SECURITIES AND EXCHANGE COMMISSION
                         Washington, D. C.  20549

                                Form 10-Q

(Mark One)
[X]  Quarterly report pursuant to Section 13 or 15(d) of the 
     Securities Exchange Act of 1934 for the quarterly period 
     ended September 30, 1998.

- or -

[  ] Transition report pursuant to Section 13 or 15(d) of the 
     Securities Exchange Act of 1934 for the transition period 
     from _____________ to _________________.

                         Commission File No. 0-17267

                         MALLON RESOURCES CORPORATION
           (Exact name of registrant as specified in its charter)

        COLORADO                          84-1095959
(State or other jurisdiction of   (IRS Employer Identification No.)
incorporation or organization)

999 18th Street, Suite 1700
Denver, Colorado  80202
(Address of principal executive offices)

(303) 293-2333
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all 
reports required to be filed by Section 13 or 15(d) of the 
Securities Exchange Act of 1934 during the preceding 12 months (or 
such shorter period of time registrant was required to file such 
reports), and (2) has been subject to such filing requirements for 
the past 90 days.

            YES [X]                NO [  ]

As of September 30, 1998, 7,024,665 shares of registrant's common 
stock, par value $0.01 per share, were outstanding.


PART I - FINANCIAL INFORMATION

Item 1 -- Financial Statements

                         MALLON RESOURCES CORPORATION

                         CONSOLIDATED BALANCE SHEETS
                                (In thousands)

<TABLE>
<CAPTION>
                                                               September 30,   December 31,
                                                                   1998            1997   
                                                               (Unaudited)

                                   ASSETS
<S>                                                              <C>            <C>
Current assets:
    Cash and cash equivalents                                    $    834       $  6,741
    Accounts receivable: 
       Oil and gas sales                                            1,050          1,464
       Joint interest participants, net of allowance of $8
          and $8, respectively                                      1,745          2,406
       Related parties                                                159             72
       Other                                                           --              7
    Inventories                                                       392            327
    Other                                                              64             46
          Total current assets                                      4,244         11,063

Property and equipment: 
    Oil and gas properties, full cost method                       88,094         63,148
    Natural gas processing plant                                    4,630          2,760
    Other equipment                                                   929            665
                                                                   93,653         66,573
    Less accumulated depreciation, depletion and amortization     (30,133)       (26,393)
                                                                   63,520         40,180

Notes receivable-related parties                                       19             18

Other, net                                                            213            165

Total Assets                                                     $ 67,996       $ 51,426
                                                                 ========       ========


                         LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities: 
    Trade accounts payable                                       $  7,876       $  6,797
    Undistributed revenue                                             918            813
    Current portion of installment obligation, less unamortized
       discount of $6 and $22, respectively                           394            378
    Drilling advances                                                  12            135
    Accrued taxes and expenses                                        125              4
    Current portion of long-term bank debt                            338             --
    Current portion of lease obligation                                --          1,746
          Total current liabilities                                 9,663          9,873

Long-term bank debt                                                16,944              1
Accrued expenses                                                       39             39
          Total non-current liabilities                            16,983             40

Total liabilities                                                  26,646          9,913

Commitments and contingencies

Series B Mandatorily Redeemable Convertible Preferred Stock, 
    $0.01 par value, 500,000 shares authorized, 135,200 shares
    issued and outstanding, liquidation preference and
    mandatory redemption of $1,352,000                              1,326          1,317

Shareholders' equity: 
    Common Stock, $0.01 par value, 25,000,000 
       shares authorized; 7,024,665 and 6,995,264
       shares issued and outstanding, respectively                     70             70
    Additional paid in capital                                     74,119         73,937
    Accumulated deficit                                           (34,165)       (33,811)
          Total shareholders' equity                               40,024         40,196

Total Liabilities and Shareholders' Equity                       $ 67,996       $ 51,426
                                                                 ========       ========
</TABLE>

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


                        MALLON RESOURCES CORPORATION
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                   (In thousands, except per share amounts)
                                 (Unaudited)

<TABLE>
<CAPTION>
                                                   For the Three Months   For the Nine Months
                                                   Ended September 30,    Ended September 30,
                                                    1998        1997        1998       1997  
<S>                                                <C>         <C>        <C>        <C>
Revenues:
    Oil and gas sales                              $3,620      $1,995     $ 9,602    $ 5,806
    Interest and other                                 16          19          86         47
                                                    3,636       2,014       9,688      5,853

Costs and expenses: 
    Oil and gas production                          1,488         838       3,847      2,158
    Depreciation, depletion and amortization        1,430         699       3,764      1,775
    Impairment of oil and gas properties               --           4          --         59
    General and administrative                        613         435       1,802      1,730
    Interest and other                                337         166         620        372
                                                    3,868       2,142      10,033      6,094

Equity in loss of affiliate                            --        (120)         --       (476)

Net loss                                             (232)       (248)       (345)      (717)

Dividends on preferred stock and accretion            (30)        (30)        (90)      (155)

Preferred stock conversion inducement                  --          --          --       (403)

Net loss attributable to common shareholders       $ (262)     $ (278)    $  (435)   $(1,275)
                                                   ======      ======     =======    =======

Basic: 
    Net loss attributable to common shareholders 
       per share                                   $ (.04)     $(0.06)    $ (0.06)   $ (0.28)
                                                   ======      ======     =======    =======

    Weighted average shares outstanding             7,025       4,695       7,012      4,576
                                                   ======      ======     =======    =======
</TABLE>

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


                        MALLON RESOURCES CORPORATION

                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (In thousands)
                                (Unaudited)

<TABLE>
<CAPTION>
                                                                       For the Nine Months
                                                                       Ended September 30, 
                                                                        1998         1997  
<S>                                                                   <C>          <C>
Cash flows from operating activities: 
    Net loss                                                          $   (345)    $   (717)
    Adjustments to reconcile net loss to net cash provided by operating activities:
        Depreciation, depletion and amortization                         3,764        1,775
        Impairment of oil and gas properties                                --           59
        Amortization of discount on installment obligation                  17           33
        Equity in loss of affiliate                                         --          476
        Stock compensation expense                                         169          106
        Changes in operating assets and liabilities: 
            (Increase) decrease in: 
                Accounts receivable                                      1,042           59
                Inventory and other assets                                (155)        (184)
            Increase (decrease) in: 
                Trade accounts payable and undistributed revenue         1,185        2,206
                Accrued taxes and expenses                                 117           19
                Drilling advances                                         (122)          (9)
Net cash provided by operating activities                                5,672        3,823

Cash flows from investing activities: 
    Additions to property and equipment                                (26,717)     (10,953)
    Purchase of subsidiary stock                                            --          (55)
    Other                                                                   --          (47)
    Increase in notes receivable-related parties                            (1)          (1)
Net cash used in investing activities                                  (26,718)     (11,056)

Cash flows from financing activities: 
    Proceeds from long-term debt                                        17,281        5,100
    Lease obligation payments                                           (2,061)         (18)
    Payment of preferred dividends                                         (81)        (134)
    Redemption of preferred stock                                           --         (121)
Net cash provided by financing activities                               15,139        4,827

Net decrease in cash and cash equivalents                               (5,907)      (2,406)

Cash and cash equivalents, beginning of period                           6,741        2,771

Cash and cash equivalents, end of period                              $    834     $    365
                                                                      ========     ========

Supplemental cash flow information: 
    Cash paid for interest                                            $    551     $    341
                                                                      ========     ========

    Non-cash transactions: 
        Installment obligation (less unamortized discount) in
            exchange for property and equipment                       $     --     $    733
                                                                      ========     ========

        Acquisition of equipment under lease obligation               $    315     $     --
                                                                      ========     ========
</TABLE>


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


                         MALLON RESOURCES CORPORATION

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (Unaudited)
                                ___________

Note 1.  GENERAL

    Mallon Resources Corporation (the "Company") engages in oil 
and gas exploration and production through its wholly-owned 
subsidiary, Mallon Oil Company ("Mallon Oil"), whose oil and gas 
operations are conducted primarily in the State of New Mexico.  The 
Company also has an interest in Laguna Gold Company ("Laguna").  
All significant intercompany balances and transactions have been 
eliminated from the consolidated financial statements.

    At September 30, 1998, the Company owned approximately 46% of 
Laguna.  As discussed in the Company's annual report on Form 10-K 
for the year ended December 31, 1997 (the "1997 Form 10-K"), the 
Company's share of Laguna's net losses exceeded the carrying value 
of its investment in and advances to Laguna because of Laguna's 
decision to write-down its mining assets.  Accordingly, the Company 
no longer reflects its share of Laguna's net losses and may only 
reflect its share of Laguna's future earnings to the extent that 
they exceed the Company's share of Laguna's current and future net 
losses not recognized.

    These unaudited consolidated financial statements have been 
prepared in accordance with generally accepted accounting 
principles for interim financial information and with the 
instructions to Form 10-Q and Article 10 of Regulation S-X.  
Accordingly, they do not include all of the information and 
footnotes required by generally accepted accounting principles for 
complete financial statements.  In the opinion of management, such 
interim statements reflect all adjustments (consisting of normal 
recurring adjustments) necessary to present fairly the financial 
position and the results of operations and cash flows for the 
interim periods presented.  The results of operations for these 
interim periods are not necessarily indicative of the results to be 
expected for the full year.  These interim statements should be 
read in conjunction with the consolidated financial statements and 
notes thereto included in the 1997 Form 10-K.

    Certain prior year amounts in the consolidated financial 
statements have been reclassified to conform to the presentation 
used in 1998.

Note 2. LONG-TERM BANK DEBT

    Effective March 1998, the borrowing base under the Company's 
revolving credit facility was increased to $21,250,000, and the 
amount of the monthly reduction to the borrowing base was reduced 
to zero, until redetermined in connection with the next borrowing 
base review.  Previously, the amount of the reduction was $170,000 
per month.  At September 30, 1998, the amount outstanding under the 
facility was $15,160,000, leaving the amount available under the 
facility at $6,090,000.

    In August 1998, the Company negotiated a term loan for 
$6,500,000 with Bank One, Texas, N.A. to finance equipment for the 
Company's gas sweetening plant.  At September 30, 1998, the Company 
had borrowed $1,967,000 on the term loan.  The Company borrowed the 
remaining $4,533,000 in October.  On October 30, 1998, the balance 
converted to a 5-year term loan with principal and interest 
payments payable monthly.  Interest on the loan is LIBOR plus 2%.  
However, effective October 30, 1998, the Company also entered into 
a 5-year interest rate swap agreement which will fix the interest 
rate on the term loan at an effective 7.88%.  The notional amount 
of the interest rate swap is $6,500,000 and declines monthly by the 
amount of principal payments.

Note 3. EARNINGS (LOSS) PER SHARE

    In fourth quarter 1997, the Company adopted Statement of 
Financial Accounting Standards ("SFAS") No. 128, "Earnings per 
Share."  Under the provisions of SFAS No. 128, basic earnings per 
share is computed by dividing income available to common 
shareholders by the weighted average number of common shares 
outstanding for the period. Diluted earnings per share reflects the 
potential dilution that could occur if the Company's outstanding 
stock options and warrants were exercised (calculated using the 
treasury stock method) or if the Company's Series B Convertible 
Preferred Stock were converted to common stock.  SFAS No. 128 
requires a restatement of all periods presented.

    The consolidated statement of operations for the three and nine 
months ended September 30, 1998 and 1997 reflect only basic 
earnings per share because the Company was in a loss position for 
all periods presented and all common stock equivalents are anti-
dilutive.

Note 4. WARRANTS:

    In August 1995, the Company issued warrants to purchase an 
aggregate of 31,824 shares of common stock at an adjusted exercise 
price of $7.86 per share to an affiliate of Midland Bank plc, New 
York Branch, as an "equity kicker" in connection with the 
establishment of a now terminated line of credit with that bank.  
In May 1998, the holder of the warrants opted to convert them into 
shares of common stock through a cashless conversion whereby they 
received 11,415 shares of common stock, which were the equivalent 
in value to the difference between the 31,824 shares of common 
stock at the defined current market price of $12.25 per share and 
the exercise price of $7.86 per share.

Note 5. NEW ACCOUNTING STANDARDS:

    The Company adopted SFAS No. 130, "Comprehensive Income," 
beginning with the first quarter of 1998.  There are no components 
of comprehensive income which have been excluded from net income 
and, therefore no separate statement of comprehensive income has 
been presented.

    In June 1998, the Financial Accounting Standards Board issued 
SFAS No. 133, "Accounting for Derivative Instruments and for 
Hedging Activities."  The Statement establishes accounting and 
reporting standards requiring that every derivative instrument 
(including certain derivative instruments embedded in other 
contracts) be recorded in the balance sheet as either an asset or 
liability measured at its fair value.  The Statement requires that 
changes in the  derivative's fair value be recognized currently in 
earnings unless specific hedge accounting criteria are met.  
Special accounting for qualifying hedges allows a derivative's 
gains and losses to offset related results on the hedged item in 
the income statement, and requires that a company must formally 
document, designate, and assess the effectiveness of transactions 
that receive hedge accounting.

    SFAS No. 133 is effective for fiscal years beginning after 
June 15, 1999.  A company may also implement the Statement as of 
the beginning of any fiscal quarter after issuance (that is, fiscal 
quarters beginning June 16, 1998 and thereafter).  SFAS No. 133 
cannot be applied retroactively.  SFAS No. 133 must be applied to 
(a) derivative instruments and (b) certain derivative instruments 
embedded in hybrid contracts that were issued, acquired, or 
substantially modified after December 31, 1997 (and, at the 
company's election, before January 1, 1998).

    The Company has not yet quantified the impact of adopting SFAS 
No. 133 on its financial statements and has not determined the 
timing or method of adoption of SFAS No. 133.  However, SFAS No. 
133 could increase volatility in earnings and other comprehensive 
income.

Item 2.  Management's Discussion and Analysis of Financial 
Condition and Results of Operations

    The following discussion is intended to assist in understanding 
the Company's consolidated financial position at September 30, 1998 
and December 31, 1997, results of operations for the three and nine 
months ended September 30, 1998 and 1997 and cash flows for the 
nine months ended September 30, 1998 and 1997.  The Company's 
Consolidated Financial Statements and notes thereto should be 
referred to in conjunction with the following discussion.

                               Overview

    The Company's revenues, profitability and future rate of growth 
will be substantially dependent upon its drilling success in the 
San Juan and Delaware Basins, and prevailing prices for oil and 
gas, which are in turn dependent upon numerous factors that are 
beyond the Company's control, such as economic, political and 
regulatory developments and competition from other sources of 
energy.  The energy markets have historically been volatile, and 
there can be no assurance that oil and gas prices will not be 
subject to wide fluctuations in the future.   A substantial or 
extended decline in oil or gas prices could have a material adverse 
effect on the Company's financial position, results of operations 
and access to capital, as well as the quantities of oil and gas 
reserves that the Company may economically produce.

                     Liquidity and Capital Resources

    The Company has a revolving credit facility (the "Facility") 
with Bank One, Texas, N.A. (the "Bank').  The borrowing base under 
the Facility is subject to redetermination every six months, or at 
such other times as the Bank may determine.  The Company is 
obligated to maintain certain financial and other covenants, 
including a minimum current ratio, minimum net equity, a debt 
coverage ratio and a total bank debt ceiling.  The Facility is 
collateralized by substantially all of the Company's oil and gas 
properties.  Effective March 1998, the borrowing base under the 
Facility was increased to $21,250,000 and the term extended to 
April 30, 2001.  At November 14, 1998, the principal amount 
outstanding was $18,845,000, leaving the amount remaining available 
under the Facility at $2,405,000.  The Company is currently in 
compliance with the covenants of the Facility.

    Capital expenditures related to the Company's drilling and 
development programs totaled approximately $26,574,000 for the nine 
months ended September 30, 1998 and $10,267,000 for the nine months 
ended September 30, 1997.  The Company's current budget for 
drilling and development capital expenditures in 1998 is 
approximately $32,530,000.  During the nine months ended 
September 30, 1998, the Company completed 35 of the 40 wells 
drilled and recompleted 32 wells.  During the nine months ended 
September 30, 1997, the Company completed 18 of the 20 development 
wells it drilled and recompleted 13 wells.  In addition, the 
Company participated in the drilling of an exploratory well in 
first quarter 1997 which was abandoned as a dry hole.  The Company 
currently plans to drill approximately 45 wells and recomplete 
approximately 42 wells during fiscal 1998.

    In August 1998, the Company negotiated a $6,500,000 term loan 
with Bank One, Texas, N.A. to finance equipment for the Company's 
gas sweetening plant.  At September 30, 1998, the Company had 
borrowed $1,967,000 on the term loan.  The Company borrowed the 
remaining $4,533,000 in October.  On October 30, 1998, the balance 
converted to a 5-year term loan with principal and interest 
payments payable monthly.  Interest on the loan is LIBOR plus 2%.  
However, effective October 30, 1998, the Company also entered into 
a 5-year interest rate swap agreement which will fix the interest 
rate on the term loan at an effective 7.88%.  The notional amount 
of the interest rate swap is $6,500,000 and declines monthly by the 
amount of principal payments.

    The Company believes that, with the net proceeds of the 
December 1997 common stock sale, borrowings available under the 
Facility and term loan, and the operating cash flows that are 
expected to be generated by the application of such funds to the 
Company's drilling program, the Company will have sufficient 
capital to fund the continued development of its current properties 
and to meet the Company's liquidity requirements through 1998.

                            Results of Operations

<TABLE>
<CAPTION>
                                                   For the Three Months   For the Nine Months
                                                    Ended September 30,   Ended September 30,
                                                    1998         1997      1998         1997 
                                                      (In thousands, except per unit data)
<S>                                                <C>          <C>       <C>          <C>
Results of Operations from Oil and Gas Producing Activities: 
    Oil and gas sales                              $3,620       $1,995    $9,602       $5,806
    Production tax and marketing expense              508          281     1,414          739
    Lease operating expense                           980          557     2,433        1,419
    Depletion                                       1,387          668     3,611        1,698
    Depreciation                                       16           --        80           --

Net Production: 
    Oil (MBbl)                                     $   51       $   50    $  180       $  131
    Natural gas (MMcf)                              1,810          575     4,056        1,553
    MBOE                                              353          146       856          390
    Mmcfe                                           2,116          875     5,136        2,339

Average Sales Price Realized: (1)
    Oil (per Bbl)                                  $12.69       $19.08    $13.46       $20.15
    Natural gas (per Mcf)                            1.64         1.81      1.77         2.04
    Per BOE                                         10.25        13.66     11.22        14.89
    Per Mcfe                                         1.71         2.28      1.87         2.48

Average cost data (per BOE):
    Production tax and marketing expense           $ 1.44       $ 1.92    $ 1.65       $ 1.89
    Lease operating expense                          2.78         3.82      2.84         3.64
    Depletion                                        3.93         4.58      4.22         4.35
    Depreciation                                     0.05           --      0.09           --

Average Cost Data (per Mcfe): 
    Production tax and marketing expense           $ 0.24       $ 0.32    $ 0.28       $ 0.32
    Lease operating expense                          0.46         0.64      0.47         0.61
    Depletion                                        0.66         0.76      0.70         0.73
    Depreciation                                     0.01           --      0.02           --
</TABLE>_________________

1) Includes effects of hedging.

Three and Nine Months Ended September 30, 1998 Compared to September 30, 1997

    Revenues.  Total revenues increased 81% to $3,636,000 for the 
three months ended September 30, 1998 from $2,014,000 for the three 
months ended September 30, 1997 and increased 66% to $9,688,000 for 
the nine months ended September 30, 1998 from $5,853,000 for the 
nine months ended September 30, 1997.  Oil and gas sales increased 
81% to $3,620,000 for the 1998 quarter from $1,995,000 for the 1997 
quarter due primarily to higher oil and gas production in the 1998 
quarter.  Oil and gas sales increased 65% to $9,602,000 for the 
nine months ended September 30, 1998 from $5,806,000 for the nine 
months ended September 30, 1997, due to higher oil and gas 
production in the 1998 period.  Average oil prices realized per 
barrel decreased 33% to $12.69 in the fiscal 1998 quarter, from 
$19.08 in the fiscal 1997 quarter; and average gas prices realized 
per Mcf decreased 9% to $1.64 in the 1998 quarter from $1.81 in the 
1997 quarter.  Average oil prices realized per barrel decreased 33% 
to $13.46 for the nine months ended September 30, 1998, from $20.15 
for the comparable 1997 period, and average gas prices realized per 
Mcf decreased 13% to $1.77 in the 1998 period from $2.04 for the 
nine months ended September 30, 1997.  Oil production increased 2% 
to 51,000 barrels in the 1998 quarter from 50,000 barrels in the 
1997 quarter and gas production increased 215% to 1,810,000 Mcf in 
the 1998 quarter from 575,000 Mcf in the 1997 quarter.   Oil 
production increased 37% to 180,000 barrels for the nine months 
ended September 30, 1998 from 131,000 barrels for the nine months 
ended September 30, 1997; and gas production increased 161% to 
4,056,000 Mcf for the nine months ended September 30, 1998 from 
1,553,000 Mcf for the same period a year ago.  The oil and gas 
production increases are due to the Company's successful drilling 
and recompletion program in 1998.

    Oil and Gas Production Expenses.  Oil and gas production 
expenses, including production tax and marketing expenses, 
increased 78% to $1,488,000 for the three months ended 
September 30, 1998 from $838,000 for the 1997 quarter, and 
increased 78% to $3,847,000 for the nine months ended September 30, 
1998 from $2,158,000 for the comparable 1997 period, due to new 
wells coming on line as a result of the 1998 drilling program.  Per 
BOE, oil and gas production expense, including production tax and 
marketing expense, decreased $1.52, or 26%, to $4.22 for the 1998 
quarter from $5.74 for the 1997 quarter.  Production tax and 
marketing expense per BOE decreased $0.48 to $1.44 per BOE, or 25%, 
for the 1998 quarter from $1.92 for the 1997 quarter because of 
lower oil and gas prices in the 1998 quarter.  LOE per BOE 
decreased 27% to $2.78 for the 1998 quarter from $3.82 for the 1997 
quarter.  Oil and gas production expenses per BOE decreased $1.04, 
or 19%, to $4.49 for the nine months ended September 30, 1998 from 
$5.53 for the nine months ended September 30, 1997.  Production tax 
and marketing expense decreased $0.24 per BOE, or 13%, during the 
nine months ended September 30, 1998 as a result of lower oil and 
gas prices.  LOE decreased $0.80 per BOE, or 22%, during the nine 
months ended September 30, 1998.  LOE per BOE in the 1998 periods 
is lower due to higher average production rates per well for the 
new wells and a higher proportion of gas production in 1998, which 
is less costly to produce than oil.

    Depreciation, Depletion and Amortization.  Depreciation, 
depletion and amortization for the three months ended September 30, 
1998 increased 105% to $1,430,000 from $699,000 in the 1997 
quarter, and increased 112% to $3,764,000 for the nine months ended 
September 30, 1998 from $1,775,000 for the nine months ended 
September 30, 1997.  Depletion per BOE decreased 14% to $3.93 for 
the fiscal 1998 quarter from $4.58 for the fiscal 1997 quarter and 
decreased 3% to $4.22 for the nine months ended September 30, 1998 
from $4.35 for the nine months ended September 30, 1997, primarily 
due to a higher ratio of reserve increases to capital expenditures 
in the 1998 periods.

    Impairment of Oil and Gas Properties.  Impairment of oil and 
gas properties was $4,000 and $59,000, respectively, for the three 
and nine months ended September 30, 1997.  In 1996, the Company 
acquired a 2.25% working interest in an exploration venture to 
drill one or more wells offshore Belize.  The joint venture drilled 
a dry hole during the first quarter of 1997.  Accordingly, the 
Company reduced the carrying amount of its capitalized costs.  
During the three and nine months ended September 30, 1998, the 
Company's oil and gas activities were conducted entirely in the 
United States.

    Under the full cost accounting rules of the Securities and 
Exchange Commission (SEC), the Company reviews the carrying value 
of its oil and gas properties each quarter on a country-by-country 
basis.  Under full cost accounting rules, capitalized costs of oil 
and gas properties may not exceed the present value of estimated 
future net revenues from proved reserves, discounted at 10 percent, 
plus the lower of cost or fair market value of unproved properties, 
as adjusted for related tax effects and deferred income taxes.  
Application of these rules generally requires pricing future 
production at the unescalated oil and gas prices in effect at the 
end of each fiscal quarter and requires a write-down if the 
"ceiling" is exceeded, even if prices declined for only a short 
period of time.  The Company did not have a write-down due to 
ceiling test limitations as of September 30, 1998.  Under current 
pricing, there is the potential, while not a certainty, that a 
write-down may occur.  If a write-down is required, the one-time 
charge to earnings would not impact cash flow from operating 
activities.

    General and Administrative Expenses.  Total general and 
administrative expenses for the three months ended September 30, 
1998 increased 41% to $613,000 from $435,000 in the 1997 quarter, 
and increased 4% to $1,802,000 for the nine months ended 
September 30, 1998 from $1,730,000 for the same period in 1997 due 
to the hiring of additional personnel because of expanded 
operations.  During the quarter and nine months ended September 30, 
1998, the Company capitalized $161,000 and $763,000, respectively, 
more of general and administrative expenses directly related to its 
drilling program than was capitalized in the 1997 periods.

    Interest and Other Expenses.  Interest and other expenses for 
the three months ended September 30, 1998 increased 103% to 
$337,000 from $166,000 for the three months ended September 30, 
1997 and increased 67% to $620,000 for the nine months ended 
September 30, 1998 from $372,000 for the nine months ended 
September 30, 1997.  The increase was primarily due to interest on 
the Company's equipment lease obligations and higher outstanding 
borrowings under the Company's credit facility in the 1998 periods.

    Equity in Loss of Affiliate.  Equity in loss of affiliate of 
$120,000 and $476,000 in the three and nine months ended 
September 30, 1997, respectively, represents the equity in the 
Laguna loss.

    Income Taxes.  The Company incurred net operating losses 
("NOLs") for U.S. Federal income tax purposes in 1998 and 1997, 
which can be carried forward to offset future taxable income.  
Statement of Financial Accounting Standards No. 109 requires that a 
valuation allowance be provided if it is more likely than not that 
some portion or all of a deferred tax asset will not be realized.  
The Company's ability to realize the benefit of its deferred tax 
asset will depend on the generation of future taxable income 
through profitable operations and the expansion of the Company's 
oil and gas producing activities.  The market and capital risks 
associated with achieving the above requirement are considerable, 
resulting in the Company's decision to provide a valuation 
allowance equal to the net deferred tax asset.  Accordingly, the 
Company did not recognize any tax benefit in the consolidated 
statements of operations for the three and nine months ended 
September 30, 1998 and 1997.

    Net Loss.  Net loss for the three months ended September 30, 
1998 decreased 6% to $232,000 from $248,000 for the three months 
ended September 30, 1997, and decreased 52% to $345,000 for the 
nine months ended September 30, 1998 from $717,000 for the same 
period a year ago, as a result of the factors discussed above.  The 
Company paid the 8% dividend of $27,000 on its Series B Mandatorily 
Redeemable Convertible Preferred Stock ("Series B Preferred 
Stock"), and realized accretion of $3,000, in each of the three 
months ended September 30, 1998 and 1997, respectively.  The 
Company paid dividends of $81,000 and realized accretion of $9,000 
during the nine months ended September 30, 1998 compared to 
dividends of $134,000 and accretion of $21,000 during the nine 
months ended September 30, 1997.  Preferred dividend payments were 
reduced, beginning in April 1997, as a result of the conversion 
into common stock and redemption of approximately 265,000 shares of 
Series B Preferred Stock.  The excess of the fair value of the 
common stock issued at the $9.00 conversion price over the fair 
value of the common stock that would have been issued at the $11.31 
conversion price, totaling $403,000, is reflected on the statements 
of operations for the nine months ended September 30, 1997 as an 
increase to the net loss attributable to common shareholders. Net 
loss attributable to common shareholders for the three months ended 
September 30, 1998 decreased 6% to $262,000 from $278,000 for the 
three months ended September 30, 1997, and decreased 66% to 
$435,000 for the nine months ended September 30, 1998 from 
$1,275,000 for the nine months ended September 30, 1997.

                             Year 2000 Issues

    Year 2000 issues result from the inability of computer programs 
or equipment to accurately calculate, store or use a date 
subsequent to December 31, 1999.  The erroneous date can be 
interpreted in a number of different ways; typically the year 2000 
is interpreted as the year 1900.  This could result in a system 
failure or miscalculations causing disruptions of operations, 
including, among other things, a temporary inability to process 
transactions, send invoices or engage in similar normal business.  
Similar issues exist in embedded computer chips which operate many 
common and specialized machines.

    The Company has recently completed an assessment of its core 
financial and operational software systems to ensure compliance.  
The licensors of both the Company's core financial software system 
and its underlying operating system have certified that such 
software is Year 2000 compliant.  The Company's core exploration 
software system is not currently Year 2000 compliant, but the 
licensor has indicated that such software will be compliant by 
January 1999.  Additionally, other less critical software systems 
and various types of equipment have been assessed and are believed 
to be compliant.  The Company believes that the potential impact, 
if any, of these less critical systems not being Year 2000 
compliant will at most require employees to manually complete 
otherwise automated tasks or calculations and it should not impact 
the Company's ability to continue exploration, drilling, production 
or sales activities.

    The Company has initiated communications with its significant 
suppliers, business partners and customers to determine the extent 
to which the Company is vulnerable to those third parties' failure 
to correct their own Year 2000 issues.  There can be no guarantee, 
however, that the systems of other companies on which the Company's 
systems rely will be timely converted, or that a failure to convert 
by another company, or a conversion that is incompatible with the 
Company's systems would not have a material adverse effect on the 
Company.  The Company has determined it has no exposure to 
contingencies related to the Year 2000 issue with respect to 
products sold to third parties.

    The Company also relies on non-information technology systems, 
such as office telephones, facsimile machines, air conditioning, 
heating, elevators in its leased offices, which may have embedded 
technology such as micro controllers.  Some of these systems are 
outside of the Company's control to assess or remedy.  A failure of 
one of these items might adversely impact the Company's business 
but in management's opinion would not create a material disruption.

    The Company has and will utilize both internal and external 
resources to complete tasks and perform testing necessary to 
address the Year 2000 issue.  The Company has completed a majority 
of its Year 2000 project.  The Company has not incurred, and does 
not anticipate that it will incur, significant costs relating to 
the assessment and remediation of Year 2000 issues.

                                Miscellaneous

    The Company's oil and gas operations are significantly affected 
by certain provisions of the Internal Revenue Code of 1986, as 
amended, applicable to the oil and gas industry.  Current law 
permits the Company to deduct currently, rather than capitalize, 
intangible drilling and development costs incurred or borne by it.  
The Company, as an independent producer, is also entitled to a 
deduction for percentage depletion with respect to the first 1,000 
barrels per day of domestic crude oil (and/or equivalent units of 
domestic natural gas) produced (if such percentage depletion 
exceeds cost depletion).  Generally, this deduction is 15% of gross 
income from an oil and gas property, without reference to the 
taxpayer's basis in the property.  The percentage depletion 
deduction may not exceed 100% of the taxable income from a given 
property.  Further, percentage depletion is limited in the 
aggregate to 65% of the Company's taxable income.  Any depletion 
disallowed under the 65% limitation, however, may be carried over 
indefinitely.

    The Company uses hedging instruments to manage commodity price 
risks.  The Company has used energy swaps and other financial 
arrangements to hedge against the effects of fluctuations in the 
sales prices for oil and natural gas.  Gains and losses on such 
transactions are matched to product sales and charged or credited 
to oil and gas sales when that product is sold.  Management 
believes that the use of various hedging arrangements can be a 
prudent means of protecting the Company's financial interests from 
the volatility of oil and gas prices by limiting the Company's 
exposure to future oil and gas price declines.  However, such 
hedging arrangements also limit the benefits the Company would 
realize if prices increase.  The Company recognized a hedging gain 
of $217,000 in third quarter 1998 compared to a hedging loss of 
$118,000 in third quarter 1997, and recognized a hedging gain of 
$329,000 for the nine months ended September 30, 1998 compared to a 
hedging loss of $217,000 for the nine months ended September 30, 
1997.  These amounts are included in oil and gas sales in the 
Company's consolidated statements of operations.

    Inflation has not historically had a material impact on the 
Company's financial statements, and management does not believe 
that the Company will be materially more or less sensitive to the 
effects of inflation than other companies in the oil and gas 
business.

    The preceding information contains forward-looking statements, 
the realization of which cannot be assured.  Actual results may 
differ significantly from those forecast.  When evaluating the 
Company, its operations, or its expectations, the reader should 
bear in mind that the Company and its operations are subject to 
numerous risks and uncertainties.  Among these are risks related to 
the oil and gas business generally (including operating risks and 
hazards and the regulations imposed thereon), risks and 
uncertainties related to the volatility of the prices of oil and 
gas, uncertainties related to the estimation of reserves of oil and 
gas and the value of such reserves, uncertainties relating to 
geologic models and evaluations, the effects of competition and 
extensive environmental regulation, and other factors, many of 
which are necessarily beyond the Company's control.  These and 
other risk factors that affect the Company's business are discussed 
in the Company's 1997 Form 10-K.


PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits:

     None.

(b)  Reports on Form 8-K:

During third quarter 1998, the Company filed Periodic Reports on 
Form 8-K dated July 8, 1998, August 13, 1998, August 14, 1998 and 
September 28, 1998.  Each of those reports related to an "Item 5. 
Other Events" matter.


                                 SIGNATURES 

    Pursuant to the requirements 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.


                                 MALLON RESOURCES CORPORATION
                                 Registrant


Date:  November 12, 1998         By:  _/s/ Roy K. Ross            
                                        Roy K. Ross
                                        Executive Vice President


Date:  November 12, 1998         By:  _/s/ Alfonso R. Lopez        
                                        Alfonso R. Lopez
                                        Vice President, Finance
                                        Corporate Treasurer