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

                           FORM  10-KSB

                           (Mark One)
     X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITY EXCHANGE ACT OF 1934
           For the fiscal year ended December 31, 1997

                               OR
[  ]  TRANSITION  REPORT  UNDER  SECTION  13  OR  15(d)  OF THE
                  SECURITY EXCHANGE ACT OF 1934
       For the transition period from ....................
                     to.....................

                   Commission File No. 1-8523

                      MSR  Exploration Ltd.
     (Exact name of Registrant as specified in its charter)

              Delaware                   75-2695071
 (State or other jurisdiction of      (I.R.S. Employer
  incorporation or organization)     Identification No.)

   New Address:
   612 Eighth Avenue,  Fort Worth, Texas 76104
   Prior Address:
   500 Main Street,  Fort Worth, Texas 76102
        (Address of principal executive offices)(Zip Code)

 Registrant's telephone number, including area code:
                 (817) 877-3151

Securities registered pursuant to Section 12(b) of the Exchange Act:
                                             Name of each exchange
    Title of each class                        on which registered
      Common  Shares,                           United State
    $0.01 par value                        American Stock Exchange

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Registrant (1) has filed on time all reports required to be filed
by  Section 13 or 15(d) of the Exchange Act during the  preceding
12 months and (2) has been subject to such filing requirement for
the past 90 days.

The Registrant's revenues for the period from Inception, March 7,
1997, to December 31, 1997 were $854,000

The  aggregate  market  value  of  the  Common  Shares  held   by
nonaffiliates (approximately 10,103,000 shares) of the Registrant
as of March 16, 1998, was approximately $10,103,000.  As of March
16, 1998, there were 25,777,014 shares of the registrant's Common
Stock outstanding.

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  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. [ X ]

Old MSR did not filed documents and  reports required  to be filed
by Section 12, 13 or 15(d) of the  Exchange Act after distribution
of securities under a plan confirmed by a court because  there was
no distribution of securities  under  a
confirmed plan.

           DOCUMENTS INCORPORATED BY REFERENCE:  NONE

Transitional Small Business Disclosure Format:  Yes      or No  X

2

                           PART I


ITEM 1.   DESCRIPTION OF THE BUSINESS

BUSINESS DEVELOPMENT

MSR  Exploration  Ltd.,  previously Mercury  Montana,  Inc.  (the
"Company") was organized on March 7, 1997 under the laws  of  the
State  of  Delaware  for  the purpose of acquiring  from  Mercury
Exploration  Company,  a  Texas  corporation,  ("Mercury"),   and
thereafter exploring, developing, and operating, all of Mercury's
oil  and natural gas properties located in Montana  (the "Mercury
Properties").  Upon formation of the Company, Mercury and certain
of  its  directors,  officers  and agents  conveyed  the  Mercury
Properties to the Company in exchange for shares of the Company's
common stock and common stock warrants.

On  October  31,  1997,  the  Company  completed  a  merger  (the
"Merger") with MSR Exploration Ltd., formerly an Alberta,  Canada
corporation  ("Old MSR"). The Merger combined all the  assets  of
the  Company and Old MSR and was accounted for under the purchase
method  of  accounting. The Company was the surviving corporation
in the Merger and changed its name to MSR Exploration Ltd.

As a result of the Merger, pursuant to the terms of the Agreement
and  Plan of Merger, dated March 26, 1997, as amended, among  Old
MSR,   the   Company  and  Mercury  Exploration   Company,   each
outstanding share of common stock, no par value per share, of Old
MSR  outstanding immediately prior to the effective time  of  the
merger  was  converted  into the right to receive  one  share  of
common  stock,  par value $0.01 per share, of  the  Company.   In
accordance with Rule 12g-3(a) of the Securities Exchange  Act  of
1934,  as amended (the "Exchange Act"), the Company has succeeded
to  the  obligations of Old MSR under the Exchange Act  and  will
continue  to  file  reports  with  the  Securities  and  Exchange
Commission using the Commission File Number (No. 1-8523) utilized
by its predecessor.

On  February  7,  1992, Old MSR voluntarily filed for  protection
under  Chapter 11 of the U.S. Bankruptcy Code.  On September  12,
1992,  Old MSR filed a plan of reorganization with the Bankruptcy
Court,  which  was  subsequently amended  to  reflect  agreements
between  Old MSR and its creditors.  On March 2, 1993, Old  MSR's
plan of reorganization was approved by the Bankruptcy Court.

The  Company's corporate offices are located at 612 Eighth Avenue
in  Fort Worth, Texas 76104.  The telephone number is (817)  877-
3151.   Unless  the  context requires otherwise,  all  references
herein  to  "MSR,"  "New  MSR"  or  the  "Company"  are  to   MSR
Exploration Ltd., post Merger, and its subsidiaries.

BUSINESS COMBINATION

At  a combined Annual General and Special Meeting of Shareholders
of  Old  MSR  held on October 30, 1997, the shareholders  elected
directors  and approved the domestication or continuance  of  Old
MSR from Alberta, Canada, to Delaware, USA.  The domestication of
Old  MSR  into  Delaware was required for the  Merger  to  become
effective.   The Merger was subsequently approved on October  31,
1997, by written consent of the stockholders of Old MSR.

As part of the Merger, the Company issued to Old MSR shareholders
one  share  of  common  stock of the  Company  for  each  of  the
13,777,014 outstanding shares of Old MSR common stock.   Each  of
the  12,000,000 shares of common stock of the Company outstanding
prior  to  the  Merger remained outstanding.  The combined  total
number of outstanding shares of the Company's common stock became
25,777,014.   All  such  shares are listed  for  trading  on  the
American  Stock Exchange.  In addition, warrants to purchase  5.5
million shares of common stock of the Company at $1.25 per share,
and   5.5  million  shares  at  $2.00  per  share  also  remained
outstanding  after the Merger, as did Company  stock  options  to
purchase  an aggregate of 228,570 shares of Company common  stock
at  $0.875 per share granted in lieu of salaries.  An outstanding
warrant to purchase 280,000 shares of common stock of Old MSR  at
$3.375  per share was converted to an equivalent right to acquire
shares of the Company.

Three  members  of Old MSR's Board of Directors,  Otto  J.  Buis,
Patrick  M.  Montalban and Steven M. Morris,  together  with  two
independent  directors, D. Randall Kent and  W.  Yandell  Rogers,
III,  were  elected to the Board of Directors of Old MSR  at  its
October  30,  1997, meeting.  With the completion of the  Merger,
Messrs. Buis, Montalban, Morris, Kent and Rogers became directors
of  the  Company, joined by Frank Darden, Thomas  F.  Darden  and
Glenn M. Darden, directors of the Company prior to the Merger and
also directors of Mercury.

On October 31, 1997, the Company restructured Old MSR's revolving
credit  facility and entered into a new credit agreement  with  a
bank.   The closing of the new loan was subject to the successful
completion  of  the  Company's merger  with  Old  MSR.   The  new
agreement  provides  for a $25,000,000 senior  secured  revolving
credit  facility  with an initial borrowing base of  $12,000,000,
which  matures  in five years.  The Company immediately  utilized
the  new  credit facility to repay  $4.0 million of debt owed  by
Mercury  to  Nations  Bank.  Such debt was  due  and  payable  by
Mercury on December 31, 2002.  The debt was secured by a lien  on
the  Mercury Properties, which were taken by the Company  subject
to such lien.

The  Company's  principal line of business  is  the  exploration,
development,  production and sale of crude oil and  natural  gas.
The Company's oil and gas properties are primarily in Montana and
Texas.   All of the Company's interests in the United States  are
operated and managed by Mercury. The Company and Mercury  entered
into  a  management agreement upon effectiveness of  the  Merger.
Pursuant  to  the  agreement, Mercury  will  manage  the  ongoing
operations  of  the Company's various oil and gas properties  and
gas  gathering and compression facilities located in Montana  and
Texas.   The  Company is required to reimburse  Mercury  for  its
costs  and  expenses  incurred in connection with  managing  such
operations  and,  in addition, pay to Mercury  a  management  fee
equal to 10 percent of such costs and expenses.  The Company also
must indemnify Mercury and its officers, directors, shareholders,
employees  and agents against losses incurred in connection  with
the performance of the management agreement, except to the extent
that  such  losses arise as a result of the gross  negligence  or
intentional misconduct of such indemnified parties.  The term  of
the management agreement is two years from the effective date  of
the  Merger  and  continues thereafter  for  successive  one-year
terms.   Unless  terminated by either party to the agreement,  at
the  end of the initial term or any successive one-year term upon
30-day advance notice.


BUSINESS OF THE COMPANY

General.  The business purpose of the Company is to engage in the
acquisition,  exploration, production  and  sale  of  crude  oil,
condensate  and  natural  gas and the gathering,  processing  and
transmission of natural gas.

The  Company pursues its business through the acquisition of  oil
and  gas mineral leases, gas gathering systems and producing  oil
and  gas  properties.   Based upon each  specific  mineral  lease
situation  as well as geological and engineering interpretations,
the  Company either develops its inventory of leases through  the
drilling  of  oil  and/or  gas wells or redrills  or  recompletes
existing  wells  located on such leases for the recovery  of  oil
and/or gas reserves located thereon. The Company currently has an
interest  in  oil and gas mineral leases, gas gathering  pipeline
systems   and  wells  producing  hydrocarbons  that  are  located
principally  in  the  states of Montana and  Texas.  The  Company
evaluates other opportunities for the development of oil and  gas
reserves  and related assets as they become available and,  given
the  right circumstances, may become involved in these activities
in areas other than those in which it is currently involved.

The Company has entered into an agreement with Mercury to act  as
"operator"  of the Company's oil and gas properties primarily  in
Montana and Texas.  In this capacity, Mercury is responsible  for
the  daily activities of producing oil and/or gas from individual
wells   and   leases  located  within  those  states.   Mercury's
functions  are  focused  primarily  towards  management  of   the
properties to maximize profitability and supervision of its field
employees.  Additionally, for some wells, Mercury contracts  with
individuals  doing business within the proximity  of  the  wells,
more  commonly  referred  to  as "pumpers,"  for  performing  the
various tasks that are required to maintain the production of oil
and/or  gas from the wells.  The Company is not a user or refiner
of  the  oil and/or gas produced, except as it may relate to  the
operation of wells that may produce gas.  Once extracted from the
ground,  the Company either connects the production to a pipeline
gathering system, in the case of gas, or stores the crude oil  in
storage  tanks located in proximity of the producing  field,  for
collection by an oil purchaser.  The properties that the  Company
owns  are located in areas which are typically serviced  by  more
than one crude oil purchaser, and a gas pipeline gathering system
is generally in proximity of the natural gas being produced.

The  Company  owns  and  holds  working  interests  in  over  425
producing  oil  and  gas wells.  The Company also  holds  or  has
acquired  interests in properties that contain proved undeveloped
reserves  that  require  additional  drilling,  workovers,  water
flooding or other forms of enhancement to become productive.   In
addition  to  acquiring such properties,  the  Company  has  also
engaged in exploration and development activities by drilling new
wells on such properties during the past several years.

Acquisition of Additional Properties.  The Company will  continue
to  evaluate  and  select  additional prospects  and  leases  for
acquisition   and   development   which   management    considers
appropriate for the purposes of the Company.  Such prospects  may
be  located anywhere in the United States.  The principal purpose
of  the  Company in such acquisitions will be to seek and acquire
properties which presently are producing oil and/or gas  and  are
generating  sufficient revenues from such properties  to  provide
the  Company  with the potential to significantly  increase  cash
flow.

To   the   extent   the  Company  continues  seeking   additional
acquisitions  of  producing oil and gas properties,  it  competes
with  many  other  entities that seek to acquire similar  assets.
The  operations  and expenditures on behalf  of  the  Company  in
seeking  additional acquisitions are minor in relation  to  total
operations conducted and in comparison to amounts expended by all
entities  operating within this industry.  The total  number  and
identity of producing oil and gas properties and proved developed
leases  acquired  by the Company will depend  upon,  among  other
things, a combination of the total amount of capital available to
the   Company,   the  latest  geological  and  geophysical   data
available,  and  the  continuation  of  a  sufficient  supply  of
properties that may become available for purchase.

Because   management  is  responsible  for  selecting  additional
acquisitions,  it continually engages in a process  of  reviewing
and  analyzing  prospects  submitted by  oil  and  gas  operating
companies,  investment bankers, geologists, engineers and  others
within  the  energy  industry.  In some circumstances,  prospects
may, in addition to the usual royalty paid to the landowner, have
the burden of an overriding royalty for the benefit of the entity
or  person  submitting prospects to the Company.   These  royalty
interests  do  not share in any expense of drilling, development,
completion, operating and other costs incident to the  production
and  sale  of oil and gas. The Company seeks to acquire leasehold
interests   which  will  create  the  maximum  revenue   interest
attributable to the working interest owners.

The   following   information  and  factors  are  considered   by
management in connection with each decision to acquire a Property
for the Company:

1.The amount of uncommitted funds then available;
2.The   current   production  and  expected  future   cash   flow
  therefrom;
3.The  geologic  and geographic region in which the  property  is
  located; and
4.The  nature  and  extent  of geological  and  engineering  data
  available concerning the property.

Oil  and gas production, prospects and leases have been and  will
continue  to  be  acquired by the Company from  various  industry
sources,   including,  without  limitation,   landowners,   lease
brokers,  operating  companies,  investment  bankers  and   other
persons  or  companies engaged in the business of  acquiring  and
dealing  in oil and gas properties.  In that regard, leases  that
are purchased by the Company may be whole or fractional interests
in  oil  and gas properties, and if fractional, a portion of  the
costs  of development may be borne by the parties possessing  the
remaining  fractional interests. The Company may also, from  time
to  time,  enter  into joint ventures or farmout arrangements  to
acquire or develop properties.

Drilling  Agreements  and Operation of  Wells.   In  addition  to
acquiring producing oil and gas properties, the Company  may  use
its working capital and available line of credit for drilling and
other  development  on the properties in which  the  Company  has
acquired interests, to the extent funds permit.  The Company sub-
contracts the drilling, redrilling or workover of wells for which
it is designated the operator.  When the Company is acting as the
operator, it will typically enter into a drilling agreement  with
an   independent   drilling  contractor.   The   Company   either
compensates  the  drilling contractor i) on a  footage  contract,
ii)  on  an  hourly arrangement during the drilling, testing  and
completion phase of each well, or  iii) by seeking a fixed  price
or  turn-key  agreement.   The drilling contractor  is  typically
allowed  to utilize other selected independent contractors,  each
of which is experienced in providing drilling-related services in
the area, to conduct certain activities on behalf of the Company.

The  Company, through Mercury, manages all day-to-day  operations
of  the Company's wells, leases and prospects for which it is the
operator.  While the Company may enter into agreements with other
parties   for  specific  services,  such  agreements  will   keep
management  functions within the control  of  the  Company.   The
Company   utilizes  in-house  technical  personnel   to   provide
geological, geophysical, engineering and other services and  when
necessary,  retains  these services on a contractual  basis  from
within  the  industry.  The Company, through or  with  assistance
from  Mercury, reviews and analyzes all prospects,  drilling  and
logging  data, engineering information and production  data,  and
monitors  all expenditures made on behalf of the Company  by  any
third party engaged as a subcontractor.

The  Company will determine from time to time that it is  in  its
best interest to drill either exploratory or development wells on
properties  in  which  it  has acquired  an  ownership  interest.
Management will have the responsibility to determine whether  any
well  should,  at any point, be abandoned.  In the event  that  a
well is lost at any depth, either vertically or horizontally,  by
reason  of any accident or casualty, or if igneous rock or  other
impenetrable  substances are encountered, or loss of  circulation
or  other  conditions  render  further  drilling  impractical  by
methods to be employed, the Company may elect to plug and abandon
a  well  and  cease operations on the prospect  or  to  plug  and
abandon  a well and commence drilling an additional well  on  the
prospect.

Timing  of  Acquisitions/Operations.  The Company is  continually
evaluating  the  acquisition of additional  proved  oil  and  gas
properties  and  other oil and gas companies.  Additionally,  the
Company may commence drilling on existing prospects, as it  deems
appropriate.  The Company believes that it has available suitable
prospects and leases for future development.

Gas Gathering, Processing and Transmission.  The Company owns and
operates  gas-gathering  pipeline  systems  and  two  gas  plants
located  in  northwest  Montana.  During  the  two  months  ended
December  31,  1997, the Red River Plant sold 12,800  Mcf,  which
were  approximately 5 percent of the Company's total  gas  sales.
The  Gypsy  Highview  Gas  Plant and  the  Red  River  Gas  Plant
presently  compress  natural gas from Company  leases.   The  Red
River  Plant  has  a  capacity of  8,000  Mcf  per  day  and  was
delivering to the purchasers approximately 200 Mcf per  day  from
12  company  wells.  The Gypsy Highview Plant has a  capacity  of
8,000 Mcf per day and has been shut down since November 1997  due
to lack of available gas production from area wells.

The  Company  has  a  five-year natural gas sales  contract  with
Montana  Power  Company that expires on  January  1,  2004.   The
agreement  calls for an annual price predetermination in  January
of each year, with the 1998 base price set at $1.65 per Mcf.  For
the  past two years, the purchaser has invoked its right  not  to
take  gas during the months of June, July and August.  Therefore,
the  Company  does not anticipate any sale from  its  gas  plants
during those months.

The  Company's  gas plants have been qualified and  permitted  to
operate  by  Montana's Department of Environmental  Quality.   In
addition,  the  Federal  Energy  Regulatory  Commission  ("FERC")
regulates interstate natural gas transportation rates and service
conditions,  which affect the marketing of gas  produced  by  the
Company, as well as the revenues received by the Company for  the
sales  of such productions.  Since the mid-1980s, 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 of interstate pipeline  sales,
transportation,  storage and other components  of  the  city-gate
sales services which such pipelines previously performed.  One of
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 these 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  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.

Insurance.  The Company maintains insurance coverage generally as
follows:

1.Employer's  liability insurance in certain states  covering
  injury or death to any employee who may be outside  the scope of
  the worker's compensation statute;
2.Commercial general liability insurance for bodily injury and
  property  damage,  including property  damage  by  blowout  and
  cratering,  completed  operations, and  broad-form  contractual
  liability  with respect to any contract which the operator  may
  enter into;
3.Automobile liability insurance covering owned, non-owned and
  hired automotive equipment;
4.Umbrella liability insurance; and
5 Operator's  insurance covering the costs of  controlling  a
  blowout,  and  seepage  and pollution  liability,  when  deemed
  appropriate on certain properties.

The   Company  attempts  to  obtain  such  insurance  in  amounts
management believes to be reasonable and standard.  Such coverage
will  likely  not  fully protect the Company  from  any  specific
casualty  or  loss.   There is no assurance such  insurance  will
always  be  available  to the Company or, if  so,  on  terms  the
Company can afford.

The  Company is subject to, and to the best of its knowledge  and
belief  is currently in compliance with, all bonding requirements
(such  as  those relating to plugging and abandonment)  that  are
imposed  by each of the states in which the properties for  which
the Company acts as operator are located.

Competition.   The  oil and gas industry is a highly  competitive
industry.    Competitors  include  major  oil  companies,   other
independent  oil  and gas concerns and individual  producers  and
operators,  many  of which have financing resources,  staffs  and
facilities substantially greater than those of the Company.   The
principal means of competition for acquisition of properties  are
the   amount  and  terms  of  the  consideration  offered.   When
possible, the Company tries to avoid open competitive bidding for
acquisition  opportunities.  The principal means  of  competition
with  respect  to the sale of oil and natural gas production  are
product availability and price.  While it is not possible for the
Company  to  state accurately its position in  the  oil  and  gas
industry,  the  Company  believes  that  it  represents  a  minor
competitive factor.

Business  Risks  and  Regulation.  The Company's  operations  are
affected  in  various degrees by political developments,  federal
and  state  laws  and regulations.  In particular,  oil  and  gas
production  operations  and  economics  are  affected  by   price
controls,  tax and other laws relating to the petroleum industry.
They  are  all affected by the changes in such laws, by  changing
administrative   regulations  and  by  the   interpretation   and
application of such rules and regulations.

Legislation affecting the oil and gas industry is under  constant
review  for  amendment  or expansion.  Numerous  departments  and
agencies,  both federal and state, are authorized by  statute  to
issue  and 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 the Company's  cost
of  doing  business and, consequently, affects its profitability.
Sales  of  crude oil, condensate and natural gas liquids  by  the
Company can be made at uncontrolled market prices.

Changing Oil and Natural Gas Prices and Markets -- The market for
oil  and  natural gas produced by the Company depends on  factors
beyond  the  Company's control, including the extent of  domestic
production and imports of oil and natural gas, the proximity  and
capacity  of  natural  gas  pipelines  and  other  transportation
facilities,  demand  for oil and natural gas,  the  marketing  of
competitive   fuels,  and  the  effects  of  state  and   federal
regulation of oil and natural gas production and sales.  The  oil
and  gas  industry as a whole also competes with other industries
in  supplying  the  energy and fuel requirements  of  industrial,
commercial and individual consumers.

The  Company's production revenues and the carrying value of  its
oil and natural gas properties are affected by changes in oil and
natural  gas prices.  Moreover, the Company's current  borrowings
under  certain credit facilities, its borrowing capacity and  its
ability  to obtain additional capital in the future are  directly
affected by oil and natural gas prices.

Environmental Regulation.  Various federal, state and local  laws
and  regulations  covering the discharge of  materials  into  the
environment,  or  otherwise relating to  the  protection  of  the
environment, may affect the Company's operations and costs  as  a
result of the effect on oil and gas exploration, development  and
production  operations.   At present, substantially  all  of  the
Company's  U.S. production of crude oil, condensate  and  natural
gas is in states having conservation laws and regulations.  It is
not  anticipated that the Company will be required, in  the  near
future,  to expend amounts that are material in relation  to  its
total  capital  expenditures program by reason  of  environmental
laws  and  regulations, but inasmuch as such laws and regulations
are  frequently  changed, the Company is unable  to  predict  the
ultimate  cost  of compliance.  The Company is  able  to  control
directly the operations of only those wells for which it  or  its
agent  act  as operator.  Notwithstanding the Company's  lack  of
control  over  wells  operated by  others,  the  failure  of  the
operator to comply with applicable environmental regulations may,
in certain circumstances, be attributable to the Company.

Raw  Materials.  The Company's raw materials are its oil and  gas
reserves.  Many operators are engaged in the exploration for  oil
and  gas,  and  there is strong competition for desirable  leases
(See  Item  2.  "Description  of Property"  and  Note  1  to  the
Consolidated Financial Statements Item 7, appearing elsewhere  in
this   Form  10-KSB,  for  certain  information  concerning   the
Company's oil and gas properties, producing activities and proved
reserves).

Working   Capital  Practices.   The  Company's  working   capital
practices are common to the industry, with crude oil and  natural
gas sold to purchasers under short-term payment arrangements.

Major  Customers.  From the Company's inception on March 7,  1997
to  December  31, 1997, three customers: Rio Vista Energy,  Ltd.,
Montana  Power  Company  and  J. N.  Petroleum  Marketing,  Inc.,
accounted for approximately 42 percent, 22 percent and 11 percent
respectively of total consolidated oil and gas sales.

The  Company  does not anticipate that the loss  of  any  of  its
present purchasers would have a materially adverse effect on  the
Company's  consolidated business and believes that, in the  event
of  the loss of a present purchaser, other purchasers of oil  and
gas   operating  in  the  Company's  areas  would  purchase   the
production at competitive prices.

Employees.  At December 31, 1997, the Company had eight full-time
employees, including officers.

Financial  Information About Foreign and Domestic Operations  and
Export  Sales.   Since inception in March 1997, the  Company  has
produced  and sold oil and gas in the United States.  At December
31,   1997,  five  wells  were  on  production  in  Canada.   For
information  regarding  the  Company's  United  States  revenues,
operating  profits  and  assets see  the  Consolidated  Financial
Statements.   Revenues and expenses from Canadian  interests  are
considered immaterial.


ITEM 2.  DESCRIPTION OF PROPERTY

Montana  Properties.  The Company owns crude oil and natural  gas
producing properties in northwest Montana, near Cut Bank  located
in  Glacier, Pondera and Teton Counties.  Approximately 75  crude
oil  producing wells (the "Mercury Properties") were  contributed
to  the Company by Mercury upon the Company's formation in  March
1997.   These  wells were subject to a prior production  payment,
forward-sale agreement between Mercury and a third party covering
a  period from October 1996 through December 1997.  The agreement
was  the obligation of Mercury, consequently the oil revenue  and
associated  expenses  from these properties belonged  to  Mercury
through December 31, 1997, and started accruing to the Company on
January 1, 1998.

The  Mercury  Properties also include the rights and  obligations
under  an agreement with a utility company in Montana related  to
approximately 304,000 acres of largely undeveloped  oil  and  gas
properties   centered  over  the  Cut  Bank  Field   complex   in
northwestern Montana.  The Company holds 100 percent of  the  oil
rights  and  the  rights to 30 percent of  the  revenue  interest
pertaining to liquids produced from gas wells.

As  a  result  of the Merger the Company became the owner  of  an
interest in approximately 236 oil wells producing primarily  from
the  Cut Bank formation to depths to 3,000 feet.  The Company has
an  average of 99 percent of working interests in the area.   The
Company's   net   production  during   December   1997   averaged
approximately  250 barrels of oil per day (BOPD).  The  Company's
average  daily production in January 1998, including the  Mercury
Properties, was approximately 700 BOPD.

The  geologic  complexity of Cut Bank Field has resulted  in  the
inefficient  development of the field and  consequently  a  large
amount  of oil, which is potentially recoverable, remains in  the
rock.  MSR is using modern technology in an attempt to accurately
model  these depositional complexities and identify bypassed  oil
reserves  that  could  be recovered by developing  the  Cut  Bank
Field.

In  late  1997,  MSR shot a 3-D seismic survey over approximately
nine  square miles of the Cut Bank Field.  This data is currently
being   evaluated  using  methods  and  techniques   which   will
seismically  image the sand deposits and integrate all  available
geologic  and  reservoir  engineering data  to  create  the  most
accurately detailed model possible. In 1998, MSR plans  to  drill
three  or four wells in the Cut Bank Field.  These wells will  be
drilled  once the seismic evaluation is completed and will  allow
MSR  to  test  and refine the model.  If these techniques,  which
have  been  proven to identify undeveloped and bypassed reserves,
are successful at Cut Bank, MSR could add significant reserves to
the  Cut  Bank  Field.   During the fourth quarter of  1997,  the
Company  incurred approximately $530,000 of capital  expenditures
on 3-D seismic imaging.

In  northwestern  Montana, the Company owns  the  Red  River  Gas
Plant, which consists of a compressor and a dehydration unit, and
an  associated gathering and transmission system.  MSR  purchases
sweet gas from wells in the field and dries and transports it  to
the Montana Power System in the north Cut Bank area.  The Company
also  owns  the  Gypsy-Highview Gas  Plant  and  a  natural  gas-
gathering   and   transmission   pipeline   system   located   in
northwestern Montana.

Texas  Properties.  The Company owns 100 percent working interest
in  43 wells near Winters, Texas, in Runnels County, that produce
primarily  crude  oil.  During December 1997, the  Company's  net
production from these properties averaged approximately 70 BOPD.

In  southeast  Texas, the Company owns three principally  natural
gas wells, the Cinco Ltd. #1, Schmidt #1 and Josey Ranch #3.  The
Company  holds  a  74 percent, 42 percent and 42 percent  working
interest  in  the wells and the wells are located in  Fort  Bend,
Brazoria  and  Harris  Counties, respectively.   During  December
1997, the Company's net production from these properties averaged
approximately 1886 Mcf per day of natural gas and 28 BOPD.

Active areas of exploration interest for the Company are Montana,
Texas,  North Dakota and Western Canada properties.   The Company
also  owns  minor  oil and gas working and royalty  interests  in
Western Canada.

Productive Wells and Acreage as of December 31, 1997.

                                 Gross                    Net
United States properties   Oil          Gas        Oil           Gas
 Productive Wells*         278          143        278            141.58
 Developed  Acreage**    103,414 Acres             102,606 Acres
 Undeveloped  Acreage*** 21,983 Acres              17,962 Acres


                                 Gross                     Net
Canadian properties        Oil          Gas         Oil           Gas
 Productive Wells*           0            5           0           .27
 Developed Acreage**      15,974 Acres              1,019 Acres
 Undeveloped  Acreage***   9,648 Acres                197 Acres


A  "gross"  acre  or gross well is an acre or well  in  which  an
interest  is  owned.  The number of gross acres or wells  is  the
total number of acres or wells in which an interest is owned.   A
"net"  acre  or net well is deemed to exist when the sum  of  the
fractional  interests owned in gross acres or wells  equals  one.
The number of net acres or wells is the sum of fractional working
interests owned by the Company in gross acres or wells, expressed
as whole numbers and fractions thereof.

*       "Productive wells" are wells producing oil or gas.
**      "Developed  acreage" is acreage assignable to  productive
wells.
***    "Undeveloped acreage" refers to lease acres on which wells
have  not been drilled or completed to a point that would  permit
the production of commercial quantities of oil and gas regardless
of whether or not such acreage contains proved reserves.

Essentially  all  of  the Company's oil  and  gas  interests  are
working  interests or overriding royalty interests under standard
onshore oil and gas leases, rather than mineral ownership or  fee
title.   The  defensibility  of  the  Company's  title  to   such
interests in most cases is supported by written title opinions.

Title  of  Properties.  Title to the properties acquired  by  the
Company  is  subject to royalty, overriding royalty, carried  and
other  similar interests, contractual arrangements  customary  in
the oil and gas industry, liens incident to operating agreements,
liens  for  current taxes not yet due and to other  comparatively
minor  encumbrances.  Substantially all of the Company's oil  and
gas  properties  are  pledged  to a financial  institution  under
certain credit agreements.

Production   Results.   The  average  sales  price  and   average
production (lifting) cost per barrels of oil equivalent (BOE) for
the  period from inception March 7, 1997, to December  31,  1997,
were as follows:

      Production          Average Price           Average
     Oil       Gas       Oil           Gas         Production
   (Bbl)*    (Mcf)**    (Bbl)*       (Mcf)**      Cost per BOE
  16,336     274,100    $15.74        $2.08           $4.77

*      Barrels ("Bbl")
**    Thousand cubic feet ("Mcf")

Drilling  Results.  Below is a summary of combined drilling
activity for the  Company and Old MSR, for the three years
ended December  31, 1997.  No wells were drilled during 1997.

 Wells Drilled (Gross):  Exploratory         Development
   Year              Productive   Dry     Productive     Dry
    1996**             1           -        -             -
    1996*              -           -        -             1
    1995**             2           -        4             -
*     Canadian
**   USA

In  general,  an "exploratory well" is a well drilled  either  in
search  of a new and yet undiscovered pool of oil or gas or  with
the expectation of greatly extending the limit of a pool which is
partly  developed.   All  other wells  are  "development  wells."
Wells completed in multiple zones are treated as a single well.

Reserves.   The  determination  of  reserves  is  a  complex  and
interpretive process, which is subject to continued revisions, as
additional  information  becomes  available.   Reserve  estimates
prepared  by  different engineers from the  same  data  can  vary
widely.    Therefore,  the  reserve  data  in  the   Supplemental
Financial  Information appearing elsewhere in  this  Form  10-KSB
should  not  be construed as being exact.  Any reserve  estimate,
especially  when based upon volumetric calculations,  depends  in
part  on  the quality of available data, engineering and geologic
interpretation and judgment, and thus represents only an informed
professional  assessment.  Subsequent reservoir  performance  may
justify  upward  or  downward  revision  of  the  estimate.   The
Company's  proved reserves and proved developed reserves  of  oil
and  gas  and the standardized measure of discounted  future  net
cash  flows relating to proved oil and gas reserves for the as
of   December  31, 1997, were estimated by Citadel  Engineering
Ltd.,  independent  petroleum  consultants  located  in  Calgary,
Alberta, Canada.  Such estimates were used in the preparation  of
the Company's financial statements.  The Company has not included
estimates  of  total  proved oil and gas reserves  comparable  to
those disclosed in the Supplemental Financial Information in  any
reports filed with Federal authorities or agencies other than the
Securities and Exchange Commission.


ITEM 3.  LEGAL PROCEEDINGS

None.


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

Old  MSR  held an Annual General and Special Shareholders Meeting
on  October 30, 1997, at 10:00 a.m. local time.  At the  meeting,
shareholders  (1)  elected five  directors and (2)  approved  the
continuance or domestication of the Old MSR from Alberta, Canada,
to  Delaware,  USA.   After  the  continuance,  the  shareholders
approved  the  merger of Old MSR with Mercury Montana,  Inc.,  by
written consent.  Below are the results of the voting.

                              Shares For   Shares Against  Abstentions
Director Otto J.Buis          11,149,748     125,882
Director Patrick M. Montalban 10,588,471     687,159
Director Steven M. Morris     11,149,478     126,152
Director D. Randall Kent      10,876,648     398,982
Director W.Yandell Rogers,III 10,875,348     400,282
Continuance to Delaware        8,368,804     132,130           17,518
Consent to Merge               9,193,286                      212,917

The  Company was not required to, and did not, submit any matters
to a vote of security holders during the first quarter of 1998.


                            PART  II

ITEM  5.   MARKET  FOR  REGISTRANT'S COMMON  EQUITY  AND  RELATED
STOCKHOLDER MATTERS.

Market  Information.  The Company's common stock has been  listed
on  the  American Stock Exchange since November 3, 1997; and  the
common  stock  of  Old  MSR,  since September 13, 1983.  "MSR" is
the Company's trading symbol.   The following  table sets forth,
for the calendar periods  indicated, the  range  of  high  and low
prices for the  Company's  and Old MSR's as reported by the
American Stock Exchange.

                         1997                      1996
                   High       Low            High    Low

First Quarter      $1        $13/16          $1 1/4   $13/16
Second Quarter      1 1/8     15/16           1 1/16    3/4
Third Quarter       1 1/8      3/4            1         3/4
Fourth Quarter      1 3/8     15/16            15/16   11/16


Security Holders.  As of March 17, 1998, the number of registered
holders of the Company's common shares was 1,432.

Dividends.   The  Company has never paid any cash  dividends  and
presently intends to retain its earnings to finance the growth of
its  business.  The  Company's credit facility  contains  certain
restrictions  on  the  Company's  ability  to  declare  and   pay
dividends.  The payment of future cash dividends, if any, will be
reviewed  periodically by the Board of Directors and will  depend
upon,  among  other  things, the Company's  financial  condition,
funds  from  operations, the level of its capital and exploration
expenditures, its future business prospects and any  restrictions
imposed by the Company's present or future credit facility.


ITEM  6.   MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The   following  discussion  and  analysis  should  be  read   in
conjunction with the Company's consolidated financial  statements
and  the  notes associated with them contained elsewhere in  this
report.   This discussion should not be construed to  imply  that
the  results discussed herein will necessarily continue into  the
future or that any conclusion reached herein will necessarily  be
indicative  of  actual operating results  in  the  future.   Such
discussion  represents  only  the  best  present  assessment   of
management of the Company.

On  March 7, 1997, the Company was organized to explore,  develop
and  operate  oil  and natural gas properties.  In  exchange  for
Company  common stock and common stock warrants, the founders  of
the  Company  contributed approximately 75  crude  oil  producing
wells  in  northwest Montana, constituting the Mercury Properties
as discussed in Item 2 above.  These properties were subject to a
forward  sale of production and consequently the revenue or
expenses from the  properties  did  not begin to accrue to  the
Company  until January 1, 1998.

On  March 26, 1997, Old MSR , entered into an agreement with  the
Company,  then known as Mercury Montana, Inc., and  its  majority
shareholder at that time, Mercury, both of Fort Worth, Texas,  to
combine  all of the Company's oil and gas assets in Montana  with
all the  oil  and gas assets of Old MSR by way of the Merger. The
Company  was the surviving corporation in the Merger and  changed
its  name  to  MSR  Exploration Ltd. on  October  31,  1997,  the
effective time of the Merger.  The Merger was accounted for under
the purchase method of accounting with the Company considered the
accounting acquiror.

Due  to  the Company's limited existence, discussion and analysis
of  results  of operations will be centered on the unaudited  pro
forma  consolidated  statements of  operation  set  forth  below.
These pro forma statements of operations are presented to provide
more comparative information about the Company for 1998 and beyond.

Comparison  of  Pro  Forma Statements of Operations.   Pro  Forma
statements   of   operations,   including   production    payment
adjustments,  for the year ended December 31, 1997 and  the  year
ended  December  31,  1996 are presented  immediately  after  the
following comparisons.

Revenue.   Total  pro forma revenues for the year ended  December
31,  1997 were $6,577,000, an 8 percent decrease compared to  pro
forma revenues of $7,135,000 for 1996.  Oil sales were $4,151,000
in  1997,  a  15% decrease compared to $4,908,000 in 1996.   This
decrease  was  attributable to a 10 percent decrease  in  average
price  per  barrel sold from $19.25 in 1996 to  $17.34  in  1997.
Sale  volumes  decreased 6 percent from 255,000 barrels  sold  in
1996  to  239,000 barrels in 1997.  The decrease in sales volumes
was  due primarily to natural production declines.  Pro forma gas
sales in 1997 were $2,331,000, an 8 percent increase compared  to
$2,168,000 in 1996.  An average gas sales price of $2.21 per  Mcf
was  approximately the same for both periods.  Gas sales  volumes
in  1997 were 1,054,000 Mcf, an increase of 8 percent compared to
977,000 Mcf in 1996.  This increase in gas sales volumes  was  in
part due to increased sales from gas plants.

Expenses.   Total pro forma expenses for 1997 were $6,928,000,  a
decrease of 3 percent compared to $7,108,000 for 1996.  Operating
expenses  increased  3% from 1996 to 1997  primarily  due  to  an
increase  in gas plant operating expenses.  Production taxes  and
depletion  and depreciation expenses were down 3 and  6  percent,
respectively,  due  to the reduction in sales revenues.   General
and  administrative expenses for 1997 were $937,000, an 8 percent
decrease compared to $1,018,000 for 1996.  This decrease was  the
result  of  cost  cutting efforts, which were  begun  during  the
fourth  quarter of 1997.  Interest expense declined 6 percent  in
1997 to $1,042,000 compared to $1,107,000 in 1996.  The reduction
in  interest  expense was due to reduced interest  rates  in  the
fourth quarter of 1997 and reduction of debt throughout 1997.

Net  income (loss).  For 1997 the pro forma net loss was $232,000
compared to a net income of $18,000 for 1996.  The 1997 loss  was
primarily due to lower crude oil prices.

The following pro forma consolidated statements of operations for
the years ended December 31, 1997 and 1996 combine the historical
information of the Company and Old MSR adjusted to give effect to
the  Merger and Production Payment and  the  related  pro forma
adjustments which are based on estimates and assumptions explained
in further detail in Notes to  these statements.  The pro forma
statements of operations for the   years ended December 31,  1997
and  1996,  reflect  the consolidated  operations  of the Company
and Old  MSR  as  if  the merger  had  been  consummated  as  of
January 1, 1996.

The   pro  forma  statements  of  operations  are  provided   for
comparative purposes only and should be read in conjunction  with
the  historical consolidated financial statements of the  Company
included   elsewhere  in  this  Form  10-KSB.   The   pro   forma
information  presented  is  not  necessarily  indicative  of  the
combined  financial results as they may be in the  future  or  as
they  might  have been for the periods indicated had  the  Merger
been consummated as of January 1, 1996.  The Merger was accounted
for  under  the  purchase method of accounting with  the  Company
considered the accounting acquiror.


MSR Exploration Ltd.
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1997
In thousands except for per share amounts

                               Ten Months                         As Adjusted
                                Ended                              Pro Forma
                              October 31,               Production Including
                                 1997  Adjust-           Payment   Production
                        Company Old MSR ments Pro Forma Adjustment  Payment
                        Note 1 (a)      Note 1            Note 2      Note 2
REVENUES
 Oil sales                 $257  $1,714         $1,971    $2,180    $4,151
 Gas sales                  570   1,761          2,331               2,331
 Interest and other          27      68             95                  95
    Total revenues          854   3,543    0     4,397     2,180     6,577


EXPENSES
 Operating expenses         228   1,255          1,483     1,326     2,809
 Production taxes            68     283            351       210       561
 Depletion and depreciat    220   1,169  (248)(b 1,141       438     1,579
 General and administrat    146     791    0 (c)   937                 937
 Interest                   147     605            752       290     1,042
    Total expenses          809   4,103  (248)   4,664     2,264     6,928

Income (loss) before inc     45    (560)  248     (267)      (84)     (351)

Income tax benefit (expe    (15)    190   (84)(d)   91        29       119

Net income (loss)           $30   ($370) $164    ($176)     ($55)    ($232)

Basic and diluted per
share net income (loss)   $0.00  ($0.03)        ($0.01)             ($0.01)

Weighted average number of
 shares outstanding      12,000   13,777        25,777               25,777

See Notes to Pro Forma Consolidated Financial Statements




MSR Exploration Ltd.
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1996
In thousands except for per share amounts
                                                                  As Adjusted
                                                                  Pro Forma
                                                      Production  Including
                                 Old  Adjust-          Payment    Production
                       Company   MSR  ments Pro Forma Adjustment   Payment
                       Note 1 (a)     Note 1           Note 2      Note 2
REVENUES
 Oil sales              $1,855  2,364         $4,219      $689    $4,908
 Gas sales                 215  1,953          2,168               2,168
 Interest and other                59             59                  59
    Total revenues       2,070  4,376          6,446       689     7,135


EXPENSES
 Operating expenses      1,054  1,435          2,489       243     2,732
 Production taxes          199    312            511        65       576
 Depletion and deprecia    412  1,378($268)(b) 1,522       153     1,675
 General and administrative     1,018    0 (c) 1,018               1,018
 Interest                  273    733          1,006       101     1,107
    Total expenses       1,938  4,876 (268)    6,546       562     7,108

Income (loss) before in    132   (500) 268      (100)      127        27

Income tax benefit (exp    (45)   170  (91)(d)    34       (43)       (9)

Net income (loss)          $87  ($330)$177      ($66)      $84       $18

Basic and diluted per
share net income (loss)  $0.01 ($0.02)        ($0.00)               $0.00

Weighted average number of
 shares outstanding     12,000 13,777         25,777               25,777


See Notes to Pro Forma Consolidated Financial Statements


12

NOTES TO PRO FORMA STATEMENTS OF OPERATIONS

1.  Pro Forma Adjustments
The  accompanying unaudited pro forma consolidated statements  of
operations reflect the following adjustments;

(a)   The  information reflected as "Company" for  1997  is  from
  inception, March 7, 1997, to December 31, 1997, which  includes
  Old  MSR beginning October 31, 1997.  Amounts for the first two
  months of 1997 are considered immaterial.  The 1996 informantion
  reflects  operations from the Mercury Properties for  the  nine
  months  ended September 30, 1996.  Revenues for the last  three
  months of 1996 were dedicated to the forward sale, see Note 2.
(b)  Depreciation, depletion and amortization expense (DD&A)
expense for Old MSR has been recomputed based on the revaluation
of Old MSR's properties required by the purchase method of
accounting for the Merger.  Old MSR's  DD&A expense was reduced
$268,000 for 1996 and $248,000 for 1997.
(c)  The general and administrative expenses of the combined
entities are not anticipated to increase.  By bringing together
both the Company's and Old MSR's Fort Worth, Texas offices and
the Cut Bank, Montana offices, general and administrative
expenses are anticipated to be reduced by approximately 25
percent per year.
(d)  Income taxes or tax benefits were computed on a pro forma
basis using the Company's effective rate of 34 percent.

2.   Forward Sale of Oil Revenues.

The Company's oil revenues and associated operating expenses from
the  Mercury  Properties included in the pro forma statements  of
operations  were  subject to a prior production  payment  forward
sales  agreement between Mercury and a third party ("the  Forward
Sales  Agreement") for the period of October 1996 until a certain
amount  of  production  was delivered to the  third  party.   The
production  payment was completed and the agreement fulfilled  on
December 31, 1997.  The Forward Sales Agreement is the obligation
of  Mercury.  Mercury recorded the receipt of the sales  proceeds
under  the  Forward  Sales  Agreement and  the  related  deferred
revenue.

While  the Company's oil revenues and associated expenses related
to  the  Mercury  Properties  were excluded  from  the  Company's
statements  of operations for the year ended December  31,  1997,
the   revenues  and  expenses  are  included  in  the  pro  forma
statements of operations for 1996 and 1997 to provide comparative
information  about  the Company for 1998  and  beyond.   The  oil
revenues and associated expenses of the Mercury Properties  began
accruing to the Company on January 1, 1998.

Oil revenues and operating expenses relating to the Forward Sales
Agreement  have  been added to  the statements of operations  for
1996  from  the  effective  date of the Forward  Sales  Agreement
(October  1,  1996) to the end of 1996 and for the twelve  months
ended  December 31, 1997 under the Production Payment  Adjustment
column  and  reported  as if the Merger had been  consummated  on
January 1, 1996.

Interest expense accociated with the Forward Sale was not charged
to  the  Company by Mercury.  It is included with the  production
payment  revenues  and  expense to present  a  more  accurate  as
adjusted pro forma results of operations.

Liquidity and Capital Resources

The  Company's current ratio at December 31, 1997 was  1.1  to  1
with  positive working capital of $42,000.  The Company's  source
of liquidity is cash flow from operations and bank debt.  As part
of  the  formation of the Company on March 7, 1997,  the  Company
agreed to guarantee the repayment of $4.0 million of debt owed by
Mercury  Exploration Company to a bank.  On October 31, 1997  the
Company  restructured the Old MSR revolving credit  facility  and
entered  into a new credit agreement with a bank.  Proceeds  from
the  new  facility were used to repay the $4.0  million  of  debt
guarantee by the Company and repay $6.0 million of debt  owed  by
Old  MSR.   The closing of the loan was subject to the successful
completion  of  the  Company's merger  with  Old  MSR.   The  new
agreement  is  for a $25,000,000 senior secured revolving  credit
facility  with  an  initial borrowing base of $12,000,000,  which
matures  in  five years.  The Company can designate the  interest
rate  on  amounts  outstanding  at either  the  London  Interbank
Offered  Rate  (LIBOR)  +  1.75%, or bank  prime  plus  1%.   The
collateral for this loan agreement consists of substantially  all
of  the  existing  assets of the Company and any future  reserves
acquired.

Discretionary cash flow, a measure of performance for exploration
and  production companies, is determined by adjusting net  income
to  eliminate depletion and depreciation expense, deferred income
tax,  gain (loss) on sale of assets and non-cash amortization  of
debt financing costs.  The effects of working capital changes are
not taken into account.  This measure reflects an amount that  is
available for capital expenditures and debt repayment.   The  pro
forma  combined  entities with the production payment  properties
generated  discretionary cash flow of approximately $1.3  million
and $1.7 million in 1997 and 1996, respectively.

The  Company  requires  capital primarily  for  the  exploration,
exploitation  and acquisition of oil and natural gas  properties,
the   repayment  of  indebtedness  and  general  working  capital
purposes.    During  1997  the  Company  incurred   approximately
$530,000  on  3-D seismic to evaluate a portion of the  Cut  Bank
field  in  northwest Montana and approximately $62,000 for  other
development expenditures.

The  Company's  combined NOL carryforward is subject  to  certain
limitations.  Under Section 382 of the Internal Revenue Code, the
taxable  income  of  the Company available  for  offset  by  pre-
ownership change NOL carryforwards and certain built-in losses is
subject  to  an  annual limitation (the "382 Limitation")  if  an
"ownership  change" occurs.  The Company has determined  that  an
ownership  change occurred for purposes of Section 382  in  1997.
As  a  result of this ownership change, the NOL carryforward will
not  be  affected, but the annual 382 Limitation will  equal  the
fair market value of the Company immediately before the ownership
change multiplied by the long-term tax exempt interest rate.   To
the  extent the 382 Limitation exceeds the federal taxable income
of  the  post-merger entity for a given year, the 382  Limitation
for  the  subsequent year will be increased by such excess.   NOL
carryforwards  of  the  Company will be  disallowed  entirely  if
certain  continuity of business enterprise requirements  are  not
met.   It is expected these requirements will be met.  The effect
of  the  382 Limitation may be to defer the use of the  Company's
existing NOL carryforwards.

Changes  in  the supply and demand for oil, natural gas  liquids,
hydrocarbon  price volatility, inflation, timing  of  production,
reserve   revisions  and  other  factors  make  these   estimates
inherently imprecise and subject to substantial revision.   As  a
result, these measures are not necessarily accurate estimates  of
future  cash  flows  nor  do  these  measures  serve  as  precise
determinations of current market value.

Changes in Prices and Inflation.  The Company's revenues and  the
value  of its oil and natural gas properties have been, and  will
continue  to  be,  affected by changes in  oil  and  natural  gas
prices.   The  Company's  ability to maintain  current  borrowing
capacity and to obtain additional capital on attractive terms  is
also substantially dependent on oil and natural gas prices.   Oil
and  natural  gas prices are subject to significant seasonal  and
other  fluctuations  that  are beyond the  Company's  ability  to
control or predict.  Although certain of the Company's costs  and
expenses  are  affected by the level of inflation, inflation  did
not  have  a  significant  effect on  the  Company's  results  of
operations during 1997.

Year 2000 Issue

The  Company  is  in  the process of conducting  a  comprehensive
evaluation  and  assessment of the business risks  and  exposures
related  to  the  coming change in the century.   These  business
risks  and  exposures relate to the problem  present  in  certain
software  and  embedded logic control devices  to  recognize  the
change  in  the  century.  If not corrected,  such  software  and
devices could fail or create erroneous results by or at the  Year
2000.

Since  1995,  the  Company  has replaced  all  major  information
systems with Year 2000 compliance as a criterion; therefore,  the
Company does not currently expect to incur any material amount of
expense  associated with its remediation of its major information
systems.  With respect to the risks and exposures related to  the
Company's customers, partners, suppliers, financial institutions,
and  other  constituencies and the resulting potential impact  on
the  Company's  business operations and financial condition,  the
Company  has initiated formal communications with its  customers,
partners,    suppliers,   financial   institutions   and    other
constituencies  to mitigate or prevent such risks and  exposures.
The  extent  of  such risks and exposures will  be  assessed  and
evaluated.

The  evaluation  and assessment of the extent of  the  risks  and
exposures related to the Company's information systems, including
embedded  logic  devices, and the Company's customers,  partners,
suppliers,  financial  institutions,  and  other  constituencies,
should  be  substantially  completed  during  1998.   Until   the
evaluation and assessment is completed, the Company can not  have
a  reasonable  basis  to conclude that the  risks  and  exposures
related  to  the  Year  2000  will not materially  affect  future
financial results, or cause reported financial information not to
reflect  fairly  the  future operating results  future  financial
condition or cash flow of the Company.

Forward-Looking Statements.  Certain statements in  this  report,
including   statements   of   the  Company's   and   management's
expectations,  intentions, plans and beliefs, particularly  those
contained in or implied by "Management's Discussion and  Analysis
of  Financial Condition and Results of Operations" and the  Notes
to   Consolidated   Financial  Statements,  are   forward-looking
statements, as defined in Section 21E of the Securities  Exchange
Act  of  1934,  that are dependent on certain events,  risks  and
uncertainties  that may be outside the Company's control.   These
forward-looking  statements  include statements  of  management's
plans  and  objectives  for the Company's future  operations  and
statements of future economic performance; information  regarding
drilling   schedule,   expected   or   planned   production    or
transportation    capacity,   future   production    levels    of
international  and domestic fields, the Company's capital  budget
and future capital requirements, the Company's meeting its future
capital  needs,  the Company's realization of  its  deferred  tax
assets, the level of future expenditures for environmental  costs
and  the  outcome of regulatory and litigation matters;  and  the
assumptions  described  in this report underlying  such  forward-
looking statements.  Actual results and developments could differ
materially  from those expressed in or implied by such statements
due  to a number of factors, including, without limitation, those
described  in  the  context  of such forward-looking  statements,
fluctuations   in  the price of crude oil and  natural  gas,  the
success  rate of exploration efforts, timeliness and  development
activities, and the risk factors described from time to  time  in
the   Company's  other  documents  and  reports  filed  with  the
Securities and Exchange Commission.


ITEM 7.  FINANCIAL STATEMENTS

Financial   Statements.    The  audited  Company's   consolidated
financial statements as of December 31, 1997, and for the  period
from inception, March 7, 1997 to December 31, 1997, are submitted
herewith as part of this Form 10-KSB.

Information    About   Oil   and   Gas   Producing    Activities.
Supplementary  disclosures regarding the Company's  oil  and  gas
producing  activities are set forth in the unaudited Supplemental
Financial Information appearing elsewhere in this Form 10-KSB.


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

None.




                            PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  names,  ages  and positions of the Company's  Directors  and
Executive Officers are as follows:

    Name                   Age                 Position

 Thomas F. Darden           44          Chairman of the Board,
                                        Chief Executive Officer
                                        and Director

 Glenn M. Darden            42          President,
                                        Chief Operating Officer
                                        and Director

 Patrick M. Montalban       40          Vice President
                                        and Director

 Howard N. Boals            54          Vice President - Finance and
                                        Administration,
                                        Secretary and Treasurer

 Frank Darden               70          Director

 D. Randall Kent            72          Director

 Steven M. Morris           46          Director

 W. Yandell Rogers, III     35          Director


The   Company's  Board  of  Directors  has  an  Audit   Committee
consisting of D. Randall Kent, W. Yandell Rogers, III, and Steven
M.  Morris, and its Compensation Committee includes Frank Darden,
Steven  M.  Morris and W. Yandell Rogers, III.  The Company  does
not have a nominating committee.

Thomas F. Darden has served as President of Mercury for the  last
five years.  During that time, Mercury has developed and acquired
interests  in  over  1,200 producing wells in Michigan,  Indiana,
Kentucky, Wyoming, Montana, New Mexico and Texas.  A graduate  of
Tulane University with a BA in Economics in 1975, Mr. Darden  has
been  employed  by  Mercury  or its parent  corporation,  Mercury
Production  Company, for 22 years.  Mr. Darden became a  Director
and  the President of the Company upon its formation on March  7,
1997.   On January 1, 1998, Mr. Darden was named Chairman of  the
Board and Chief Executive Officer.

Glenn  M.  Darden has served with Mercury for 14 years, the  last
five  years  as  the Executive Vice President  of  that  company.
Prior  to  working for Mercury, Mr. Darden worked as a  geologist
for  Mitchell  Energy  Corporation.  Mr.  Darden  graduated  from
Tulane  University  in  1979 with a BA in  Earth  Sciences.   Mr.
Darden  became a Director and Vice President of the Company  upon
its  formation on March 7, 1997.  Effective January 1,  1998,  he
was named President and Chief Operating Officer.

Patrick M. Montalban is a petroleum geologist who graduated  from
the  University of Montana in 1981.  He joined Old MSR as a Staff
Geologist  in  1983 and became Vice President of Exploration  and
Production  in  October 1986.  In December  1990,  he  was  named
Executive Vice President and at the December 1991 Annual  Meeting
for  Old  MSR was elected Director.  Upon closing the  Merger  on
October  31, 1997, Mr. Montalban became a Director of the Company
and was named Vice President.

Howard  N. Boals is a certified public accountant with  over  ten
years experience as a controller for publicly and privately  held
oil  and  gas  exploration and production companies.   From  1992
through 1994,  Mr. Boals was the accounting manager for  PG  &  E
Resources  Inc. of Dallas and the prior five years was controller
for  Sinclair  Resources,  Inc.  Mr.  Boals  joined  Old  MSR  as
controller in January 1995.  In September 1995, he was named Vice
President - Finance and Administration.  On October 30, 1997, Mr.
Boals  was  elected to serve as the Company's  Vice  President  -
Finance and Administration, Secretary and Treasurer.

Frank  Darden is a registered professional engineer and  Chairman
of  the  Board  of Mercury; a family owned private  oil  and  gas
company  in  Fort  Worth, Texas.  Mr. Darden founded  the  parent
corporation  of  Mercury,  Mercury Production  Company,  and  has
served  as  its  Chairman since 1965 and as chairman  of  Mercury
since  its founding in 1978.  Mr. Darden commenced his career  in
the oil and gas business with Humble Oil and Refining Company  in
1948.   From  1954  through  1955, he  was  retained  by  Empresa
Colombiana de Petroleos to organize an engineering department and
guide  the company's planning for the secondary recovery  program
in  the La Cira Field in the Magdelena Valley of Colombia.   From
1956 through 1964, Mr. Darden served as Manager of Operations for
Newmont  Oil  Company, the energy subsidiary  of  Newmont  Mining
Corporation,  and  as Executive Vice President  and  Director  of
Yucca Water Company.  Mr. Darden became a Director of the Company
upon its formation on March 7, 1997.

Steven  M.  Morris is a certified public accountant and President
of  Morris  &  Co., a private investment firm in Houston,  Texas.
From  1988  to  1991 he was Vice-President of  Finance  for  ITEX
Enterprises,  Inc.   From  1981  to  1988,  Mr.  Morris  was  the
Financial  Vice-President of Hanson Minerals Company,  a  Houston
based  oil  and gas exploration company.  From 1978 to  1981  Mr.
Morris  was a Partner in the Certified Public Accounting Firm  of
Haley  & Morris.  He served as Senior Accountant with the Houston
office of Arthur Young and Company from 1974 to 1977.  Mr. Morris
was  elected  Director  of  Old MSR at the  Special  Stockholders
Meeting held on October 25, 1994.   Upon closing of the Merger on
October 31, 1997, Mr. Morris became a Director of the Company.

D.  Randall  Kent  is  a retired Vice President  of  the  General
Dynamics  Corporation.   He  joined  General  Dynamics/Ft.  Worth
division  in  1949  and served in various engineering  management
positions, including Vice President and Chief Engineer of the  F-
16  Fighter Program.  Following his retirement in 1991, Mr.  Kent
has  served  as a consultant to the Lockheed-Martin  Corporation.
Mr. Kent graduated from Louisiana State University in 1947 with a
BS  in Mechanical Engineering and from Cornell University in 1949
with an MS in Engineering.  Mr. Kent was elected as a Director of
Old  MSR  at  its October 30, 1997 Annual and Special Meeting  of
Shareholders,  and upon closing the Merger on October  31,  1997,
became a Director of the Company.

W.  Yandell Rogers, III has served as Vice President and  General
Manager  of Ridgway's, Inc. since July 1997.  For more than  five
years  prior  to  that  date he served as  Regional  Manager  for
Ridgway's, Inc.  Based in Houston, Texas, Ridgway's, Inc. is  the
largest  privately held reprographics firm in the U.S. with  more
than 60 locations nationwide.  Mr. Rogers graduated from Southern
Methodist University in 1986 with a B.B.A. in finance. Mr. Rogers
was  elected  as  a Director of Old MSR at its October  30,  1997
Annual and Special Meeting of Shareholders, and upon closing  the
Merger on October 31, 1997, became a Director of the Company.

All  Directors of the Company hold office until the  next  annual
meeting of Shareholders or until their successors are elected and
shall  qualify.  Executive officers are elected annually by,  and
serve at the discretion of the Board of Directors.  There are  no
arrangements  or understandings between any of the  directors  or
officers  or  any  other  person  (other  than  arrangements   or
understandings  with  directors  or  officers  acting  as   such)
pursuant to which any person was elected as a director or officer
of  the  Company.  Frank Darden is the father of Thomas F. Darden
and  Glenn  M.  Darden.  There are no other family  relationships
among the executive officers of the Company.





ITEM 10.  EXECUTIVE COMPENSATION

Compensation.  The following table lists compensation paid to all
the Company's chief executive officers and other officers paid in
excess of $100,000 for the three years ended December 31, 1997.

                     Summary of Compensation
                                                    Common
Name and                             Annual         Stock
Principal  Position         Year  Compensation      Option

Thomas  F.  Darden  (1)     1997       None          114,285
Chairman of the Board
and Chief Executive Officer

Otto J. Buis  (2)            1997     $121,666
Chairman of the Board        1996     $116,667
President and                1995     $101,000
Chief Executive  Officer     1995     $101,000

(1)   Mr.  Darden was granted Company stock options  in  lieu  of
salary  on  March  7, 1997.  Mr. Darden's common   stock  options
have an option price of $0.875, expire March 7, 2002 and amount to
46% of the  Company's stock options outstanding.

(2)   Mr.  Buis resigned his position with the Company  effective
December 31, 1997.  Mr. Buis' annual compensation is the  total
amount he received from the Company and Old MSR.

Directors  who  are not employees of the Company  receive  annual
compensation  of 10,000 shares of the Company Common  Stock  plus
traveling and out-of-pocket expenses for each Director's  meeting
attended.

ITEM  11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS  AND
MANAGEMENT

The  following  table  sets forth with respect  to  the  Company,
certain information as of March 16, 1998 regarding the beneficial
ownership of the Company's common stock, as the case may  be,  of
(i)  directors, (ii) executive officers, (iii) executive officers
and directors as a group and (iv) holders of five percent or more
of such securities.

                                                 Shares Beneficially
                                                       Owned
Name of Beneficial Owner                           Number       Percent
Directors
 Frank Darden (1)                                  2,300,000       8.6
 Glenn M. Darden  (1)                              2,414,285       8.9
 Thomas F. Darden (1)                              2,414,285       8.9
 Patrick M. Montalban                                276,600       1.1
 Steven M. Morris                                  1,722,222       6.7
 D. Randall Kent                                      30,000       0.1
 W. Yandell Rogers, III                               35,000       0.1
Executive Officers Not Named Above
 Howard N. Boals (4)                                  25,000       0.1
Directors  and  Executive Offices as a Group (2)   9,217,392      35.0
Holders of Five Percent or More Not Named Above
 Mercury Exploration Company (3)                  12,420,000      39.2
 Joseph V. Montalban                               1,809,855       7.0
 Anne  Darden Self (1)                             2,300,000       8.6

1)    Does  not  include  shares beneficially  owned  by  Mercury
  Exploration Company.  See footnote 2) below.  Does include with
  respect  to each person 1,100,000 shares subject to immediately
  exercisable warrants.  Also includes with respect  to  each  of
  Thomas F. Darden and Glenn M. Darden 114,285 shares subject  to
  immediately exercisable options.

2)   Includes 3,300,000 shares subject to immediately exercisable
  warrants  and 248,570 shares subject to immediately exercisable
  options.  Does not include shares beneficially owned by Mercury
  Exploration Company.

3)   Number of shares indicated includes 5,940,000 shares subject
  to  immediately  exercisable warrants.  Each of  Frank  Darden,
  Thomas  F.  Darden, Glenn M. Darden and Anne  Darden  Self  are
  directors, officers and shareholders of Mercury and share voting
  and investment power with respect to the 12,420,000 shares of the
  Company's Common Stock beneficially owned by Mercury.  Each such
  person disclaims beneficial ownership of such shares.

4)    Includes  20,000  shares subject to  currently  exercisable
  options.


The address of each of Mercury Exploration Company, Frank Darden,
Glenn  M.  Darden,  and Howard N. Boals is 612 8th  Avenue,  Fort
Worth, Texas 76104.  The address of Thomas F. Darden is 720 South
Otsego,  Gaylord, Michigan 49735 and the address of  Anne  Darden
Self is 2630 Fountainview, Suite 300, Houston, Texas 77057.

The  address  of  Steven M. Morris is 952 Echo Lane,  Suite  335,
Houston, Texas 77024.  The address of Joseph V. Montalban is East
Lakeshore  Drive,  Whitefish,  Montana  59937.   The  address  of
Patrick  M.  Montalban is 317 1st Avenue S.E., Cut Bank,  Montana
59427.  The address of D. Randall Kent is 4421 Tamworth Rd., Fort
Worth,  Texas  76116.  The address of W. Yandell Rogers,  III  is
5711 Hillcroft, Houston, Texas 77036.



ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On  October 31, 1997, the Company and Mercury Exploration Company
(Mercury) have entered into a Management Agreement.  Pursuant  to
the Agreement, Mercury will be managing all of the operations  of
the  Company's  various oil and gas properties and gas  gathering
and compression facilities located in Montana and Texas.  Mercury
will   also  provide  accounting,  administrative  and   advisory
services.

The  Company  agreed  to  reimburse Mercury  for  its  costs  and
expenses incurred in connection with managing such operations and
pay  a  management  fee equal to 10 percent  of  such  costs  and
expenses.  The term of the Management Agreement is for two  years
and thereafter for successive one-year terms.

Mercury  owns 6,480,000 shares of the Company's Common Stock  and
three  of Mercury's directors and officers - Frank Darden, Thomas
Darden, and Glenn Darden - are also directors and officers of the
Company.


ITEM  13.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND  REPORTS
ON FORM 8-K.
                                                             Page in
                                                               this
                                                            Form 10-KSB
Financial Statements:

Independent Auditors' Report                                        F-1
Consolidated Balance Sheet
 at December 31, 1997                                               F-2
Consolidated Statement of Operations
 For the Period from Inception, March 7, 1997 to December 31, 1997  F-3
Consolidated Statement of Stockholders' Equity
 For the Period from Inception, March 7, 1997 to December 31, 1997  F-4
Consolidated Statement of Cash Flows
 For the Period from Inception, March 7, 1997 to December 31, 1997  F-5
Notes to Consolidated Financial Statements
 December 31, 1997                                           F-6 / F-15
Unaudited Statement of Revenues and Direct Operating Expenses
 For the Year Ended December 31, 1997                              F-16


Supplemental Financial Information (Unaudited):
Disclosures about Oil and Gas Producing Activities          F-17 / F-19
Selected Quarterly Financial Data                                  F-20

Exhibits Required by Item 601 of Regulation S-B:

     Exhibit Number      Description

          2.1*      Agreement  and  Plan of Merger  dated  as  of
                    March  26, 1997, among MSR Exploration  Ltd.,
                    Mercury Montana, Inc. and Mercury Exploration
                    Company,  as amended by Amendment  No.  1  to
                    Agreement and Plan of Merger dated as of June
                    17, 1997 and Amendment No. 2 to Agreement and
                    Plan of Merger dated as of September 11, 1997
                    (included  as  Appendix  "E"  to  the   Proxy
                    Statement/Prospectus)    of    the     second
                    Registration Statement referenced  below.

          2.2*      Credit Agreement dated October 31, 1997 among
                    MSR  Exploration Ltd., as Borrower, The  Bank
                    named  therein and Banque Paribas, as  Agent,
                    relating  to  a $25,000,000 Revolving  Credit
                    Facility.  Filed as an exhibit to Form 10-QSB
                    -   Quarterly   Report,  for   period   ended
                    September  30,  1997 incorporated  herein  by
                    reference.

          3.3*      The  Company's  Certificate of Incorporation,
                    as  amended (included as Appendix "F" to  the
                    Proxy  Statement/Prospectus)  of  the  second
                    Registration Statement referenced  below.

          3.4*      The  Company's Bylaws (included  as  Appendix
                    "G" to the Proxy Statement/Prospectus) of the
                    second   Registration  Statement   referenced
                    below.

          4.1*      Common  Stock Warrant dated January 13,  1995
                    issued  to  Banque Paribas by MSR Exploration
                    Ltd.
          4.2*      Form  of  Common  Stock  Warrants  issued  to
                    Mercury  Exploration Company,  Frank  Darden,
                    Thomas  F.  Darden,  Glenn  M.  Darden,  Anne
                    Darden Self, Jack L. Thurber and Jeff Cook by
                    Mercury  Montana, Inc., each dated  March  7,
                    1997  and  each having an exercise price  per
                    share of $1.25.

          4.3*      Form  of  Common  Stock  Warrants  issued  to
                    Mercury  Exploration Company,  Frank  Darden,
                    Thomas  F.  Darden,  Glenn  M.  Darden,  Anne
                    Darden  Self, Jack  L. Thurber and Jeff  Cook
                    by Mercury Montana, Inc., each dated March 7,
                    1997  and  each having an exercise price  per
                    share of $2.00.

          4.4*      Form  of  Stock  Purchase Warrant  issued  to
                    Mercury  Exploration Company at the Effective
                    Time of the Merger.

          4.5*      Form  of  Certificate representing shares  of
                    Common Stock of Mercury Montana, Inc. (to  be
                    known as MSR Exploration Ltd.).

          10.1*     Form  of  Management Agreement  entered  into
                    between  the  Company and Mercury Exploration
                    Company.

          10.3*     1997   Stock  Option  Plan  of  the  Company,
                    previously  known as Mercury Montana, Inc.

          10.4*     Employment  Agreement between MSR Exploration
                    Ltd. and Patrick M. Montalban.

          10.5*     Wells Agreement.

          10.6*     Purchase  and Sale Agreement between  Mercury
                    Exploration  Company and  Supply  Development
                    Group, Inc.

          10.7*     Production  and  Delivery  Agreement  between
                    Mercury Exploration Company and MCNIC  Oil  &
                    Gas f/k/a Supply Development Group, Inc.

          10.8*     Conveyance of Production Payment from Mercury
                    Exploration Company to MCNIC Oil & Gas  f/k/a
                    Supply Development Group, Inc.

          21.*      Subsidiaries of MSR Exploration Ltd.

          27.       Financial Data Schedule (filed herewith)

*    Filed as an exhibit to the Old MSR Registration Statement on
Form  S-4  (333-29769)  and as an exhibit  to  Mercury  Montana's
Registration  Statement on Form S-4 (333-29783), and incorporated
herein by reference.

Reports on Form 8-K
The  Company filed a Form 8-K on October 31, 1997 announcing  the
completion  of  the Merger with and between the Company  and  Old
MSR.
                           SIGNATURES

Pursuant  to  the  requirements of Section 13 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.
                                               MSR Exploration Ltd.
                                                (the "Registrant")

Dated:   March  27, 1997             by:  /s/Thomas F. Darden
                                       Thomas F. Darden
                                       Chairman of the Board
                                       and Chief Executive Officer

Pursuant  to the requirements of the Securities Exchange  Act  of
1934,  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/ Thomas F. Darden        Chairman of the Board,    March 27, 1998
 Thomas F. Darden            Chief Executive Officer
                             and Director


 /s/ Glenn M. Darden         President,                March 27, 1998
 Glenn M. Darden             Chief Operating Officer
                             and Director


 /s/ Patrick M. Montalban    Vice President            March 27, 1998
 Patrick M. Montalban        and Director


 /s/ Howard N. Boals         Vice President - Finance  March 27, 1998
 Howard N. Boals             Chief Accounting Officer


 /s/ Frank Darden            Director                  March 27, 1998
 Frank Darden


 /s/ Steven M. Morris        Director                  March 27, 1998
 Steven M. Morris


 /s/ D. Randall Kent         Director                   March 27, 1998
 D. Randall Kent


 /s/ W. Yandell Rogers, III  Director                   March 27, 1998
 W. Yandell Rogers, III










INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
MSR Exploration Ltd. and Subsidiaries
Fort Worth, Texas


We have audited the accompanying consolidated balance sheet of
MSR Exploration Ltd. and subsidiaries (the Company) as of
December 31, 1997, and the related consolidated statement of
operations, stockholders' equity and cash flows for the period
from inception March 7,1997 to December 31, 1997.  These
financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 1997, and the results of its
operations and its cash flows for the period from inception March
7,1997 to December 31, 1997, in conformity with generally
accepted accounting principles.




DELOITTE & TOUCHE LLP

Fort Worth, Texas
March 25, 1998












                              F - 1


MSR Exploration Ltd. and  Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31, 1997
In thousands


ASSETS

 Cash and cash equivalents                          $   528
 Time deposits                                           59
 Accounts receivable                                    507
 Inventories                                            248
 Prepaid expenses                                        32
      Total current assets                            1,374

PROPERTIES, PLANT AND EQUIPMENT - NET
 ("full cost")                                       24,234

OTHER ASSETS                                            355
                                                 $   25,963


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
 Current portion of long-term debt                      $88
 Accounts payable                                       652
 Accrued liabilities                                    592
      Total current liabilities                       1,332

LONG-TERM DEBT                                       10,560

DEFERRED INCOME TAXES                                 1,001

STOCKHOLDERS' EQUITY
 Common stock, $0.01 par value
    Authorized 50,000,000 shares, issued
    and outstanding 25,777,014                          258
 Preferred stock, $0.01 par value
    Authorized 10,000,000 shares, issued and
    and outstanding - none                                0
 Paid in capital in excess of par value              12,812
 Foreign currency translation adjustment                (30)
 Retained earnings                                       30
                                                     13,070
                                                 $   25,963






The accompanying notes are an integral part of these
 consolidated financial statements.

F - 2




MSR Exploration Ltd. and  Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period from Inception,
March 7, 1997 to December 31, 1997
In thousands except for per share data


REVENUE
 Oil sales                                             $257
 Gas sales                                              570
 Interest and other income                               27
    Total revenues                                      854


EXPENSES
 Operating expenses                                      228
 Production taxes                                         68
 Depletion and depreciation                              220
 General and administrative                              146
 Interest                                                147
    Total expenses                                       809

Income before income taxes                                45

Income tax (expense) benefit                             (15)

Net income                                                $30


Basic and diluted earnings per share                    $0.00

Basic weighted average number of shares
 outstanding for the period                            14,801

Diluted weighted average number of shares
 outstanding for the period                            14,838













The accompanying notes are an integral part of these
consolidated financial statements.

F - 3


MSR Exploration Ltd. and  Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Period from Inception, March 7, 1997, to December 31, 1997
In Thousands
<TABLE>
<CAPTION>

                                                          Cumulative
                                                          Paid in   Foreign              Total
                                                          Capital   Currency             Stock-
                                     Common Stock        in Excess Translatio Retained  holders'
                                        Shares    Amount   of Par  Adjustment Earnings   Equity

<S>                                     <C>       <C>      <C>       <C>       <C>     <C>
Inception March 7, 1997
Issuance of shares in exchange for
 oil and gas properties                   12,000   $120      $337        $0        $0      $457

Merger - Issuance of shares in
 exchange for Old MSR shares
 (Note 1)                                  1,377     138    12,400                        12,538

Warrants - 60,000 warrants
 issued  in payment of bank
 commitment fee                                                 75                            75

Translation adjustments                                                  (30)                (30)

Net Income                                                                          30        30


Balance at December 31, 1997              13,377  $   258 $  12,812 $    (30)     $ 30    $13,070

</TABLE>

The accompanying notes are an integral part of these
 consolidated financial statements.

F - 4


MSR Exploration Ltd. and  Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from Inception,
March 7, 1997 to December 31, 1997
In thousands

OPERATING ACTIVITIES
   Net Income                                                    $30
   Charges and credits to net loss not affecting cash
      Depletion and depreciation                                 220
      Deferred income taxes                                       15
   Changes in assets and liabilities
      Receivables                                                236
      Inventories and prepaid expenses                           (22)
      Accounts payable and accrued liabilities                  (153)
NET CASH FROM (USED FOR) OPERATING ACTIVITIES                    326

INVESTING ACTIVITIES
   Property, plant and equipment expenditures                   (592)
   Cash received in merger                                       350
   Change in cumulative foreign currency translation             (30)
NET CASH FROM (USED FOR) INVESTING  ACTIVITIES                  (272)

FINANCING ACTIVITIES
   Proceeds from debt borrowings                              10,575
   Repayment of long-term debt                               (10,040)
   Payment of financing costs                                    (61)
NET CASH FROM (USED FOR) FINANCING ACTIVITIES                    474

CASH AT END OF PERIOD                                           $528


The accompanying notes are an integral part of these
 consolidated financial statements.

F - 5


              MSR Exploration Ltd. and Subsidiaries

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1997

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The  accompanying consolidated financial statements  include  the
accounts  of MSR Exploration Ltd. (the Company), and  its  wholly
owned   subsidiaries.    The  Company's  consolidated   financial
statements  includes  the  operations of  the  Company  from  its
inception  on  March  7, 1997 and Old  MSR's  operations since
October  31, 1997, the effective date of the  Merger.   All
significant  inter-company transactions and  balances  have  been
eliminated in consolidation.

Principal Business Activity and Merger

MSR  Exploration Ltd. ( "the Company") formerly Mercury  Montana,
Inc.  was organized on March 7, 1997 under the laws of the  State
of Delaware for the purpose of acquiring from Mercury Exploration
Company  (Mercury)  and  thereafter  exploring,  developing   and
operating  all  of the Company's oil and natural  gas  properties
located in Montana (the "Mercury Properties").  Upon formation of
the   Company,  Mercury  conveyed  to  the  Company  the  Mercury
Properties and associated debt in exchange for a majority of  the
then  outstanding Company Common Stock and warrants  to  purchase
additional  shares  of Company Common Stock.  Certain  directors,
officers  and  agents  of Mercury also conveyed  to  the  Company
certain  contractual rights in the Mercury Properties in exchange
for  shares  of Company Common Stock and warrants.   The  Mercury
Properties  included approximately 75 crude oil  producing  wells
which  were  subject to a prior production payment,  forward-sale
agreement  between  Mercury and a third party covering  a  period
from  October 1996 through December 1997.  The agreement was  the
obligation of Mercury; consequently the oil revenue and associated
expenses  from  these  properties  belonged  to  Mercury  through
December 31, 1997, and started accruing to the Company on January
1, 1998.

On  March  26,  1997,  MSR Exploration Ltd.,  ("Old  MSR")  ,  an
Alberta,  Canada corporation entered into an agreement  with  the
Company,  then  known as Mercury Montana, Inc. and  its  majority
shareholder at that time, Mercury, both of Fort Worth, Texas,  to
combine  all of the Company's oil and gas assets in Montana  with
all  the oil and gas assets of Old MSR by way of a merger of  the
Company  and  Old MSR.  The Company was the surviving corporation
in  the merger and changed its name to MSR Exploration Ltd. after
the merger was effective.  The merger was accounted for under the
purchase method of accounting.

At  a combined Annual General and Special Meeting of Shareholders
of the Old MSR held on October 30, 1997, the shareholders elected
directors  and approved the domestication or continuance  of  Old
MSR  from  Alberta, Canada to Delaware, U.S.A.  The domestication
of  Old  MSR into Delaware was required for the merger to  become
effective.   The merger was subsequently approved on October  31,
1997, by written consent of the stockholders of Old MSR.

As part of the merger, the Company issued to Old MSR shareholders
one  share  of  common  stock of the  Company  for  each  of  the
13,777,014 outstanding shares of Old MSR common stock.   Each  of
the  12,000,000 shares of common stock of the Company outstanding
prior  to  the  merger remained outstanding.  The combined  total
number of outstanding shares is 25,777,014.  All such shares  are
listed  for trading on the American Stock Exchange.  In addition,
the  Company paid $4 million of Mercury Exploration Company  bank
debt.   Outstanding  warrants to purchase 5.5 million  shares  of
common  stock of the Company at $1.25 per share, and 5.5  million
shares  at  $2.00 per share also remained outstanding  after  the
merger, as did Company stock options to purchase an aggregate  of
228,570  shares  of  Company common stock  at  $0.875  per  share
granted  in lieu of salaries.  An outstanding warrant to purchase
280,000 shares of common sock of the Old MSR at $3.375 per  share
was  converted  to an equivalent right to acquire shares  of  the
Company.

Three  members  of Old MSR's Board of Directors,  Otto  J.  Buis,
Patrick  M.  Montalban and Steven M. Morris,  together  with  two
independent  directors, D. Randall Kent and  W.  Yandell  Rogers,
III,  were  elected to the Board of Directors of Old MSR  at  its
October  30,  1997 meeting.  With the completion of  the  merger,
Messrs. Buis, Montalban, Morris, Kent and Rogers became directors
of  the  Company joined by Frank Darden, Thomas  F.  Darden   and
Glenn M. Darden, the directors of the Company prior to the merger
and also directors of Mercury.

              MSR Exploration Ltd. and Subsidiaries

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Principal Business Activity and Merger (continued)

On  October  31,  1997, the Company restructured  the  Old  MSR's
revolving credit facility and entered into a new credit agreement
with  a  bank.   The  closing of the  loan  was  subject  to  the
successful completion of the Company's merger with Old MSR.   The
new  agreement  is  for  a $25,000,000 senior  secured  revolving
credit  facility  with an initial borrowing base of  $12,000,000,
which matures in five years.

U.S. Dollar Reporting

The  majority  of  the Company's business is transacted  in  U.S.
dollars  and, accordingly, the consolidated financial  statements
are expressed in that currency.

Accounts Receivable

The Company's customers are large oil and natural gas purchasers.
The  Company  does  not require collateral  and  receivables  are
generally  due in 30-60 days.  Management considers all  accounts
receivable current and collectible; accordingly, no allowance for
doubtful accounts has been established.

Major Customers

For the period from Inception March 7, 1997, to December 31, 1997,
three  purchasers:  Rio Vista Energy, Ltd. Montana Power  Company
and  J.N.  Petroleum Marketing, Inc., accounted for approximately
42%,   22%   and   11%,  respectively  of  the  Company's   total
consolidated oil and gas sales.  The Company does not  anticipate
that  the  loss of any of its present purchasers would  adversely
effect  the  Company's consolidated business.  The  Company  also
believes  that,  in  the event of a loss of a present  purchaser,
other  oil and gas purchasers located in the Company's  areas  of
production would offer competitive prices for such production.

Inventories

Inventories are valued at the lower of cost (first-in,  first-out
method)  or  market and consist of crude oil in  tanks  and  well
equipment spares and supplies.

Properties, Plant and Equipment

The  Company follows the "full cost" method of accounting for oil
and  gas  properties whereby all costs associated with acquiring,
exploring   for,  and  developing  oil  and  gas   reserves   are
capitalized  and  accumulated in cost centers  established  on  a
country-by-country  basis.  Such costs include  land  acquisition
costs,  geological and geophysical expenses, carrying charges  on
non-producing  properties, costs of drilling both productive  and
non-productive  wells, and overhead charges directly  related  to
acquisition, exploration and development activities.

The  capitalized costs related to each cost center, including the
estimated  future costs to develop proved reserves and the  costs
of   production  equipment,  are  amortized  using  the  unit-of-
production  method based on the estimated net proved reserves  as
determined  by  independent petroleum engineers.  Investments  in
unproved  properties  are  not amortized  until  proven  reserves
associated  with  them  can  be determined  or  until  impairment
occurs.   Oil  and  natural  gas  reserves  and  production   are
converted  into  equivalent units based upon  estimated  relative
energy content.

The capitalized costs less accumulated depletion and depreciation
in  each  cost  center  are limited to an  amount  equal  to  the
estimated future net revenue from proved reserves discounted at a
ten  percent  interest rate (based on prices  and  costs  at  the
balance  sheet date) plus the lower of cost (net of  impairments)
or fair market value of unproved properties.

Proceeds  from  the  sale of oil and gas properties  are  applied
against  capitalized  costs, with no  gain  or  loss  recognized,
unless  such  a  sale would significantly alter the  relationship
between capitalized costs and proved reserves of oil and gas,  in
which case the gain or loss is recognized in income.

              MSR Exploration Ltd. and Subsidiaries

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Properties, Plant and Equipment (continued)

Other  plant  and equipment are depreciated on the  straight-line
basis as follows:
     Gas  processing  plants and gathering  systems  -  over
     eight years
     Other equipment - over three to seven years

Potential  impairment  of  producing properties  and  significant
unproved  properties and other plant and equipment  are  assessed
annually  (unless economic events warrant more frequent reviews).
In  addition,  a  quarterly  impairment  analysis  of  aggregated
properties  is  performed by the Company using discounted  future
net cash flows determined based upon current prices and costs.

Revenue Recognition

The  Company recognizes revenue as quantities of oil and gas sold
or  volumes  of  gas  transported, and utilizes  the  entitlement
method  of  accounting  for oil and gas imbalances.   Under  this
method,  the  Company  recognizes revenue for  its  proportionate
share  of volumes sold.  Any over-produced amount is recorded  as
deferred  revenue and any under-produced amount  is  recorded  as
current  revenue  and revenue receivable.   The  Company  had  no
significant  over or under-produced positions as of December  31,
1997.

Environmental Compliance and Remediation

Environmental  compliance costs, including on  going  maintenance
and   monitoring,   are  expensed  as  incurred.    Environmental
remediation costs, which improve the condition of a property, are
capitalized.

Deferred Charges

Financing charges related to the acquisition of debt are deferred
and  amortized  over  the term of that debt using  the  effective
interest method.

Foreign Currency Translation

The  functional currency for the Company's foreign operations  is
the   applicable   local  currency;  therefore,  translation   is
performed for balance sheet accounts using current exchange rates
in  effect at the balance sheet date, and for revenue and expense
accounts using a weighted average exchange rate for the year.

Joint Venture Operations

Certain  of  the Company's exploration and development activities
relating  to oil and gas are conducted jointly with others.   The
accompanying  financial  statements reflect  only  the  Company's
proportionate interest in such activities.

Income Taxes

Income taxes provide for the tax effects of transactions reported
in  the  financial statements and consist of taxes currently  due
plus deferred taxes related primarily to differences between  the
basis of properties, plant and equipment for financial and income
tax reporting.  The deferred tax assets and liabilities represent
the  future  tax return consequences of those differences,  which
will  either  be  taxable  or  deductible  when  the  assets  and
liabilities are recovered or settled.

Earnings Per Share

In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement  of Financial Accounting Standards ("SFAS")  No.  128,
"Earnings Per Share" ("EPS") which established new standards  for
computing  and  presenting  EPS.   SAFES  No.  128  replaced  the
presentation  of primary EPS with a presentation  of  basic  EPS.
Basic  EPS  excludes dilution and is computed by dividing  income
available to common shareholders by the weighted-average

              MSR Exploration Ltd. and Subsidiaries

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Earnings Per Share (continued)

number of common shares outstanding for the period.  Diluted  EPS
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted
into common stock.  The diluted weighted average number of shares
outstanding includes 16,000 shares for the period attributable to
the  assumed exercise of dilutive common stock options.  Earnings
per  share amounts for 1997 have been presented to conform to the
SFAES No. 128 requirements.

Cash Equivalents and Time Deposits

The  Company  considers  all highly liquid investments  purchased
with  a  maturity of three months or less to be cash equivalents.
Investments  with an original maturity in excess of three  months
are considered to be time deposits.

Stock-Based Compensation

Compensation  expense is recorded with respect  to  stock  option
grants  to  employees using the intrinsic value method prescribed
by  Accounting Principles Board Opinion No. 25.  The Company  has
not  elected  the fair value method of accounting for stock-based
compensation  encouraged,  but  not  required,  by  Statement  of
Financial  Accounting Standards No. 123, "Accounting  for  Stock-
Based Compensation."

Disclosure of Fair Value of Financial Instruments

The  Company's financial instruments include cash, time deposits,
accounts  receivable, notes payable, accounts payable  and  long-
term  debt.   The Company estimates that the carrying  amount  of
these items is a reasonable estimate of their fair value.

Accounting Estimates

The  preparation  of  financial  statements  in  conformity  with
generally  accepted accounting principles requires management  to
make  estimates and assumptions that affect the reported  amounts
of assets and liabilities and the disclosure of contingent assets
and  liabilities at the date of the financial statements, as well
as  the  reported  amounts of revenues and  expenses  during  the
reporting  period.   Actual  results  could  differ  from   those
estimates.

Recently Issued Accounting Standards

In   June   1997,  the  FASB  issued  SFAS  No.  130,  "Reporting
Comprehensive Income," which establishes standards for  reporting
comprehensive  income  and  its components  (revenues,  expenses,
gains and losses) in a full set of gerbil-purpose statements.  It
requires  (a)  classification  of items  of  other  comprehensive
income  by their nature in a financial statement and (b)  display
of the accumulated balance of other comprehensive income separate
from  retained  earnings and additional paid-in  surplus  in  the
equity  section  of  the  statement of financial  position.   The
Company  plans to adopt SFAS No. 130 for the quarter ended  March
31, 1998.

2.  PRODUCTION PAYMENT

The  Mercury Properties contributed to the Company's by  Mercury,
upon  its  inception,  were  subject  to  a  production  payment.
Mercury  and Supply Development Group, Inc. ( SDG )
entered into a Production Payment Agreement  in
October 1996.  Pursuant to the agreement SDG was entitled  to  an
aggregate  of  320,000  barrels  of  oil  produced  from  certain
properties of Mercury, including the Mercury Properties.  Mercury
could satisfy this obligation by delivering to SDG proceeds  from
the  sale  of  oil produced rather than delivering  the  oil  "in
kind", unless SDG elected to take oil "in kind".  Pursuant to the
Merger Agreement among the Company, Old MSR, and Mercury dated as
of March 26, 1997, as amended, Mercury was entitled to all of the
oil  revenue  and  income attributable to the Mercury  Properties
until  the Production Payment Amount had been delivered  to  SDG;
provided  that Mercury must reimburse the Company for  all  costs
and  expenses of oil production.  Mercury's obligation to SDG was
satisfied on December 31, 1997.  No amounts associated  with  the
Production  Payment  Agreement are  reflected  in  the  Company's
financial statements, as the Production Payment Agreement was  an
obligation of Mercury.

              MSR Exploration Ltd. and Subsidiaries

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

3.  PRO FORMA CONDENSED CONSOLIDATED DATA - UNAUDITED

The following pro forma condensed consolidated data for the years
ended  December 31, 1997 and 1996 are presented as if the  merger
of  the  Company with Old MSR had been consummated on January  1,
1996.   Most of the Company's pro forma revenue and expenses  for
1997  and  1996  were subject to a prior forward  sale  and  were
excluded  from  the  Company's  statements  of  operations.   Oil
revenues  and  direct operating expenses subject to  the  forward
sale  for  1997  were  approximately  $2,180,000  and  $2,235,000
respectively,  and  for  1996  were  approximately  $689,000   of
revenues and $605,000 of associated expenses.  For 1996  the  oil
revenues  and  associated expenses subject to  the  forward  sale
relate  to the final three months of 1996.  Revenues and expenses
associated  with the forward sale began to accrue to the  Company
on  January  1, 1998.  Pro forma data  for  the
period from January 1, 1997, to March 7, 1997, has been  excluded
because  Company  revenue and expenses from sources  other   than
those associated with the forward sale are considered immaterial.



In thousands except for per share amounts.                   Adjusted
                                                              Pro Forma
                                                              Including
                                                             Production
                                                               Payment
1997                                  Historical   Pro Forma    Note 2

Revenue                                    $854       $4,397     $6,577
Expenses                                    824        4,573      6,809
Net income (loss)                           $30        ($176)     ($232)

Basic and diluted earnings (loss) pe      $0.00       ($0.01)    ($0.01)
Weighted average number of
  of shares outstanding                  25,777       25,777     25,777


                                                              Adjusted
                                                              Pro Forma
                                                              Including
                                                             Production
                                                               Payment
   1996                              Historical   Pro Forma     Note 2

Revenue                                  $2,070       $6,446     $7,135
Expenses                                  1,188        6,512      7,117
Net income (loss)                          $882         ($66)       $18

Basic and diluted earnings (loss) per share           ($0.00)     $0.00
Weighted average number of
  of shares outstanding                               25,777     25,777



              MSR Exploration Ltd. and Subsidiaries

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.  BANKRUPTCY

On  February  2,  1992, Old MSR  filed for bankruptcy  protection
under Chapter 11 of the U.S. Bankruptcy Code.  Old MSR elected to
voluntarily  file for bankruptcy primarily due to its substantial
net   losses   and  its  inability  to  negotiate  an   agreeable
restructuring of indebtedness with its then primary lender.

On  September  12,  1992, Old MSR filed a plan of  reorganization
with  the  Bankruptcy  Court which was  subsequently  amended  on
December  11,  1992  and  March 2, 1993,  to  reflect  agreements
between Old MSR and its creditors.  As of December 31, 1997,  the
remaining amounts due to these creditors totaled $150,500.




5. PROPERTIES, PLANT AND EQUIPMENT

Capitalized costs at December 31, 1997, in thousands:

Proved oil and gas properties                $39,930
Unproved oil and gas interests                   847
Accumulated depletion and depreciation       (17,917)
                                              22,860

Gas processing plants and gathering systems    3,851
Other equipment                                  830
Accumulated depletion and depreciation        (3,307)
                                               1,374
                                             $24,234

6.  OTHER ASSETS

Other assets included deferred charges related to the acquisition
of long-term debt (amortized over the life of that debt using the
effective interest method) and restricted cash (held in a  letter
of  credit in lieu of a plugging and abandonment bond required by
the U.S. Environmental Protection Agency).   Amounts presented in
thousands.




                                 1977

Deferred loan cost                 $118
Less accumulated amortization        (4)
Net deferred loan cost              114

Restricted cash                     241
Total other assets                 $355



7.  NOTE PAYABLE AND LONG-TERM DEBT


                                                       1997
Long-term debt, in thousands, consists of:
Note payable to a bank
  (7.6% at December 31, 1997)                        $10,498

Various pre-petition claims at interest rates ranging
  from 6% to 10%, due in monthly, quarterly and
  annual installments, including interest                150

                                                      10,648
Less current maturities                                  (88)
                                                     $10,560



Long-term debt maturities are as follows, in thousands:

Years Ending December 31,                      Amount

                    1998                           $88
                    1999                            62
                    2000                          None
                    2001                          None
                    2002                        10,498
                 Thereafter                       None

                                               $10,648

As  part  of the formation of the Company on March 7,  1997,  the
Company agreed to guarantee the repayment of $4.0 million of debt
owed  by  Mercury Exploration Company to a bank.  On October  31,
1997  the  Company  restructured the  Old  MSR  revolving  credit
facility  and  entered into a new credit agreement with  a  bank.
Proceeds  from  the  new facility were used  to  repay  the  $4.0
million  of debt guarantee by the Company and repay $6.0  million
of  debt owed by Old MSR.  The closing of the loan was subject to
the  successful completion of the Company's merger with Old  MSR.
The  new  agreement is for a $25,000,000 senior secured revolving
credit  facility  with an initial borrowing base of  $12,000,000,
which  matures  in  five years.  The Company  can  designate  the
interest  rate  on  amounts  outstanding  at  either  the  London
Interbank  Offered Rate (LIBOR) + 1.75%, or bank prime  plus  1%.
The  collateral for this loan agreement consists of substantially
all of the existing assets of the Company and any future reserves
acquired.    The  loan  agreement  contains  certain  restrictive
covenants, which, among other things, require the maintenance  of
a  minimum  current ratio,  net  worth  debt  service  ratio  and
and contains certain dividend restrictions.










              MSR Exploration Ltd. and Subsidiaries

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8.  INCOME TAXES

Deferred  income taxes reflect the net tax effects  of  temporary
differences   between  the  carrying  amounts   of   assets   and
liabilities for financial reporting purposes and the amounts used
for income tax purposes.  Significant components of the Company's
deferred  tax assets and liabilities as of December 31, 1997  are
as follows, in thousands:

                                         1997

Deferred tax assets:
   Operating loss carryforwards          $2,301
   Investment tax credits                   171
     Total deferred tax assets            2,472
   Less valuation allowance


Deferred tax liabilities:
   Properties, plant and equipment        3,473
     Total deferred tax liabilities       3,473

      Net deferred tax liabilities       $1,001

The income tax expense for the period from inception March 7,
1997 to December 31, 1997 was $15,000.  This amount represents a
deferred provision as no current tax provision or benefit was
realized.

The  Company  has  U.S.  net  operating  loss  carry-forwards  of
approximately $6,500,000 available to reduce future U.S.  taxable
income  subject to certain limitations.  These U.S. net operating
loss carry-forwards begin to expire in 2001. The Company also has
Canadian expense carry-forwards totaling approximately $2,000,000
available  to  reduce  future  Canadian  taxable  income.   These
Canadian expense carry-forwards have no expiration date.  Use  of
these  U.S.  and Canadian carry-forwards is dependent  on  future
taxable income.

9.  STOCKHOLDERS' EQUITY

The  Company  is authorized to issue 50,000,000 of  common  stock
with  a  par value of one cent ($0.01) and 10,000,000  shares  of
preferred  stock  with  a par value of  one  cent  ($0.01).   The
Company  currently has outstanding 25,777,014  shares  of  common
stock,  warrants to purchase additional shares of  common  stock,
5,550,000  shares at $1.25 per share, 5,550,000 shares  at  $2.00
per share, and options to purchase 248,570 shares of common stock
at $0.875 per share, and common stock warrants for 280,000 shares
at $3.375 per share, and 60,000 shares at $0.01 per share.

As a result of the merger of Old MSR with and into the Company on
October 31, 1997 pursuant to the terms of the Agreement and  Plan
of  Merger,  dated as of March 26,  1997, as amended,  among  Old
MSR,   the   Company  and  Mercury  Exploration   Company,   each
outstanding share of common stock, no par value per share, of Old
MSR  outstanding immediately prior to the effective time  of  the
Merger,  was  converted into the right to receive  one  share  of
common  stock,  par value $0.01 per share, of  the  Company.   In
accordance with Rule 12g-3(a) of the Securities Exchange  Act  of
1934, as amended, the Company has succeeded to the obligations of
Old  MSR under the Exchange Act and will continue to file reports
with  the Securities and Exchange Commission using the Commission
File  Number  (No.  1-8523)  utilized  by  its  predecessor.   In
connection  with the Merger, the Company changed  its  name  from
Mercury Montana, Inc. to MSR Exploration Ltd.







                Exploration Ltd. and Subsidiaries

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

9.  STOCKHOLDERS' EQUITY (continued)

Stock Option Plan

The  1997  Stock  Option  Plan of the Company  (the  "Plan")  was
adopted by the Board of Directors of the Company and approved  by
its  shareholders and became effective as of March 7, 1997.   The
Plan  permits the granting of options to purchase shares  of  the
Company's  Common  Stock.  All employees  and  directors  of  the
Company are eligible to participate in the Plan.  An aggregate of
250,000 shares of the Company's Common Stock have been authorized
and reserved for issuance under the Plan.  The Company's Board of
Directors  has  increased the authorized  share  to  a  total  of
500,000  shares, subject to shareholder approval.  As of December
31,  1997, options to purchase an aggregate of 248,570 shares  of
the Company's Common Stock have been granted under the Plan at an
exercise  price of $0.875 per share.  Options are totally  vested
when granted and  must be exercised within five years of the date
of  grant.  The Company's Compensation Committee of the Board  of
Directors determines who shall be granted options under the  Plan
and  the terms thereof, and administers the Plan.  No options may
be granted under the Plan after March 7, 2007.

No  compensation cost has been recognized at date of grant of the
stock  options because the exercise price at date  of  grant  was
equal  to  the fair value of the common stock at date  of  grant.
Had  compensation cost for the Company's stock option  plan  been
determined  based on the fair value at the grant date for  awards
under  the plan the Company's net income would have been  reduced
by  $62,000  for  the period ended December 31, 1997.   The  fair
value of the options were calculated in accordance with the Black-
Scholes option pricing model using an expected volatility of 26%,
expected option term of five years and a risk-free rate of return
of  6%.   Pro  forma basic and diluted earnings  per  share  were
$0.00.

10.  RELATED PARTY TRANSACTIONS

On  October 31, 1997, the Company and Mercury Exploration Company
(Mercury) have entered into a Management Agreement.  Pursuant  to
the Agreement, Mercury will be managing all of the operations  of
the  Company's  various oil and gas properties and gas  gathering
and compression facilities located in Montana and Texas.  Mercury
will   also  provide  accounting,  administrative  and   advisory
services.

The  Company  agreed  to  reimburse Mercury  for  its  costs  and
expenses incurred in connection with managing such operations and
pay  a  management  fee equal to 10 percent  of  such  costs  and
expenses.  The term of the Management Agreement is for two  years
and  thereafter for successive one-year terms.  At  December  31,
1997  the Company owed Mercury approximately $52,000 for  payment
of  costs incurred on behalf of the Company .  No management  fee
have been paid or accrued for the period ended December 31, 1997.

Mercury  owns 6,480,000 shares of the Company's Common Stock  and
three  of Mercury's directors and officers - Frank Darden, Thomas
Darden, and Glenn Darden - are also directors and officers of the
Company.





11.  SUPPLEMENTAL CASH FLOW INFORMATION

For the period from inception, March 7, 1997, to December 31, 1997,
in thousands:

                                                  1997

Cash paid during the year:
   Interest                                        $134
   Income taxes                                      $0

Non-cash provided from financing activities:
   Purchase of the net assets of Old MSR
     by the issuance of 13,777,014 shares
     of common stock. Amount includes assets
     totaling $20,034,000, including cash of
     $350,000, and liabilities totaling
     $8,496,000, including long-term debt of
     $6,114,000                                  $12,538

   Consideration for financing costs by
      issuance of common stock warrants             $75




MSR Exploration Ltd.
Unaudited Statements of Revenues and Direct Operating Expenses
In Thousands

                                               Twelve Months
                                                 Ended
                                               December 31,
                                                 1996

REVENUES
   Oil sales                                     $1,855
   Gas sales                                        215
     Total revenues                               2,070

DIRECT OPERATION EXPENSES
   Operating expenses                               989
   Production taxes                                 199
     Total expenses                               1,188

EXCESS OF REVENUES OVER DIRECT OPERATING EXPENS    $882


The accompanying notes are an integral part of this statement.


1.  Basis of Presentation

       Historical   financial  statements  reflecting   financial
position,  results  of  operations and  cash  flows  required  by
generally  accepted accounting principles are not  presented  for
the  year ended December 31, 1996, as such information is neither
readily  available on an individual property basis nor meaningful
for  the  properties included in the Merger.   Accordingly,  this
statement  of revenues and direct operating expenses is presented
in  lieu of the financial statements required under Rule 3-05  of
Securities and Exchange Commission Regulation S-X.

      The accompanying statement of revenues and direct operating
expenses   represent  the  Company's  pre-Merger  net   ownership
interest  in  the  properties included  in  the  Merger  and  are
presented   on  the  full  cost  accrual  basis  of   accounting.
Depreciation, depletion, and amortization, allocated general  and
administrative expenses, interest expense, and income taxes  have
been  excluded  because the property interests  included  in  the
Merger  were  from  a  newly  formed business  and  the  expenses
incurred  would not necessarily be indicative of the expenses  to
be incurred by the Company after the Merger.

2.  Forward Sale of Oil Revenues

The  Mercury  Properties  were subject to  a  Production  Payment
Agreement  entered  into in October 1996 between  Mercury  and  a
third party.  The Agreement was the obligation of Mercury and was
for   the  period from October 1, 1996 to December 31, 1997.  The
Company's oil revenues and associated operating expenses included
in  the  statements of revenues and direct operating expenses  do
not include any amounts which were subject to the Agreement.  The
oil  revenues and associated expenses relating to the  production
payment  forward sale started accruing to the Company on  January
1, 1998.

The  oil  revenues  and  associated  expenses  dedicated  to  the
production  payment  forward sale from October  1,  1996  through
December  31, 1996 were excluded from the Statement  of  Revenues
and  Direct Operating Expenses.  Such amounts were also  excluded
form  the  Company's statement of operations for the period  from
Inception,  March  7,  1997, to December 31,  1997.   To  provide
information  about  the  Company for 1998  and  beyond,  revenues
subject  to the forward sales agreement amounted to $689,000  for
1996.   Direct  operating  expenses  subject  to  the  sale  were
$308,000 for 1996.


       DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
                           (Unaudited)

The  following  information  about  the  Company's  oil  and  gas
producing  activities  has  been  prepared  in  accordance   with
Statement  of Financial Standards No. 69, Disclosures  about  Oil
and Gas Producing Activities.

The  Company  believes  that the valuation method  prescribed  by
Statement of Financial Standards No. 69 does not provide the best
estimate of current economic value of its oil and gas reserves as
unproved reserves are not attributed any economic value  and  the
use  of  year-end price assumptions and a 10% discount  rate  are
arbitrary.   The pro forma amounts for 1996 are presented  as  if
the  Company had been in existence, owned the Mercury  Properties
and had been combined with Old MSR since January 1, 1996.

Proved Oil and Gas Quantities

The  following information summarizes the Company's estimated net
quantities  of proved and proved-developed oil and gas  reserves.
The December 31, 1997 and 1996 end of year reserves are based  on
estimates of Citadel Engineering Ltd., petroleum consultants.




Year Ended December 31, 1997                   Oil        Gas
                                             (MBbl)      (MMcf)
Proved reserves
  Beginning of year - pro forma              5,281        1,339
  Revisions of previous estimates              686          332
  Purchase of reserves in place - Old MSR    3,646       19,870
  Production                                  (143)       (322)

  End of year                                9,470       21,219

Proved developed reserves
  Beginning of year - pro forma              1,628        1,339

  End of year                                4,412       16,484


Year Ended December 31, 1996 - Pro Forma      Oil        Gas
                                             (MBbl)      (MMcf)
Proved reserves
  Beginning of year                          5,291        1,401
  Revisions of previous estimates              120           25
  Production                                  (130)         (87)

  End of year                                5,281        1,339

Proved developed reserves
  Beginning of year                          1,638        1,401

  End of year                                1,628        1,339


                                            F - 17



DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (continued)
(Unaudited)

The following standardized measure of discounted future net cash flows
relating to proved oil and gas reserves has been computed using
year-end prices, except where contractual arrangements in place
at year-end provide for future prices changes and costs.


                                             As of December 31,
                                              1997        1996
                                                        Pro Forma

Future cash flows                            $178,672   $119,585
Future production and development costs       (70,242)   (71,893)
Future income tax expense                     (25,474)   (10,200)
                                               82,956     37,492
10% annual discount for timing of cash flow   (44,581)   (20,445)

Standardized measure of discounted
  cash flows                                  $38,375    $17,047


The standardized measure of discounted cash flows does not include
any value relating to the Company's gathering, processing and
transmission of gas reserves owned by other companies.


The following table sets out in aggregate the principle source of
change in the standardized measure of discounted future net cash
flows for the year ended December 31, 1997, in thousands.


                                                          1997
Sales of oil and gas produced, net of
  production costs                                   $       (531)
Net changes in price and production costs                  (5,628)
Purchase of reserves in place                              20,817
Revisions of previous quantity estimates                    2,908
Development costs incurred during the year                     62
Accretion of discount                                       1,705
Net change in income taxes                                  1,234
Other                                                         761
Net increase (decrease)                                    21,328
Balance at beginning of year - pro forma                   17,047

Balance at end of year                                 $   38,375


                                           F - 18


DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (continued)
(Unaudited)

Costs incurred in oil and gas property acquisition, exploration
and development activities, in thousands:


                                           Inception-
                                           March 7,1997
                                               to         Year Ended
                                           December 31,  December 31,
                                              1997          1996

Property acquisition costs                    $19,583           $0

Exploration costs                                $530           $0

Development costs                                 $62          $84



Results of operations from producing activities, in thousands:

                                           Inception-
                                           March 7,1997
                                               to      Year Ended
                                           December 31,December 31,
                                              1997        1996

Oil and gas sales                                $827     $2,070
Operating expenses                               (228)    (1,054)
Production taxes                                  (68)      (199)
Depletion and depreciation                       (220)      (273)
                                                  311        544
Income taxes                                     (106)      (185)
Results of operations from producing activities
  (excluding corporate overhead and
  interest costs)                                $205       $359



                                           F - 19


SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)

The following table summarizes selected quarterly financial data for the
quarter ended December 31, 1997, in thousands.


                                           December 31,
                                              1997

  Revenue                                        $729

  Net income (loss)                              $(19)

  Basic and diluted earnings
    (loss) per share                             Nil


F - 20


              MSR Exploration Ltd. and Subsidiaries

EXHIBIT INDEX

     Exhibit Number      Description

          2.1*      Agreement  and  Plan of Merger  dated  as  of
                    March  26, 1997, among MSR Exploration  Ltd.,
                    Mercury Montana, Inc. and Mercury Exploration
                    Company,  as amended by Amendment  No.  1  to
                    Agreement and Plan of Merger dated as of June
                    17, 1997 and Amendment No. 2 to Agreement and
                    Plan of Merger dated as of September 11, 1997
                    (included  as  Appendix  "E"  to  the   Proxy
                    Statement/Prospectus)    of    the     second
                    Registration Statement referenced  below.

          2.2*      Credit Agreement dated October 31, 1997 among
                    MSR  Exploration Ltd., as Borrower, The  Bank
                    named  therein and Banque Paribas, as  Agent,
                    relating  to  a $25,000,000 Revolving  Credit
                    Facility.  Filed as an exhibit to Form 10-QSB
                    -   Quarterly   Report,  for   period   ended
                    September  30,  1997 incorporated  herein  by
                    reference.

          3.3*      The  Company's  Certificate of Incorporation,
                    as  amended (included as Appendix "F" to  the
                    Proxy  Statement/Prospectus)  of  the  second
                    Registration Statement referenced  below.

          3.4*      The  Company's Bylaws (included  as  Appendix
                    "G" to the Proxy Statement/Prospectus) of the
                    second   Registration  Statement   referenced
                    below.

          4.1*      Common  Stock Warrant dated January 13,  1995
                    issued  to  Banque Paribas by MSR Exploration
                    Ltd.
          4.2*      Form  of  Common  Stock  Warrants  issued  to
                    Mercury  Exploration Company,  Frank  Darden,
                    Thomas  F.  Darden,  Glenn  M.  Darden,  Anne
                    Darden Self, Jack L. Thurber and Jeff Cook by
                    Mercury  Montana, Inc., each dated  March  7,
                    1997  and  each having an exercise price  per
                    share of $1.25.

          4.3*      Form  of  Common  Stock  Warrants  issued  to
                    Mercury  Exploration Company,  Frank  Darden,
                    Thomas  F.  Darden,  Glenn  M.  Darden,  Anne
                    Darden  Self, Jack  L. Thurber and Jeff  Cook
                    by Mercury Montana, Inc., each dated March 7,
                    1997  and  each having an exercise price  per
                    share of $2.00.

          4.4*      Form  of  Stock  Purchase Warrant  issued  to
                    Mercury  Exploration Company at the Effective
                    Time of the Merger.

          4.5*      Form  of  Certificate representing shares  of
                    Common Stock of Mercury Montana, Inc. (to  be
                    known as MSR Exploration Ltd.).

          10.1*     Form  of  Management Agreement  entered  into
                    between  the  Company and Mercury Exploration
                    Company.

          10.3*     1997   Stock  Option  Plan  of  the  Company,
                    previously  known as Mercury Montana, Inc.

          10.4*     Employment  Agreement between MSR Exploration
                    Ltd. and Patrick M. Montalban.

          10.5*     Wells Agreement.

          10.6*     Purchase  and Sale Agreement between  Mercury
                    Exploration  Company and  Supply  Development
                    Group, Inc.

          10.7*     Production  and  Delivery  Agreement  between
                    Mercury Exploration Company and MCNIC  Oil  &
                    Gas f/k/a Supply Development Group, Inc.

          10.8*     Conveyance of Production Payment from Mercury
                    Exploration Company to MCNIC Oil & Gas  f/k/a
                    Supply Development Group, Inc.

          21.*      Subsidiaries of MSR Exploration Ltd.

          27.       Financial Data Schedule (filed herewith)

*    Filed as an exhibit to the Old MSR Registration Statement on
Form  S-4  (333-29769)  and as an exhibit  to  Mercury  Montana's
Registration  Statement on Form S-4 (333-29783), and incorporated
herein by reference.