 2,  this  cross  ownership  was
canceled.

At December 31, 1996, investments consisted of the following:

     The Home-Stake Oil & Gas Company (owned by HSRC)...  $  3,538,454
     Alden Pipeline Company.............................        54,041
                                                          ------------
                                                          $  3,592,495
                                                          ============
The  Company  received   dividends   totaling  $60,674  and  $71,023  for  these
investments in 1997 and 1996, respectively.

                                      F-11

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 3 - Related party transactions and investments (continued)

Summarized  combined financial  information for HSOG and Alden Pipeline Company,
in 1996 only and for which amounts are not material, is presented below:

                                                       Years ended December 31,
                                                       1997              1996

Income statement data:

   Revenues........................................  $  7,457,014  $  7,759,424
   Income before income taxes......................     2,485,651     1,858,854
   Net income (1)..................................     1,825,749     1,417,738

                                                                   December 31,
                                                                       1996

Balance sheet data:

   Current assets..............................................    $  1,576,125
   Property and equipment (net)................................       8,735,493
   Other assets................................................       2,756,922
   Current liabilities.........................................       2,299,840
   Noncurrent liabilities......................................       3,131,206
   Equity......................................................       7,637,494


     (1) Includes  $345,080  and  $273,108  in  1997  and  1996,   respectively,
         attributable to the equity earnings of the HSRC recorded by HSOG.

Note 4 - Note payable

Note payable at December 31, 1996 consisted of the following balances:

Prime rate bank note due May 1, 1998, requiring monthly principal
  payments of $80,355, plus interest.............................  $  1,366,035
Less current portion.............................................       964,260
                                                                   ------------
                                                                   $    401,775
                                                                   ============
The Company has a bank line of credit in the amount of $700,000  available until
May 1, 1998 which provides for monthly  payments of interest on the  outstanding
borrowings  at bank  prime less one  percent.  In  connection  with this line of
credit,  the  Company  has issued a letter of credit in the amount of  $120,000,
which is guaranteed by this line,  and pays a commitment  fee of one-half of one
percent (1/2%) per annum on the unused portion of the line.

The Company's  credit  facilities  include certain loan covenants which require,
among other  things,  that the Company  maintain  certain  financial  ratios and
minimum net worth requirements. In addition, the Company's annual cash dividends
are limited to the lesser of $365,000 or net income.

In connection with the acquisition of certain producing gas properties described
in Note 9, the Company has negotiated a new credit facility with its bank which,
when  executed,  will provide for borrowings of $6.6 million,  payable  $110,000
monthly,  plus interest at prime less 1/2 %, beginning May 1, 1998. In addition,
this arrangement will provide the Company with a one-year bank line of credit in
the amount of $5 million,  with  interest at prime less 1%. This  facility  will
limit annual cash dividends to the lesser of $550,000 or net income. This credit
facility is expected to be executed on or about March 31, 1998.

                                      F-12

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 5 - Income taxes

Deferred  income taxes  represent the net tax effects  associated with temporary
differences  in the net book  values  of  certain  assets  and  liabilities  for
financial  reporting  and income tax  purposes.  Significant  components  of the
Company's  deferred  income tax  liabilities  and assets at December  31, are as
follows:

                                                        1997           1996
                                                        ----           ----
Deferred tax liabilities:

  Intangible drilling costs........................  $  1,867,311  $    588,931
  Excess of tax over book depreciation.............       705,219       192,065
  Leasehold costs..................................     2,934,635       202,542
                                                     ------------  ------------
                                                        5,507,165       983,538
Deferred tax assets:

  Alternative minimum tax credit carryforwards.....       241,611       173,242
  Deferred compensation accrual....................        19,556        14,667
  Other (net)......................................        38,450        22,429
                                                     ------------  ------------
                                                          299,617       210,338
                                                     ------------  ------------
Net deferred tax liability.........................  $  5,207,548  $    773,200
                                                     ============  ============

The  reconciliation  of the income tax  provision  to the  "expected"  provision
computed at the statutory federal income tax rate is as follows:

                                                          1997           1996
                                                          ----           ----

Computed "expected" provision......................  $    986,263  $    835,331
Excess statutory depletion.........................      (188,966)     (101,828)
Income from equity affiliates......................      (181,795)     (135,927)
Other..............................................       122,789        15,120
                                                     ------------  ------------
Provision for income taxes.........................  $    738,291  $    612,696
                                                     ============  ============

At December 31, 1997, the Company had nonexpiring alternative minimum tax credit
carryforwards  of  approximately  $241,600  available to reduce  future  federal
income  taxes,  the benefits of which have been  recognized  in these  financial
statements.

Note 6 - Benefit plans

The Company has a 401(k)  Profit  Sharing Plan  covering  substantially  all the
Company's  employees  that have completed one year of service and provides for a
mandatory Company contribution equal to 3% of the employee's compensation and an
additional matching Company  contribution of up to 3%. Company  contributions to
the Plan were $24,322 and $22,288 in 1997 and 1996, respectively.

Note 7 - Commitments and contingencies

The Company has a  non-cancelable  operating  lease  covering  its office  space
through  December 30, 2000.  This lease  provides for annual rental  payments of
$111,816, subject to an annual expense adjustment.

The Company is involved in various legal actions arising in the normal course of
business.  In the  opinion  of  management  and  legal  counsel,  the  Company's
liabilities,  if any, in these  matters  will not have a material  effect on the
Company's financial position, results of operations or cash flows.

                                      F-13

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 8 - Stockholders' Equity

Common Stock

On December  11, 1997,  the  stockholders  of HSOG  approved an amendment to the
Company's  Certificate  of  Incorporation  which  changed  the par  value of the
Company's common stock to $ .01 per share and increased the number of authorized
shares of common stock from 100,000 to  12,000,000.  In  conjunction  with these
amendments,  the  stockholders  also  approved  the merger of HSRC with and into
HSOG,  as  described  in Note 2. As a part of the merger,  the common stock each
company owned in the other, and all treasury shares,  were canceled.  Holders of
HSRC common stock  received 48.66 shares of new HSOG common stock for each share
of HSRC owned,  resulting in the issuance of 2,742,203  shares.  Holders of HSOG
common stock  received 30 shares of new HSOG common stock for each share of HSOG
formerly  owned,  resulting in the issuance of 1,775,160  shares.  The Company's
1996 balance  sheet has been  restated to reflect the change in the par value of
the Company's common stock,  the increased  number of shares  authorized and the
48.66 exchange ratio described above. All references to the number of shares and
per share amounts reflect the historical shares of HSRC,  adjusted for the 48.66
exchange ratio.

Preferred Stock

The Company is authorized to issue up to 2,000,000  shares of Preferred Stock at
the discretion of the Board of Directors.  This stock is commonly referred to as
"blank  check"  stock,  with the Board of  Directors  having  the  authority  to
determine voting rights, dividend rights, preferences, etc.

Incentive Stock Plan

On December 11, 1997, the  stockholders  approved the adoption of The Home-Stake
Oil & Gas Company  1997  Incentive  Stock Plan (the "Stock  Plan")  which became
effective on December 31,  1997.  There are a total of 451,736  shares of common
stock  authorized  and  reserved  under the  Stock  Plan.  The  number of shares
reserved for issuance under the Stock Plan automatically  increases as necessary
so that,  when added to the number of shares subject to stock options granted or
awarded under the Stock Plan, the total number of shares reserved will equal 10%
of the issued and outstanding shares of the Company.

At December  31, 1997 there were no options  outstanding.  On February 12, 1998,
the Board of Directors granted qualified stock options in varying amounts to all
employees  totaling  155,250 shares.  Such options vest over a 5-year period and
have an option price of $4.50 per share. In addition,  there were  non-qualified
options  issued to all  outside  directors  in the  aggregate  amount of 100,000
shares that are exercisable immediately, at an option price of $4.50 per share.

Shareholder Rights Plan

On May 29,  1991,  the  Company  adopted a Rights  Plan and  distributed  to its
shareholders  one Right for each outstanding  share of common stock.  Each Right
entitles the holder to purchase one-tenth of an additional share of common stock
from the Company and acquire a note  payable  from the Company to the holder or,
under certain  circumstances,  purchase the stock of an acquiring company.  Upon
the occurrence of certain specified events related to a change in control of the
Company,  each holder of a Right (other than a potential acquiror) will have the
right to  acquire,  upon  exercise,  shares  of the  Company's  common  stock at
one-half of the then current market price. The Rights expire January 1, 2000 and
are exercisable  only if a person or group acquires 15% or more of the Company's
common  stock or commences a tender offer that would result in a person or group
acquiring 15% or more of the Company's  common stock.  The Rights are redeemable
in whole,  but not in part,  at a price of $.01 per  Right,  payable  in cash or
stock.

                                      F-14

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

Note 9 - Subsequent Events (unaudited as to reserve quantities)

On March 5, 1998 the Company  entered  into an  agreement  to  purchase  certain
producing gas properties for a purchase price of $6,685,000,  subject to certain
adjustments for operations subsequent to January 1, 1998. This purchase includes
estimated  proved reserves of 6.4 Bcf of gas. This  acquisition will be financed
under the new credit facility described in Note 4 and will be secured by certain
of the Company's producing properties.  This acquisition is expected to close on
or about March 31, 1998.

                                      F-15

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
    SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (unaudited)

Estimated quantities of proved oil and gas reserves

Changes in estimated  proved oil and gas reserve  quantities  are  summarized as
follows:

                                         1997                     1996
                                 ----------------------  -----------------------
                                    Oil         Gas         Oil          Gas
                                   (Bbls)      (Mcf)       (Bbls)       (Mcf)

Proved developed and undeveloped:

   Beginning of year............  2,432,711   8,835,929   2,757,425   9,956,399
   Revisions of previous
     estimates..................    187,009   1,625,539    (184,463)   (525,793)
   Purchases of reserves
     in-place...................        894       2,896      15,891     479,378
   Extensions, discoveries and
     other additions............     42,710     542,950      99,368     516,241
   Added by merger..............  2,226,892   8,973,426           -           -
   Sales of reserves in-place...   (209,027)   (232,080)    (15,985)   (332,266)
   Production...................   (210,997) (1,208,464)   (239,525) (1,258,030)
                                 ----------  ----------  ----------  ----------
   End of year..................  4,470,192  18,540,196   2,432,711   8,835,929
                                 ==========  ==========  ==========  ==========
Proved developed producing:

  Beginning of year.............  2,380,522   7,369,964   2,686,118   8,453,229
                                 ==========  ==========  ==========  ==========
  End of year...................  4,386,132  15,902,988   2,380,522   7,369,964
                                 ==========  ==========  ==========  ==========

The Company's share of net proved oil and gas reserves of HSOG, accounted for on
the equity method in 1996 (see Note 3 to the Financial Statements), were 808,161
barrels of oil and 2,881,865 mcf of gas at December 31, 1996.

The estimates of oil and gas reserves were prepared by Company  employees and do
not include proved undeveloped reserves attributable to either royalty interests
(information is not available) or outside operated working interests (quantities
are not considered  significant to total Company proved reserves).  Furthermore,
these estimates do not include  reserves whose estimates or  recoverability  are
less precise,  commonly  referred to as "probable" or "possible"  reserves.  The
Company has no reserves outside the continental United States.

Standardized measure of discounted future net cash flows

In  accordance  with the  requirements  of  Statement  of  Financial  Accounting
Standards No. 69 ("SFAS No. 69") presented  below are  projections of future net
oil and gas cash flows (sales less production taxes, operating expenses, certain
development  costs and  estimated  income taxes) and related  present  values of
proved oil and gas reserves.  As required by SFAS No. 69, these  projections are
based on end of period prices and costs,  held constant for all future  periods.
Present values of the future net oil and gas cash flows were calculated  using a
10% discount  factor as required.  While this  information  was  developed  with
reasonable  care and disclosed in good faith,  it is emphasized that some of the
data are necessarily imprecise and represent only approximate amounts because of
the subjective  judgments involved in developing such information.  Accordingly,
this  information  may not  represent  the present  financial  condition  of the
Company or its expected future results.  This  information  does not include any
amounts applicable to "probable" or "possible"  reserves which may become proved
in the future.

                                      F-16

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
    SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (unaudited)

Although these  disclosures  have been prepared in accordance  with SFAS No. 69,
this  information  does not  purport to  present  the fair  market  value of the
Company's  oil and gas  properties  or a fair  estimate of the present  value of
future cash flows  expected to be obtained  from their  production.  The reserve
estimates,  while carefully made, may be  significantly  revised based on future
events.  In  addition,  estimates  of the timing of  production,  actual  prices
realized and related production costs and taxes may also vary significantly from
those used in these calculations.

                                                        1997          1996
                                                        ----          ----
Future net cash flows:

  Oil and gas sales................................  $130,251,202  $ 78,855,048
  Lease operating expenses.........................   (39,352,926)  (23,802,053)
  Production taxes.................................    (9,916,302)   (6,147,291)
  Development costs................................      (646,142)     (474,842)
  Income taxes.....................................   (20,500,870)  (12,305,138)
                                                     ------------  ------------
                                                       59,834,962    36,125,724

     Less discount to present value
           at 10% rate.............................   (26,643,527)  (15,133,629)
                                                     ------------  ------------
Standardized measure of discounted
     future net cash flows.........................  $ 33,191,435  $ 20,992,095
                                                     ============  ============

The Company's share of the  standardized  measure of discounted  future net cash
flows of HSOG,  accounted  for on the equity method in 1996,  was  $6,819,163 at
December 31, 1996.

The following  information  summarizes the principal changes in the standardized
measure of discounted future net cash flows.

                                                         1997          1996
                                                         ----          ----
Beginning of year..................................  $ 20,992,095  $ 14,213,715
Sales of oil and gas, net of production costs......    (4,802,923)   (4,288,183)
Net changes in prices and production costs.........    (4,410,247)   10,716,647
Extensions and discoveries.........................       772,995     1,303,483
Purchases of reserves-in-place.....................         8,314       573,138
Added by merger....................................    16,198,548             -
Sales of reserves-in-place.........................    (1,530,374)     (438,724)
Revisions of previous quantity estimates...........     2,686,262    (2,022,227)
Net change in income taxes.........................     1,638,638    (2,169,336)
Other (net)........................................      (461,083)    1,682,210
Accretion of discount..............................     2,099,210     1,421,372
                                                     ------------  ------------
End of year........................................  $ 33,191,435  $ 20,992,095
                                                     ============  ============



                                      F-17

<PAGE>

                        THE HOME-STAKE OIL & GAS COMPANY
    SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (unaudited)

Costs incurred

Costs incurred in oil and gas producing activities include:

                                                        1997           1996
                                                        ----           ----
Acquisition costs - proved properties..............  $      3,486  $    327,008
Acquisition costs - unproved properties............       646,496       137,518
Exploration costs..................................       432,250       400,468
Development costs..................................       837,628        87,181
                                                     ------------  ------------
                                                       $1,919,860  $    952,175
                                                     ============  ============

The Company's  share of costs  incurred in oil and gas  producing  activities of
HSOG in 1996,  which was  accounted  for on the  equity  method,  was  $236,588.
Acquisition costs for proved and unproved  properties related to the merger were
$16,389,405 and $823,817, respectively.

                                      F-18

<PAGE>
                                INDEX TO EXHIBITS

The  following  documents  are included as exhibits to this Form  10-KSB.  Those
exhibits  below  incorporated  by reference  herein are indicated as such by the
information  supplied  in  the  parenthetical  thereafter.  If no  parenthetical
appears after an exhibit, such exhibit is filed herewith.


  Number  Description

     3.1  Amended and Restated Certificate of Incorporation of the Company.

     3.2  Bylaws of the Company, as amended.

     4.1  Rights  Agreement and Indenture  dated as of May 2, 1994,  between the
          Company  and  The  Fourth   National  Bank  of  Tulsa  (now  known  as
          NationsBank, N.A.) (Filed as Exhibit 4.1 to the Company's Registration
          Statement on Form 10, Registration No. 0-19766).

   *10.1  Amended  and  Restated  Home-Stake  Oil &  Gas  Company  Key  Employee
          Incentive Bonus Plan.

   *10.2  Amended and Restated  Employment  Agreement  by and between  Robert C.
          Simpson and the Company dated February 5, 1998.

   *10.3  Amended and Restated  Home-Stake  Oil & Gas Company  Change in Control
          Severance Pay Plan.

   *10.4  The Home-Stake Oil & Gas Company 1997 Incentive Stock Plan.

   *10.5  Form of  Indemnity  Agreement  between the Company and each  Director,
          dated May 14, 1996 (Filed as Exhibit 10.1 to the  Company's  Quarterly
          Report of Form 10-QSB for the quarter ended June 30, 1996).

    10.6  Third Amended and Restated Loan Agreement dated March 29, 1995 between
          the Company and Bank IV Oklahoma,  N.A.  (Filed as Exhibit 10.9 to the
          Company's  Annual  Report on Form 10- KSB for the year ended  December
          31, 1994).

    10.7  First  Amendment and  Modification to Loan Agreement dated May 1, 1996
          to the Third Amended and Restated Loan Agreement  dated March 29, 1995
          between the Company and Bank IV Oklahoma,  N.A. (Filed as Exhibit 10.2
          to the Company's Quarterly Report of Form 10-QSB for the quarter ended
          June 30, 1996)

      27  Financial Data Schedule.



<PAGE>