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

                                   -----------
                                   FORM 10-QSB
                                   -----------

(Mark One)

X   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
--  Act of 1934

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997

OR

     Transition report pursuant to Section 13 or 15(d) of the Securities 
--   Exchange Act of 1934

                         COMMISSION FILE NUMBER: 0-28814

                       COTTON VALLEY RESOURCES CORPORATION

             (Exact name of registrant as specified in its charter)

          YUKON, CANADA                                    98-0164357
 (State or other jurisdiction of                        (I.R.S. Employer
 incorporation or organization)                        Identification No.)

                           8350 N. CENTRAL EXPRESSWAY
                                   SUITE M2030
                               DALLAS, TEXAS 75206

                    (Address of principal executive offices)

                         TELEPHONE NUMBER (214) 363-1968

              (Registrant's telephone number, including area code)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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                No  X
                           ---               ---

         As of December 31, 1997 there were 17,283,248 shares of the
Registrant's Common Stock outstanding.


<PAGE>   2

                       COTTON VALLEY RESOURCES CORPORATION

                                      INDEX


<TABLE>
<CAPTION>
                                     PART I. FINANCIAL INFORMATION                                 Page No.
                                                                                                   --------

<S>               <C>                                                                              <C>
ITEM 1.           CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

                  Condensed Consolidated Balance Sheet as of
                  December 31, 1997                                                                       3

                  Condensed Consolidated Statements of Operations
                  For the six months ended December 31, 1997 and 1996                                     4

                  Condensed Consolidated Statements of Operations
                  For the three months ended December 31, 1997 and 1996                                   5

                  Condensed Consolidated Statements of Cash Flow
                  For the six months ended December 31, 1997 and 1996                                     6

                  Notes to Condensed Consolidated Financial Statements                                    7

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                  RESULTS OF OPERATIONS                                                                   9


                                      PART II. OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS                                                                      11

ITEM 5.           OTHER INFORMATION                                                                      11

                  SIGNATURES                                                                             12

</TABLE>

                                      -2-

<PAGE>   3

PART I.  FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                       COTTON VALLEY RESOURCES CORPORATION

                      CONDENSED CONSOLIDATED BALANCE SHEET
                                December 31, 1997
                                   (Unaudited)

                                     ASSETS

<TABLE>
<S>                                                                                     <C>
CURRENT ASSETS:                                                                         (U.S. Dollars)
         Cash                                                                            $    405,430
         Accounts receivable                                                                  542,425
         Prepaid expenses                                                                      94,138
         Cash deposits                                                                        329,750
                                                                                         ------------
         TOTAL CURRENT ASSETS                                                               1,371,743

RESTRICTED CASH                                                                             2,570,280

OIL AND GAS PROPERTIES                                                                     20,120,591

OILFIELD EQUIPMENT INVENTORY                                                                2,614,069

OFFICE EQUIPMENT                                                                               71,742
                                                                                         ------------

       TOTAL ASSETS                                                                      $ 26,748,425
                                                                                         ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:                                                                     (U.S. Dollars)
       Accounts payable and accrued liabilities                                          $  1,172,548
       Current portion of long-term debt                                                 $    150,250
                                                                                         ------------
       TOTAL CURRENT LIABILITIES                                                            1,322,798

LONG TERM DEBT                                                                              4,564,710

DEFERRED INCOME TAXES                                                                       2,486,812

STOCKHOLDERS' EQUITY:
       Preferred Stock, no par value, authorized-unlimited, none issued
       Common Stock, no par value, authorized-unlimited, 17,283,248 issued                 21,513,857
       Deficit accumulated in development stage                                            (2,769,155)
       Treasury Stock (270,000 shares)                                                       (425,000)
       Accumulated Earnings                                                                    54,403
                                                                                         ------------
       TOTAL STOCKHOLDERS' EQUITY                                                          18,374,105
                                                                                         ------------

       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                        $ 26,748,425
                                                                                         ============
</TABLE>


              SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS


                                      -3-
<PAGE>   4

                       COTTON VALLEY RESOURCES CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                           (Expressed in U.S. Dollars)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                             Period from          Period from
                                         July 1, 1997 to      July 1, 1996 to
                                       December 31, 1997    December 31, 1996
                                       -----------------    -----------------
<S>                                      <C>                  <C>         
REVENUE:
   Oil and gas sales                     $    435,289         $     41,365
   Equipment sales                            713,622
   Interest Income                              8,140
   Other Income                                   934
                                         ------------         ------------
            TOTAL REVENUE                   1,157,985               41,365
                                         ------------         ------------

EXPENSES:
   Oil and gas production                     225,925
   Equipment purchase and rework              259,573
   General and administrative                 515,944              903,319
   Interest                                    27,388               35,162
   Depreciation and Depletion                  56,618
                                         ------------         ------------
         TOTAL EXPENSES                     1,085,448              938,481
                                         ------------         ------------

PROFIT (LOSS) BEFORE INCOME TAXES              72,537             (897,116)

INCOME TAX BENEFIT (PROVISION)                (18,134)             295,000
                                         ------------         ------------

NET PROFIT (LOSS)                        $     54,403         $   (602,116)
                                         ============         ============

NET PROFIT (LOSS) PER SHARE              $       0.00         $      (0.05)
                                         ============         ============
     (Basic and Diluted)

WEIGHTED AVERAGE SHARES                    15,457,000           13,390,524
                                         ============         ============
</TABLE>






              SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS



                                      -4-
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                       COTTON VALLEY RESOURCES CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                           (Expressed in U.S. Dollars)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                             Period from          Period from
                                      October 1, 1997 to   October 1, 1996 to
                                       December 31, 1997    December 31, 1996
                                      ------------------   -------------------
<S>                                      <C>                  <C>         
REVENUE:
   Oil and gas sales                     $    240,088         $     21,881
   Equipment sales                            283,622
   Interest Income                              8,140
   Other Income                                   934
                                         ------------         ------------
            TOTAL REVENUE                     532,784               21,881
                                         ------------         ------------

EXPENSES:
   Oil and gas production                      89,189
   Equipment purchase and rework              180,475
   General and administrative                 334,112              591,881
   Interest                                     6,804               35,162
   Depreciation and Depletion                  27,430
                                         ------------         ------------
         TOTAL EXPENSES                       638,010              627,043
                                         ------------         ------------

PROFIT (LOSS) BEFORE INCOME TAXES            (105,226)            (605,162)

INCOME TAX BENEFIT (PROVISION)                 26,307              151,291
                                         ------------         ------------

NET PROFIT (LOSS)                        $    (78,919)        $   (453,871)
                                         ============         ============

NET PROFIT (LOSS) PER SHARE              $       0.00         $      (0.03)
                                         ============         ============
     (Basic and Diluted)

WEIGHTED AVERAGE SHARES                    16,620,000           13,390,000
                                         ============         ============
</TABLE>




              SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS


                                      -5-
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                       COTTON VALLEY RESOURCES CORPORATION

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
                           (Expressed in U.S. Dollars)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                     Period from            Period from
                                                                                 July 1, 1997 to        July 1, 1996 to
                                                                               December 31, 1997      December 31, 1996
                                                                               -----------------      -----------------
<S>                                                                            <C>                    <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net profit (loss)                                                             $    54,403             $  (602,116)
     Adjustments to reconcile to net cash used by operating activities:
         Deferred income tax provision (benefit)                                        18,134                (295,000)
         Depreciation and depletion                                                     56,618                   5,572
         Common stock issued for services                                                                      322,932
         Change in accounts payable and other liabilities                              479,511                 (85,674)
         Change in accounts receivable                                                (456,823)
         Increase in deposits                                                         (329,750)
         Other                                                                         (27,527)                 (3,263)
                                                                                   -----------             -----------
     NET CASH USED BY OPERATING ACTIVITIES                                            (205,434)               (267,676)

CASH FLOWS FROM INVESTING ACTIVITIES:
     Additions to oil and gas properties                                            (1,917,863)               (303,134)
     Addition to oilfield equipment inventory                                       (2,614,069)
     Increase in restricted cash                                                    (2,570,820)
     Purchase of other assets                                                              -0-                 (43,831)
                                                                                   -----------             -----------
     NET CASH USED BY INVESTING ACTIVITIES                                          (7,102,752)               (346,965)
                                                                                   -----------             -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Reduction in advances from related parties                                        (20,000)
     Sale of common stock and exercise of warrants                                   3,331,044                 455,949
     Increase in long-term debt                                                      4,264,710
     Costs related to sale of stock and notes                                                                  (14,600)
     Repayment of notes payable                                                       (504,750)
                                                                                   -----------             -----------
     NET CASH PROVIDED BY FINANCING ACTIVITIES                                       7,071,004                 441,349

DECREASE IN CASH                                                                      (237,209)               (563,165)

CASH - Beginning of period                                                             642,612                 803,070

CASH - End of period                                                               $   405,430             $   239,905
                                                                                    ===========             ===========

SUPPLEMENTAL INFORMATION
     Debt incurred in acquisition of oil and gas properties                        $   300,000                 355,000
     
     Oil and gas properties acquired with common stock                               4,530,000                    
     Issuance of common stock for stock offering costs                                                          12,409
</TABLE>



              SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS



                                      -6-
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                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                           (Expressed in U.S. Dollars)
                                   (Unaudited)

(1)   NATURE OF BUSINESS AND BASIS OF PREPARATION AND PRESENTATION

     Cotton Valley Resources Corporation (the "Company") has its primary
     business focus in the acquisition of ownership interests in, and the
     production of oil and gas from, existing oil and gas fields that indicate a
     potential for increased production through rehabilitation. The Company
     purchases, repairs, rehabilitates and sells used oilfield production
     equipment. Also, beginning in February, 1998, the Company provides well
     servicing and horizontal drilling services on its own properties and for
     other operators.

     The condensed consolidated financial statements of Cotton Valley Resources
     Corporation and subsidiaries (collectively "Cotton Valley") included herein
     have been prepared by Cotton Valley without audit. Certain information and
     footnote disclosures normally included in financial statements prepared in
     accordance with generally accepted accounting principles have been
     condensed or omitted, since Cotton Valley believes that the disclosures
     included are adequate to make the information presented not misleading. In
     the opinion of management, the condensed consolidated financial statements
     include all adjustments consisting of normal recurring adjustments
     necessary to present fairly the financial position, results of operations,
     and cash flows as of the dates and for the periods presented. These
     condensed consolidated financial statements should be read in conjunction
     with the consolidated financial statements and the notes thereto included
     for the fiscal year ended June 30, 1997.

(2)   COMMON STOCK

     During the six months ended December 31, 1997, Cotton Valley issued
     2,511,317 shares of common stock to four individuals to purchase Aspen
     Energy Corporation ("Aspen") which was recorded at $4,700,000, issued
     272,700 shares of common stock in a private placement for proceeds of
     $454,000 (before deducting costs of $45,400), issued 9,447 shares of common
     stock for acquisition of an oil and gas well which was recorded at $35,000,
     and issued 1,716,296 shares of common stock on exercise of options and
     warrants for $2,877,042.

(3)   ACQUISITION OF ASPEN ENERGY CORPORATION

     During the period, Cotton Valley acquired Aspen for $5,200,000, consisting
     of $500,000 cash and notes and 2,511,317 shares of common stock, of which
     270,000 shares were returned to Cotton Valley by two (2) Aspen shareholders
     in settlement of notes payable to Aspen in the amount of $425,000. The
     acquisition closed on July 31, 1997 and was accounted for as a purchase.
     The operations of Aspen are consolidated with the Company beginning on
     August 1, 1997.



                                      -7-
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(4)   ACQUISITION OF SEARS RANCH PROSPECT

     During the period, Cotton Valley acquired the 6,600 acre Sears Ranch
     Prospect in Nolan and Fisher Counties, Texas, for $400,000.

(5)   ACQUISITION OF HORIZONTAL DRILLING EQUIPMENT

     During the period, Cotton Valley acquired substantially all the business
     and equipment of M&M Directional Services Consultants for $550,000, through
     a newly formed 83.33% subsidiary, Mustang Horizontal Services, Inc.

(6)   ACQUISITION OF WELL SERVICE RIGS AND EQUIPMENT

     During the period, Cotton Valley acquired two (2) well service rigs and
     related well service equipment for $1,220,000, and formed Mustang Well
     Servicing Company to operate the rigs and provide well servicing.

(7)   SECURED CONVERTIBLE DEBENTURE

     During the period, Cotton Valley sold $4,320,000 of 7% Secured Convertible
     Debentures to a group of private investors. Portions of the proceeds were
     used to complete the acquisition of the well service rigs and related
     equipment.




                                      -8-
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

FIRST SIX MONTHS FISCAL 1998 AND FIRST SIX MONTHS FISCAL 1997

         During the six months ended December 31, 1997, Cotton Valley incurred a
net profit of $54,403, which compares to a loss of $602,116 during the first six
months of 1996. The improvement results from the first used equipment sales by
Cotton Valley's wholly-owned subsidiary, Mustang Oilfield Equipment Company, oil
and gas production beginning August, 1997, from the Aspen Energy Corporation
properties, oil and gas production beginning November, 1997, from the Sears
Ranch Prospect, and continued production from the Company's Alden Field and
Cheneyboro properties.

         Oil and gas sales increased 952% from $41,365 for the six months ended
December 31, 1996 to $435,289 for the six months ended December 31, 1997,
reflecting the addition of the Aspen, Alden and Sears Ranch acquisitions. Oil
and gas production costs increased to $225,925 for the six months ended December
31, 1997, reflecting the addition of the acquisitions and continued remedial
work required at the Alden Field.

         Used equipment sales for the first half of fiscal 1998 were $713,622 as
compared to no sales for the comparable quarter of fiscal 1997. Cost of goods
sold for the first half of fiscal 1998 was $259,573.

         General and administrative costs were $515,944 in the first half of
fiscal 1998, a decrease of $387,375 or 43% less than the $903,319 incurred in
the first half of fiscal 1997. Much of the decrease was due to an administrative
cost reduction program instituted by management in mid-June, 1997.

         The Company has provided for income taxes of $18,134 for the first half
of fiscal 1998 as compared to recognition of an income tax benefit of $295,000
for the first half of fiscal 1997. This is directly related to the size of the
profit or loss before income taxes.

2ND QUARTER FISCAL 1998 AND 2ND QUARTER FISCAL 1997

         During the three months ended December 31, 1997, Cotton Valley incurred
a net loss of $78,919, which compares to a loss of $453,871 during the 2nd
Quarter of 1996. The improvement results from the first used equipment sales by
Cotton Valley's wholly-owned subsidiary, Mustang Oilfield Equipment Company, oil
and gas production beginning August, 1997, from the Aspen Energy Corporation
properties, oil and gas production beginning November, 1997, from the Sears
Ranch Prospect, and continued production from the Company's Alden Field and
Cheneyboro properties.

         Oil and gas sales increased 997% from $21,881 for the three months
ended December 31, 1996 to $240,088 for the three months ended December 31,
1997, reflecting the addition of the Aspen, Alden and Sears Ranch acquisitions.
Oil and gas production costs increased to $89,189 



                                      -9-


<PAGE>   10

for the three months ended December 31, 1997, reflecting the addition of the
acquisitions and continued remedial work required at the Alden Field.

         Used equipment sales for the 2nd quarter of fiscal 1998 were $283,622
as compared to no sales for the comparable quarter of fiscal 1997. Cost of goods
sold for the 2nd quarter of fiscal 1998 was $180,475.

         General and administrative costs were $334,112 in the 2nd quarter of
fiscal 1998, a decrease of $257,769 or 44% less than the $591,881 incurred in
the 2nd quarter of fiscal 1997. Much of the decrease was due to an
administrative cost reduction program instituted by management in mid-June,
1997.

         The Company has an income tax benefit of $26,307 for the 2nd quarter of
fiscal 1998 as compared to an income tax benefit of $151,291 for the 2nd quarter
of fiscal 1997. This is directly related to the size of the profit or loss
before income taxes.

LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 1997, Cotton Valley has working capital of $48,945.
In addition Cotton Valley has $2,570,280 of restricted cash which may be used
for acquisition and development of additional assets. Management estimates that
aggregate capital expenditures of approximately $5 million will be spent during
the remainder of fiscal 1998 to acquire and develop oil and gas reserves. Cotton
Valley intends to finance this acquisition and development with the proceeds
from private placements, exercise of warrants, traditional bank debt and
institutional mezzanine reserves based financing. No assurance can be given that
the Company will be successful in these efforts.




                                      -10-
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PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

As of the date of this filing, there are no legal proceedings pending against
Cotton Valley.

ITEM 5.  OTHER INFORMATION

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:

Certain statements in this filing, and elsewhere (such as in other filings by
Cotton Valley with the Commission, press releases, presentations by Cotton
Valley or its management and oral statements) constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Cotton Valley to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, (i)
significant variability in Cotton Valley's quarterly revenues and results of
operations as a result of variations in the Cotton Valley's production in a
particular quarter while a significant percentage of its operating expenses are
fixed in ADVANCE, (ii) changes in the prices of oil and gas, (iii) Cotton
Valley's ability to obtain capital, (iv) other risk factors commonly faced by
development stage oil and gas companies.




                                      -11-
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                                   SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

DATED:  February 23, 1998



                       COTTON VALLEY RESOURCES CORPORATION
                                  (Registrant)





                              -----------------------------------------------
                              Eugene A. Soltero
                              Chief Executive Officer and Acting Chief 
                               Financial Officer





                              -----------------------------------------------
                              Susan Silva
                              Chief Accounting Officer




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<PAGE>   13
                               INDEX TO EXHIBITS




EXHIBIT 
NUMBER           DESCRIPTION
-------          -----------

  27             Financial Data Schedule